10-K 1 y91928e10vk.txt FORM 10-K -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2003 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, 07938-0813 LIBERTY CORNER, NJ (Zip Code) (Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 604-8686 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange, Inc. Series A Cumulative Preferred New York Stock Exchange, Inc. Stock, $.01 par value
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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of the close of business on November 20, 2003, there were outstanding 27,911,879 shares of the Registrant's Common Stock and 2,493,061 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 February 28, 2003 was $88,080,931. (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.) DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement filed in connection with the Annual Meeting of Stockholders to be held April 27, 2004 is incorporated by reference in Part III of this Form 10-K. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FEDDERS CORPORATION FORM 10-K ANNUAL REPORT SEPTEMBER 1, 2002 TO AUGUST 31, 2003 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 5 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 7 Item 6. Selected Financial Data..................................... 8 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 15 Item 8. Financial Statements and Supplementary Data................. 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 15 Item 9A. Controls and Procedures..................................... 15 PART III Item 10. Directors and Executive Officers of the Registrant.......... 16 Item 11. Executive Compensation...................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 16 Item 13. Certain Relationships and Related Transactions.............. 16 Item 14. Principal Accounting Fees and Services...................... 16 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 16
1 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Fedders Corporation (the "Company" or the "Registrant") is a leading global manufacturer and marketer of air treatment products, including air conditioners, air cleaners, gas furnaces, dehumidifiers and humidifiers, and thermal technology products. The Company was established more than 100 years ago and has been in the indoor air treatment business for more than 50 years. The Company has been actively pursuing strategic acquisitions and alliances and new product introductions to support continued growth in new and existing markets. During fiscal year 2003, highlights of this program were as follows: - In January 2003, the Company entered into a manufacturing joint venture with Suning Appliance Group, the largest retailer of split-type air conditioners in China. - Sales operations in China and India commenced for commercial and industrial air cleaners and air conditioners. - New, ducted central air conditioners made in China were introduced to global markets. Unless otherwise indicated, all references herein to the "Company" or the "Registrant" include Fedders Corporation and its principal operating subsidiaries. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company has two reportable industry segments: Heating, Ventilation, Air Conditioning and Refrigeration ("HVACR") and Engineered Products. See Note 8 of the Notes to Consolidated Financial Statements at page F-16 herein. (c) NARRATIVE DESCRIPTION OF BUSINESS The Company manufactures and sells, worldwide, a wide variety of air treatment products, including air conditioners, air cleaners, gas furnaces, humidifiers and dehumidifiers, and thermal technology products. With its expanding product line, the Company serves the unique air treatment demands of various key markets including the residential, commercial/industrial, communications, medical/biotechnology, and consumer markets. HVACR PRODUCTS The HVACR segment designs, manufactures and distributes window, residential split system condensing units and air handlers, gas furnaces, multi-split systems, through-the-wall, portable and packaged unit air conditioners, residential humidifiers, dehumidifiers and air cleaners. MARKETS The Company's HVACR products are sold, primarily by the Company's salaried sales force, through a variety of sales channels, including global retailers, national retailers, regional retailers, wholesale distributors, catalog supply houses, private label and original equipment manufacturers, and on the Internet. PRODUCTION The Company currently manufactures air conditioners in Effingham, Illinois; Longview, Texas; Ningbo, Shanghai and Nanjing, China; Dadra, India; and Manila, Philippines gas furnaces in Ningbo, China and rotary compressors in Xi'an, China. SOURCES AND AVAILABILITY OF RAW MATERIALS The principal raw materials used for production are steel, copper and aluminum, which the Company obtains from domestic and foreign suppliers. The Company also purchases certain components used in its 2 products from other manufacturers including thermostats, compressors, motors and electrical controls. The Company endeavors to obtain the lowest possible cost in its purchases of raw materials and components, which must meet specified quality standards, through an active global sourcing program. ENGINEERED PRODUCTS PRODUCTS The Engineered Products segment designs, manufactures and distributes media filters, electronic filters, humidifiers, dust collectors, fan filter units and solid-state thermoelectric heat pump modules. MARKETS The Company's Engineered Products are sold through manufacturers' representatives, distributors and direct sales to OEMs, retailers and end-users. PRODUCTION The Company produces electronic and media air cleaners and humidification systems in Sanford, North Carolina. HEPA/ULPA air cleaner products are produced in Albuquerque, New Mexico. The Company manufactures residential, commercial and industrial air cleaner products in Suzhou, China. Thermoelectric modules are produced in Lawrence Township, New Jersey and Quanzhou, China. SOURCES AND AVAILABILITY OF RAW MATERIALS The principal raw materials used for production are steel, aluminum, filter paper and ceramics, which the Company obtains from domestic and foreign suppliers. The Company also purchases certain components used in its products, such as motors and electrical controls, from other manufacturers. The Company endeavors to obtain the lowest possible cost in its purchases of raw materials and components, which must meet specified quality standards, through an active global sourcing program. SEASONALITY OF BUSINESS The Company is succeeding with its strategy to diversify sales and earnings and has changed its fiscal year to the calendar year, effective with the next fiscal year. However, results of operations and financial condition are currently principally dependent on the manufacture and sale of room air conditioners, the demand for which is highly seasonal in North American markets. Seasonally low volume sales are not sufficient to offset fixed costs, resulting in operating losses at certain times of the year. In addition, the Company's working capital needs are seasonal, with the greatest utilization of lines of credit occurring early in the calendar year. See "Management's Discussion and Analysis of Results of Operations and Financial Condition," at pages 10 through 15 herein. See also the discussion under "Working Capital Practices." WORKING CAPITAL PRACTICES The Company regularly reviews working capital with a view to maintaining the lowest level consistent with requirements of anticipated levels of operation. Sales currently peak in the period from March through June. Production is weighted towards the selling season, accordingly, the greatest use of credit lines occurs early in the calendar year. Cash balances peak in August. Information with respect to the Company's warranty and defective return policy is provided in Note 1 of the Notes to Consolidated Financial Statements at page F-5 herein. See also the information entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" at pages 10 through 15 herein. BACKLOG The Company's recently completed August 31, 2003 fiscal year coincides with the end of the North American air conditioner sales cycle. Backlog at this time of year is insignificant. 3 QUALITY ASSURANCE One of the key elements of the Company's strategy is a commitment to a single worldwide standard of quality. All of the Company's manufacturing facilities globally have earned (or are in the process of obtaining) the highest level of certification, ISO 9001, for their quality management systems under the International Standards Organization. The ISO 9000 program is an internationally recognized benchmark of quality management systems within a production facility. The same level of quality will be required at all of the Company's manufacturing facilities. PATENTS, TRADEMARKS, LICENSES AND CONCESSIONS HELD The Company owns a number of trademarks and licenses the name MAYTAG from Maytag Corporation for use on air conditioners and dehumidifiers. While the Company believes that its trademarks, such as FEDDERS, EMERSON QUIET KOOL, AIRTEMP, MELCOR, TRION, SUN, KOPPEL, EUBANK, POLENZ and MAC-10, and the trademark MAYTAG, are well known and enhance the marketing of its products, the Company does not consider the successful conduct of its business to be dependent upon such trademarks. The Company aggressively protects its trademark and intellectual property rights worldwide. COMPETITION All of the markets in which the Company does business are very competitive. Many of the Company's competitors are larger and have greater resources than the Company. The Company competes principally on the basis of technology, quality, price, a broad product line and its ability to deliver product and service to its customers on a just-in-time basis. RESEARCH AND DEVELOPMENT The Company's product development activities include ongoing research and development programs to redesign existing products, reduce manufacturing cost, increase product efficiencies and create new products. In fiscal 2003, 2002 and 2001, the Company spent approximately $9.5 million, $8.9 million and $9.1 million, respectively, on research and development. Research and development expenditures are included within selling, general and administrative expense and are expensed as incurred. ENVIRONMENTAL PROTECTION The Company's operations are subject to various United States (federal and state) and foreign environmental statutes and regulations, including laws and regulations dealing with storage, treatment, discharge and disposal of hazardous materials, substances and wastes and that affect the production of chemical refrigerants used in the operation of some of the Company's products. The refrigerant used in room air conditioners is an HCFC that is to be phased out of use in new products on January 1, 2010 in the United States. Chemical producers are currently developing environmentally acceptable alternative refrigerants for use in room air conditioners that are expected to be available in advance of any now-proposed phase-out deadlines for the current refrigerant. Modifications to the design of the Company's products may be necessary in order to utilize alternative refrigerants. The cost of the substitution of alternative refrigerants is not currently expected to have a material adverse impact on the Company. The Company believes it is currently in material compliance with applicable environmental laws and regulations. The Company did not make capital expenditures on environmental matters during the fiscal year ended August 31, 2003 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 December 31, 2004. EMPLOYEES The Company has approximately 2,870 employees worldwide. The Company considers its relations with its employees to be generally satisfactory. 4 FOREIGN OPERATIONS Foreign operations are subject to the risks inherent in such activities, such as foreign regulations, unsettled political conditions and exchange rate fluctuations. Through certain subsidiary companies, the Company has operations in a number of countries, including China, India, Germany, the United Kingdom and the Philippines. Of our thirteen manufacturing facilities, six are in China. The Company's foreign operations, at times, may be adversely affected by changes in government policies such as changes in laws and regulations (or the interpretation thereof), restrictions on imports and exports and sources of supply, duties or tariffs, the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of restrictions on currency conversion and remittances abroad and the expropriation of private enterprise. In addition, policy concerns particular to the United States with respect to a country in which the Company has operations could adversely affect the Company's operations in that country. The Company monitors its operations with a view to minimizing the impact on its foreign investments and overall business that could arise as a result of the risks inherent in maintaining operations in foreign countries as described above. See Note 1 of the Notes to Consolidated Financial Statements at page F-5 herein. ITEM 2. PROPERTIES The Company owns or leases the following primary facilities:
APPROXIMATE SQUARE FEET LOCATION PRINCIPAL FUNCTIONS OF FLOOR AREA -------- ------------------- ------------- Liberty Corner, New Jersey (Leased) Corporate Headquarters 25,000 HVACR Effingham, Illinois (Owned) Manufacture of air conditioners 650,000 Columbia, Tennessee (Owned) Warehouse 232,000 Longview, Texas (Owned) Manufacture of air conditioners 100,000 Vienna, Georgia (Owned) Warehouse 65,000 Manila, Philippines (Leased) Manufacture of air conditioners 41,000 Ningbo, China (Leased) Manufacture of air conditioners and 323,000 gas furnaces Shanghai, China (Leased) Manufacture of air conditioners 175,000 Nanjing, China (Leased) Manufacture of air conditioners 140,000 Dadra, India (50% owned) Manufacture of air conditioners 207,000 Xi'an, China (Leased) Manufacture of rotary compressors 120,000 Norderstedt, Germany (Leased) Sales and distribution of air 35,000 treatment and thermal technology products Singapore (Leased) Research and Design Center 14,600 Engineered Products Lawrence Township, New Jersey (Owned) Manufacture of thermoelectric devices 22,400 Quanzhou, China (Leased) Manufacture of thermoelectric devices 29,000 Sanford, North Carolina (Owned) Manufacture of air cleaning products 263,000 and humidifiers Albuquerque, New Mexico (Leased) Manufacture of cleanroom products 63,000 Suzhou, China (Leased) Manufacture of cleanroom products 41,000
The Effingham, Illinois facility is subject to a mortgage securing a $3.5 million, 1% promissory note payable over the next five years to the State of Illinois. The Sanford, North Carolina and the Lawrence Township, New Jersey facility are each subject to a mortgage securing repayment of economic development bonds and the Longview, Texas and Vienna, Georgia facilities are each subject to a mortgage securing bank 5 loans. The Company believes that productive capacity at its major manufacturing facilities is adequate to meet production needs in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AND AGE POSITION HELD EXECUTIVE OFFICER ------------ ------------- ----------------- Sal Giordano, Jr., 65 Chairman and Chief Executive Officer 1965 Jordan Bruno, 52 Vice President, Taxes 2000 Michael W. Carr, 50 Senior Vice President, Human Resources 2002 Nancy DiGiovanni, 52 Treasurer 1998 Robert N. Edwards, 57 Vice President and General Counsel 2000 Daryl G. Erbs, 46 Senior Vice President and President, HVACR 1999 Richard L. Essex, 54 Vice President, Fedders International 2003 Michael B. Etter, 48 President 1997 Michael Giordano, 39(1) Executive Vice President, Finance and 1999 Administration and Chief Financial Officer Kent E. Hansen, 56 Executive Vice President and Secretary 1996 C.P. Ho, 52 Vice President, Engineered Products 2003 Judy A. Katz, 52 Vice President, Corporate Marketing and 2000 Strategic Planning Robert L. Laurent, Jr., 48 Executive Vice President, Acquisitions and 1989 Alliances
--------------- (1) Son of Sal Giordano, Jr. BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS Mr. Sal Giordano, Jr. has been Chief Executive Officer of the Company for more than five years. Mr. Bruno was elected Vice President, Taxes in December 2000. Previously, he was Director, Taxes for more than five years. Mr. Carr was elected Senior Vice President, Human Resources in June 2002. Previously, he was Vice President, Human Resources and Administration with Otsuka America Pharmaceutical, Inc. from August 2000 and, prior thereto, Vice President, Human Resources -- Intercontinental Region with Wyeth Global Pharmaceuticals, Inc. from August 1996. Ms. DiGiovanni was elected to her present position in October 1998. Previously she was Assistant Treasurer of the Company from 1989. Mr. Edwards was elected to his present position in June 2000. He has been General Counsel of the Company for more than five years. Mr. Erbs was elected to his present position in June 2003. Prior thereto, he was Group Vice President, International and Unitary Products from June 2002 and Senior Vice President, International from March 2001. Previously, he was Senior Vice President, Technology and Vice President, Technology of the Company from August 1999. Prior to his joining the Company in February 1999, Mr. Erbs was with Carrier Corporation for many years, serving in a variety of engineering management positions. 6 Mr. Essex was elected Vice President, International in June 2003. Previously, he was Senior Vice President, International from January 2003 and Vice President, Sales, International from July 2001. Prior thereto, Mr. Essex held senior sales and marketing positions with Frigidaire Home Products. Mr. Etter was elected President in June 2000. Previously, he was Senior Vice President of the Company and Chairman and Chief Executive Officer of Fedders Air Conditioning from May 1, 1999. He served as Vice President of Global Purchasing for the Company from December 1997 to May 1999 and, prior thereto, Vice President, Purchasing of Fedders North America. Mr. Michael Giordano was elected Executive Vice President, Finance and Administration and Chief Financial Officer in June 2000. Prior thereto, he was Vice President, Finance and Chief Financial Officer of the Company from July 1, 1999. Previously, Mr. Giordano served as Senior Vice President of Fedders International, Inc. from 1998. Mr. Hansen was elected to his present position in June 2000. Previously he was Senior Vice President and Secretary from August 1996. Mr. Ho was elected Vice President, Engineered Products in June 2003. Previously, he was General Manager of the Company's Trion Inc. subsidiary from March 2003. Prior thereto, he was Vice President, Engineering -- FIAQ from September 2002 and Director, Engineering -- Trion since prior to 1998. Ms. Katz was elected Vice President, Strategic Planning in June 2000 and added Corporate Marketing in July 2003. Previously, she held the position of Vice President, Communications and Planning for more than five years. Mr. Laurent has been Executive Vice President, Acquisitions and Alliances since January 1999. Previously, he was Executive Vice President, Finance and Administration of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange. There is no established public trading market for the Company's Class B Stock, as there are restrictions on its transfer. As of October 31, 2003, there were 3,106 holders of Common Stock and 15 holders of Class B Stock. For information with respect to the Company's Common Stock and Class B Stock, see Note 9 of the Notes to Consolidated Financial Statements on pages F-18 through F-20. PRICE RANGE OF COMMON AND CLASS A STOCK For information regarding the high and low sale prices of the Company's Common and formerly outstanding Class A Stock for each of the quarters in the past two fiscal years, see Fedders Corporation Quarterly Financial Data (unaudited) on page F-36. DIVIDENDS PAID ON COMMON, CLASS A AND CLASS B STOCK For information regarding the dividends paid by the Company on its Common, Class B and formerly outstanding Class A Stock in the past five fiscal years, see Selected Financial Data on page 8. EQUITY COMPENSATION PLAN INFORMATION All stock option plans, as approved by the stockholders, provide for the granting to employees and officers of incentive stock options (as defined under current tax laws) and non-qualified stock options. All of the plans provide for the granting of non-qualified stock options to directors who are not employees. Stock options granted prior to June 1, 2002 are exercisable one year after the date of grant. Stock options granted subsequent to June 1, 2002 vest over a four-year period. Options, if not exercised, will expire five years from the date of grant. Certain options are only exercisable at the end of five years unless a sales target is achieved prior thereto. 7
(C) NUMBER OF SECURITIES (A) REMAINING AVAILABLE FOR NUMBER OF SECURITIES (B) FUTURE ISSUANCE UNDER TO BE ISSUED WEIGHTED-AVERAGE STOCK OPTION PLANS UPON EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES STOCK OPTION PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A)) -------------------------- -------------------- ------------------- ------------------------ Stock option plans approved by stockholders............ 2,228,000 $3.28 1,514,000 --------- ----- --------- Total........................ 2,228,000 $3.28 1,514,000 ========= ===== =========
ITEM 6. SELECTED FINANCIAL DATA(1)
2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENT, SHARE AND PER SHARE DATA) Net sales............................... $421,703 $373,702 $405,697 $416,181 $362,048 Gross profit............................ 92,868 83,050 68,700 104,828 84,591 Percent of net sales.................. 22.0 22.2 16.9 25.2 23.4 Operating income (loss)(2).............. 31,079 20,339 (15,045) 46,854 40,258 Percent of net sales.................... 7.4 5.4 (3.7) 11.3 11.1 Income (loss) before income taxes and cumulative effect of a change in accounting principle.................. 13,020 2,976 (33,263) 30,474 30,986 Percent of net sales.................. 3.1 .8 (8.2) 7.3 8.6 Income (loss) before cumulative effect of a change in accounting principle... 8,796 8,009 (22,453) 20,401 20,724 Percent of net sales.................. 2.1 2.1 (5.5) 4.9 5.7 Cumulative effect of a change in accounting principle(3)............... 11,906 -- -- -- -- Net (loss) income....................... (3,110) 8,009 (22,453) 20,401 20,724 Preferred Stock dividends(5)............ 618 -- -- -- -- Net (loss) income applicable to common stockholders.......................... $ (3,728) $ 8,009 $(22,453) $ 20,401 $ 20,724 (Loss) earnings per common share(4)(5)(6): Basic................................. $ (0.12) $ 0.25 $ (0.71) $ 0.58 $ 0.56 Diluted............................... (0.12) 0.25 (0.71) 0.57 0.56 Dividends per share declared(4)(5)(6): Preferred Stock....................... $ 1.613 -- -- -- -- New Common Stock...................... 0.120 $ 0.060 -- -- -- Old Common/Class A Stock.............. -- 0.060 $ 0.120 $ 0.120 $ 0.105 New Class B Stock..................... 0.120 0.060 -- -- -- Old Class B Stock..................... -- 0.054 0.108 0.108 0.095 Cash and cash equivalents............... $ 60,902 $ 67,379 $ 51,192 $ 87,193 $117,509 Total assets............................ 392,929 366,128 362,332 388,175 382,342 Long-term debt (including current portion)(7)........................... 164,044 167,131 168,455 166,434 161,363 Stockholders' equity(4)(5)(6)(8)........ 74,928 77,818 73,014 112,260 108,933 Capital expenditures.................... 7,271 7,846 10,773 9,858 9,378 Depreciation and amortization(9)........ 9,543 14,830 15,431 13,076 10,279 -------- -------- -------- -------- --------
8
2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENT, SHARE AND PER SHARE DATA) Other financial data: Cash flow provided by (used in): Operating activities.................. $ 5,617 $ 34,134 $ 5,919 $ 4,619 $ 51,989 Investing activities.................. (7,368) (14,564) (30,327) (15,037) (48,778) Financing activities.................. (4,726) (3,383) (11,593) (19,898) 23,312
--------------- (1) The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements and the notes thereto. (2) Fiscal 2001 results include $8,947 of asset impairment, employee severance and other restructuring charges, $4,031 of one-time inventory charges, a $7,583 deferred compensation charge relating to the retirement of an officer of the Company, an additional $2,283 of other non-recurring inventory write-offs, $1,364 of operating losses incurred at the Tennessee and Maryland facilities subsequent to the announcement that production at these facilities would cease, a $726 non-cash charge for the re-pricing of a majority of unexercised stock options and $716 of other one-time charges. (3) In 2003, the Company recorded a transitional goodwill impairment charge of $11.9 million as a cumulative effect of a change in accounting principle. See Note 1 to the Notes to Consolidated Financial Statements. (4) On May 16, 2003, the Company's Board of Directors authorized the distribution of transferable rights to the Company's Common and Class B stockholders. Stockholders received one right for every ten shares of Common Stock and Class B Stock they held as of July 1, 2003. Each transferable right represented the right to purchase one share of the Company's Series A Cumulative Preferred Stock at the subscription price of $23.70, until the expiration date of August 12, 2003. At the expiration of the offering on August 12, 2003, 262,316 rights had been subscribed. (5) In October 2002, the Company's Board of Directors approved a plan pursuant to which a new class of cumulative preferred stock would be offered to stockholders in exchange for up to 15,000,000 shares of the Company's Common Stock, with 0.14 shares of Series A Cumulative Preferred Stock being offered in exchange for every share of Common Stock. The Series A Cumulative Preferred Stock receives a cumulative annual dividend of $2.15 and has a liquidation preference of $25.00 plus the amount of any accrued and unpaid dividends. The holders of the Series A Cumulative Preferred Stock has no right to vote, except in limited circumstances. The exchange of 2,315,750 shares of Common Stock for 323,947 shares of Series A Cumulative Preferred Stock was completed on December 27, 2002. On February 14, 2003, the Company announced an offer to exchange shares of Series A Cumulative Preferred Stock for up to 12,500,000 shares of the Company's Common Stock, with 0.14 shares of Preferred Stock being offered in exchange for every share of Common Stock. The exchange of 633,082 shares of Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was completed on March 18, 2003. (6) On March 26, 2002, the Company's stockholders approved a recapitalization plan (the "Plan") which became effective the same day. Under the Plan the holder of each share of Common Stock received 1.1 shares of new Common Stock, the holder of each share of Class A Stock received 1 share of new Common Stock and the holder of each share of Class B Stock received 1.1 shares of new Class B Stock. (7) In August 1999, a subsidiary of the Company issued $50,000 of 9 3/8% Senior Subordinated Notes, proceeds of which were utilized, in part, to replenish cash used to acquire Trion. (8) During fiscal 2001, the Company repurchased 2,998,000 shares of old Common and Class A Stock at an average price of $4.39 per share for a total of $13,169, excluding commissions. During fiscal 2000, the Company repurchased 2,768,000 shares of old Common and Class A Stock at an average price of $4.87 per share for a total of $13,484, excluding commissions. During fiscal 1999, the Company repurchased 2,601,000 shares of old Common and Class A Stock at an average price of $5.08 per share for a total of $13,215, excluding commissions. 9 (9) In accordance with SFAS No. 142, beginning September 1, 2002, the Company no longer amortizes goodwill. Goodwill amortization expense was $3.0 million, $2.7 million, $2.7 million, and $2.4 million in fiscal years 2002, 2001, 2000 and 1999, respectively. See Note 1 to the Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is management's discussion and analysis of certain significant factors which affected the Company's financial position and operating results during the periods included in the accompanying consolidated financial statements. OPERATING RESULTS AS A PERCENT OF NET SALES
2003 2002 2001 ---- ---- ---- Gross profit................................................ 22.0% 22.2% 16.9% Selling, general and administrative expense................. 14.7 16.9 18.4 Asset impairment, employee severance and other restructuring charges................................................... -- -- 2.2 Operating income (loss)..................................... 7.4 5.4 (3.7) Interest expense............................................ 4.4 5.0 4.4 Income (loss) before income taxes and cumulative effect of a change in accounting principle............................ 3.1 0.8 (8.2) ---- ---- ----
NET (LOSS) INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
2003 2002 2001 ------- ------ -------- Net (loss) income applicable to common stockholders..... $(3,728) $8,009 $(22,453) Cumulative effect of a change in accounting principle... 11,906 -- -- Net income (loss) applicable to common stockholders before cumulative effect of a change in accounting principle............................................. 8,178 8,009 (22,453) Net income (loss) per common share before cumulative effect of a change in accounting principle: Basic................................................. $ 0.27 $ 0.25 $ (0.71) Diluted............................................... $ 0.27 $ 0.25 $ (0.71)
RESULTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2003 (FISCAL 2003), THE YEAR ENDED AUGUST 31, 2002 (FISCAL 2002) AND THE YEAR ENDED AUGUST 31, 2001 (FISCAL 2001) THE COMPANY'S RESULTS OF OPERATIONS ARE PRESENTED IN TWO REPORTABLE SEGMENTS: (1) HEATING, VENTILATION, AIR CONDITIONING, AND REFRIGERATION (HVACR), AND (2) ENGINEERED PRODUCTS. THE HVACR SEGMENT COMPRISES THE COMPANY'S HEATING, VENTILATION, AIR CONDITIONING AND REFRIGERATION SYSTEMS OPERATIONS. THE ENGINEERED PRODUCTS SEGMENT COMPRISES THE COMPANY'S COMMERCIAL AND INDUSTRIAL AIR CLEANING, HUMIDIFICATION AND THERMOELECTRIC PRODUCTS OPERATIONS. ON AUGUST 26, 2003, THE BOARD OF DIRECTORS OF THE COMPANY DECIDED TO CHANGE THE COMPANY'S FISCAL YEAR END FROM AUGUST 31 TO DECEMBER 31. THE COMPANY INTENDS TO FILE A TRANSITION REPORT ON FORM 10-Q TO COVER THE TRANSITION PERIOD OF SEPTEMBER 1, 2003 TO DECEMBER 31, 2003. Net sales for fiscal 2003 totaled $421.7 million, an increase of 12.8% from sales of $373.7 million in fiscal 2002. The sales increase in fiscal 2003 reflects a $49.5 million, or 14.9%, increase in sales in the HVACR segment to $382.2 million compared to $332.7 million in fiscal 2002. Sales in the HVACR segment increased in all major global markets despite a general decline in pricing. In the Engineered Products segment, sales were $39.5 million in fiscal 2003 compared to $41.0 million in fiscal 2002. The 3.6% sales decline was due to continued weak demand in the capital equipment market for commercial and industrial air cleaners. Net sales for fiscal 2002 of $373.7 million, declined by approximately 7.9% compared to sales of $405.7 million in fiscal 2001. Sales declined in all segments due to the weak global economic environment. In the HVACR segment, sales of $332.7 million reflected a decline of 7.6% compared to $360.0 million in fiscal 10 2001, due to weak market conditions following two previous cool summers in the North American market which reduced demand for room air conditioners, weakness in demand for cooling products in the wireless telecom capital equipment market and general weakness in international markets, particularly in Europe, as well as continued global deflationary pressures which resulted in a decline in pricing. In the Engineered Products segment sales of $41.0 million declined by approximately 10.4% compared to $45.7 million in fiscal 2001. The decline was primarily the result of a decrease in sales of fan filter units used in cleanroom applications due to the weak semi-conductor capital equipment market. Gross profit improved to $92.9 million in fiscal 2003 from $83.0 million in fiscal 2002. The gross profit percentage was 22.0% of net sales in fiscal 2003 as compared to 22.2% in fiscal 2002. The decline reflects continued deflationary effects on pricing, overhead absorption variances at Engineered Products production facilities due to lower production and sales and to higher manufacturing engineering costs related to the movement of additional high-volume production to Asia and start-up expenses related to supporting the introduction of new products globally. In fiscal 2002, the gross profit percentage for the fiscal year improved to 22.2% of net sales from 16.9% in fiscal 2001. The increase reflects improvements in the Company's cost structure following the restructuring implemented at the end of fiscal 2001, which resulted in the transfer of a majority of the production of room air conditioners and all dehumidifiers and compressors from North America to China. Selling, general and administrative expenses for fiscal 2003 were $61.9 million, or 14.7% of net sales, as compared to $63.1 million, or 16.9% of net sales, in fiscal 2002. The decrease was primarily due to the elimination of goodwill amortization expense. Selling, general and administrative expenses for fiscal 2002 were $63.1 million, or 16.9% of net sales, compared to $74.8 million or 18.4% of net sales, in fiscal 2001. The decline reflected continued cost reduction efforts as the result of the integration of acquired companies. Fiscal 2001 expenses included a one-time compensation charge of $7.6 million. Operating income increased 52.8% in fiscal 2003 to $31.1 million, or 7.4% of net sales, compared to $20.3 million, or 5.4% of net sales, in fiscal 2002, which included $3.0 million in goodwill amortization expense. The increase in operating income reflects higher sales and improved operating leverage within the HVACR segment. Operating income was $20.3 million for fiscal 2002, or 5.4% of net sales, compared to an operating loss of $15.0 million in fiscal 2001, which included $8.9 million in asset impairment, employee severance, and other restructuring charges, a $7.6 million compensation charge, $4.0 million of one-time inventory charges, $2.3 million of other non-recurring inventory write-offs, $1.4 million of operating losses incurred at the Tennessee and Maryland facilities subsequent to the announcement that production at these facilities would cease, and $0.7 million of other one-time charges. Net interest expense decreased in fiscal 2003 to $18.5 million, or 4.4% of net sales, compared to $18.6 million, or 5.0% of net sales, in fiscal 2002 due to lower borrowing costs on the Company's short-term lines of credit. Net interest expense increased in fiscal 2002 to $18.6 million, or 5.0% of net sales, compared to $17.8 million, or 4.4% of net sales, in fiscal 2001 due to lower cash balances at the beginning of the fiscal year and cash used for acquisitions during the year. Upon adoption of SFAS No. 142, the Company was required to perform a transitional goodwill impairment test. The transitional goodwill impairment test was completed during the fourth quarter of fiscal year 2003. As a result, the Company recognized a non-cash transitional goodwill impairment charge of $11.9 million in its Engineered Products segment, because the projected financial performance of the Engineered Products segment was insufficient to support the related goodwill. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle as of September 1, 2002. Net income in fiscal 2003 applicable to common stockholders before the cumulative effect of a change in accounting principle was $8.2 million, or 27 cents diluted earnings per common share, compared to net income of $8.0 million, or 25 cents diluted earnings per common share, in fiscal 2002. Net loss applicable to common stockholders in fiscal 2003, including the $11.9 million non-cash transitional goodwill impairment charge, was $3.7 million, or 12 cents diluted loss per common share. In fiscal 2002, net income improved to $8.0 million, or 25 cents diluted earnings per common share, compared to a net loss of $22.5 million, or 71 cents diluted loss per common share, in fiscal 2001. Net income in fiscal 2002 benefited from a $6.0 million reduction in accrued 11 tax liabilities. The reduction was due to reserves no longer required for federal, state and foreign tax purposes primarily due to favorable audit results and a change in estimate for foreign taxes. LIQUIDITY AND CAPITAL RESOURCES Working capital requirements of the Company are seasonal, with cash balances peaking in the fourth fiscal quarter and the greatest utilization of its lines of credit occurring early in the calendar year. The Company ended fiscal 2003 with $60.9 million in cash and cash equivalents compared to $67.4 million at August 31, 2002. In August 2002, the Company received a federal tax refund of $8.3 million due to recent changes in U.S. tax laws that allowed the Company to extend the carry-back period for certain federal net operating losses from 2 to 5 years. Net cash provided by operations in fiscal 2003 amounted to $5.6 million compared to $34.1 million in the prior year. Cash provided by operations declined primarily as a result of increased finished goods inventories, offset in part by an increase in accounts payable. Net inventories at the end of the year were $78.9 million compared to $48.6 million at the end of the last fiscal year. The increase in finished goods was the result of a build up of inventory to support in-season sales due to the shift offshore of production of high volume products and to support sales of new products globally. In fiscal 2003 the company completed two exchange offers in which a new class of cumulative preferred stock was offered to stockholders in exchange for the Company's Common Stock. The exchange offers were intended to provide an opportunity to stockholders interested in a security that will provide significantly higher dividends than the Common Stock. The exchange of 2,315,750 shares of Common Stock for 323,947 shares of Series A Cumulative Preferred Stock was completed on December 27, 2002, and the exchange of 633,082 shares of Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was completed on March 18, 2003. Subsequently, the Company distributed transferable rights to the Company's Common and Class B stockholders enabling them to purchase the Series A Cumulative Preferred Stock at a discount to market prices. The rights offering was made to raise capital for possible future strategic acquisitions, to decrease the use of debt for working capital, and for general corporate purposes. As of the expiration of the offer on August 12, 2003, 262,316 rights had been subscribed for gross proceeds to the Company of $6,167. Net cash used in investing activities by the Company in fiscal 2003 was $7.4 million versus $14.6 million in the prior year. Investments in acquisitions and joint ventures for the year amounted to $1.3 million. In March 2003, the Company entered into a joint venture with Nanjing Suning High & New Technology Industrial Park Co., Ltd. to manufacture split-type air conditioners in China. The Company has a 2/3 interest in the joint venture, Fedders Suning Nanjing Co., Ltd. Capital expenditures for the year were $7.3 million compared to $7.8 million in fiscal 2002, and were primarily related to investments in tooling, machinery and equipment to support production in Asia. Net cash used in financing activities in fiscal 2003 amounted to $4.7 million and consisted primarily of $4.1 million of cash dividends and repayments of debt of $6.4 million offset by $6.2 million in proceeds from a rights offering. Net cash used in financing activities in the prior year was $3.4 million and consisted primarily of $3.7 million of cash dividends. In fiscal 2003, the Company's $100 million revolving credit facility was utilized during the five-month period from January through May with a maximum outstanding balance during the fiscal year of $41.8 million. The term of this credit facility was extended to February 1, 2006. The Company also utilized short-term borrowing facilities to support production in the Company's China operations. There was a maximum outstanding balance of $26.7 million in China during fiscal 2003. 12 The following summarizes Fedders' contractual cash obligations and commercial commitments at August 31, 2003, and the effect such obligations are expected to have on liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD ---------------------------------------------------- LESS THAN ------------------------------- AFTER CONTRACTUAL OBLIGATION TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS ---------------------- -------- ------- --------- --------- ------- (AMOUNTS IN THOUSANDS) Long-term debt, including current maturities........................ $159,772 $ 4,014 $2,304 $150,003 $3,451 Capital lease obligations........... 5,675 735 1,685 1,862 1,393 Operating leases and contractual minimum payments.................. 19,596 3,463 5,954 5,441 4,738 Short term notes.................... 7,520 7,520 -- -- -- -------- ------- ------ -------- ------ Total contractual cash obligations....................... $192,563 $15,732 $9,943 $157,306 $9,582 ======== ======= ====== ======== ======
From time to time, subsidiaries of the Company may guarantee the debt of certain unconsolidated joint ventures, up to a maximum of the Company's ownership percentage in the unconsolidated joint venture. The Company currently holds no collateral for such guarantees, and has not recorded corresponding obligations. The Company's subsidiaries would be obligated to perform in the event the unconsolidated joint ventures fail to pay the principal and interest on the loans or fail to comply with the terms of the loan agreement.
COMMITMENTS BY PERIOD ------------------------------------------------- LESS THAN ------------------------------ AFTER 5 OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS ---------------------------- ------ ------ --------- --------- ------- (AMOUNTS IN THOUSANDS) Guarantee of debt........................ $3,000 $600 -- $2,400 -- ------ ---- -- ------ -- Total commercial commitments............. $3,000 $600 -- $2,400 -- ====== ==== == ====== ==
Management believes that the Company's cash, earnings and borrowing capacity are adequate to meet the demands of its operations and its long-term credit requirements. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. The adoption of this statement in the first quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted this statement at the beginning of its fiscal year 2003. The adoption of this statement did not have a material effect on the Company's financial position, results of operations and its cash flows. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. SFAS 146 is effective for the Company for disposal activities initiated after December 31, 2002 and will be applied prospectively. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting And Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The interpretation also requires enhanced and additional disclosures of guarantees in 13 interim and annual financial statements for periods ending after December 15, 2002. The Company adopted this statement in the second quarter of fiscal year 2003. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123 ("SFAS 123")." This statement provides alternative methods of transition for a voluntary change to the fair- value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. The Company adopted the disclosure requirements of this statement in the second quarter of fiscal year 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation defines when a business enterprise must consolidate a variable interest entity. This interpretation applies immediately to variable interest entities created after January 31, 2003 and became effective for all other transactions as of July 1, 2003. However, in October 2003 the FASB permitted companies to defer the July 1, 2003 effective date to December 31, 2003, in whole or in part, and indicated that it would provide further clarification of this interpretation before December 31, 2003. The Company has determined that it is not reasonably probable that it will be required to consolidate or disclose information about a variable interest entity. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, generally all provisions of this statement should be applied prospectively. The adoption of this statement in the fourth quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). This statement changes the accounting for certain financial instruments that issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement in the fourth quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS ESTIMATES In preparing financial statements in accordance with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEFERRED TAX ASSETS At August 31, 2003, the Company has foreign net operating loss carry-forwards of approximately $1.3 million, for which the Company has recorded a deferred tax asset. For the Company to realize the benefit of its deferred tax asset, the Company must achieve future earnings prior to the expiration of its net operating loss carry-forwards. The Company has established a valuation allowance against the future tax benefit of a portion of its net operating loss carry-forwards. The Company may need to further adjust that valuation allowance if future earnings are, or are projected to be, significantly different from current estimates. The 14 valuation allowance reflects the uncertainty associated with the realization of deferred tax assets. The increase in the valuation reserve was due primarily to foreign net operating losses. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the recoverability of the carrying amount of an asset or asset group should be assessed. The Company assesses the carrying amount of the asset or asset group by comparing the carrying amount to the estimate of cash inflows, net of outflows. If the estimated net cash inflows are less than the asset carrying amount, the asset is written down to fair value. Fair value is based upon quoted market prices, if available. When quoted market prices are not available, the Company estimates fair value based upon the selling prices of similar assets or valuation techniques. The Company must estimate the net cash inflows to assess an asset or asset group carrying amount and fair value. Estimates are based upon internal budgets and forecasts. A change in the utilization of the assets or a decision to exit certain product lines or manufacturing locations could impact the Company's estimate of future cash flows. A decrease in estimated future cash flows could reduce the fair values of long-lived assets, increasing the likelihood of impairment, which could have a significant impact on the Company's consolidated results of operations and financial position. The Company is required to test goodwill for impairment at least annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carry amount. The Company has elected to perform the annual tests for indications of goodwill impairment as of September 30 of each year. The Company identifies potential goodwill impairment by comparing the fair value of a reporting segment with its carrying amount, including goodwill. The Company determines fair value using a discounted cash flow and market-multiple approach. If the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting segment is not considered impaired. If the carrying amount of a segment exceeds its fair value, the amount of goodwill impairment loss, if any, must be measured. The Company measures the amount of goodwill impairment loss by comparing the implied fair value of reporting segment goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting segment goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized as an operating expense. WARRANTY AND DEFECTIVE RETURNS The Company's air conditioner products are covered by standard product warranty plans that extend from 1 to 5 years. In addition, major retailers have consumer return policies which allow consumers the ability to return product that may be defective in lieu of field service. Upon return to the Company, these units are inspected, repaired as required, reboxed and held for future sale as factory reconditioned products. A portion of those units returned is not repairable. At the time revenue is recognized, upon shipment, measurements of those sales are reduced by estimates of the future costs associated with fulfilling warranty obligations and for the expense associated with repairing or scrapping defective returns. The Company estimates warranty costs and defective returns utilizing historical failure and defective return rates, which may or may not be indicative of future rates. The estimate for warranty obligations and defective returns is a critical accounting estimate for the HVACR segment. Over the past 3 years, warranty and defective return costs represented approximately 5.5% of sales for the HVACR segment. Each quarter, the estimate of warranty and defective return obligations, including the assumptions about estimated failure and return rates, is reevaluated. The Company has discussed the development and selection of this critical accounting estimate with the Audit Committee of its Board of Directors and the Audit Committee has reviewed the Company's disclosure relating to it in this MD&A. RISK FACTORS Foreign operations are subject to the risks inherent in such activities, such as foreign regulations, unsettled political conditions and exchange rate fluctuations. 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company at August 31, 2003 and 2002, and for the years ended August 31, 2003, 2002 and 2001, the notes thereto and the report of the Company's independent auditors thereon are included at pages F-1 through F-38, herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14 (c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company including its consolidated subsidiaries required to be included in the Company's reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. During the Company's last fiscal quarter, there have not been any significant changes in the Company's internal controls over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the Company's directors, see the section entitled "Election of Directors" in the Company's Proxy Statement, to be filed in connection with the Company's Annual Meeting of Stockholders to be held on April 27, 2004, which section is incorporated herein by reference. For information with respect to the Company's executive officers, see Part I of this Form 10-K. The Company has adopted a code of ethics for its principal executive officer and senior financial officers pursuant to Section 406 of the Sarbanes Oxley Act. Copies of the code are available free of charge by writing to Secretary, Fedders Corporation, 505 Martinsville Road, Liberty Corner, NJ 07938. Identification of the members of the Audit Committee of the Board of Directors as well as the Board of Directors' determination as to whether one or more members is a financial expert is incorporated by reference to the Company's Proxy Statement referred to above. ITEM 11. EXECUTIVE COMPENSATION See the section entitled "Executive Compensation" in the Company's Proxy Statement, to be filed in connection with the Company's Annual Meeting of Stockholders to be held on April 27, 2004, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the sections entitled "Security Ownership of Directors and Officers" and "Principal Stockholders" in the Company's Proxy Statement, to be filed in connection with the Company's Annual Meeting of Stockholders to be held on April 27, 2004, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the section entitled "Election of Directors" in the Company's Proxy Statement, to be filed in connection with the Company's Annual Meeting of Stockholders to be held on April 27, 2004, which section is incorporated herein by reference. 16 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES See the section entitled "Independent Public Accountants" in the Company's Proxy Statement, to be filed in connection with the Company's Annual Meeting of Stockholders to be held on April 27, 2004, which section is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements The following Consolidated Financial Statements of the Company and its subsidiaries are included:
PAGE # ----------- Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended August 31, 2003, 2002 and 2001.................................................. F-1 Consolidated Balance Sheets at August 31, 2003 and 2002..... F-2 Consolidated Statements of Cash Flows for the years ended August 31, 2003, 2002 and 2001............................ F-3 Consolidated Statements of Stockholders' Equity for the years ended August 31, 2003, 2002 and 2001................ F-4 Notes to Consolidated Financial Statements.................. F-5-F-34 Independent Auditors' Reports............................... F-35 & F-38
(a) 2. Financial Statement Schedule Consolidated Schedule as of and for the years ended August 31, 2003, 2002 and 2001 II. Valuation and Qualifying Accounts...................... F-37
All other schedules have been omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the notes thereto. (a) 3. Exhibits (3) (i) Restated Certificate of Incorporation of the Company filed as Exhibit (A) to Annex (A) of the Company's Proxy Statement/Prospectus dated January 9, 2002 and incorporated herein by reference. By-Laws of the Company, filed as Exhibit 3(ii) to the (ii) Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2002 and incorporated herein by reference. (4) (i) Registration Statement on Form S-4 filed with the Securities and Exchange Commission on September 10, 1997 and incorporated herein by reference. Registration Statement on Form S-4 filed with the Securities (ii) and Exchange Commission on January 24, 2000 and incorporated herein by reference. (10) (i) Stock Option Plan VIII, filed as Annex F to the Company's Proxy Statement -- Prospectus dated May 10, 1996 and incorporated herein by reference. Employment Agreement between the Company and Sal Giordano, (ii) Jr. effective December 14, 2001, filed as Exhibit 10 (ii) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2002 and incorporated herein by reference. (21) Subsidiaries. (23) Consent of Deloitte & Touche LLP. (31) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. Current Report on Form 8-K dated October 14, 2003, reporting the Company's year-end results for fiscal year 2003. 17 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, thereunto duly authorized. FEDDERS CORPORATION By /s/ MICHAEL GIORDANO ------------------------------------ Michael Giordano Executive Vice President, Finance and Administration and Chief Financial Officer November 26, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ SALVATORE GIORDANO, JR. Chairman and Chief Executive November 26, 2003 -------------------------------------- Officer and a Director Salvatore Giordano, Jr. (Principal Executive Officer) /s/ WILLIAM J. BRENNAN Director November 26, 2003 -------------------------------------- William J. Brennan /s/ DAVID C. CHANG Director November 26, 2003 -------------------------------------- David C. Chang /s/ MICHAEL L. DUCKER Director November 26, 2003 -------------------------------------- Michael L. Ducker /s/ JOSEPH GIORDANO Director November 26, 2003 -------------------------------------- Joseph Giordano /s/ C. A. KEEN Director November 26, 2003 -------------------------------------- C. A. Keen /s/ HOWARD S. MODLIN Director November 26, 2003 -------------------------------------- Howard S. Modlin /s/ S. A. MUSCARNERA Director November 26, 2003 -------------------------------------- S. A. Muscarnera /s/ ANTHONY E. PULEO Director November 26, 2003 -------------------------------------- Anthony E. Puleo /s/ MICHAEL GIORDANO Executive Vice President, November 26, 2003 -------------------------------------- Finance and Administration and Michael Giordano Chief Financial Officer (Principal Financial and Accounting Officer)
18 FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED AUGUST 31, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net sales................................................... $421,703 $373,702 $405,697 Costs and expenses: Cost of sales............................................. 328,835 290,652 336,997 Selling, general and administrative expense............... 61,904 63,108 74,798 Asset impairment, employee severance and other restructuring (credits) charges........................ (115) (397) 8,947 -------- -------- -------- 390,624 353,363 420,742 -------- -------- -------- Operating income (loss)..................................... 31,079 20,339 (15,045) Partners' net interest in joint venture results............. (14) 713 (160) Interest expense (net of interest income of $1,409, $1,232 and $2,934 in 2003, 2002 and 2001, respectively).......... (18,546) (18,617) (17,845) Other income (expense)...................................... 501 541 (213) -------- -------- -------- Income before income taxes and cumulative effect of a change in accounting principle................................... 13,020 2,976 (33,263) Provision (benefit) for income taxes........................ 4,224 (5,033) (10,810) -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle...................................... 8,796 8,009 (22,453) Cumulative effect of a change in accounting principle....... 11,906 -- -- -------- -------- -------- Net (loss) income........................................... (3,110) 8,009 (22,453) Preferred stock dividends................................... (618) -- -- -------- -------- -------- Net (loss) income applicable to common stockholders......... (3,728) 8,009 (22,453) Other comprehensive (loss) income: Foreign currency translation, net of tax.................... (933) 853 (1,037) -------- -------- -------- Comprehensive (loss) income................................. $ (4,661) $ 8,862 $(23,490) ======== ======== ======== Earnings (loss) per common share: Basic/diluted earnings (loss) per common share before cumulative effect of a change in accounting principle, less preferred stock dividends......................... $ 0.27 $ 0.25 $ (0.71) Cumulative effect of a change in accounting principle..... (0.39) -- -- -------- -------- -------- Basic/diluted (loss) earnings per common share............ $ (0.12) $ 0.25 $ (0.71) ======== ======== ======== Weighted average shares: Basic..................................................... 30,638 31,492 31,808 Diluted................................................... 30,704 31,494 31,808 Dividends per share declared: New Common Stock.......................................... $ 0.120 $ 0.060 -- Old Common/Class A Stock.................................. -- 0.060 $ 0.120 New Class B Stock......................................... 0.120 0.060 -- Old Class B Stock......................................... -- 0.054 0.108 Preferred Stock........................................... 1.613 -- -- ======== ======== ========
See accompanying notes to the consolidated financial statements F-1 FEDDERS CORPORATION CONSOLIDATED BALANCE SHEETS
AUGUST 31, ----------------------- 2003 2002 ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 60,902 $ 67,379 Accounts receivable (less allowances of $2,032 and $2,613 in 2003 and 2002, respectively)........................ 35,178 31,768 Net inventories........................................... 78,948 48,580 Deferred income taxes..................................... 7,654 5,620 Assets held for sale...................................... 8,564 -- Other current assets...................................... 21,463 13,564 -------- -------- Total current assets........................................ 212,709 166,911 Net property, plant and equipment........................... 55,860 66,846 Deferred income taxes....................................... 8,224 2,867 Goodwill.................................................... 78,630 90,536 Other intangible assets..................................... 1,788 1,556 Other assets................................................ 35,718 37,412 -------- -------- TOTAL ASSETS................................................ $392,929 $366,128 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes.......................................... $ 7,520 $ 9,829 Current portion of long-term debt......................... 4,652 3,362 Accounts payable.......................................... 56,812 41,888 Income taxes payable...................................... 5,452 5,955 Accrued expenses.......................................... 48,552 37,099 -------- -------- Total current liabilities................................... 122,988 98,133 Long-term debt.............................................. 159,392 163,769 OTHER LONG-TERM LIABILITIES: Warranty.................................................. 805 1,285 Other..................................................... 30,232 20,940 Partners' interest in joint ventures........................ 4,584 4,183 STOCKHOLDERS' EQUITY: Preferred Stock, $0.01 par value, 15,000 shares authorized, 675 and none issued at August 31, 2003 and 2002, respectively.............................................. 7 -- Common Stock, $0.01 par value, 70,000 shares authorized, 35,278 and 38,249 issued at August 31, 2003 and 2002, respectively.............................................. 353 382 Class B Stock, $0.01 par value, 5,000 shares authorized, 2,493 issued at August 31, 2003 and 2002, respectively.... 25 25 Additional paid-in capital.................................. 74,025 68,870 Retained earnings........................................... 40,179 47,551 Accumulated other comprehensive loss........................ (2,245) (1,312) -------- -------- 112,344 115,516 Deferred compensation....................................... (94) (376) Treasury stock, at cost, 8,158 shares of Common Stock at August 31, 2003 and 2002, respectively.................... (37,322) (37,322) -------- -------- Total stockholders' equity.................................. 74,928 77,818 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $392,929 $366,128 ======== ========
See accompanying notes to the consolidated financial statements F-2 FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $ (3,110) $ 8,009 $(22,453) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization............................. 9,543 14,830 15,431 Deferred income taxes..................................... 4,341 6,756 (5,950) Tax benefit related to stock options exercised............ -- -- 134 Stock option repricing charge............................. 147 (339) 726 Fixed asset impairment.................................... -- -- 6,206 Goodwill impairment....................................... 11,906 -- -- Partners' net interest in joint venture results........... 14 (713) 160 CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts receivable....................................... (3,410) (6,667) 3,639 Inventories............................................... (30,368) 25,557 8,215 Other current assets...................................... (7,899) (6,755) (812) Other assets.............................................. 2,751 (4,238) (704) Income taxes payable...................................... (503) (471) (4,631) Accounts payable.......................................... 14,924 673 665 Accrued expenses.......................................... 11,317 (2,858) 1,434 Other long-term liabilities............................... (2,920) (285) 4,320 Other -- net.............................................. (1,116) 635 (461) -------- -------- -------- Net cash provided by operating activities................... 5,617 34,134 5,919 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.................. (7,271) (7,846) (10,773) Disposal of property, plant and equipment................... 1,236 1,290 140 Acquisition of businesses, net of cash acquired............. (1,333) (8,008) (19,694) -------- -------- -------- Net cash used in investing activities....................... (7,368) (14,564) (30,327) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments of) proceeds from short-term notes.............. (2,309) 2,238 3,717 Repayments of long-term debt................................ (4,087) (3,666) (2,826) Proceeds from long-term borrowing........................... 1,000 2,000 4,519 Proceeds from stock options exercised....................... 30 1 526 Cash dividends.............................................. (4,126) (3,725) (3,914) Repurchases of capital stock................................ -- -- (13,237) Proceeds from stock rights subscribed....................... 6,167 -- -- Cost of offerings and recapitalization...................... (1,401) (428) (587) Other....................................................... -- 197 209 -------- -------- -------- Net cash used in financing activities....................... (4,726) (3,383) (11,593) -------- -------- -------- Net (decrease) increase in cash and cash equivalents........ (6,477) 16,187 (36,001) Cash and cash equivalents at beginning of year.............. 67,379 51,192 87,193 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 60,902 $ 67,379 $ 51,192 ======== ======== ======== SUPPLEMENTAL DISCLOSURE: Net interest paid......................................... $ 18,345 $ 16,880 $ 16,857 Income taxes paid......................................... 970 967 379 -------- -------- -------- NON-CASH INVESTING AND FINANCING ACTIVITIES: Property, plant and equipment acquired under capital leases.................................................. -- -- $ 826 ======== ======== ======== Property, plant and equipment contributed to joint ventures................................................ $ 340 $ 4,908 -- ======== ======== ========
See accompanying notes to the consolidated financial statements F-3 FEDDERS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED AUGUST 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (AMOUNTS IN THOUSANDS) PREFERRED STOCK Balance at beginning of year.............................. -- -- -- Issuance of shares upon Exchange Offer.................... $ 4 -- -- Stock rights subscribed................................... 3 -- -- -------- -------- -------- Balance at end of year.................................... $ 7 -- -- ======== ======== ======== NEW COMMON STOCK Balance at beginning of year.............................. $ 382 -- -- Stock options exercised................................... -- $ 1 -- Issuance of shares upon recapitalization.................. -- 381 -- Exchange of shares upon Preferred Stock exchange offer.... (29) -- -- -------- -------- -------- Balance at end of year.................................... $ 353 $ 382 -- ======== ======== ======== OLD COMMON STOCK Balance at beginning of year.............................. -- $ 16,135 $ 16,135 Exchange of shares upon recapitalization.................. -- (16,135) -- -------- -------- -------- Balance at end of year.................................... -- -- $ 16,135 ======== ======== ======== CLASS A STOCK Balance at beginning of year.............................. -- $ 20,298 $ 19,825 Stock options exercised................................... -- -- 425 Exchange of shares upon recapitalization.................. -- (20,298) -- Other..................................................... -- -- 48 -------- -------- -------- Balance at end of year.................................... -- -- $ 20,298 ======== ======== ======== NEW CLASS B STOCK Balance at beginning of year.............................. $ 25 -- -- Issuance of shares upon recapitalization.................. -- $ 25 -- -------- -------- -------- Balance at end of year.................................... $ 25 $ 25 -- ======== ======== ======== OLD CLASS B STOCK Balance at beginning of year.............................. -- $ 2,267 $ 2,267 Exchange of shares upon recapitalization.................. -- (2,267) -- -------- -------- -------- Balance at end of year.................................... -- -- $ 2,267 ======== ======== ======== ADDITIONAL PAID-IN CAPITAL Balance at beginning of year.............................. $ 68,870 $ 31,146 $ 29,591 Stock options exercised................................... 30 1 1,114 Tax benefit related to stock options exercised............ -- -- 134 Cost of offerings and recapitalization.................... (1,401) (428) (587) Stock option repricing.................................... 147 (339) 726 Effect of recapitalization and exchange offer............. 23 38,294 -- Proceeds from rights offering............................. 6,167 -- -- Other..................................................... 189 196 168 -------- -------- -------- Balance at end of year.................................... $ 74,025 $ 68,870 $ 31,146 ======== ======== ======== RETAINED EARNINGS Balance at beginning of year.............................. $ 47,551 $ 43,313 $ 69,575 Net (loss) income......................................... (3,110) 8,009 (22,453) Dividends................................................. (4,262) (3,771) (3,809) -------- -------- -------- Balance at end of year.................................... $ 40,179 $ 47,551 $ 43,313 ======== ======== ======== ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of year.............................. $ (1,312) $ (2,165) $ (1,128) Foreign currency translation adjustment, net of tax....... (933) 853 (1,037) -------- -------- -------- Balance at end of year.................................... $ (2,245) $ (1,312) $ (2,165) ======== ======== ======== DEFERRED COMPENSATION Balance at beginning of year.............................. $ (376) $ (658) $ (940) Amortization of deferred compensation..................... 282 282 282 -------- -------- -------- Balance at end of year.................................... $ (94) $ (376) $ (658) ======== ======== ======== TREASURY STOCK Balance at beginning of year.............................. $(37,322) $(37,322) $(23,065) Repurchase of stock....................................... -- -- (13,237) Shares relinquished or purchased.......................... -- -- (1,020) -------- -------- -------- Balance at end of year.................................... $(37,322) $(37,322) $(37,322) ======== ======== ========
See accompanying notes to the consolidated financial statements F-4 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE, SHARE AND MARKET DATA) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fedders Corporation (the "Company") is a leading global manufacturer and marketer of air treatment products, including air conditioners, air cleaners, dehumidifiers, humidifiers, and thermal technology products. FISCAL YEAR On August 26, 2003, the Board of Directors of the Company decided to change the Company's fiscal year end from August 31 to December 31. The Company intends to file a transition report on Form 10-Q to cover the transition period of September 1, 2003 to December 31, 2003. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries and joint ventures. Joint ventures which are not majority owned, but over which the Company shares joint control, are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated in consolidation. REVENUE RECOGNITION Sales are recorded consistent with their related shipping terms upon the passing of the title and the risks and rewards of ownership to the customer. For a majority of the Company's customers, title and the risks and rewards of ownership pass at the time of shipment. However, certain of the Company's sales are recorded at the time the products are delivered to the customers. Sales are recorded net of a provision for sales allowances and warranties and defective returns. WARRANTY AND DEFECTIVE RETURN POLICY The Company's policy is to accrue the estimated cost of warranty coverage and defective returns at the time the sale is recorded. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated at the rate of exchange in effect at the end of the period. Net sales and expenses are translated at the average rate of exchange for the period. Translation adjustments are reflected in other comprehensive loss as a separate component of stockholders' equity. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of the first-in, first-out (FIFO) cost or market. The Company reviews inventory periodically for slow-moving and obsolete items. Write-downs are recorded in the period in which they are identified. Inventories consist of the following at August 31:
2003 2002 ------- ------- Finished goods.............................................. $52,226 $25,364 Work-in-process............................................. 5,114 3,042 Raw materials and supplies.................................. 21,608 20,174 ------- ------- $78,948 $48,580 ======= =======
F-5 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER CURRENT ASSETS Other current assets consist of the following at August 31:
2003 2002 ------- ------- VAT tax refund receivable................................... $16,105 $ 8,048 Other....................................................... 5,358 5,516 ------- ------- $21,463 $13,564 ======= =======
PROPERTY, PLANT AND EQUIPMENT Replacements, betterments and additions to property, plant and equipment are capitalized at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property, plant and equipment, the cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in cost of sales or selling, general and administrative expense, as appropriate. Net property, plant and equipment consist of the following at August 31:
ESTIMATED USEFUL LIFE 2003 2002 -------------- -------- -------- Land and improvements............................ $ 1,508 $ 3,770 Buildings and leasehold improvements............. 10 to 30 years 31,423 40,246 Machinery and equipment.......................... 3 to 12 years 100,581 98,271 -------- -------- Property, plant and equipment -- gross........... 133,512 142,287 Accumulated depreciation......................... (77,652) (75,441) -------- -------- Net property, plant and equipment................ $ 55,860 $ 66,846 ======== ========
The Company, using estimates based on reasonable assumptions and projections, reviews for impairment of long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstances indicate the carrying amount of its assets might not be recoverable and appropriately records any necessary adjustments. Depreciation is provided on the straight-line basis over the estimated useful life of each asset as noted above. Depreciation expense for the fiscal years ended August 31, 2003, 2002 and 2001 was $9,112, $10,394 and $10,671, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS The Company records the excess purchase price of net tangible and intangible assets acquired over their estimated fair value as goodwill. The Company adopted the provisions of SFAS 142 as of September 1, 2002. Under SFAS 142, the Company is required to test goodwill for impairment at least annually. The Company has elected to perform its annual test for indications of goodwill impairment as of September 30 of each year. The Company identifies potential goodwill impairment by comparing the fair value of a reporting segment with its carrying amount, including goodwill. The Company determines fair value using a discounted cash flow and market-multiple approach. If the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting segment is not considered impaired. If the carrying amount of a segment exceeds its fair value, the amount of goodwill impairment loss, if any, must be measured. The Company measures the amount of goodwill impairment loss by comparing the implied fair value of reporting segment goodwill with the carrying amount of that goodwill. If the carrying amount of the segment goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized as an operating expense. The Company completed the transitional goodwill impairment test during the fourth quarter for fiscal 2003. The Company did not identify any impairment within its HVACR reporting segment but has recognized a non-cash goodwill impairment charge of $11.9 million within its Engineered Products reporting segment. The projected financial performance of the Engineered Products reporting segment was insufficient to support F-6 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the related goodwill. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle as of September 1, 2002. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the Company ceased amortization of goodwill as of September 1, 2002. The following table presents the annual results of the Company on a comparable basis:
YEAR ENDED AUGUST 31, ---------------------------- 2003 2002 2001 ------- ------- -------- Net (loss) income: Reported net (loss) income applicable to common stockholders......................................... $(3,728) $ 8,009 $(22,453) Goodwill amortization, net of tax...................... -- 2,000 1,827 ------- ------- -------- Adjusted net (loss) income applicable to common stockholders......................................... $(3,728) $10,009 $(20,626) ======= ======= ======== Basic net (loss) earnings per common share: Reported basic net (loss) earnings per common share.... $ (0.12) $ 0.25 $ (0.71) Goodwill amortization.................................. -- 0.06 0.06 ------- ------- -------- Adjusted basic net (loss) earning per common share..... $ (0.12) $ 0.31 $ (0.65) ======= ======= ======== Diluted net (loss) earnings per common share: Reported diluted net (loss) earning per common share... $ (0.12) $ 0.25 $ (0.71) Goodwill amortization.................................. -- 0.06 0.06 ------- ------- -------- Adjusted diluted net (loss) earning per common share... $ (0.12) $ 0.31 $ (0.65) ======= ======= ========
Goodwill and other intangible assets consist of the following at August 31:
2003 2002 ------- ------- Goodwill.................................................... $78,630 $90,536 ======= ======= Gross other amortizable intangibles......................... $ 3,189 $ 2,787 Accumulated amortization.................................... (1,401) (1,231) ------- ------- Other intangible assets..................................... $ 1,788 $ 1,556 ======= =======
As of August 31, 2003 and 2002, the Company had goodwill of $70,133 reflected in its HVACR reportable segment. As of August 31, 2003 and 2002, the Company had goodwill of 8,497 and 20,403 in its Engineered Products reportable segments, respectively. Other intangible assets primarily include a right associated with a joint venture that is being amortized over 20 years. Amortization expense for the fiscal years ended August 31, 2003, 2002 and 2001, is $181, $215 and $187, respectively. Estimated amortization expense for other intangibles will be approximately $120 for each of the next five years and $1,188 thereafter. F-7 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER ASSETS Other assets consist of the following at August 31:
2003 2002 ------- ------- Note due from an executive officer (note 11)................ $ 6,000 $ 6,000 Unamortized deferred finance costs, amortized over the life of the debt............................................... 2,413 3,112 Cash surrender value of life insurance...................... 7,939 7,227 Supplemental retirement assets.............................. 7,389 8,858 Investment in unconsolidated joint ventures (note 12)....... 9,979 9,784 Other....................................................... 1,998 2,431 ------- ------- $35,718 $37,412 ======= =======
ACCRUED EXPENSES Accrued expenses consist of the following at August 31:
2003 2002 ------- ------- Warranty.................................................... $ 8,855 $ 6,173 Marketing programs.......................................... 14,371 8,867 Salaries and benefits....................................... 10,962 8,901 Insurance and taxes......................................... 3,512 3,944 Professional fees........................................... 1,274 923 Other....................................................... 9,578 8,291 ------- ------- $48,552 $37,099 ======= =======
INCOME TAXES Deferred income taxes are provided to reflect the tax effects of temporary differences between assets and liabilities for financial reporting purposes and income tax purposes. Provisions are also made for U.S. income taxes on undistributed earnings of foreign subsidiaries not considered to be indefinitely reinvested (note 7). SHIPPING AND HANDLING FEES AND COSTS Costs associated with the handling and warehousing of finished goods are charged to selling, general and administrative expense and amounted to $5,811, $4,817 and $3,819 in 2003, 2002 and 2001, respectively. RESEARCH AND DEVELOPMENT COSTS All research and development costs are charged to selling, general and administrative expense as incurred and amounted to $9,478, $8,896 and $9,086 in 2003, 2002 and 2001, respectively. F-8 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK COMPENSATION The Company accounts for stock options issued to its employees under the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying Common Stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair-value recognition provisions of SFAS 123 to stock-based employee compensation.
2003 2002 2001 ------- ------ -------- Net (loss) income applicable to common stockholders -- as reported........................... $(3,728) $8,009 $(22,453) Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects.................... 360 779 496 ------- ------ -------- Pro forma net (loss) income............................. $(4,088) $7,230 $(22,949) ======= ====== ======== Net (loss) income per common share: Basic and diluted -- as reported................... $ (0.12) $ 0.25 $ (0.71) Basic and diluted -- pro forma..................... $ (0.13) $ 0.23 $ (0.72)
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES Through certain subsidiary companies, the Company has operations in a number of countries, including China, India, Germany, the United Kingdom and the Philippines. Of our thirteen manufacturing facilities, six are in China. The Company's foreign operations, at times, may be adversely affected by changes in government policies such as changes in laws and regulations (or the interpretation thereof), restrictions on imports and exports and sources of supply, duties or tariffs, the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of restrictions on currency conversion and remittances abroad and the expropriation of private enterprise. In addition, policy concerns particular to the United States with respect to a country in which the Company has operations could adversely affect the Company's operations in that country. The Company monitors its operations with a view to minimizing the impact on its foreign investments and overall business that could arise as a result of the risks inherent in maintaining operations in foreign countries as described above. EARNINGS PER SHARE Basic earnings (loss) per common share are computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per common share are computed by adjusting outstanding shares assuming conversion of all potentially dilutive stock options. In 2001, stock options were not included in the computation of diluted (loss) per common share due to their anti-dilutive effect given the net loss for the year. The number of anti-dilutive stock options excluded from the computation of diluted (loss) per common share was F-9 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 289,274 for 2001. The computation of basic earnings (loss) per common share and diluted earnings (loss) per share is as follows:
2003 2002 2001 ------- ------- -------- Net (loss) income applicable to common stockholders.... $(3,728) $ 8,009 $(22,453) ------- ------- -------- Weighted average shares outstanding (amounts in thousands)........................................... 30,638 31,492 31,808 Assumed conversion of stock options (amounts in thousands)........................................... 66 2 -- ------- ------- -------- Dilutive average shares outstanding (amounts in thousands)........................................... 30,704 31,494 31,808 ======= ======= ======== (Loss) earnings per common share: Basic................................................ $ (0.12) $ 0.25 $ (0.71) Diluted.............................................. (0.12) 0.25 (0.71) ======= ======= ========
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, short term notes and accrued expenses approximates fair value due to the short maturity of these instruments. At August 31, 2003 and 2002, the fair value of long-term debt (including current portion), is estimated to be $138,731 and $146,776, respectively, based on current market rates that could be obtained by the Company for similar debt. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The nature of the Company's business activities necessarily involves the management of various financial and market risks, including those related to changes in foreign currency exchange rates. The Company's use of derivative financial instruments is limited primarily to the use of forward foreign currency exchange contracts to mitigate certain foreign currency exchange rate risks relative to Canadian dollar receivables, Euro dollar payables, and Philippine peso payables. Such contracts are not designated as hedges and any changes in fair value are recognized in "Other income (expense)" in the current period. The Company does not have any such contracts outstanding as of August 31, 2003 and 2002. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. The adoption of this statement in the first quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted this statement at the beginning of its fiscal year 2003. The adoption of this statement did not have a material effect on the Company's financial position, results of operations and its cash flows. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. SFAS 146 is effective for the Company for disposal activities initiated after December 31, 2002 and will be applied prospectively. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting And Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement F-10 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The interpretation also requires enhanced and additional disclosures of guarantees in interim and annual financial statements for periods ending after December 15, 2002. The Company adopted this statement in the second quarter of fiscal year 2003. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123 ("SFAS 123")." This statement provides alternative methods of transition for a voluntary change to the fair- value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. The Company adopted the disclosure requirements of this statement in the second quarter of fiscal year 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation defines when a business enterprise must consolidate a variable interest entity. This interpretation applies immediately to variable interest entities created after January 31, 2003 and became effective for all other transactions as of July 1, 2003. However, in October 2003 the FASB permitted companies to defer the July 1, 2003 effective date to December 31, 2003, in whole or in part, and indicated that it would provide further clarification of this interpretation before December 31, 2003. The Company has determined that it is not reasonably probable that it will be required to consolidate or disclose information about a variable interest entity. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, generally all provisions of this statement should be applied prospectively. The adoption of this statement in the fourth quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150"). This statement changes the accounting for certain financial instruments that issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement in the fourth quarter of fiscal year 2003 did not have a material effect on the Company's financial position, results of operations and its cash flows. 2. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED CHARGES In the fourth quarter of 2001, the Company announced a plan to restructure its then existing operations, which included the transfer of a majority of the Company's room air conditioner production, as well as all production of dehumidifiers and compressors, from its Illinois, Tennessee and Maryland facilities to facilities in China in order to lower costs and improve profitability. The Company's plan resulted in charges for fixed- F-11 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) asset impairments, employee severance costs, inventory write-downs and other restructuring charges directly related to the restructuring plan, including facility closing costs and lease termination costs. In conjunction with the restructuring plan, the Company recorded $13,694 of charges in the fourth quarter of 2001, of which $4,747 is recorded within cost of sales and $8,947 is recorded within asset impairment, employee severance and other restructuring (credits) charges. In fiscal year 2002, the Company recorded a restructuring credit of $397 due to a change in estimate for accrued medical costs related to terminated employees. In fiscal year 2003, the Company expended $408, primarily for facility closing costs and recorded a restructuring credit of $115 associated with a gain on the disposal of certain fixed assets previously impaired as part of the 2001 restructuring. The following table displays the activity and balances of the restructuring reserve account from August 31, 2001 to August 31, 2003:
AUGUST 31, AUGUST 31, AUGUST 31, 2001 2002 2003 BALANCE ADDITIONS DEDUCTIONS BALANCE ADDITIONS DEDUCTIONS BALANCE ---------- --------- ---------- ---------- --------- ---------- ---------- Workforce reductions...... $1,773 -- $1,152 $ 621 -- $ 35 $ 586 Facility closing costs.... 787 -- 126 661 -- 184 477 Other costs............... 517 -- 114 403 -- 189 214 ------ ---- ------ ------ ---- ---- ------ Total................... $3,077 -- $1,392 $1,685 -- $408 $1,277 ====== ==== ====== ====== ==== ==== ======
The remaining balance of $1,277, which consists primarily of workforce reduction and facility closing costs, is expected to be expended during fiscal 2004. The final amounts will be settled upon the expiration period for workers' compensation claims and completion of facility clean up and waste removal. 3. CONTINGENCIES The Company is involved in litigation, both as plaintiff and defendant, incidental to the conduct of its business. It is the opinion of management, after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on its financial position, results of operations and cash flows. 4. SHORT-TERM BORROWING At August 31, 2003 and 2002, the Company had no short-term borrowing outstanding under its $100,000 U.S. revolving credit facility with a commercial finance company. Availability under the revolving credit facility is based on accounts receivable and inventory and requires maintenance of certain financial covenants. The Company is currently in compliance with the terms of these covenants. The maximum amount outstanding under the credit facility was $41,841 and $62,726 during fiscal 2003 and 2002, respectively. The average amount outstanding and average rate of interest charged on outstanding borrowings under the credit facility were $8,440 and 3.89% in fiscal 2003. The credit facility is collateralized by substantially all of the Company's assets and is in effect until February 2006. The rate of interest on the facility is prime rate or LIBOR plus 2%. At August 31, 2003 and 2002, certain foreign subsidiaries had short-term notes of $7,520 and $9,829, respectively, outstanding under loan agreements with various banks. The current notes bear interest ranging from 3.15% to 12.38% and expire no later than June 2004. The Company utilized various short-term borrowing facilities to support production in China. At August 31, 2003 and 2002, the outstanding balance under these borrowing facilities was $7,000 and $9,473, respectively. The maximum amount outstanding under these credit facilities was $26,726 and $11,451 during fiscal 2003 and 2002, respectively. The average amount outstanding and average rate of interest charged on outstanding borrowings under these credit facilities were $19,578 and 5.64% in fiscal 2003. F-12 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT Long-term debt consists of the following at August 31:
2003 2002 -------- -------- 9 3/8% Senior Subordinated Notes due in 2007: $100,000 principal amount less unamortized discount of $189 and $237.......................................... $ 99,811 $ 99,763 $50,000 principal amount less unamortized discount of $1,175 and $1,468...................................... 48,825 48,532 Fedders Koppel promissory note.............................. 2,140 3,574 Promissory note payable to the State of Illinois............ 1,804 2,129 Trion Industrial Revenue Bond............................... 3,200 3,200 Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond...................................................... 1,517 1,809 Eubank Manufacturing Enterprises, Inc. promissory note...... 599 890 Melcor, State of New Jersey Economic Development Bond....... 906 1,037 Eubank Manufacturing Enterprises, Inc. mortgage............. 970 1,019 Capital lease obligations................................... 4,272 5,178 -------- -------- 164,044 167,131 Less current maturities..................................... 4,652 3,362 -------- -------- $159,392 $163,769 ======== ========
Aggregate amounts of long-term debt, excluding capital leases of $4,272, maturing in each of the years ending August 31 are as follows:
YEAR AMOUNT ---- -------- 2004........................................................ $ 4,014 2005........................................................ 1,605 2006........................................................ 699 2007........................................................ 149,347 2008........................................................ 656 Thereafter.................................................. 3,451 -------- Total..................................................... $159,772 ========
Aggregate future minimum rental payments under capital leases are as follows:
YEAR AMOUNT ---- ------ 2004........................................................ $ 735 2005........................................................ 843 2006........................................................ 842 2007........................................................ 840 2008........................................................ 1,022 Thereafter.................................................. 1,393 ------ Total minimum lease payments................................ 5,675 Less amount representing interest........................... 1,403 ------ Total obligation under capital leases....................... $4,272 ======
In August 1997, a subsidiary of the Company issued $100,000 principal amount of 9 3/8% Senior Subordinated Notes due 2007. In August 1999, the same subsidiary issued an additional $50,000 principal amount of 9 3/8% Senior Subordinated Notes due 2007. The notes are guaranteed by the Company on a senior F-13 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subordinated basis. The notes may be redeemed by the subsidiary after August 2002 at a redemption price of 104.688% of principal amount. The provisions of the notes limit, among other things, the payment of dividends by the subsidiary. The loan from the State of Illinois has an interest rate of 1%, is to be paid over the next five years, and is collateralized by a mortgage on the Company's Illinois facility. The Trion Industrial Revenue Bond is due in November 2011, bears interest at a variable rate which fluctuates in accordance with the Bond Market Association Index, and requires no principal payments until maturity. This bond is collateralized by Trion's Sanford, North Carolina facility, including real property and equipment. The Fedders Koppel promissory note payable to a Philippines bank is to be paid over the next two years, bears interest at PHIBOR plus 3%, and is guaranteed by the Company. The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been paid in October 2003. The bond is collateralized by certain real property and equipment, is guaranteed by the Company, and bears interest at a variable rate calculated as 75% of the sum of LIBOR plus 1.75. The Eubank Manufacturing Enterprises, Inc. promissory note due to Flag Bank is to be paid next year and has a variable rate of interest, payable at the prime rate. The promissory note is collateralized by certain real property and equipment. The loan from the New Jersey Economic Development Corporation to Melcor Corporation has an interest rate of 6.6%, is to be paid over the next seven years and is collateralized by Melcor's facility and certain equipment. In June 2003, Eubank Manufacturing Enterprises Inc. refinanced its mortgage with Bank One and repaid the mortgage payable to Bank of America Leasing and Capital. The new loan has an interest rate of 4.25%, is to be paid over the next five years and is collateralized by a mortgage on Eubank's facility. 6. COMMITMENTS The Company leases certain property and equipment under operating leases. Most of these operating leases contain one of the following options: (a) the Company may, at the end of the initial lease term, purchase the property at the then fair market value or (b) the Company may renew its lease at the then fair rental value for a period of one month to five years. The Company also has contractual minimum payments under license agreements. Minimum payments for operating leases having non-cancelable terms and contractual minimum payments under the license agreements are as follows:
YEAR AMOUNT ---- ------- 2004........................................................ $ 3,463 2005........................................................ 3,001 2006........................................................ 2,953 2007........................................................ 2,729 2008........................................................ 2,712 Thereafter.................................................. 4,738 ------- Total..................................................... $19,596 =======
Total rent and licensing expense amounted to $8,556, $5,715 and $2,958 in 2003, 2002 and 2001, respectively. F-14 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES The provision (benefit) for income taxes consists of the following components at August 31:
2003 2002 2001 ------ -------- -------- Current: Federal....................................... $ (465) $(12,101) $ (5,472) State........................................ 151 (181) (53) Foreign...................................... 197 493 531 ------ -------- -------- (117) (11,789) (4,994) ------ -------- -------- Charge in lieu of income taxes......................... -- -- 134 ------ -------- -------- Deferred: Federal...................................... 4,264 6,497 (5,783) State....................................... 77 259 (167) ------ -------- -------- 4,341 6,756 (5,950) ------ -------- -------- $4,224 $ (5,033) $(10,810) ====== ======== ========
The exercise of stock options to acquire shares of the Company's stock creates a compensation deduction for income tax purposes for which there is no corresponding expense required for financial reporting purposes. The tax benefits related to these deductions are reflected as a charge in lieu of income taxes and a credit to additional paid-in capital. The Company elected to carry back its 2001 and 2002 U.S. net operating losses. Deferred tax assets and liabilities result from temporary differences between assets and liabilities for financial reporting and income tax purposes, and include the components related to acquired companies. The components are as follows at August 31:
2003 2002 -------- ------- Warranty.................................................... $ 3,453 $ 2,710 Depreciation................................................ (10,123) (7,114) Employee benefit programs................................... 7,363 7,256 Inventory................................................... 3,558 2,202 Net operating loss and tax credit carry-forwards............ 820 2,294 Restructuring............................................... 470 509 Other....................................................... (619) 1,405 -------- ------- 4,922 9,262 Valuation allowance......................................... (775) (775) -------- ------- $ 4,147 $ 8,487 ======== =======
At August 31,2003, $7,654 of current deferred tax benefit was included in current assets, $8,224 of long-term deferred benefit was included in non-current asset, and $11,731 of deferred income tax liability was included in other long-term liabilities. F-15 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The difference between the United States statutory income tax rate and the consolidated effective income tax rate is due to the following items at August 31:
2003 2002 2001 ------ ------- -------- Expected tax at statutory rate.......................... $4,557 $ 1,042 $(11,642) Tax difference on foreign earnings...................... (508) (568) 75 Valuation allowance reflected in current income......... -- 98 (356) State taxes, less federal income tax benefit............ 120 50 (143) Prior-year provisions no longer required................ -- (6,048) -- Other................................................... 55 393 1,256 ------ ------- -------- $4,224 $(5,033) $(10,810) ====== ======= ========
At August 31, 2003, the Company has foreign net operating loss carry-forwards of approximately $1,300. The valuation allowance reflects the uncertainty associated with the realization of deferred tax assets. The increase in the valuation reserve in 2002 was due primarily to foreign net operating losses. During the fourth quarter of 2002, the Company recorded a tax benefit of $6,048 to reflect favorable tax audit resolutions and the reduction in world-wide tax exposures. 8. REPORTABLE SEGMENTS The Company has two reportable segments: Heating, Ventilation, Air Conditioning and Refrigeration ("HVACR") and Engineered Products. The Company's reportable segments were determined based upon several factors, including the nature of the products provided and markets served. Each reportable segment is managed separately and includes various operating segments which have been aggregated due to similar economic characteristics. The HVACR segment designs, manufactures and distributes window, residential split system condensing units and air handlers, gas furnaces, multi-split systems, through-the-wall, portable and packaged unit air conditioners, residential humidifiers, dehumidifiers and air cleaners. HVACR products are distributed through a variety of sales channels including national retailers, regional retailers, wholesale distributors, catalog supply houses, private label/OEM, government direct and the Internet. The Engineered Products segment designs, manufactures and distributes commercial and industrial media filters, electronic filters, humidifiers, dust collectors, fan filter units and solid-state thermoelectric heat pump modules. These products are sold through manufacturers' representatives, distributors and direct sales to end-users. F-16 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SUMMARY OF BUSINESS BY SEGMENT:
2003 2002 2001 -------- -------- -------- Net sales HVACR................................................ $382,219 $332,748 $359,964 Engineered Products.................................. 39,484 40,954 45,733 -------- -------- -------- Net sales............................................ $421,703 $373,702 $405,697 ======== ======== ======== Earnings before interest, taxes and cumulative effect of changes in accounting principle HVACR................................................ $ 32,934 $ 25,908 $ 7,387 Engineered Products.................................. 194 (1,663) 15 -------- -------- -------- Segment earnings before interest, taxes and goodwill impairment......................................... 33,128 24,245 7,402 -------- -------- -------- Goodwill impairment, asset impairment, employee severance and other restructuring charges (credits).......................................... 11,791 (397) 8,947 Non-allocated expenses............................... 1,677 3,049 13,873 Interest expense, net................................ 18,546 18,617 17,845 Provision (benefit) for income tax expense........... 4,224 (5,033) (10,810) -------- -------- -------- Net (loss) income.................................... $ (3,110) $ 8,009 $(22,453) ======== ======== ========
DEPRECIATION AND AMORTIZATION 2003 2002 2001 ----------------------------- -------- -------- -------- HVACR................................................ $ 7,175 $ 10,409 $ 10,532 Engineered Products.................................. 2,033 3,779 3,686 Corporate............................................ 335 642 1,213 -------- -------- -------- Consolidated depreciation and amortization......... $ 9,543 $ 14,830 $ 15,431 ======== ======== ======== Property, plant and equipment additions HVACR................................................ $ 6,478 $ 5,955 $ 8,979 Engineered Products.................................. 330 1,796 1,662 Corporate............................................ 463 95 132 -------- -------- -------- Consolidated property, plant and equipment Additions.......................................... $ 7,271 $ 7,846 $ 10,773 ======== ======== ======== Total assets HVACR................................................ $250,967 $212,931 $224,914 Engineered Products.................................. 53,024 66,173 57,712 Non-allocated assets................................. 88,938 87,024 79,706 -------- -------- -------- Consolidated assets................................ $392,929 $366,128 $362,332 ======== ======== ========
SUMMARY OF NET SALES BY GEOGRAPHIC AREA(1)
U.S. OTHER CONSOLIDATED -------- ------- ------------ 2003................................................. $340,432 $81,271 $421,703 2002................................................. 321,666 52,036 373,702 2001................................................. 336,530 69,167 405,697
F-17 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) --------------- (1) "Other" includes the Company's net sales principally to Asia, Europe, Canada and Mexico. SUMMARY OF LONG-LIVED ASSETS BY GEOGRAPHIC AREA(2)
U.S. OTHER CONSOLIDATED -------- ------- ------------ 2003................................................. $110,688 $45,481 $156,169 2002................................................. 128,575 41,238 169,813 2001................................................. 142,434 26,564 168,998
--------------- (2) "Other" includes long-lived assets located principally in Asia. In 2003, two customers accounted for 48% of net sales; in 2002 and 2001, two customers accounted for 49% of net sales. It is not practical for the Company to report revenues for each product or group of similar products. A majority of the Company's internal reports provide detailed information by legal entity, but there is no one uniform customer or product information management system. 9. CAPITAL STOCK On May 16, 2003, the Company's Board of Directors authorized the distribution of transferable rights to the Company's Common and Class B stockholders. Stockholders received one right for every ten shares of Common Stock and Class B Stock they held as of July 1, 2003. Each transferable right represented the right to purchase one share of the Company's Series A Cumulative Preferred Stock at the subscription price of $23.70, until the expiration date of August 12, 2003. As of August 12, 2003, 262,316 rights had been subscribed. In October 2002, the Company's Board of Directors approved a plan pursuant to which a new class of cumulative Preferred Stock would be offered to stockholders in exchange for up to 15,000,000 shares of the Company's Common Stock, with 0.14 shares of Preferred Stock being offered in exchange for every share of Common Stock. The Series A Cumulative Preferred Stock receives a cumulative annual dividend of $2.15 and has a liquidation preference of $25.00 plus the amount of any accrued and unpaid dividends. The holders of the Series A Cumulative Preferred Stock has no right to vote, except in limited circumstances. The exchange of 2,315,750 shares of Common Stock for 323,947 shares of Series A Cumulative Preferred Stock was completed on December 27, 2002. On February 14, 2003, the Company announced an exchange offer to exchange shares of Series A Cumulative Preferred Stock for up to 12,500,000 shares of the Company's Common Stock, with 0.14 shares of Preferred Stock being offered in exchange for every share of Common Stock. The exchange of 633,082 shares of Common Stock for 88,276 shares of Series A Cumulative Preferred Stock was completed on March 18, 2003. On March 26, 2002, the Company's stockholders approved a recapitalization plan (the "Plan") which became effective the same day. Under the Plan, the holder of each share of Common Stock received 1.1 shares of new Common Stock, the holder of each share of Class A Stock received 1 share of new Common Stock and the holder of each share of Class B Stock received 1.1 shares of new Class B Stock. The par value of the new Common Stock and the new Class B Stock is $0.01, while the par value of the old Common Stock and old Class B Stock was $1.00. The new Common Stock and the new Class B Stock have alternating preferences with respect to payments or distributions in the event of any dissolution, liquidation or winding up of the Company. No such liquidation preference existed previously. Each share of new Class B Stock shares equally with each share of new Common Stock in payments of dividends while each share of old Class B Stock received 90% of the dividends paid to each share of old Common Stock. The new Class B Stock will automatically be converted into shares of new Common Stock if the number of outstanding shares of new Class B Stock falls below 2.5% of the aggregate number of issued and outstanding shares of new Common F-18 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock and new Class B Stock. The old Class B Stock automatically converted into shares of old Common Stock if the number of outstanding shares of old Class B Stock fell below 5.0% of the aggregate number of issued and outstanding shares of old Common Stock and old Class B Stock. Series A Cumulative Preferred Stock (15,000,000 shares authorized): The Series A Cumulative Preferred Stock receives a cumulative annual dividend of $2.15 and has a liquidation preference of $25.00 plus the amount of any accrued and unpaid dividends. The holders of the Series A Cumulative Preferred Stock has no right to vote, except in limited circumstances. New Common Stock (70,000,000 shares authorized): 3,741,757 shares of new Common Stock were reserved for the exercise of stock options and 2,394,046 shares of new Common Stock were reserved for the conversion of shares of new Class B Stock as of August 31, 2002. Old Common Stock (80,000,000 shares authorized): During fiscal 2001, 1,932,800 shares were repurchased for $8,985. During fiscal 2000, 567,900 shares were repurchased for $3,580. 3,747,157 shares of old Common Stock were reserved for the exercise of stock options, 24,044,773 shares of old Common Stock were reserved for the conversion of Class A Stock and 2,266,406 shares of old Common Stock were reserved for the conversion of shares of old Class B Stock as of August 31, 2001. Class A Stock (60,000,000 shares authorized): During fiscal 2001, 1,065,600 shares were repurchased for $4,252. An additional 224,259 shares were received by employees in connection with the exercise of stock options. During fiscal 2000, 2,200,100 shares were repurchased for $9,904. An additional 154,071 shares were received by employees in connection with the exercise of stock options. Class A Stock had rights, including dividend rights, substantially identical to the old Common Stock, except that the Class A Stock was not entitled to vote except to the extent provided under Delaware law. Class A Stock was immediately convertible into old Common Stock on a share-for-share basis upon conversion of all of the Class B Stock. New Class B Stock (5,000,000 shares authorized): New Class B Stock is immediately convertible into Common Stock on a share-for-share basis if the number of outstanding shares of new Class B Stock falls below 2.5% of the aggregate number of issued and outstanding shares of new Common Stock and new Class B Stock. New Class B Stock has greater voting power, in certain circumstances (ten-to-one in the election of directors), and has limited transferability. New Class B Stock also votes separately, as a class, on certain significant issues. Old Class B Stock (7,500,000 shares authorized): Old Class B Stock was immediately convertible into old Common Stock on a share-for-share basis if the number of outstanding shares of old Class B Stock fell below 5.0% of the aggregate number of issued and outstanding shares of old Common Stock and old Class B Stock. Old Class B Stock had greater voting power, in certain circumstances (ten-to-one in the election of directors), but received a lower dividend, if declared, equal to 90% of the dividend on old Common Stock and had limited transferability. Old Class B Stock also voted separately, as a class, on certain significant issues. F-19 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the number of shares outstanding by class of stock:
NEW COMMON OLD COMMON NEW CLASS B OLD CLASS B PREFERRED STOCK STOCK CLASS A STOCK STOCK STOCK STOCK ---------- ----------- ------------- ----------- ----------- --------- Balance at August 31, 2000................... -- 15,567,559 15,706,892 -- 2,266,406 -- Purchase of treasury stock.................. -- (1,932,800) (1,065,600) -- -- -- Stock options exercised.............. -- -- 425,055 -- -- -- Other.................... -- -- (176,361) -- -- -- ---------- ----------- ----------- --------- ---------- ------- Balance at August 31, 2001................... -- 13,634,759 14,889,986 -- 2,266,406 -- Stock options exercised.............. -- -- 400 -- -- -- Recapitalization......... 29,888,621 (13,634,759) (14,890,386) 2,493,046 (2,266,406) -- Other.................... 202,444 -- -- -- -- -- ---------- ----------- ----------- --------- ---------- ------- Balance at August 31, 2002................... 30,091,065 -- -- 2,493,046 -- -- Stock options exercised.............. 10,000 -- -- -- -- -- Exchange offer........... (2,948,942) -- -- -- -- 412,521 Stock rights subscribed............. -- -- -- -- -- 262,316 Other.................... (32,358) -- -- -- -- -- ---------- ----------- ----------- --------- ---------- ------- Balance at August 31, 2003................... 27,119,765 -- -- 2,493,046 -- 674,837 ========== =========== =========== ========= ========== =======
10. STOCK OPTION PLANS The stock option plan, as approved by the stockholders, provides for the granting to employees and officers of incentive stock options (as defined under current tax laws) and non-qualified stock options. The plan provides for the granting of non-qualified stock options to directors who are not employees. Stock options granted prior to June 1, 2002 are exercisable one year after the date of grant. Stock options granted subsequent to June 1, 2002 vest over a four-year period. Options, if not exercised, will expire five years from the date of grant. Certain options are only exercisable at the end of five years unless a sales target is achieved prior thereto. In October 2000, the Company's Board of Directors approved the repricing of a majority of unexercised stock options, reducing the exercise price to $3.625 per share, which was the fair market value of the Class A Stock on the date of repricing. The Company recorded a non-cash charge of $726 due to the repricing in fiscal 2001. In fiscal 2002, the Company recorded a $339 reduction to compensation expense to reflect changes in the market price of the Company's stock. In fiscal 2003, the Company recorded a non-cash charge of $147 to reflect changes in the market price of the Company's stock. The stock option plan summary and changes during each year are presented below:
EXERCISE EXERCISE 2003 PRICE(1) 2002 PRICE(1) 2001 ---------- -------- ---------- -------- ---------- Options outstanding at beginning of year............................. 2,514,000 $3.31 1,630,000 $3.66 2,483,000 Granted............................ -- 1,423,000 $3.01 79,000 Canceled/Expired................... (276,000) $3.48 (539,000) $3.59 (507,000) Exercised.......................... (10,000) $3.02 -- (425,000) ---------- ----- ---------- ----- ---------- Options outstanding at end of year............................. 2,228,000 $3.28 2,514,000 $3.31 1,630,000 Options exercisable at end of year............................. 317,000 $3.05 78,000 $3.61 551,000 ========== ===== ========== ===== ========== Exercise price per share........... $ 2.65 $ 2.65 $ 2.84 to 5.00 to 5.00 to 4.63 ========== ========== ==========
F-20 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) --------------- (1) weighted average Options exercisable at August 31, 2003 have an average exercise price of $3.05. There were no stock options granted during fiscal 2003. The weighted-average grant-date fair value of the stock options granted during 2002 and 2001 was $1.47 and $1.46, respectively. The fair value of each option granted is estimated on the date of grant using the Binomial option pricing model with the following weighted-average assumptions:
2002 2001 ---- ---- Expected dividend yield..................................... 3.98% 2.84% Risk-free rate.............................................. 2.9% 5.7% Expected life in years...................................... 4 4 Volatility.................................................. 68% 45%
The following table summarizes information on stock options outstanding at August 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE(1) PRICE(1) EXERCISABLE PRICE(1) --------------- ----------- ----------- -------- ----------- -------- $2.65 - 2.80...................... 70,000 3.44 $2.74 -- $ -- $3.02 - 3.02...................... 1,242,000 3.87 3.02 303,000 3.02 $3.63 - 3.63...................... 867,000 1.39 3.63 14,000 3.63 $4.50 - 5.00...................... 49,000 2.69 4.53 -- -- --------- ---- ----- ------- ----- 2,228,000 2.86 $3.28 317,000 $3.05 ========= ==== ===== ======= =====
--------------- (1) weighted average 11. PENSION PLANS AND OTHER COMPENSATION ARRANGEMENTS 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 $649, $1,064 and $1,496, in 2003, 2002 and 2001, respectively. In fiscal 2002, the Company entered into an employment agreement with an officer that has a term that extends through September 2006. The agreement provides for annual base and incentive compensation, a non-interest bearing, uncollateralized loan, which the Company expects to collect in six yearly installments over the six-year period following the officer's termination of employment (see note 1), a retirement contribution that vests over the life of the agreement and restricted stock, of which a portion vests in January 2004 and a portion vests in January 2007. The Company is amortizing the retirement contribution over the vesting period and the restricted stock, commencing on the date of grant, over the remaining life of the agreement. Due to the retirement of another officer in fiscal 2001, the Company recorded additional compensation of $7,583 to selling, general and administrative expense as a result of changes in the underlying estimate. This change in estimate was due primarily to the timing of the executive's decision to retire, since the compensation formula includes factors based upon prior year's base salary and bonus. Therefore, the effects of this change in estimate are not attributable to future periods. This officer or his beneficiary is required to be paid a monthly benefit for 10 years, commencing upon his retirement in fiscal 2001. The benefit is based upon his compensation in the year prior to retirement, pursuant to an employment agreement entered into in 1993. The Company provides a portion of health care and life insurance benefits for certain retired employees who elect to participate in the Company's plan. SFAS 106 requires accrual accounting for all post-retirement benefits other than pensions. At August 31, 2003 and 2002, post-retirement benefits, although immaterial, were fully accrued with no significant change between these dates. F-21 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. ACQUISITIONS AND JOINT VENTURES In March 2003, the Company entered into a joint venture with Nanjing Suning High & New Technology Industrial Park Co., Ltd. to manufacture split-type air conditioners in China. The Company has a 2/3 interest in the joint venture, Fedders Suning Nanjing Co., Ltd. The joint venture is included within the HVACR reportable segment. The Company's investment in the joint venture amounted to $1.3 million. This joint venture is consolidated into the Company's financial statements with Nanjing Suning's 1/3 interest accounted for as a minority interest. This transaction was accounted for as a business combination The Company completed the acquisition, in the first quarter of fiscal 2002, of a wholly-owned air conditioning manufacturing operation in Shanghai, China, now called Fedders Shanghai Co., Ltd. This subsidiary is included within the HVACR reportable segment. This plant has fully replaced the production of room air conditioners previously produced at the Company's Tennessee plant, which ceased production as part of the 2001 restructuring plan. The purchase price of $4.6 million was allocated based on the fair market value of the assets acquired, which consisted primarily of inventory and fixed assets. The excess of purchase price over the fair market value of the assets acquired was allocated to goodwill ($0.6 million). In November 2001, Melcor Corporation ("Melcor"), a subsidiary of the Company, and Quanzhou Hua Yu Electrical Component Factory formed a joint venture, Quanzhou Melcor Hua Yu Thermoelectric Company Ltd., to manufacture thermoelectric modules in China. This joint venture is included within the Engineered Products reportable segment. Melcor has a 65% interest in the joint venture. The Company's investment in the joint venture amounted to $1.8 million. This joint venture is consolidated into the Company's financial statements with Quanzhou Hua Yu's 35% interest accounted for as a minority interest. This transaction was accounted for as a business combination, which resulted in an intangible asset of $1.2 million. This intangible asset is being amortized over 20 years, which represents the term of the joint venture agreement. In October 2001, the Company entered into a joint venture with Voltas Limited ("Voltas") to produce room air conditioners in India. Fedders and Voltas each have a 50% interest in the joint venture, Universal Comfort Products Pvt. Ltd, which produces room and ductless split system air conditioners. This joint venture is included within the HVACR reportable segment. The Company's investment in the joint venture amounted to $4.9 million. The Company reports the results of the joint venture by the equity method of accounting. In January 2002, Rotorex Company, Inc. ("Rotorex"), a subsidiary of the Company, and Dong Fang Electromechanical, a subsidiary of China North Industries Group Corporation, entered into an agreement to form a joint venture to manufacture rotary compressors for air conditioners, in Xi'an, China. This joint venture is included within the HVACR reportable segment. The Company's investment in the joint venture amounted to $4.0 million. Rotorex has a 50% interest in Xi'an Fedders Dong Fang Air Conditioner Compressor Co. Ltd. The Company reports the results of the joint venture by the equity method of accounting. The Company's consolidated financial statements include the operating results of the acquired businesses and joint ventures from the date of acquisition or the commencement of the joint venture. On a pro forma basis, as if the businesses had been acquired or the joint ventures entered into at the beginning of the fiscal year, revenue, net income and earnings per share would not differ materially from the amounts reported in the consolidated financial statements for the fiscal year. 13. GUARANTEES In November 2002, FASB Interpretation ("FIN") 45, "Guarantor's Accounting And Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", was approved by the FASB. FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The interpretation also requires enhanced and additional disclosures of F-22 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) guarantees in interim and annual financial statements for periods ending after December 15, 2002. The Company adopted this statement in the second quarter of fiscal year 2003. PRODUCT WARRANTY Certain of the Company's products are covered by standard product warranty plans that extend from 1 to 5 years. In addition, major retailers have consumer return policies which allow consumers to return product that may be defective in lieu of field service. Upon return to the Company, these units are inspected, repaired as required, reboxed and held for future sale as factory reconditioned products. A portion of those units returned is not repairable. At the time revenue is recognized, upon shipment, measurements of those sales are reduced by estimates of the future costs associated with fulfilling warranty obligations and for the expense associated with repairing or scrapping defective returns. The Company uses historical failure and defective return rates, which may or may not be indicative of future rates. Each quarter, the estimate of warranty and defective return obligations including the assumptions about estimated failure and return rates, is reevaluated. The following table displays the activity and balances of the product warranty liability from August 31, 2002 to August 31, 2003:
TWELVE MONTHS ENDED AUGUST 31, 2003 ------------- Warranty balance at August 31, 2002......................... $ 7,458 Accruals for warranties issued during the period............ 12,770 Settlements made during the period.......................... (10,568) -------- Warranty balance at August 31, 2003......................... $ 9,660 ========
LOAN GUARANTEES Guarantees of subsidiary debt by the Parent and subsidiaries consist of the following at August 31, 2003: (i) The Parent guarantees the obligations of Fedders North America, Inc. ("FNA") under its 9 3/8% Senior Subordinated Notes due 2007 (the "Notes"). This is a guarantee of payment of principal and interest on the Notes that arose in connection with the issuance and sale of $150 million in principal amount of the Notes. The Parent would be required to perform under the guarantee in the event FNA failed to pay principal and interest when due or to perform its obligations under the indenture pursuant to which the Notes were issued. (ii) The Parent and various subsidiaries guarantee the obligations of certain subsidiaries under a $100 million working capital line of credit. The line of credit bears interest at LIBOR plus 2% or the prime rate of Wachovia Bank and expires in February 2006. The Parent and guarantor subsidiaries would be required to perform under the guarantees in the event that the borrowing subsidiaries failed to repay amounts borrowed under the line of credit and interest and other charges associated therewith, or failed to comply with the provisions of the credit agreement. There is no outstanding loan balance at August 31, 2003. (iii) The Parent guarantees the obligations of its subsidiary, Melcor Corporation ("Melcor"), under a $1.3 million New Jersey Economic Development Authority Economic Development Bond. The bond bears interest at the rate of 6.6% per annum and matures in July 2010. The Parent would be required to perform under the guaranty in the event that Melcor fails to pay the principal of and interest on the bond or fails to comply with the provisions of the bond agreement pursuant to which the bond was issued. The outstanding loan balance at August 31, 2003 is $0.9 million. F-23 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (iv) The Parent and Melcor Corporation guarantee the obligations of a subsidiary, Eubank Manufacturing Enterprises, Inc. ("Eubank"), under an equipment financing lease in the amount of $3.1 million. The lease bears interest at the rate of 7.16% per annum and expires in December 2007. The Parent and Melcor Corporation would be required to perform under the guarantee in the event Eubank fails to pay rent when due or fails to comply with the provisions of the lease agreement. The outstanding loan balance at August 31, 2003 is $2.4 million. (v) The Parent and a subsidiary, NYCOR North America, Inc., guarantee the obligations of Eubank Manufacturing Enterprises, Inc., a subsidiary, under a $2 million Development Authority of Dooly County, Georgia Economic Development Bond. The bond bears interest at the floating rate of 75% of the sum of LIBOR plus 1.75% per annum and matures in December 2008. The Parent and NYCOR North America would be required to perform under the guarantee in the event Eubank fails to pay the principal of and interest on the bond, when due, or fails to comply with the provisions of the bond agreement. The outstanding loan balance at August 31, 2003 is $1.5 million, which was paid in October 2003. (vi) The Parent guarantees the obligations of a subsidiary, Eubank Manufacturing Enterprises, Inc., under a loan agreement providing for a loan of $2.0 million. The loan bears interest at the prime rate of Flag Bank and matures in February 2007. The Parent would be required to perform under the guaranty in the event Eubank fails to pay the principal of and interest on the loan or fails to comply with the provisions of the loan agreement. The outstanding loan balance at August 31, 2003 is $0.6 million. (vii) The Parent guarantees the obligations of a subsidiary, Fedders Shanghai Co., Ltd. ("FSC") under a working capital line of credit totaling $6 million. The line of credit bears interest at the rate of SIBOR + 1.5% per annum and matures at various dates. The Parent would be obligated to perform under the guarantee in the event that FSC fails to pay the principal of and interest on the loan or fails to comply with the provisions of the loan agreement. There is no outstanding loan balance at August 31, 2003. (viii) The Parent guarantees the obligations of a subsidiary, Polenz GmbH ("Polenz"), under a Euro 6 million working capital line of credit. The line of credit bears interest at the rate of LIBOR + 2.5% per annum and matures June 2004. The Parent would be obligated to perform under the guarantee in the event Polenz fails to pay the principal of and interest on the loan or fails to comply with the provisions of the loan agreement. There is no outstanding loan balance at August 31, 2003. (ix) The Parent guarantees the obligations of a subsidiary, Fedders Koppel, Inc. ("FK"), under a Ph peso 320 million term loan. The loan bears interest at the rate of PHIBOR + 3% per annum and matures May 2005. The Parent would be obligated to perform under the guarantee in the event that FK fails to pay the principal of and interest on the loan or fails to comply with the provisions of the loan agreement. The outstanding loan balance at August 31, 2003 is $2.1 million. The Company also provides loan guarantees to two joint ventures which are not consolidated in the Company's financial statements: (i) Fedders International, Inc., ("FI") a subsidiary of the Company, guarantees up to 50% of the obligations of a 50%-owned joint venture, Universal Comfort Products Pvt., Ltd., ("UCPL"), under a Rupees 230 million term loan. The loan bears interest at the rate of State Bank Mid Term Loan Rate and matures November 2006. FI would be obligated to perform under the guaranty in the event UCPL fails to pay the principal of and interest on the loan or fails to comply with the terms of the loan agreement. FI's exposure under the guarantee at August 31, 2003 is approximately $2.4 million. (ii) Fedders Indoor Air Quality (Suzhou) Co., Ltd., ("FIAQ"), a subsidiary of the Company, guarantees up to RMB 5 million of the obligations of Xi'an Fedders Dong Fang Air Conditioner Compressor Co., Ltd., ("FDF"), a 50%-owned joint venture of the Company, under a working capital line of credit. The line of credit bears interest at rate set by the People's Bank of China and matures in January 2004. FIAQ would be obligated to perform its obligations under the guaranty in the event FDF F-24 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fails to pay the principal of and interest on the loan or fails to comply with the provisions of the loan agreement. FIAQ's maximum exposure under the guarantee is approximately $0.6 million as of August 31, 2003. 14. ASSETS HELD FOR SALE In October 2001, FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted this statement at the beginning of its fiscal year 2003. In connection with a restructuring of the Company's operations in 2001 (note 2), the Company ceased production at its Walkersville, Maryland facility, part of the Company's HVACR reportable segment. In December 2002, the Company began the process of actively marketing the sale of the Walkersville facility. The sale is expected to be completed no later than December 2003. The Company anticipates the selling price of the facility will exceed its net book value after consideration of selling expenses associated with marketing the facility for sale. A vacant property belonging to the Company in Ningbo, China is also being marketed for sale and the sale is expected to be completed no later than June 2004. At August 31, 2003, assets totaling $8,564, which consist of land, land improvements, buildings, and building improvements have been classified as "Assets Held for Sale" and are no longer being depreciated in accordance with SFAS 144. The following table presents the carrying amount, by asset class, of the "Assets Held for Sale" at August 31:
2003 ------ Land and land improvements.................................. $2,181 Building, net............................................... 4,587 Building improvements, net.................................. 1,796 ------ Assets Held for Sale........................................ $8,564 ======
15. SUBSEQUENT EVENTS On October 21, 2003, the Company entered into a joint venture with Jiangsu Xingrong Hi-Tech Company ("Xingrong") to design, produce and market heat exchangers used in air conditioners. The Company and Xingrong each have a 50% interest in the joint venture, Changzhou Fedders Xingrong Air Conditioner Components Co., Ltd. The Eubank Manufacturing Enterprises, Inc. Industrial Revenue Bond has been paid in October 2003. 16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Fedders North America, Inc. ("FNA") is a wholly-owned subsidiary of the Company. FNA and the Company are the Issuer and the Guarantor, respectively, of the Senior Subordinated Notes due 2007, of which $100,000 were issued in August 1997 and $50,000 were issued in August 1999 (note 5). The Company's guarantee is full and unconditional. The following condensed consolidating financial statements present separate information for FNA, the Company, and its subsidiaries other than FNA, and should be read in conjunction with the consolidated financial statements of the Company. F-25 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEAR ENDED AUGUST 31, 2003 ----------------------------------------------------------- FEDDERS NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- -------- --------- ----------- ----------- Net sales............................... $328,577 $114,583 -- $(21,457) $421,703 Cost of sales........................... 257,860 92,432 -- (21,457) 328,835 Selling, general and administrative expense(a)............................ 32,821 28,357 $ 726 -- 61,904 Asset impairment, employee severance and other restructuring credits........... (115) -- -- -- (115) -------- -------- ------- -------- -------- Operating income (loss)................. 38,011 (6,206) (726) -- 31,079 Partners' net interest in joint venture results............................... -- (14) -- -- (14) Equity income in investment............. -- -- (2,402) 2,402 -- Interest expense, net(b)................ (16,147) (2,126) (273) -- (18,546) Other income............................ 356 157 (12) -- 501 -------- -------- ------- -------- -------- Income (loss) before income taxes and cumulative effect of a change in accounting principle.................. 22,220 (8,189) (3,413) 2,402 13,020 Provision (benefit) for income taxes.... 7,134 (2,607) (303) -- 4,224 -------- -------- ------- -------- -------- Net income (loss) before cumulative effect of a change in accounting principle............................. 15,086 (5,582) (3,110) 2,402 8,796 Cumulative effect of a change in accounting principle.................. 6,906 5,000 -- -- 11,906 -------- -------- ------- -------- -------- Net income (loss)....................... $ 8,180 $(10,582) $ (3110) $ 2,402 $ (3,110) ======== ======== ======= ======== ======== Preferred stock dividend................ -- -- 618 -- 618 -------- -------- ------- -------- -------- Income (loss) applicable to common stockholders.......................... $ 8,180 $(10,582) $(3,728) $ 2,402 $ (3,728) ======== ======== ======= ======== ======== Foreign currency translation, net of tax................................... (804) (138) (933) 942 (933) -------- -------- ------- -------- -------- Comprehensive income (loss)............. $ 7,376 $(10,720) $(4,661) $ 3,344 $ (4,661) ======== ======== ======= ======== ========
F-26 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEAR ENDED AUGUST 31, 2002 FEDDERS --------------------------------- NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- ------- --------- ----------- ----------- Net sales................................ $287,079 $98,364 -- $(11,741) $373,702 Cost of sales............................ 226,550 75,843 -- (11,741) 290,652 Selling, general and administrative expense(a)............................. 35,442 26,849 $ 817 -- 63,108 Asset impairment, employee severance and other restructuring credits............ (397) -- -- -- (397) -------- ------- ------- -------- -------- Operating income (loss).................. 25,484 (4,328) (817) -- 20,339 Partners' net interest in joint venture results................................ -- 713 -- -- 713 Equity income in investment.............. -- -- 2,348 (2,348) -- Interest (expense) income, net(b)........ (16,603) (2,326) 312 -- (18,617) Other income............................. 154 387 -- -- 541 -------- ------- ------- -------- -------- Income (loss) before income taxes........ 9,035 (5,554) 1,843 (2,348) 2,976 Provision (benefit) for income taxes..... 2,938 (1,805) (6,166) -- (5,033) -------- ------- ------- -------- -------- Net income (loss)........................ 6,097 (3,749) 8,009 (2,348) 8,009 Foreign currency translation, net of tax.................................... 223 630 853 (853) 853 -------- ------- ------- -------- -------- Comprehensive income (loss).............. $ 6,320 $(3,119) $ 8,862 $ (3,201) $ 8,862 ======== ======= ======= ======== ========
F-27 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEAR ENDED AUGUST 31, 2001 FEDDERS --------------------------------- NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- ------- --------- ----------- ----------- Net sales............................... $312,408 $97,085 -- $(3,796) $405,697 Cost of sales........................... 267,294 73,499 -- (3,796) 336,997 Selling, general and administrative expense(a)............................ 38,775 24,524 $ 11,499 -- 74,798 Asset impairment, employee severance and other restructuring charges........... 8,947 -- -- -- 8,947 -------- ------- -------- ------- -------- Operating loss.......................... (2,608) (938) (11,499) -- (15,045) Partners' net interest in joint venture results............................... -- (160) -- -- (160) Equity loss in investment............... -- -- (16,192) 16,192 -- Interest (expense) income, net(b)....... (17,163) (2,905) 2,223 -- (17,845) Other expense........................... (213) -- -- -- (213) -------- ------- -------- ------- -------- Loss before income taxes................ (19,984) (4,003) (25,468) 16,192 (33,263) Benefit for income taxes................ (6,495) (1,300) (3,015) -- (10,810) -------- ------- -------- ------- -------- Net loss................................ (13,489) (2,703) (22,453) 16,192 (22,453) Foreign currency translation, net of tax................................... 12 (1,049) -- -- (1,037) -------- ------- -------- ------- -------- Comprehensive loss...................... $(13,477) $(3,752) $(22,453) $16,192 $(23,490) ======== ======= ======== ======= ========
F-28 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF AUGUST 31, 2003 FEDDERS ---------------------------------- NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- -------- --------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents............ $54,354 $ 6,548 -- -- $ 60,902 Net accounts receivable... 12,913 22,265 -- -- 35,178 Net inventories........... 42,204 36,744 -- -- 78,948 Assets held for sale...... 8,249 315 8,564 Other current assets...... 8,081 12,689 $15,370 $ (7,023) 29,117 -------- -------- ------- -------- -------- Total current assets........ 125,801 78,561 15,370 (7,023) 212,709 Investments in subsidiaries.............. -- -- 17,139 (17,139) -- Net property, plant and equipment................. 33,464 21,742 654 -- 55,860 Goodwill.................... 57,885 20,745 -- -- 78,630 Other intangible assets..... 274 1,514 -- -- 1,788 Other assets................ 7,314 6,202 30,426 -- 43,942 -------- -------- ------- -------- -------- Total assets................ $224,738 $128,764 $63,589 $(24,162) $392,929 ======== ======== ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term notes.......... -- $ 7,520 -- -- $ 7,520 Current portion of long-term debt......... $ 451 4,185 $ 16 -- 4,652 Accounts and income taxes payable................ 26,981 28,072 7,211 -- 62,264 Accrued expenses.......... 28,760 10,553 9,239 -- 48,552 -------- -------- ------- -------- -------- Total current liabilities... 56,192 50,330 16,466 -- 122,988 Long-term debt.............. 153,544 5,848 -- -- 159,392 Other long-term liabilities............... 1,351 11,529 29,764 $ (7,023) 35,621 Net due to (from) affiliates................ (24,029) 81,598 (57,569) -- -- Stockholders' equity: Common and Class B Stock.. 5 -- 385 (5) 385 Additional paid-in capital................ 21,209 24,625 74,025 (45,834) 74,025 Retained earnings (deficit)(f)........... 17,258 (43,704) 40,179 26,446 40,179 Deferred compensation and treasury stock......... -- -- (37,416) -- (37,416) Accumulated other comprehensive loss..... (792) (1,462) (2,245) 2,254 (2,245) -------- -------- ------- -------- -------- Total stockholders' equity.................... 37,680 (20,541) 74,928 (17,139) 74,928 -------- -------- ------- -------- -------- Total liabilities and stockholders' equity...... $224,738 $128,764 $63,589 $(24,162) $392,929 ======== ======== ======= ======== ========
F-29 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF AUGUST 31, 2002 ----------------------------------------------------------- FEDDERS NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- -------- --------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents............ $ 64,166 $ 3,213 -- -- $ 67,379 Net accounts receivable.............. 16,610 15,158 -- -- 31,768 Net inventories...................... 27,633 20,947 -- -- 48,580 Other current assets................. 5,924 7,806 $ 12,477 $ (7,023) 19,184 -------- -------- -------- -------- -------- Total current assets................... 114,333 47,124 12,477 (7,023) 166,911 Investments in subsidiaries............ -- -- 20,583 (20,583) -- Net property, plant and equipment...... 44,916 21,090 840 -- 66,846 Goodwill............................... 64,791 27,545 -- -- 90,536 Other intangible assets................ 316 1,240 -- -- 1,556 Other assets........................... 7,943 6,349 25,987 -- 40,279 -------- -------- -------- -------- -------- Total assets........................... $232,299 $101,548 $ 59,887 $(27,606) $366,128 ======== ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term notes..................... $ 2,432 $ 7,397 -- -- $ 9,829 Current portion of long-term debt.... 593 2,662 $ 107 -- 3,362 Accounts and income taxes payable.... 22,562 16,260 9,021 -- 47,843 Accrued expenses..................... 20,879 10,295 5,925 -- 37,099 -------- -------- -------- -------- -------- Total current liabilities.............. 46,466 36,614 15,053 -- 98,133 Long-term debt......................... 153,624 10,129 16 -- 163,769 Other long-term liabilities............ 1,822 11,466 20,143 $ (7,023) 26,408 Net due to (from) affiliates........... -- 53,143 (53,143) -- -- Stockholders' equity: Common and Class B Stock............. 5 -- 407 (5) 407 Additional paid-in capital........... 21,292 24,642 68,870 (45,934) 68,870 Retained earnings (deficit)(f)....... 9,078 (33,122) 47,551 24,044 47,551 Deferred compensation and treasury stock............................. -- -- (37,698) -- (37,698) Accumulated other comprehensive income (loss)..................... 12 (1,324) (1,312) 1,312 (1,312) -------- -------- -------- -------- -------- Total stockholders' equity............. 30,387 (9,804) 77,818 (20,583) 77,818 -------- -------- -------- -------- -------- Total liabilities and stockholders' equity............................... $232,299 $101,548 $ 59,887 $(27,606) $366,128 ======== ======== ======== ======== ========
F-30 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2003 ----------------------------------------------------------- FEDDERS NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- -------- --------- ----------- ----------- Net cash provided by (used in) operating activities............................ $ 19,829 $(17,683) $ 3,471 -- $ 5,617 -------- -------- ------- ---- ------- Net additions to property, plant and equipment............................. (2,958) (3,469) 392 -- (6,035) Acquisition of businesses............... -- (1,333) -- -- (1,333) -------- -------- ------- ---- ------- Net cash (used in) provided by investing activities............................ (2,958) (4,802) 392 -- (7,368) -------- -------- ------- ---- ------- Net short and long-term borrowings...... (2,654) (2,635) (107) -- (5,396) Cash dividends.......................... -- -- (4,126) -- (4,126) Proceeds from stock options subscribed............................ -- -- 30 -- 30 Proceeds from stock rights exercised.... -- -- 6,167 6,167 Other................................... -- -- (1,401) -- (1,401) Change in net due to (from) affiliate... (24,029) 28,455 (4,426) -- -- -------- -------- ------- ---- ------- Net cash (used in) provided by financing activities............................ (26,683) 25,820 (3,863) -- (4,726) -------- -------- ------- ---- ------- Net (decrease) increase in cash and cash equivalents........................... (9,812) 3,335 -- -- (6,477) Cash and cash equivalents at beginning of year............................... 64,166 3,213 -- -- 67,379 -------- -------- ------- ---- ------- Cash and cash equivalents at end of year.................................. $ 54,354 $ 6,548 -- -- $60,902 ======== ======== ======= ==== =======
F-31 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2002 --------------------------------------------------------- FEDDERS NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION ------- ------- --------- ----------- ----------- Net cash provided by (used in) operating activities............................. $25,764 $(3,152) $ 11,522 -- $ 34,134 ------- ------- -------- ---- -------- Net additions to property, plant and equipment.............................. (3,184) (3,277) (95) -- (6,556) Acquisition of businesses................ (4,571) (3,437) -- -- (8,008) ------- ------- -------- ---- -------- Net cash used in investing activities.... (7,755) (6,714) (95) -- (14,564) ------- ------- -------- ---- -------- Net short and long-term borrowings (repayments)........................... 1,826 (1,152) (102) -- 572 Cash dividends........................... -- -- (3,725) -- (3,725) Proceeds from stock options exercised.... -- -- 1 -- 1 Other.................................... -- -- (231) -- (231) Change in net due to (from) affiliate.... -- 10,020 (10,020) -- -- ------- ------- -------- ---- -------- Net cash provided by (used in) financing activities............................. 1,826 8,868 (14,077) -- (3,383) ------- ------- -------- ---- -------- Net increase (decrease) in cash and cash equivalents............................ 19,835 (998) (2,650) -- 16,187 Cash and cash equivalents at beginning of year................................... 44,331 4,211 2,650 -- 51,192 ------- ------- -------- ---- -------- Cash and cash equivalents at end of year................................... $64,166 $ 3,213 -- -- $ 67,379 ======= ======= ======== ==== ========
F-32 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED AUGUST 31, 2001 ----------------------------------------------------------- FEDDERS NORTH OTHER ELIMINATING FEDDERS AMERICA FEDDERS CORPORATE ENTRIES CORPORATION -------- -------- --------- ----------- ----------- Net cash (used in) provided by operating activities................. $ (7,319) $ 16,065 $ (2,827) -- $ 5,919 -------- -------- -------- ---- -------- Net additions to property, plant and equipment............................ (7,487) (3,014) (132) -- (10,633) Acquisition of businesses.............. -- (19,694) -- -- (19,694) -------- -------- -------- ---- -------- Net cash (used in) investing activities........................... (7,487) (22,708) (132) -- (30,327) -------- -------- -------- ---- -------- Proceeds from short-term notes......... -- 3,717 -- -- 3,717 Net (repayments of) proceeds from long- term debt............................ (579) 2,047 225 -- 1,693 Cash dividends......................... -- -- (3,914) -- (3,914) Proceeds from stock options exercised............................ -- -- 526 -- 526 Repurchase of capital stock............ -- -- (13,237) -- (13,237) Other.................................. -- -- (378) -- (378) Change in net due to (from) affiliate............................ -- (1,229) 1,229 -- -- -------- -------- -------- ---- -------- Net cash (used in) provided by financing activities................. (579) 4,535 (15,549) -- (11,593) -------- -------- -------- ---- -------- Net decrease in cash and cash equivalents.......................... (15,385) (2,108) (18,508) -- (36,001) Cash and cash equivalents at beginning of year.............................. 59,716 6,319 21,158 -- 87,193 -------- -------- -------- ---- -------- Cash and cash equivalents at end of year................................. $ 44,331 $ 4,211 $ 2,650 -- $ 51,192 ======== ======== ======== ==== ========
F-33 FEDDERS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTERCOMPANY TRANSACTIONS The historical condensed consolidating financial statements presented above include the following transactions between FNA and the Company: a) The Company charges corporate overhead to FNA essentially on a cost basis allocated in proportion to sales. Such charges to FNA amounted to $13,143, $11,483 and $12,409 for the years ended August 31, 2003, 2002 and 2001, respectively. b) FNA's interest expense reflects actual interest charges on the 9 3/8% Senior Subordinated Notes due 2007, State of Illinois Promissory Note, capital lease obligations, and a revolving line of credit. c) FNA's depreciation and amortization for the years ended August 31, 2003, 2002 and 2001, amounted to $6,138, $10,584 and $11,003, respectively. Capital expenditures for the years ended August 31, 2003, 2002 and 2001, amounted to $3,066, $4,369 and $7,487, respectively. d) The Company guarantees FNA's obligations under FNA's revolving credit facility. e) The Company's stock option plan includes FNA's employees. f) In fiscal 2003, 2002 and 2001, FNA did not declare a dividend. F-34 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Fedders Corporation: We have audited the accompanying consolidated balance sheets of Fedders Corporation and subsidiaries as of August 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended August 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fedders Corporation and subsidiaries as of August 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, effective September 1, 2002, the Company changed its method of accounting for goodwill and intangible assets upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey November 14, 2003 F-35 FEDDERS CORPORATION QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH FISCAL 2003 QUARTER QUARTER QUARTER QUARTER YEAR ---- ----------- ---------- ----------- ----------- ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND MARKET PRICE DATA) Net sales................................ $ 39,163 $71,496 $194,174 $116,870 $421,703 Gross profit............................. 7,831 14,923 45,100 25,014 92,868 (Loss) income before income taxes and cumulative effect of a change in accounting principle................... (11,254) (4,796) 23,629 5,441 13,020 Cumulative effect of a change in accounting principle................... 11,906 -- -- -- 11,906 Net (loss) income(a)..................... (19,504) (3,236) 15,950 3,680 (3,110) Net (loss) income applicable to common stockholders........................... (19,504) (3,410) 15,728 3,458 (3,728) Basic (loss) earnings per common share before cumulative effect of a change in accounting principle................... (0.23) (0.11) 0.53 0.12 0.27 Cumulative effect of a change in accounting principle(b)................ (0.37) -- -- -- (0.39) Basic (loss) earnings per common share(b)............................... (0.60) (0.11) 0.53 0.12 (0.12) Diluted (loss) earnings per common share before cumulative effect of a change in accounting principle................... (0.23) (0.11) 0.53 0.12 0.27 Cumulative effect of a change in accounting principle(b)................ (0.37) -- -- -- (0.39) Diluted (loss) earnings per common share.................................. (0.60) (0.11) 0.53 0.12 (0.12) Market price per share: Common Stock (FJC) High................................... 2.93 3.43 3.70 4.04 4.04 Low.................................... 2.23 2.58 2.86 2.97 2.23
FIRST SECOND THIRD FOURTH FISCAL 2002 QUARTER QUARTER QUARTER QUARTER YEAR ---- ----------- ---------- ----------- ----------- ----------- (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND MARKET PRICE DATA) Net sales................................ $ 38,097 $73,081 $170,688 $ 91,836 $373,702 Gross profit............................. 7,311 16,192 40,901 18,646 83,050 (Loss) income before income taxes........ (12,479) (4,004) 20,195 (736) 2,976 Net (loss) income........................ (8,423) (2,703) 13,631 5,504 8,009 Basic (loss) earnings per share(b)....... (0.27) (0.09) 0.43 0.17 0.25 Diluted (loss) earnings per share........ (0.27) (0.09) 0.43 0.17 0.25 Market price per share: Common Stock (FJC) High................................... 4.80 3.94 4.07 3.20 4.80 Low.................................... 2.30 2.45 2.61 1.90 1.90 Class A Stock (FJA) High................................... 4.05 3.45 3.00 N/A 4.05 Low.................................... 1.55 1.97 2.55 N/A 1.55
--------------- (a) The Company completed the transitional goodwill impairment test during the fourth quarter for fiscal 2003 and recognized a non-cash impairment charge of $11.9 million of goodwill impairment within its Engineered Products reporting segment. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle as of September 1, 2002. (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. F-36 FEDDERS CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II FOR THE YEARS ENDED AUGUST 31, 2003, 2002 AND 2001
BALANCE ADDITIONS BALANCE AT CHARGED AT END ALLOWANCE FOR DOUBTFUL BEGINNING TO OF ACCOUNTS: OF PERIOD EXPENSE DEDUCTIONS OTHER PERIOD ---------------------- --------- --------- ---------- ----- ------- (AMOUNTS IN THOUSANDS) Year ended: August 31, 2003................................ $2,613 $ 423 $(1,078) $74 $2,032 August 31, 2002................................ $2,494 $ 698 $ (579) -- $2,613 August 31, 2001................................ $2,138 $1,413 $(1,130) $73 $2,494
F-37 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Fedders Corporation: We have audited the financial statements of Fedders Corporation and subsidiaries as of August 31, 2003 and 2002, and for each of the three years in the period ended August 31, 2003, and have issued our report thereon dated November 14, 2003; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of Fedders Corporation and subsidiaries for each of the three years in the period ended August 31, 2003, listed in Item 15. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey November 14, 2003 F-38