10-K/A 1 y16402a1e10vkza.txt AMENDMENT #1 TO FORM 10-K . . . FORM 10-K/A Amendment No. 1 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 DECEMBER 31, 2004 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: NONE Indicate by check mark it the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ] 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 [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The approximate aggregate market value (based upon the closing price on the New York Stock Exchange) of common equity held by non-affiliates of the Registrant as of June 30, 2004 was $132,637,929. (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.) As of the close of business on September 1, 2005, there were outstanding 28,195,107 shares of the Registrant's Common Stock and 2,492,401 shares of its Class B Stock. DOCUMENTS INCORPORATED BY REFERENCE None. Explanatory Note This amendment No. 1 on Form 10-K/A is being filed with respect to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission (the "SEC") on September 30, 2005 (the "Form 10-K") in response to a limited review of the Original Filing made by the staff of the SEC. The Company has amended the Form 10-K to: 1. disclose the dollar amount of backlog orders believed to be firm, as of a more recent date and as of a comparable date in the preceding fiscal year, together with an indication of the portion thereof not reasonably expected to be filled within the current fiscal year in accordance with Item 101(c)(viii); 2. expand disclosure with respect to management's assessment of internal control over financial reporting and provide detailed disclosure on the Company's remediation efforts to address the identified material weaknesses in internal control over financial reporting; 3. amend 302 certifications to conform wording to language provided in Item 601 (31) of Regulation S-K; Except as described above, no other changes have been made to the original filing. This Amendment continues to speak as of the date of the original filing, and the Registrant has not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the original filing. 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business....................................................... PART II Item 9A. Controls and Procedures........................................ PART IV Item 15. Exhibits, Financial Statement Schedules........................
ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Fedders Corporation (the "Company", "Fedders" or the "Registrant") is a leading global manufacturer and marketer of air treatment products, including air conditioners, air cleaners, dehumidifiers and humidifiers, and thermal technology products. The Company was established more than 100 years ago and has been in the indoor air treatment business for more than 50 years. The Company has been actively pursuing strategic acquisitions and alliances and new product introductions to support continued growth in new and existing markets. Activities in 2004 include: - On November 1, we acquired the Addison Products Division of Heat Controller, Inc., which manufactures and markets a broad line of air conditioning products, primarily serving commercial and institutional markets, which now operates as Fedders Addison Company, Inc. - In October, we announced the establishment of a new business unit, Fedders Global Sourcing Solutions, which will leverage the Company's expertise in global sourcing and Asian manufacturing to assist other manufacturers in developing Asian suppliers, conducting reverse internet auctions and producing their products in our extensive China manufacturing facilities. - In the fourth quarter, we began construction of a research and development center in Qingpu, Shanghai, China. The center began operation by April 4, 2005. Unless otherwise indicated, all references herein to "we", "our", the "Company" or the "Registrant" include Fedders Corporation and its principal operating subsidiaries. The discussion included herein reflects the Company's operations during 2004. (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. (c) NARRATIVE DESCRIPTION OF BUSINESS The Company is a leading global producer and marketer of air treatment products for the residential, commercial and industrial markets. Our products include room air conditioners, central air conditioners, heat pumps, gas furnaces, dehumidifiers, humidifiers, air cleaners and thermal technology products. We are a low-cost producer of high quality products due, in part, to our Asian manufacturing base and our continuous cost-reduction programs in product design and manufacturing processes. HVACR PRODUCTS 3 The HVACR segment designs, manufactures and markets air conditioners, including window units, ducted central air conditioners, heat pumps, gas furnaces, ductless split- and multi-split systems, through-the-wall, portable, and packaged unit air conditioners, rotary compressors for air conditioners, residential humidifiers, dehumidifiers and air cleaners. MARKETS The Company's consumer products are sold globally, primarily by the Company's salaried sales force, directly to retailers, including regional, national and multi-national and to original equipment manufacturers. Residential and commercial products are primarily sold to wholesale distributors, contractors and original equipment manufacturers by our salaried sales force and through a network of manufacturers' representatives. 4 PRODUCTION The Company currently manufactures air conditioners in Orlando, Florida; Longview, Texas; Ningbo, Shanghai and Nanjing, China; Dadra, India; and Manila, Philippines 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. The Company also purchases certain components used in its products from other manufacturers including thermostats, compressors, motors and electrical controls. The Company endeavors to obtain the lowest possible cost in its purchases of raw materials and components, which must meet specified quality standards, through an active global sourcing program. ENGINEERED PRODUCTS PRODUCTS The Engineered Products segment designs, manufactures and markets products for commercial and industrial indoor air quality and thermal technology markets around the world. These products include electronic air cleaners, fan filters, media filters and humidification systems and thermoelectric-based components and equipment. MARKETS Engineered Products are primarily sold through manufacturers' representatives, distributors and directly to end-users. PRODUCTION The Company produces air cleaning products and humidifiers in Sanford, North Carolina. Cleanroom products are produced in Albuquerque, New Mexico and Suzhou, China and thermoelectric devices are produced 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. 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; 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." 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 and production is weighted towards the selling season. Accordingly, the greatest use of credit lines occurs early in the calendar year. Cash balances peak in the third quarter. Information with respect to the Company's warranty and defective return policy is provided in Note 1 of the Notes to Consolidated Financial Statements. See also the information entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." 5 BACKLOG The backlog for the Company's products as of December 31, 2004, was $77.4 million, a decrease of 40.7% from December 31, 2003. This decrease reflects lower orders of room air conditioners as a result of higher inventory levels throughout channels of distribution following the seasonally cool summer of 2004 in key North American markets, offset in part by increased backlog in other products. The backlog for the Company's products as of December 31, 2005, was $99.7 million, an increase of 28.8% over December 31, 2004. The increase reflects reduced inventory levels throughout channels of distribution following the warmer summer in 2005, and increased orders related to commercial and industrial products. 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 principal manufacturing facilities have received the highest level of quality certification (ISO 9000 series) from the International Standards Organization for their quality management systems. 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, ADDISON, 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 Domestically, our competitors include a number of foreign and domestic manufacturers of room air conditioners and appliances, including Whirlpool Corporation, Frigidaire Company, Matsushita Electric Industrial Co., Ltd., LG Corporation and Haier. In the central air conditioner market, competitors include Carrier Corporation, Trane, York International Corporation, Lennox Industries Inc., Goodman Manufacturing Company and Nordyne, Inc. All of the markets in which the Company does business are very competitive. Many of these competitors are larger and have greater resources than the Company. The Company competes principally on the basis of quality, price and its ability to deliver products and services to its customers on an accurate-response basis. We believe that we compete effectively by using a multiple brand strategy and providing competitively-priced, high quality products. Internationally, competitors vary depending on the market. Some markets, such as China, are served by many local manufacturers. Other markets are dominated by foreign manufacturers of air conditioners and electronics products, including Matsushita Electric Industrial Co. Ltd., Carrier-Toshiba Corporation, Hitachi, Ltd,. Mitsubishi Electric Corporation and Sanyo Electric Trading Co., Ltd., all of which also manufacture compressors. We believe that we can compete effectively by using a strategy of manufacturing low cost air conditioners locally and utilizing our global sourcing network. 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 the twelve months ended December 31, 2004, four months ended December 31, 2003, and twelve months ended August 31, 2003 and 2002, the Company spent approximately $10.2 million, $3.0 million, $9.5 million and $8.9 million, respectively, on research and development. Research and development expenditures are included within selling, general and administrative expense. 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 6 States. Chemical producers have developed environmentally acceptable alternative refrigerants for use in room air conditioners. The Company is currently supplying products using such refrigerants in certain markets. 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 December 31, 2004 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, 2005. EMPLOYEES The Company has approximately 2,700 employees worldwide, of which approximately 194 are covered by collective bargaining agreements. During our peak manufacturing period, we employ an additional 1,187 seasonal, temporary workers. The Company considers its relations with its employees to be generally satisfactory. FOREIGN OPERATIONS Foreign operations are subject to the risks inherent in such activities, such as foreign regulations, unsettled political conditions and exchange rate fluctuations. Through certain subsidiary companies, the Company has operations in a number of countries, including China, India, Germany, the United Kingdom and the Philippines. Of our fourteen manufacturing facilities, eight are in China. The Company's foreign operations, at times, may be adversely affected by changes in government policies such as changes in laws and regulations (or the interpretation thereof), restrictions on imports and exports and sources of supply, duties or tariffs, the introduction of additional measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad and the expropriation of private enterprise. In addition, policy concerns particular to the United States with respect to a country in which the Company has operations could adversely affect the Company's operations in that country. The Company monitors its operations with a view to minimizing the impact on its foreign investments and overall business that could arise as a result of the risks inherent in maintaining operations in foreign countries as described above. WEBSITE ACCESS TO REPORTS Fedders' annual reports and proxy statements are and have been throughout 2004 available, without charge, on Fedders' website (www.fedders.com) as soon as reasonably practicable after they are filed with or furnished to the SEC. Fedders also makes available on its website the charters of its Board Committees, its Corporate Governance Guidelines and its Code of Business Conduct and Ethics. Copies of SEC reports and other documents are also available, without charge, from Investor Relations, Fedders Corporation, 505 Martinsville Road, Liberty Corner, New Jersey 07938 or by sending an email to InvestorRelations@Fedders.com or by calling (908) 604-8686. The Company does not post its Forms 10-K, 10-Q or 8-K on its website, as these reports are available upon request and are also publicly available on the SEC's website, as indicated below. Information on our website does not constitute part of this report. Additionally, the Company's filings with the SEC may be read and copied at the SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. These filings are also available on the SEC's website at www.sec.gov free of charge as soon as reasonably practicable after the Company has filed the above referenced reports. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. The Company's management, under the supervision of and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that because of the material weaknesses described below, the Company's disclosure controls and procedures were not effective as of December 31, 2004. To address the deficiencies described below, the Company performed additional analysis and other post-closing procedures to ensure that the Company's consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Accordingly, 7 management believes that (i) the financial statements filed fairly present in all material respects the Company's financial condition, results of operations and cash flows for the periods presented, and (ii) this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. Management initially reported to the Audit Committee of the Company's Board of Directors that its assessment of the effectiveness of internal control over financial reporting was completed on April 15, 2005. Management subsequently determined as a result of discussions with Deloitte & Touche LLP, the Company's independent registered public accounting firm ("Deloitte"), that its assessment was, in fact, not complete under the COSO criteria. Management's April 15, 2005 report identified three material weaknesses, as well as a number of significant deficiencies, in its internal control over financial reporting. Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, including the principal executive officer and principal financial officer, has conducted an assessment of its internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and concluded that the Company did not maintain effective internal control over financial reporting. In conducting its assessment, management performed an incomplete review as of December 31, 2004 with respect to all five components of internal control over financial reporting: control environment, risk assessment, control activities, information and communication, and monitoring. The Company's management determined that the identified control deficiencies related to the controls listed below are material weaknesses because the Company believes that these deficiencies could result in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. - The Company's control environment did not sufficiently promote effective internal control over financial reporting throughout its management structure, and this material weakness was a contributing factor in the development of other material weaknesses described below. Principal contributing factors included the turnover of employees in key financial reporting positions, the lack of a formal program for training members of the Company's finance and accounting groups, a lack of a full evaluation of the Company's financial system applications due to incomplete documentation and testing of key controls, and the lack of a complete entity-wide risk assessment. This deficient control environment also contributed to the Company's inability to complete its documentation of controls by the as of date of December 31, 2004, and to complete its assessment of design effectiveness, general computer controls, financial system application controls, and tax controls. - Controls over the selection and application of accounting principles generally accepted in the United States of America to resolve non-routine or complex accounting matters are ineffective as a result of inadequate resources and technical accounting expertise, along with a lack of appropriate training. - The design and operation of controls over the financial closing and reporting process are ineffective as a result of the lack of timely preparation of account analyses and reconciliations, a lack of appropriate review of account reconciliations and supporting analyses, errors in account balance classifications, and inadequate controls over spreadsheet preparation. - Controls over the process for recording and approving journal entries were inadequate as a result of a lack of appropriate evidence of review and approval, and a lack of adequate documentation and support. - Controls over the segregation of duties were inadequate due to an inadequate level of accounting and finance resources. - Controls over the recording of product revenues were not effective with respect to estimating a provision for returns of seasonal product and the proper cutoff of revenue with respect to a non-routine revenue transaction. - The design and operation of controls over the valuation of inventory reserves for the following: refurbishments, shrinkage, manufacturing variances, and intercompany profit; were ineffective as a result of a lack of effective supervisory controls over the monitoring and review of these inventory reserves. 8 - Controls over the recording and reconciliation of property, plant and equipment at certain domestic businesses were ineffective as a result of a lack of timely and effective reconciliation of the fixed asset subsidiary ledgers to the general ledger. The material weaknesses described above resulted in numerous adjustments to the financial statements as of and for the year ended December 31, 2004 as well as the restatement of comprehensive income as discussed in Note 1 to the consolidated financial statements. As a result of the aforementioned control deficiencies, which constitute material weaknesses in internal control over financial reporting, the Company's management has determined that there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. Management has excluded from its report Fedders Addison Company, Inc. ("Addison"), a material acquisition consummated on November 2, 2004, that was not required to be assessed in 2004. The Company's consolidated revenues for the year ended December 31, 2004 were $413.0 million, of which Addison represented $2.6 million. The Company's total assets as of December 31, 2004 were $405.0 million, of which Addison represented $10.0 million. As a result of management's incomplete assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, Deloitte was unable to perform auditing procedures necessary to form an opinion on management's assessment and did not express an opinion on management's assessment and expressed an adverse opinion on the effectiveness of internal control over financial reporting. 9 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Fedders Corporation: We were engaged to audit management's assessment regarding the effectiveness of internal control over financial reporting of Fedders Corporation and subsidiaries (the "Company") as of December 31, 2004. As described in Management's Report on Internal Control Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at Fedders Addison Company, Inc., which was acquired on November 2, 2004, and whose financial statements reflect total assets and revenues constituting 2% and 1% percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. As described in the accompanying Management's Report on Internal Control Over Financial Reporting, the Company was unable to complete its assessment of the effectiveness of the Company's internal control over financial reporting. Accordingly, we are unable to perform auditing procedures necessary to form an opinion on management's assessment. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management's assessment: CONTROL ENVIRONMENT The Company's control environment did not sufficiently promote effective internal control over financial reporting throughout its management structure, and this material weakness was a contributing factor in the development of other material weaknesses described below. Principal contributing factors included the turnover of employees in key financial reporting positions, the lack of a formal program for training members of the Company's finance and accounting groups, a lack of a full evaluation of the Company's financial system applications due to incomplete documentation and testing of key controls, and the lack of a complete entity-wide risk assessment. This deficient control environment also contributed to the Company's inability to complete its documentation of controls by the as of date of December 31, 2004, and to complete its assessment of design effectiveness, general computer controls, financial system application controls, and tax controls. SELECTION AND APPLICATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA The Company's controls over the selection and application of accounting principles generally accepted in the United States of America are ineffective as a result of inadequate resources and technical accounting expertise, and a lack of appropriate training, within the accounting function to resolve non-routine or complex accounting matters. This resulted in numerous adjustments to the financial statements as of and for the year ended December 31, 2004, as well as the restatement of comprehensive income (loss) as discussed in Note 1 to the consolidated financial statements. Due to the potential pervasive effect on the financial statement account 10 balances and disclosures, in the aggregate, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. THE FINANCIAL CLOSING AND REPORTING PROCESS The Company's design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial statements are ineffective. Deficiencies identified include the lack of timely preparation of account analyses and reconciliations, a lack of appropriate review of account reconciliations and supporting analyses, errors in account balance classifications, and inadequate controls over spreadsheet preparation. As a result of these deficiencies, numerous adjustments to the financial statements were required as of and for the year ended December 31, 2004. Due to the potential pervasive effect on the financial statement account balances and disclosures and the importance of the annual and interim financial closing and reporting process, in the aggregate, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. INADEQUATE CONTROLS OVER JOURNAL ENTRIES The Company did not have appropriate controls around the process for recording and approving journal entries. Numerous instances were identified where journal entries lacked appropriate evidence of review and approval prior to being recorded. Instances also occurred in which journal entries were not adequately documented and supported with appropriate evidence and analysis. These deficiencies constitute a material weakness in internal control over financial reporting in which there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. SEGREGATION OF DUTIES The Company did not design and implement controls related to the segregation of duties. This material weakness is due in part to an inadequate level of accounting and finance resources within the organization which could result in a misappropriation of assets. Due to the potential pervasive effect on financial statement account balances and disclosures and the absence of other mitigating controls, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. CONTROLS OVER THE RECORDING OF REVENUES The Company's controls over the recording of product revenues were not effective. Specifically, the Company did not properly estimate a provision for returns granted to certain customers as a result of the lack of an established returns policy and effective monitoring of compliance with the policy. This breakdown in control resulted in an overstatement of revenues and an understatement of the related seasonal returns reserve for the three months ended June 30, 2004. Given the materiality of this error, the Company was required to restate its financial statement results for the quarter ended June 30, 2004. In addition, as a result of an inadequate management review and approval process, the Company did not maintain appropriate revenue cutoff at December 31, 2004, with respect to a non-routine revenue transaction. While the effect of this transaction individually was not material to the financial statements taken as a whole, the lack of appropriate controls with respect to the proper recognition of non-routine revenue transactions could have resulted in a material misstatement of the financial statements. The lack of effective controls over the recording of revenues constitutes a material weakness, and given its importance with respect to effective internal control over financial reporting, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. CONTROLS OVER INVENTORY AND COST OF GOODS SOLD The Company did not maintain effective control over the valuation of inventory and cost of goods sold specifically related to inventory reserves for the following: refurbishments, shrinkage, manufacturing variances, and intercompany profit. This resulted in adjustments to the Company's financial statements as of and for the year ended December 31, 2004. The Company did not have effective supervisory controls in place with respect to monitoring and reviewing these inventory reserves at its Appliances and Unitary Products businesses domestically, and its Nanjing, China facility. The lack of effective controls over the valuation of inventory and cost of goods sold and the lack of effective supervisory controls constitutes a material weakness, and given the importance of these controls with respect to effective internal control over financial reporting, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. 11 CONTROLS OVER THE RECORDING OF PROPERTY, PLANT AND EQUIPMENT The Company did not maintain effective control over the recording and reconciliation of property, plant and equipment at certain of its domestic businesses resulting in adjustments to the Company's financial statements as of and for the year ended December 31, 2004. The Company did not perform timely and effective reconciliations of its fixed asset subsidiary ledgers to the general ledger. The lack of reconciliations performed on a timely basis, and given its importance with respect to effective internal control over financial reporting, there is more than a remote likelihood that a material misstatement of the annual or interim financial statements would not have been prevented or detected. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004, of the Company and this report does not affect our report on such financial statements and financial statement schedule. Because of the limitation on the scope of our audit described in the second paragraph, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management's assessment referred to above. In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria and the effects of any other material weaknesses, if any, that we might have identified if we had been able to perform sufficient auditing procedures relating to management's assessment process, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2004, of the Company and have issued our reports (not presented herein) dated September 30, 2005, that express an unqualified opinion on those financial statements and financial statement schedule (which report on the consolidated financial statements includes an explanatory paragraph relating to the restatement discussed in Note 1). /s/ Deloitte & Touche LLP ------------------------------------------------------------ Parsippany, New Jersey September 30, 2005 12 Changes In Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the Company's fiscal quarter ended December 31, 2004. However, in connection with the material weaknesses in internal control over financial reporting discussed above, the Company performed additional analyses and other post-closing procedures, as described above in Evaluation of Disclosure Controls and Procedures, and the audit adjustments to the Company's fourth quarter 2004 financial statements were determined not to be material on an interim or annual basis. Management, with the oversight from the Audit Committee, has been addressing all of these issues and is committed to effectively remediating known weaknesses as expeditiously as possible. Although the Company's remediation efforts are well underway, control weaknesses will not be considered remediated until new internal controls over financial reporting are implemented and operational for a period of time and tested, and management concludes that these controls are operating effectively. The Company has very recently engaged new auditors, UHY LLP, because Deloitte & Touche elected not to stand for reappointment in 2005. The Company is in the process of remediation of the identified material weaknesses. As of the date of this filing, the Company's remediation include the following: - The Company's control environment did not sufficiently promote effective internal control over financial reporting throughout its management structure, and this material weakness was a contributing factor in the development of other material weaknesses described below. Principal contributing factors included the turnover of employees in key financial reporting positions, the lack of a formal program for training members of the Company's finance and accounting groups, a lack of a full evaluation of the Company's financial system applications due to incomplete documentation and testing of key controls, and the lack of a complete entity-wide risk assessment. This deficient control environment also contributed to the Company's inability to complete its documentation of controls by the as of date of December 31, 2004, and to complete its assessment of design effectiveness, general computer controls, financial system application controls, and tax controls. STEPS TAKEN TO DATE: a.) A Corporate Controller was hired with a strong background and expertise in Generally Accepted Accounting Principles and in SEC financial reporting. b.) The Internal Audit Department was strengthened and expanded c.) The Company engaged GR Consulting Group to assist in the remediation of material weaknesses. d.) Internal controls for taxes have been documented and remediated with the assistance of a consultant. e.) A change management software package (ECORA) was purchased and implemented to aid in the assessment of general computer controls. f.) During 2005, significant training has taken place for the financial staff. g.) A company-wide risk assessment was completed in April 2005. It is being updated during 2005 based on key controls. h.) The documentation and testing of key controls is in progress. The company expects to complete the testing early in 2006. 1. Controls over the selection and application of accounting principles generally accepted in the United States of America to resolve non-routine or complex accounting matters are ineffective as a result of inadequate resources and technical accounting expertise, along with a lack of appropriate training. STEPS TAKEN TO DATE: a.) A Corporate Controller was hired with a strong background and expertise in Generally Accepted Accounting Principles and in SEC financial reporting. b.) The Company has retained a public accounting firm, JH Cohn, for advice on GAAP and SEC financial reporting issues. c.) The Company has identified areas where technical expertise needed improvement and training has been provided. 13 2. The design and operation of controls over the financial closing and reporting process are ineffective as a result of the lack of timely preparation of account analyses and reconciliations, a lack of appropriate review of account reconciliations and supporting analyses, errors in account balance classifications, and inadequate controls over spreadsheet preparation. STEPS TAKEN TO DATE: a) A detailed schedule of due dates was established that includes dates for key account analyses and reconciliations for which a sign off by an appropriate reviewer is required. The schedule takes into consideration, financial statement filing requirements, and requires that key analysis to be done in a timely manner, while best utilizing accounting resources available. b) During 2005, all spreadsheets with a financial impact are being identified, internal controls related to the spreadsheets evaluated and strengthened where required. 3. Controls over the process for recording and approving journal entries were inadequate as a result of a lack of appropriate evidence of review and approval, and a lack of adequate documentation and support. STEPS TAKEN TO DATE: a.) A policy has been instituted requiring the review and approval of manual journal entries prior to being recorded as well as the quarterly testing of manual entries. 4. Controls over the segregation of duties were inadequate due to an inadequate level of accounting and finance resources. STEPS TAKEN TO DATE: a.) The company has identified the segregation of duties deficiencies, where an effective compensating control does not exist, and assigned the corrective action for management oversight. Remediation for these deficiencies is expected to be complete and tested early in 2006. 5. Controls over the recording of product revenues were not effective with respect to estimating a provision for returns of seasonal product and the proper cut-off of revenue with respect to a non-routine revenue transaction. STEPS TAKEN TO DATE: a.) The Company instituted a change in its accounting policy regarding its provision for sales allowances and returns. The change relates to certain significant customers of room air conditioners, whereby the company now has a process of estimating potential end of season returns based upon a review of customer inventory levels, taking into account actual and expected sell-through of product during the summer season. b.) In addition, the quarterly certification that is required from all Controllers and General Managers was expanded to include a specific item on revenue recognition. 6. The design and operation of controls over the valuation of inventory reserves for the following: refurbishments, shrinkage, manufacturing variances, and inter-company profit; were ineffective as a result of a lack of effective supervisory controls over the monitoring and review of these inventory reserves. STEPS TAKEN TO DATE: a.) This material weakness was specifically related to the Company's Appliances and Unitary Products businesses domestically, and, it's Nanjing, China facility. The detailed schedule of due dates for key reconciliations and account analysis implemented during 2005, requires inventory reserves at all locations, including the locations specified, be analyzed and valued each quarter. b.) During 2005, the Corporate Controller is reviewing, and approving the calculation. 14 7. Controls over the recording and reconciliation of property, plant and equipment at certain domestic businesses were ineffective as a result of a lack of timely and effective reconciliation of the fixed asset subsidiary ledgers to the general ledger. STEPS TAKEN TO DATE: a.) Under the schedule of required analysis and due dates, fixed asset subsidiary ledgers are required to be reconciled to the general ledger each quarter. b.) During 2005, the Corporate Controller is reviewing, and approving the reconciliation. Limitations on the Effectiveness of Controls. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Further, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. 15 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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 for the year ended December 31, 2004, four months ended December 31, 2003 and for the fiscal years ended August 31, 2003 and 2002....... F-1 Consolidated Balance Sheets at December 31, 2004 and 2003... F-2 Consolidated Statements of Cash Flows for the year ended December 31, 2004, four months ended December 31, 2003 and for the fiscal years ended August 31, 2003 and 2002....... F-3 Consolidated Statements of Stockholders' Equity for the year ended December 31, 2004, four months ended December 31, 2003 and for the fiscal years ended August 31, 2003 and 2002...................................................... F-4 Notes to Consolidated Financial Statements.................. F-5-F-41 Reports of Independent Registered Public Accounting Firm.... F-42 & F-46
(a) 2. Financial Statement Schedule Consolidated Schedule as of and for the fiscal year ended December 31, 2004, four months ended December 31, 2003 and for the fiscal years ended August 31, 2003 and 2002 II. Valuation and Qualifying Accounts....................... F-45
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. (ii) By-Laws of the Company, filed as Exhibit 3 (ii) to the Company's Annual Report on Form 10-K for 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 May 28, 2004 and incorporated herein by reference. (ii) First Supplemental Indenture and Waiver dated September 13, 2005, filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 14, 2005 and incorporated herein by reference. (10) (i) Stock Option Plan VIII, filed as Annex F to the Company's Proxy Statement -- Prospectus dated May 10, 1996 and incorporated herein by reference. (ii) Employment Agreement between the Company and Sal Giordano, Jr. effective December 14, 2001, 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 incorporated by reference to Annual Report on Form 10-K for fiscal year ended December 31, 2004. (23) Consent of Deloitte & Touche LLP. (31.1) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
16 EXHIBIT 31.1 CERTIFICATIONS I, Sal Giordano, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Fedders Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ SAL GIORDANO, JR. -------------------------------------- Sal Giordano, Jr. Chief Executive Officer Date: September 30, 2005 18 EXHIBIT 31.2 CERTIFICATIONS I, Robert L. Laurent, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Fedders Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ ROBERT L. LAURENT, JR. -------------------------------------- Robert L. Laurent, Jr. Chief Financial Officer Date: September 30, 2005 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. FEDDERS CORPORATION By /s/ ROBERT L. LAURENT, JR. ----------------------------------- Robert L. Laurent, Jr. Executive Vice President, Finance and Acquisitions and Chief Financial Officer January 9, 2006 20