<PAGE>
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission file number 1-7955
------
INTERNATIONAL COMFORT PRODUCTS CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Canada 98-004520009
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
66th Floor, First Canadian Place, Toronto, Ontario, Canada M5X 1B8
---------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 771-0200
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Ordinary Shares American Stock Exchange
Ordinary Shares Toronto Stock Exchange
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 (or for such shorter period that the
registrant was required to file such reports), 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 the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to Form 10-K. [X]
As of March 23, 1998, there were 23,682,544 Ordinary Shares of
International Comfort Products Corporation outstanding and held by non-
affiliates with an aggregate market value of $202,781,783.
As of March 23, 1998, there were 39,873,463 Ordinary Shares of
International Comfort Products Corporation outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT Incorporated into
Portions of the Definitive Proxy Statement
for Annual Meeting of Shareholders on May 13,
1998 (hereinafter the "1998 Proxy Statement")
to be filed within 120 days after the end of the
fiscal year ended December 31, 1997 Part III
=========================================================================
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
The Registrant, International Comfort Products Corporation (formerly Inter-
City Products Corporation), is referred to herein as the "Company" and such
reference includes both the Registrant and its consolidated subsidiaries,
unless otherwise indicated.
The Company is one of the leading designers, manufacturers and marketers of
central air conditioning and heating products for residential and light
commercial use in the United States and Canada. The Company also has
recently emphasized its presence in other international markets, such as
Mexico, Latin America and southern Europe. The Company designs,
manufactures, sells and distributes a complete range of central air
conditioners, heat pumps and combination gas/electric units (collectively,
"unitary air conditioners" or "cooling products"), and gas, oil and
electric furnaces ("heating products") along with related parts and
accessories for the residential and light commercial markets.
Its principal brand names - Heil, Tempstar, Arcoaire, Comfortmaker, Airquest,
KeepRite and Lincoln - are widely recognized in the industry. The Company's
commercial products carry the new ICP Commercial brand, as well as the
traditional Heil, Tempstar, Arcoaire, Comfortmaker and KeepRite identities.
Management believes that the Company and its products are known for their
quality, reliability, customer service and price competitiveness. The
Company's products are sold primarily through a network of approximately 400
independent heating, ventilation and air conditioning ("HVAC") distributors
in the U.S., Canada, and international markets. The Company's products are
also marketed through independent air conditioning and refrigeration
wholesalers, major commercial contractors and builders.
In 1997, the Company had operating revenue of $630.7 million. For 1997,
sales of cooling products were approximately 61.3% (1996 - 61.7%; 1995 -
63.3%) of consolidated operating revenue and sales of heating products were
approximately 25.7% (1996 - 27.1%; 1995 - 27.7%) of consolidated operating
revenue. In 1997, service parts and other income accounted for 13.0% (1996 -
11.2%; 1995 - 9.0%) of consolidated operating revenue. Management believes
the Company derived approximately 70% of its sales in 1997 from the
replacement and renovation market and approximately 30% from the new
residential and commercial construction market. Financial information by
geographic area is disclosed in Note 14 to the Consolidated Financial
Statements and is incorporated herein by reference.
The Company was formed by articles of amalgamation dated September 1, 1988 as
amended by articles of arrangement dated April 18, 1990 under the laws of the
Province of Manitoba
- 1 -
<PAGE>
and subsequently continued under the Canada Business Corporations Act
effective August 14, 1992. The Company's primary heating and cooling
subsidiaries are International Comfort Products Corporation (USA) ("ICP USA")
and International Comfort Products Corporation (Canada) ("ICP Canada").
STRATEGY
Since 1995, the Company has undertaken a strategic initiative to (i) reduce
manufacturing and overhead costs; (ii) reduce lead times for processing
customer orders; (iii) improve product quality and customer service; (iv)
broaden product offerings while rationalizing stockkeeping units within
product lines; and (v) improve and expand the Company's distribution network.
The restructuring process included:
* the consolidation of production at ICP (USA)'s Lewisburg,
Tennessee, manufacturing facility;
* writing off discontinued businesses and nonperforming assets;
* extensive salaried and hourly staff layoffs, including the
elimination of management layers;
* major streamlining of manufacturing practices;
* revisions to product prices and distributor credit terms;
* the workdown of inventory in the factory and in the distribution
system;
* the introduction of competitive entry-level products;
* the termination of underperforming distributors and addition of new
distributors;
* the implementation of effective working capital management
practices; and
* improvements in operations, product quality, and customer service.
Although the immediate results of the Company's strategic initiative severely
depressed 1995 revenues and earnings, management believes that the steps it
undertook allowed the Company to return to profitability and positions the
Company for continued growth. From 1995 through 1997, the Company
identified and eliminated approximately $50 million from its manufacturing
cost base.
In addition to continuing the Company's implementation of its 1995
initiatives, the Company is committed to (i) growing its operating revenue in
excess of industry growth rates; (ii) improving profitability; and (iii)
managing working capital. The Company seeks to achieve these goals through
the implementation of the following strategies:
(i) Modify management systems and incentives.
The Company has organized its major operations into five separate business
units (residential, commercial, Canada, FAST Parts, and international). Each
unit has
- 2 -
<PAGE>
separate growth strategies and long-term goals, and access to all corporate
services and resources to address these needs. The Company believes this
approach focuses energy on long-term planning and building to customer
demand, and encourages a healthy degree of internal competitiveness.
(ii) Increase residential market share in the United States and Canada by
improving the distribution network. The Company believes that by
strengthening its substantial distributor base and selecting additional
distributors in markets where sales are below market share targets, the
Company may increase its core residential sales. As part of its strategy,
the Company intends to focus on strengthening its relationships with its
distributors, with special emphasis on the distributor's commitment to annual
sales quotas, participation in the Company's marketing and promotional
programs, staff training and mutually beneficial business practices.
(iii) Expand its commercial market product offerings and gain market share.
The Company also intends to undertake efforts to increase its commercial
product sales. In 1997, the Company formed a business unit devoted solely to
designing, manufacturing and marketing commercial unitary package and split
systems up to 20 tons. Until 1998, the Company sourced split systems of
commercial products from 12.5 to 20 tons from other manufacturers. The
Company is also considering manufacturing and marketing an expanded
commercial product offering to meet market requirements through 40 tons.
(iv) Develop aftermarket replacement parts business. Aftermarket parts
currently represents about 5% of the Company's revenues. In order to grow
this segment of its business, the Company has designated this as a separate
business group. With 27,000 stockkeeping units, the Company intends to
provide distributors the benefit of one-stop shopping for compressors, coils,
motors, fans, values, fasteners and other repair items for HVAC equipment.
(v) Pursue international opportunities . The Company intends to
expand its operations outside North America. In 1997, the Company opened two
distribution warehouses in Miami to service the Latin American markets, two
distribution warehouses in Mexico, and a parts distribution store in Brazil.
Late in 1997, the Company also acquired a distribution company in Spain.
The Company believes it can increase its operating revenues by establishing
a brand name parts distribution center in South America for air conditioning
and refrigeration repair service sectors and follow with the introduction of
the Company's products later. The Company believes that this strategy of
expansion overseas can create an opportunity to generate early cash flow
without risking a substantial amount of capital.
(vi) Seek to augment internally generated growth by acquiring businesses
with new
- 3-
<PAGE>
products, customer lists and manufacturing resources. With a stronger
financial position, the Company intents to consider acquisitions that support
its growth strategy and are synergetic to its management style, distribution
systems and purchasing and manufacturing methods.
(vii) Continue to reduce manufacturing costs and standardize components.
By reducing costs, the Company can continue to lower its break-even point for
its operations. Management believes that its positive results of operations
for 1997 resulted in large part from structural cost reductions achieved
during the prior two years. Management believes it is necessary to continue
productivity gains in order to offset the effects of inflation.
(viii) Reduce lead time. The Company also is attempting to reduce the lead
time required for customer orders. Lead time on customer orders has declined
from 90 days as recently as 1994 to 14 days in 1997 on approximately 98
percent of the Company's residential products. The Company intends to
continue to focus efforts to reduce the lead time even further in order to
reduce inventory requirements for the Company's distributors and thereby make
the Company a more attractive supplier of heating and cooling products.
(ix) Expand strategic relationships. The Company also believes that it
can increase its core residential sales by building relationships with
national accounts, such as dealer buying groups, distributor consolidators,
and major home builders. Management believes that the selection of the
Company by 23 national home builders, including five within the last two
years, to supply the Company's products for new home developments is evidence
of past success of this approach.
ACQUISITIONS AND DIVESTITURES
Effective January 31, 1998, ICP (USA) acquired United Electric Company
("United Electric") of Wichita Falls, Texas, a manufacturer of hydronic and
direct expansion blower and HVAC coils, fan coils, and hydronic unit
ventilators for commercial HVAC systems. United Electric's estimated 1997
sales were approximately $25.0 million. This acquisition will be included in
the consolidated financial statements of the Company upon the acquisition
date.
In September 1997, the Company sold substantially all of the assets and
liabilities of General Heating and Cooling Company ("General Heating"), a
heating and cooling products distributor and a company-owned factory branch
to Pameco Corporation, a leading distributor in the HVAC industry. In January
1997, the Company also sold Coastline Distribution Inc. ("Coastline") which
had 21 branches throughout Florida, Georgia and Alabama, to Watsco, Inc., a
leading distributor in the climate control industry. In addition, Watsco,
Inc. also acquired four of the Company's U.S. factory branches. Coastline
and General were acquired in July 1996 as a strategic move to protect the
Company's long-term prospects in the U.S. southeast and midwest and were sold
when owners committed to the businesses were found.
During 1997, the Company acquired two western Canadian distributors and a
distribution company in Spain to expand coverage in the western Canadian
provinces and establish a base in Europe, respectively.
In May 1996, the Company sold Thompson Pipe and Steel Company ("Thompson
Pipe"), a wholly owned steel pipe manufacturing subsidiary, which was
involved in the fabrication of large diameter steel pipe and fittings and the
manufacture of liquid propane gas tank cylinders. The results of operations
of Thompson Pipe have been accounted for as a discontinued operation.
- 4 -
<PAGE>
PRODUCTS
The Company designs, manufactures, and markets heating and cooling systems
for single family homes, mobile homes and multi-family apartment buildings,
as well as commercial properties such as schools, restaurants, small business
offices, retail stores, and other industrial and commercial buildings.
The Company's products are:
UNITARY AIR CONDITIONERS
(1) Split system and packaged air conditioners
A split system air conditioner consists of an outdoor unit containing
a compressor and a condenser, and a connected indoor unit containing a
heat exchanger, an electric, gas or oil heating section, an indoor blower
system and associated controls. A packaged air conditioner consists of a
self-contained cooling system in a single weatherized cabinet.
(2) Split system and packaged heat pumps
These systems are used for heating as well as cooling systems. A split
system heat pump is similar to a split system air conditioner, but also
includes a refrigerant reversing valve, special controls and auxiliary
heat (usually electric). A packaged heat pump is similar to a packaged
air conditioner and includes a reversing valve, special controls and
auxiliary heat.
(3) Combination gas/electric units
A combination gas/electric unit is a self-contained packaged air
conditioner with a gas furnace heat exchanger and special controls in a
single weatherized cabinet.
The Company's residential unitary air conditioners range in capacity from one
to five tons, while its commercial unitary packaged and split systems range
in capacity from three to 20 tons. The Company's longer term goal is to
manufacture and market a commercial system up to 40 tons.
GAS, OIL AND ELECTRIC FURNACES
The Company's residential furnaces range in capacity from 50,000 to 150,000
British Thermal Units per hour ("BTU/hr"), while its commercial heating line
features furnaces ranging in capacity up to 355,000 BTU/hr.
BRAND NAMES
The Company offers its various products under several brand names - HEIL,
TEMPSTAR, ARCOAIRE, COMFORTMAKER, AIRQUEST, KEEPRITE, and LINCOLN. United
Electric sells its products under the MAGICAIRE brand. The Company believes
that its products are widely recognized for their quality, customer service,
reliability and price competitiveness.
PARTS AND ACCESSORIES BUSINESS
The Company also conducts an active parts business under the "FAST" (Factory
Authorized Service Technology) trademark in the United States and Canada.
The parts business has shifted
- 5 -
<PAGE>
from a primary emphasis on serving warranty claims to being a one-stop
shopping counter that a distributor, dealer or contractor might need to
service heating and cooling systems. The Company believes its warranty
protection is generally equal to or superior to that of its major
competitors.
SALES AND DISTRIBUTION
The Company markets its products in all 50 states in the United States,
primarily through independent distributors. These distributors are the
Company's link to dealers and, in turn, to consumers. Distributors sell the
Company's products to installers in the replacement and renovation businesses
as well as building contractors in the new housing and light commercial
construction sectors. Approximately 70 percent of the Company's products are
used to replace existing systems, with the balance installed in new
construction projects. The Company is also focused on building relationships
with national accounts, such as dealer buying groups, distributor
consolidators, and major home builders.
Within the Company, two separate teams are responsible for sales of the
Company's United States sales between an Eastern and Western division. The
Company offers distributors a variety of advantages designed to promote
maximum profitability to the Company and its distributors. A network of
regional sales managers, field sales and customer service personnel is
accessible to distributors to coordinate promotional activities and to
quickly resolve any product problems. To improve communications with
distributors, the Company has a program designed to give them computer access
to the Company's inventory records. Such improved communications will
facilitate the Company's "just-in-time" production system, permitting the
Company to tailor its manufacturing schedule to the specific product lines in
the greatest demand. Allowing distributor access to available inventory
levels has the additional benefit of permitting distributors to reduce their
inventory levels while being assured of an adequate and timely supply of
products. The on-line program also permits distributors to process warranty
claims through a computer network linked with the Company.
The Company monitors monthly shipments and inventory levels from a
representative sampling of distributors using new electronic data interchange
capabilities. This sampling allows the Company to gauge future sales demand
and improves the communication between the different functions that are
involved in forecasting and scheduling production.
In Canada, the Company markets its products through four primary channels:
1. KEEPRITE, ARCOAIRE and COMFORTMAKER brand residential central heating
and air conditioning products are sold through HVAC distributors and
independent wholesalers in all provinces in Canada. KEEPRITE brand
commercial products are sold through independent distributors and major
commercial contractors across Canada;
2. HEIL brand residential products are sold directly to distributors and
installing dealers by distribution centres which are wholly-owned by the
Company in Ontario, Quebec, Manitoba and British Columbia;
3. TEMPSTAR brand products are sold through plumbing and heating
wholesaler outlets
- 6 -
<PAGE>
owned by Westburne Industrial Enterprises on an exclusive basis in all
provinces in Canada; and
4. LINCOLN brand oil and electric furnaces are sold by the Company in
eastern Canada.
In 1997, the Company generated approximately $26.7 million in export revenue
(1996 - $8.2 million; 1995 - $6.4 million). The Company's principal markets
for international sales are in Latin America and Europe.
The Company also offers extensive training courses at its national training
center in LaVergne and other selected locations. The courses are designed to
help improve business and technical skills and include small business
management, dealer sales, distributor sales, residential application and
design, introduction to heating and air conditioning, heat pump service and
troubleshooting, gas furnace installation and service fundamentals and
troubleshooting.
The Company conducts advertising to enhance consumer awareness and to
position its principal brands as premier residential heating and cooling
products. The advertising program is complemented with trade advertising
that focuses on dealers who install the Company's products and who influence
the sale of heating and cooling products at the consumer level.
The Company offers a cooperative program to certain of its distributors which
subsidizes local advertising and other promotional and developmental costs.
In addition, the Company enables its distributors to offer various incentives
to their dealer customers.
COMPETITION
Based on the Company's industry knowledge and published industry statistics,
the Company believes itself to be one of the leading manufacturers (in terms
of units shipped) of residential and light commercial heating and cooling
products in the United States and Canada. The Company's six largest
competitors in these markets are Carrier Corporation, Goodman Manufacturing
Corporation, Rheem Manufacturing, The Trane Company, York International
Corporation, and Lennox Industries Inc. The Company believes that the total
market share for these competitors (including the Company's market share)
accounted for over 90% of the residential unitary air conditioner and the
warm air furnace markets in 1997.
MANUFACTURING
Substantially, all of the Company's residential cooling and heating products
are manufactured at a company-owned, 1,010,000 square foot facility located
in Lewisburg, Tennessee. The Company focuses on lean production from its
plant, supported by the latest cost-cutting technology and a "just-in-
time" production system. This system is designed to minimize raw material
and in process inventories through close coordination of delivery of raw
materials and components from outside suppliers at the manufacturing
facility. The production process facilitates the manufacturing of
standardized products. By manufacturing standardized products and using more
adaptable equipment, the Company is able to reduce the time necessary to set
up the
- 7 -
<PAGE>
production line to manufacture a particular model and to change the
production line to manufacture other similar models.
While most of the components used by the Company are purchased from outside
suppliers, the Company manufactures selected components where it is cost-
efficient. For example, the Company produces heat transfer surfaces, or
coils, for its unitary air conditioners as well as patented heat exchangers
used in its furnaces. The Company imposes strict quality control standards
through a Total Quality Management Program covering all aspects of the
manufacturing process. All units produced are tested and key statistics from
selected units are recorded prior to shipment. In addition, several units
are randomly selected each day for a quality audit of construction and
performance. In 1996, the Company adopted the ISO 9000 standards which set
quality guidelines for manufacturers and requires an independent party to
audit and document the compliance guidelines twice a year. The Company's
Lewisburg and LaVergne facilities received the Certificate of Registration to
the ISO 9001:1994 Quality Standard on July 1, 1997.
Beginning in 1995, distributors and dealers have been participating in
monthly in-plant audits of products whereby a product is selected from the
assembly line for inspection and testing. These in-plant audits provide
suggestions for improved quality and features which have resulted in a
significantly higher customer satisfaction rating for the Company's products.
FACILITIES
In 1995, the Company constructed a 500,000 square foot distribution center in
Lewisburg, adjacent to the manufacturing facility. All marketing, finance
and administrative functions were consolidated at the manufacturing and
distribution facilities in Lewisburg in 1995. The Company leases parts
warehouses in LaVergne and Manchester, Tennessee.
In Canada, the Company owns two main facilities. Oil and electric furnaces
are manufactured in Laval, Quebec and the former manufacturing facility
located in Brantford, Ontario, is being utilized as ICP (Canada)'s primary
distribution center. The Company also leases other distribution facilities
in Ontario, Quebec, Manitoba and British Columbia.
RAW MATERIALS AND PURCHASED COMPONENTS
The Company purchases all raw materials and most components used in the
manufacturing process. Purchased materials and components include copper,
aluminum, steel, wire, paint, compressors, motors, capacitors, fasteners,
controls, valves and insulating materials. When practical, the Company
establishes multiple sources for the purchase of raw materials and
components in an attempt to ensure competitive pricing, supply flexibility
and protection from supply disruption. The Company works closely with major
suppliers to ensure that all major components meet quality and performance
standards. The Company deals with approximately 250 suppliers, of whom 65
firms represent 95 percent of its purchasing expenditures. Typically,
- 8 -
<PAGE>
outside suppliers provide warranties on all major purchased components. The
Company believes that it has adequate sources of raw materials and components
for its manufacturing requirements.
The Company purchases many of its components from suppliers who are certified
by the Company. Certified suppliers are judged by the Company to have quality
components that can be readily introduced into the production lines without
being inspected upon receipt. The Company believes that the process of
certification identifies a small number of quality suppliers, which
facilitates the Company's "just-in-time" production system.
RESEARCH AND DEVELOPMENT
The Company maintains an engineering staff of approximately 60 people, who
are involved in laboratory testing and improvement of existing product lines
and in the development and testing of new products for the United States,
Canadian, and international markets. These activities are conducted in the
Company's laboratory and manufacturing facilities located in LaVergne and
Lewisburg, Tennessee, respectively. The Company is in the process of
relocating its laboratory from its LaVergne facility to the Lewisburg plant.
The primary objective of the engineering department is to conduct research to
keep the Company's products competitive by improving product cost, safety,
reliability and performance and ensuring compliance with environmental
standards. The Company's goal is to respond to market needs and the
technological demands of government regulation. The engineering staff also
strives to reduce manufacturing costs through cost control programs,
standardization, size and weight reduction, the application of new
technology, and improvements in production techniques.
Close contact is maintained with marketing personnel to ensure that the final
product will meet customer needs, and with manufacturing personnel to ensure
that the product design is compatible with the Company's flexible "just-in-
time" manufacturing process. The Company's engineers also work closely with
major component suppliers to improve manufacturing efficiencies and keep
abreast of new technological advances.
During the past three fiscal years, research and development costs aggregated
approximately $8.7 million.
PATENTS AND TRADEMARKS
The Company holds numerous patents relating to the design and use of its
products that it considers important. It is the Company's policy to obtain
patent protection for its new and developmental products and to enforce such
patent rights as appropriate. The Company owns several trademarks that it
considers important in the marketing of its products, including HEIL,
TEMPSTAR, KEEPRITE, ARCOAIRE, COMFORTMAKER, LINCOLN, and AIRQUEST. The
Company believes that its rights in these trademarks are adequately
protected.
MAJOR CUSTOMERS
During 1997, one customer accounted for approximately 11% of the Company's
consolidated
- 9 -
<PAGE>
operating revenue and revenues from the Company's 10 largest customers
accounted for approximately 36% of consolidated operating revenue. While
management believes its relationships with its distributors are satisfactory,
in the event of the loss of a significant distributor, the Company's results
of operations would be adversely effected in the event that the Company is
unable to satisfactorily replace the distributor.
ENVIRONMENTAL REGULATION AND PROCEEDINGS
The Company and its operations are subject to a variety of federal,
provincial, state and local environmental laws and regulations, including,
among others, the Clean Air Act, the Clean Water Act, the Comprehensive
Environmental, Resource, Conservation and Liability Act, the Resource
Conservation and Recovery Act, the Occupational Health and Safety Act and the
Toxic Substances Control Act in the United States and the Canadian
Environmental Protection Act, the Fisheries Act (Canada), the Environmental
Protection Act (Ontario), the Gasoline Handling Act (Ontario), and the
Environmental Quality Act (Quebec) in Canada. The Company believes that it
is in substantial compliance with such existing environmental laws and
regulations.
Growing concern over potential ozone depletion has led to increased
regulation of high ozone depletion refrigerants, including the Montreal
Protocol. On November 25, 1992, the Montreal Protocol was amended to phase-
out the production and use of hydrochlorofluorocarbons ("HCFCs"), beginning
in 1996 and ending in 2030.
In the United States, the 1990 Clean Air Act Amendments implement the
Montreal Protocol by establishing a program for limiting the production and
use of ozone-depleting chemicals. Under the Clean Air Act, HCFC-22 (the only
refrigerant used in the Company's products) is designated as a "Class II
substance"; such substances are currently scheduled to be phased out under
the Clean Air Act Amendments between 2010 and 2020.
As a result of the recent amendments to the Montreal Protocol, the
Environmental Protection Agency ("EPA"), which is authorized under the Clean
Air Act to accelerate the statutory phase-out schedule for any Class II
substance, is likely to promulgate regulations to implement those amendments.
Alternatively, the EPA could adopt proposals made by various groups to
phase-out Class II substances, including HCFC-22, substantially earlier
than under the schedule provided by either the Clean Air Act or the Montreal
Protocol. It is unclear which, if any, of these proposed schedules will be
adopted by the EPA.
In Canada, the Ozone-Depleting Substance Regulations under the Canadian
Environmental Protection Act do not currently regulate the production and use
of HCFCs. However, Environment Canada is committed to complying with the
Montreal Protocol and is considering a more aggressive phase-out of HCFCs
than is currently agreed under the Montreal Protocol. It is anticipated that
the Ozone-Depleting Substance Regulations may be amended to provide for a
gradual phase-out of HCFCs between 2004 and 2020.
All cooling products manufactured by the Company contain HCFC-22. This
refrigerant is sealed
- 10 -
<PAGE>
inside the air conditioner and is expected to remain within the unit
throughout the operating life of the system without leakage to the
atmosphere. The Company believes that its operations comply with all current
legislation and regulations relating to refrigerants and that the Montreal
Protocol, the Clean Air Act Amendments and their implementing regulations as
currently in effect or any anticipated accelerated phase-out will not have a
material adverse impact on its operations over the next ten years. However,
the Company believes that the implementation of more severe restrictions on
the use of Class II refrigerants could have such an impact.
Prior to the phase-out of HCFC-22, the Company must identify substitute
refrigerants for use in cooling products. The Company has been working
closely with refrigerant manufacturers and others in the industry to develop
new refrigerants that are compatible with its existing cooling product lines.
Such new refrigerants may require the Company to modify the design of its
cooling products. The Company is unable to predict the precise extent of
necessary modifications or the costs associated with the use of alternative
refrigerants, but does not expect that either will have a material adverse
effect on the industry unless the phase-out is accelerated more rapidly than
is currently anticipated under the Clean Air Act or the Montreal Protocol.
The Company and its operations are subject to federal, provincial, state and
local laws and regulations that limit the discharge of pollutants into the
air and water and establish standards for the treatment, storage and disposal
of solid and hazardous wastes. Federal, provincial and state environmental
laws and regulations impose liability on responsible parties, including past
and present owners and operators of sites, to clean up, or contribute to the
cost of cleaning up sites at which hazardous wastes or materials were
disposed or released. The Company is involved in remedial action at its
Lewisburg manufacturing facility pursuant to these laws, but, based on
information currently available, does not anticipate that such action will
have a material adverse effect on its financial condition or operations as
further described.
In conjunction with the Tennessee Department of Environment and Conservation,
ICP (USA) has been involved in paying the costs of assessing the extent of,
and remediating, soil and ground water contamination at its Lewisburg
manufacturing facility caused by a sudden and accidental spill of
trichloroethylene in 1980 by the previous owner of the property. ICP (USA)
has paid for certain investigative activities and initial remediation at the
manufacturing facility as well as off-site drum storage locations. At
December 31, 1997, the costs of the remainder of the environmental cleanup,
which management believes are reasonably determinable over a ten year period,
were discounted at 5.5%. At December 31, 1997, ICP (USA) has a provision of
approximately $3.1 million for the cost of this cleanup.
In connection with the environmental remediation at the off-site drum storage
locations, ICP (USA) has entered into a cost-sharing agreement with the
previous owner. This agreement calls for each entity to bear fifty percent
of the investigation, cleanup, monitoring, removal and treatment of the
existing drum storage sites. Additionally, in the event that other drum
storage sites are discovered, ICP (USA) and the previous owner shall bear the
additional costs at a ratio of sixty percent and forty percent, respectively.
The estimated costs to cleanup the existing drum storage sites are included
in the amounts detailed above.
- 11 -
<PAGE>
In December 1991, the Company and Flying J, Inc. ("Flying J") entered into a
cost sharing agreement whereby the Company will participate with Flying J in
the financing of future cleanup activities for environmental contamination at
various refinery sites sold by the Company to Flying J in 1980. This
settlement does not affect claims by Flying J or the Company against third
parties who may be responsible for contribution to refinery cleanup costs.
In December 1991, the Company also reached a settlement with several of its
insurance carriers whereby the insurers will reimburse the Company for a
portion of the expenses the Company will incur in the cleanup activities at
the refineries. Ongoing cleanup activities at four refinery sites are at
different regulatory stages.
Although the scope of the project is becoming better understood and defined
with the various regulatory agencies, the ultimate scope of the projects
remains uncertain and it is not possible to definitively estimate the
ultimate costs of remediation of such environmental contamination. At
December 31, 1997, the Company has an accrual of $11.0 million for its
estimated share of future cleanup costs. The Company has offsetting
receivables due from insurers of $6.8 million included in the consolidated
balance sheet. Based on current information prepared by independent
environmental consultants, the Company's share of the cost of environmental
cleanup, discounted at 5.5% is currently estimated to be approximately $7.2
million over the next 21 years. The expected insurance recoveries discounted
at 5.5% are currently estimated to be approximately $3.6 million over the
next 21 years.
OTHER GOVERNMENTAL REGULATIONS
The Company is subject to regulations in the United States promulgated under
the 1987 National Appliance Energy Conservation Act, as amended, and various
state regulations concerning the energy efficiency of its products. The
Company has developed and continues to develop products which will comply
with these regulations, and does not believe that such regulations will have
a material adverse effect on its business.
The Company is also subject to the energy efficiency requirements contained
in the Energy Policy Act of 1992, which became effective in 1994. All of the
Company's products comply with these standards.
BACKLOG ORDERS
The backlog of orders was approximately $24.2 million at December 31, 1997
(1996 - $63.4 million, 1995 - $71.6 million). The decline in backlog of
orders reflects the Company's shift away from advanced orders and pre-season
sales programs due to significantly shorter lead times on customer orders
over the past three years.
EXPORT SALES
Export sales, being sales from the Company's domestic operations to foreign
customers amounted to approximately $26.7 million in 1997 (1996 - $8.2
million; 1995 - $6.4 million).
- 12 -
<PAGE>
EMPLOYEES
At December 31, 1997, the Company had approximately 2,300 salaried and hourly
employees engaged in its operations. The hourly employees representing
approximately 1,600 of the total employees, are represented under five
collective bargaining agreements with four unions. The renegotiation of these
collective agreements will occur during the years 1998 and 1999. The Company
considers its labor relations to be satisfactory.
- 13 -
<PAGE>
ITEM 2. PROPERTIES.
The major operating facilities which are owned or leased by the Company at
December 31, 1997 are shown in the following table:
<TABLE>
<CAPTION>
OWNED/ AREA
LOCATION LEASED<F1> (SQ.FT.) PRODUCTS/ACTIVITIES
- --------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES
Franklin, TN L 10,400 Executive office
Lewisburg, TN O 1,010,000 Manufacture of residential
and light commercial
heating and cooling products
O 500,000 Distribution
LaVergne, TN<F2> O 247,000 Research, development and
training center
Nashville, TN L 160,700 Service parts warehouse
Manchester, TN L 75,000 Service parts warehouse
Miami, FL L 32,800 Parts and distribution
L 5,600 Parts and distribution
CANADA
Brantford, ON O 323,000 Distribution
L 22,500 Distribution
Laval, PQ O 96,800 Manufacture of residential
heating products
L 88,800 Distribution
Vaughan, ON L 41,300 Distribution
Prince George, BC L 28,100 Distribution
Winnipeg, MB L 26,900 Distribution
Langley, BC L 10,800 Distribution
Burnaby, BC L 10,700 Distribution
Waterloo, ON L 10,600 Distribution
Coquitlam, BC L 5,200 Distribution
Kelowna, BC L 4,800 Distribution
Terrace, BC L 4,800 Distribution
BRAZIL
Sao Paulo L 10,800 Parts and distribution
MEXICO
Guadalajara L 14,000 Parts and distribution
Monterrey L 12,000 Parts and distribution
SPAIN
Madrid L 11,400 Parts and distribution
Barcelona L 3,900 Parts and distribution
</TABLE>
[FN]
<F1>
Certain of the Company's assets are pledged as collateral against ICP (USA)'s
9.75% Senior Notes. See "International Comfort Products Corporation - Notes
to the Consolidated Financial Statements".
<F2>
Research laboratory is in the process of being relocated to the Lewisburg
manufacturing facility. The Company is currently subleasing approximately
108,000 sq. ft. of the facility to a third party.
</FN>
- 14 -
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings pertaining to the Company and its subsidiaries is set forth
on note 15 to the Company's Consolidated Financial Statements and is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K, no matter was submitted to a vote of security holders,
through the solicitation of proxies or otherwise.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company, in accordance with General Instruction G(3) to Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, 17 C.F.R. Section
229.401, furnishes the following information with regard to its executive
officers as an additional item in Part I of this Annual Report on Form 10-K.
The following officers are those that the Company currently deems to be
"executive officers", as defined by the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Name Office Age
---- ------ ---
<S> <C> <C>
Richard W. Snyder Chairman of the Board 59
W. Michael Clevy President and Chief Executive Officer 49
David P. Cain Senior Vice President, General Counsel
and Secretary 52
Stephen L. Clanton Senior Vice President, Chief Financial Officer
and Treasurer 46
Francis C. Harrell Senior Vice President, USA Sales 58
Robert C. Henningsen Senior Vice President, Human Resources and
Administration 58
Herman V. Kling Senior Vice President, Marketing 48
Alexander T. Lim Vice President, Engineering 55
Augusto H. Millan Senior Vice President and General Manager,
International Sales and General Manager,
Aftermarket Sales 48
David B. Schumacher Vice President and General Manager,
Commercial Products Group 38
Karla G. Smith Vice President, Corporate Communications 36
H. David Tayler Senior Vice President and General Manager,
Canadian Operations 54
James R. Wiese Senior Vice President and General Manager,
Residential Products Group 47
</TABLE>
There is no family relationship among the above or any of the directors of
the Company. Although all executive officers are employees at will of the
Company, each executive officer of the Company generally is elected each year
for a term of one year.
Mr. Snyder, in 1982, founded SnyderGeneral Corporation, a manufacturer and
marketer of air quality control products for the heating, ventilating and air
conditioning markets. SnyderGeneral Corporation's residential air
conditioning and heating business was acquired by the Corporation in June
1991. Mr. Snyder is a former Chairman of the Air Conditioning and
Refrigeration Institute. Mr. Snyder was elected Chairman of the Board of the
Corporation in June 1997.
Mr. Clevy joined the Corporation as President and Chief Operating Officer of
the Corporation's U.S. operating subsidiary, International Comfort Products
Corporation (USA) ("ICP USA") in September 1994. He was appointed President
and Chief Executive Officer of the Corporation in December 1995. Prior to
joining the Corporation, he was Vice President of Manufacturing and
Technology of Carrier Corporation.
- 15 -<PAGE>
Mr. Cain joined the Corporation on January 25, 1977 as Superintendent of
Distribution. Thereafter, he moved into Manufacturing from 1978 until 1980,
into Sales and Marketing until 1986, and into the Law department where he
advanced to Senior Vice President and General Counsel on January 1, 1993 and
Senior Vice President, General Counsel and Secretary on June 4, 1996.
Mr. Clanton joined the Corporation as Senior Vice President, Chief Financial
Officer and Treasurer on July 8, 1996. Prior to joining the Corporation, he
was Executive Vice President and Chief Financial Officer for Falcon Products
Inc., St. Louis, Missouri from 1988 to 1996.
Mr. Harrell joined the Corporation as Vice President, Sales transferring from
SnyderGeneral on July 1, 1991. He was appointed Senior Vice President, USA
Sales on January 1, 1995.
Mr. Henningsen joined the Corporation as General Manager, Human Resources on
June 1, 1987. He was appointed as Vice President, Human Resources and
Administration on January 1, 1989. He has served as Senior Vice President,
Human Resources and Administration since December 7, 1994.
Mr. Kling joined the Corporation as Senior Vice President - Marketing on
February 1, 1997. Prior to joining the Corporation, he was Product Manager
for General Electric Company. He worked for General Electric in marketing,
customer service and sales for 20 years.
Mr. Lim joined the Corporation as Director, Light Residential Engineering on
May 1, 1987, transferring from KeepRite Inc. He served as Director and
Senior Director of Quality and Technology from 1989 until December 1, 1995
when he was appointed Vice President - Engineering.
Mr. Millan joined the Corporation as Vice President, Financial Operations on
November 1, 1994. He was appointed as Senior Vice President and General
Manager, International Sales and General Manager, Aftermarket Sales on
January 1, 1996. Prior to joining the Corporation, he was Managing Director
of United Technologies Corporation.
Mr. Schumacher joined the Corporation on March 1, 1992 as Manager -
Development Engineer transferring from SnyderGeneral. He was promoted to
Manager Product Marketing (ACO) on January 1, 1993 and to Senior Director -
Product Marketing on March 1, 1995. He was appointed Vice President and
General Manager, Commercial Products Group on January 1, 1997.
Ms. Smith joined the Corporation as Manager - Communications on May 1, 1992
transferring from SnyderGeneral. She was promoted to Director, Advertising
and Sales Promotion on February 1, 1994 and to Senior Director, Corporate
Communications on February 1, 1996. She was appointed Vice President,
Corporate Communications on January 1, 1997.
Mr. Tayler joined the Corporation in May 1972. He served as Vice President -
Operations from 1986 to 1995. In May 1995, he was appointed Senior Vice
President and General Manager, Canadian Operations.
Mr. Wiese joined the Corporation as Director, Dealer Development on August
22, 1988. He was
- 16 -
<PAGE>
promoted to Senior Director - Sales on August 1, 1992. He was appointed
Senior Vice President, Marketing on January 25, 1993 and has served as Senior
Vice President and General Manager, Residential Products Group since January
1, 1997.
- 17 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. The Company's ordinary shares are traded on
the Toronto Stock Exchange ("TSE") and the American Stock Exchange ("AMEX")
under the symbol "ICP." The following table sets forth the high and low
trading prices of the Company's ordinary shares as reported by the TSE and
AMEX during each of the fiscal quarters of the prior two fiscal years:
<TABLE>
<CAPTION>
1997 TSE-Cdn.$ AMEX-U.S.$
---------------------------------------------------------------
High Low High Low
---------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 7.35 3.90 5.38 2.88
Second Quarter 8.25 6.30 6.06 4.56
Third Quarter 12.85 8.00 9.50 5.19
Fourth Quarter 13.25 9.70 9.06 6.31
---------------------------------------------------------------
<CAPTION>
1996 TSE-Cdn.$ AMEX-U.S.$
---------------------------------------------------------------
High Low High Low
---------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 2.25 1.20 1.75 1.00
Second Quarter 4.25 2.05 3.19 1.56
Third Quarter 4.30 3.70 3.25 2.75
Fourth Quarter 4.60 3.40 3.50 2.56
---------------------------------------------------------------
</TABLE>
(b) HOLDERS. There were 1,538 shareholders of record as of December 31,
1997.
(c) DIVIDENDS. The Company has not paid a dividend on its ordinary
shares since 1990. The Company currently intends to retain all earnings to
support the development and growth of the Company. In addition, the
Company's senior debt issue limits the ability to pay dividends and
distributions on its ordinary shares.
- 18 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
EIGHT YEAR SUMMARY OF OPERATIONS
(Canadian GAAP)
- ------------------------------------------------------------------------------------------
For the Years
ended December 31 1997 1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
(In Millions of
U.S. Dollars)
Operating revenue $ 630.7 $ 641.9 $ 532.8 $ 635.2 $ 598.0 $ 566.7 $ 467.9 $ 473.8
Gross margin 127.0 124.1 65.4 112.9 99.6 121.3 102.3 108.6
Operating
profit (loss) 41.5 33.4 (43.3) 17.6 (4.0) 14.6 16.7 27.3
Financial expenses 19.5 21.8 25.1 23.1 18.1 16.8 26.6 21.9
Income (loss) from
continuing
operations 22.0 11.6 (81.2) (4.6) (17.8) (2.1) (5.0) 1.7
Net income (loss) 22.0 8.5 (93.2) (7.5) (21.0) (3.2) (6.9) 153.3
- ------------------------------------------------------------------------------------------
PER ORDINARY SHARE
(In U.S. Dollars)
Income (loss) from
continuing
operations $ 0.56 $ 0.30 $ (2.09) $ (0.20) $ (0.87) $ (0.26) $ (0.70) $ (0.29)
Net income (loss)
after
discontinued
operations $ 0.56 $ 0.22 $ (2.40) $ (0.29) $ (1.00) $ (0.31) $ (0.86) $ 21.83
- ------------------------------------------------------------------------------------------
FINANCIAL POSITION
(In Millions of
U.S. Dollars)
Total assets $ 352.0 $ 345.0 $ 345.8 $ 486.1 $ 490.2 $ 401.8 $ 420.5 $ 327.1
Working capital 136.6 103.8 60.5 153.0 167.5 102.9 73.8 45.2
Fixed assets (cost) 214.3 213.2 186.2 197.9 213.3 201.9 179.1 155.6
Debt* 185.5 204.0 182.7 242.8 216.0 128.8 197.0 150.1
- ------------------------------------------------------------------------------------------
</TABLE>
* Includes short-term borrowings and long-term debt.
- 19 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The Company reported its second consecutive year of profits in 1997 after
five prior years of losses. The 1997 net income totaled $22.0 million, or 56
cents a share, compared with $8.5 million, or 22 cents per share, a year
earlier. Improved net income was achieved despite a slight decline in
operating revenue.
ACQUISITIONS AND DIVESTITURES
During 1997, the Company sold two distribution companies and five factory
branches. The distribution companies were acquired in July 1996 to protect
the Company's long-term growth prospects in the U.S. midwest and southeast.
At the time of acquisition, the Company stated that it would sell the
distributors when owners committed to the business could be found.
The sale of the two distributor companies and five factory branches primarily
accounted for the 1997 decline in the Company's operating revenue.
In 1997, the Company acquired a distribution company in Spain and two
distribution companies in Canada to establish a base in Europe and to expand
coverage in the western provinces, respectively. The Company intends to make
further acquisitions in North America and overseas that complement or augment
its core businesses of manufacturing and selling residential and commercial
heating and cooling systems. Subsequent to year end, the Company purchased
United Electric Company of Wichita Falls, Texas. With 1997 sales of
approximately $25 million, United Electric is a profitable company that
manufactures components for commercial products. United Electric will
continue to operate as an independent company.
- 20 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The following table sets forth, for the years presented, certain information
relating to the operations of the Company, expressed as a percentage of
operating revenue.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Cost of sales 79.9 80.7 87.7
Gross margin 20.1 19.3 12.3
Selling, general and
administrative expenses 13.6 14.1 17.5
Operating profit (loss) 6.5 5.2 (8.1)
Financial expenses 3.0 3.4 4.7
Income (loss) before
income taxes 3.5 1.8 (12.8)
Income taxes - - (2.4)
Income (loss) from
continuing operations 3.5 1.8 (15.2)
Loss from discontinued
operations - (.5) (2.3)
Net income (loss) 3.5 1.3 (17.5)
===============================================================
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUE
Operating revenue was $630.7 million in 1997, compared with $641.9 million a
year earlier, a decline of $11.2 million, or 1.7 percent. The two
distribution companies noted earlier accounted for 3.3 percent of 1997
operating revenue, compared with 4.5 percent in 1996.
When the revenue of the distribution companies and the factory branches is
removed from the 1997 and 1996 results, the Company's 1997 operating revenue
increased slightly to $609.1 million from $607.1 million. This occurred in
a year when North American industry sales declined by about five percent due
to the impact of a cool spring and summer on the demand for air conditioning
units. Higher international, commercial and parts sales offset the revenue
decline in the Company's residential products.
Approximately 84 percent of the 1997 revenue was generated in the United
States, 12 percent in Canada, and 4 percent in international markets,
compared with 87 percent, 12 percent, and 1 percent, respectively in 1996.
- 21 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
GROSS MARGIN
Despite lower production and sales volumes, gross margin increased by $2.9
million to $127.0 million, or 20.1 percent of operating revenue in 1997
compared to 19.3 percent in 1996. The improved margin resulted primarily
from continuous cost savings and manufacturing efficiencies introduced at the
plant in Lewisburg, Tennessee. The Company intends to continue the emphasis
on cost reductions and manufacturing efficiencies to improve gross margin.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") excluding warranty
expense were virtually unchanged in 1997 compared with 1996. The higher
expenses associated with two acquisitions in Western Canada, a distribution
company in Spain and the establishment of parts outlets in Latin America were
offset by the cost savings resulting from the sale of the non-core businesses
noted earlier. Total SG&A declined as a percentage of operating revenue from
14.1% in 1996 to 13.6% in 1997 primarily due to reduced warranty expense.
Warranty expense declined in 1997, partly as a result of reductions in
product field failure rates and the progress made toward the Company's
quality control target of zero defects. The remainder of the decline in
warranty expense related to a specific provision recorded in 1996 for a
component used by many installers and supplied by other manufacturers.
The 1996 warranty expense also included a provision for the introduction of
a standard five-year limited warranty on replacement and service parts,
replacing the previous one-year warranty, and an additional provision for the
packaged terminal air conditioning product line sold at the end of 1994.
OPERATING PROFIT
The 1997 operating profit of $41.5 million was a 24 percent improvement over
the previous year of $33.4 million. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") was $56.6 million, compared with
$49.1 million in 1996.
FINANCIAL EXPENSES
Financial expenses declined to $19.5 million in 1997 from $21.8 million in
1996. The downward trend reflected lower interest expense, which fell to
$18.2 million in 1997 versus $19.4 million in the previous year. The
reduction in interest expense was the result of both lower interest rates and
lower average borrowing levels that declined, net of cash, to approximately
$186 million in 1997 from $196 million in 1996.
- 22 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
In 1997, $1.3 million of debt issuance costs were amortized, compared with
$1.8 million in 1996. In addition, $0.6 million of debt issuance costs were
written off in 1996.
INCOME TAXES
The Company is currently not recording an income tax provision as a result of
accumulated tax losses from prior years.
DISCONTINUED OPERATIONS
The Company had no discontinued operations in 1997.
In 1996, the Company incurred a $3.1 million loss on the sale of Thompson
Pipe & Steel Company ("TP&S"), a steel pipe manufacturing company based in
Denver, which was sold in 1996.
NET INCOME (LOSS)
Net income totaled $22.0 million, or 56 cents per share in 1997, compared
with $8.5 million, or 22 cents per share, in 1996.
The improvement in 1997 net income reflected structural cost reductions
through the introduction of lean production at the manufacturing plant since
1995, and tight management of overhead costs and financial expenses. The net
income also benefited from the early results of the long-term strategy to
diversify the revenue stream beyond the mature North American residential
market into commercial products, aftermarket parts and international sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUE
Operating revenue was $641.9 million in 1996, an increase of $109.1 million,
or 20.5 percent, compared to 1995. Approximately $40 million was due to
robust industry growth, gains in market share, and the addition of new
distributors. Another $40 million was the result of renewed confidence in the
Company's future among distributors who replenished inventories after
reducing them in 1995 following a change in the Company's credit terms. The
acquisition of the two distribution companies discussed earlier added $29
million in 1996 revenue.
GROSS MARGIN
Gross margin increased from 12.3 percent of operating revenue in 1995 to 19.3
percent in 1996, more than reversing the decline experienced in 1995. The
recovery was the result of increased factory utilization from higher
production volumes and sales as well as cost saving measures and
manufacturing efficiencies at the plant in Lewisburg.
- 23 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In 1996, SG&A declined by $2.5 million due to lower bad debt expense, offset
by higher marketing, advertising and sales expenditures associated with
strong business expansion as well as additional expense for managing the two
distributor networks acquired in 1996.
The 1996 warranty expense also increased by $2.8 million resulting from a
provision for the introduction of a standard five-year limited warranty on
replacement and service parts, and an additional provision for the packaged
terminal air conditioning product line sold at the end of 1994.
OPERATING PROFIT (LOSS)
The 1996 operating profit of $33.4 million was a dramatic reversal of the
$43.3 million operating loss recorded in 1995. EBITDA for 1996 was $49.1
million compared with a negative $24.5 million in 1995.
In 1995, $10.1 million was charged in asset writedowns for redundant
machinery and equipment, the closing of the paint shop at the Lewisburg plant
and the write-off of idle assets at the former Brantford, Ontario, plant.
Restructuring costs totaled $5.4 million in 1995 for staff severance in the
U.S. and Canadian operations. No similar charges were incurred in 1996.
FINANCIAL EXPENSES
Financial expenses declined to $21.8 million in 1996 from $25.1 million in
1995. The downward trend reflected lower interest expense, which fell to
$19.4 million in 1996 compared to $21.7 million in the prior year. The
reduction in interest expense was the result of both lower interest rates and
lower average borrowing levels that declined, net of cash, to approximately
$196 million in 1996 from $239 million in 1995.
In 1996, $1.8 million of debt issuance costs were amortized, compared with
$1.3 million in 1995. In addition, $0.6 million of debt issuance costs were
written off in 1996 and $2.1 million in 1995.
INCOME TAXES
The Company did not record an income tax provision in 1996 as a result of
accumulated tax losses from prior years. In 1995, the total tax provision of
$12.8 million included a deferred tax provision of $11.4 million, which
represented the write-off of accumulated deferred income tax debits recorded
as of December 31, 1994. This write-off was required since there was not
reasonable assurance as of December 31, 1995, that the timing differences
supporting these deferred tax debits would reverse.
- 24 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
DISCONTINUED OPERATIONS
In 1996, the Company incurred a $3.1 million loss on the sale of TP&S.
In 1995, losses from discontinued operations totaled $12.0 million and
consisted of: (i) $14.3 million for TP&S, including $6.0 million in asset
writedowns; (ii) a $1.9 million write-off of a deferred tax debit established
in prior years; (iii) the receipt of $2.9 million from a favorable judgment
involving a former Canadian oil and gas subsidiary sold in 1989; and (iv)
the utilization of tax losses for prior years resulting from the costs of
selling the gas utility and propane operations of the Company in 1990.
NET INCOME (LOSS)
Net income was $8.5 million, or 22 cents per share, in 1996 compared with a
loss of $93.2 million, or $2.40 per share, in 1995.
The 1996 return to profitability reflected strong growth in sales revenue
coupled with lower structural costs.
The 1995 loss included $50 million for restructuring costs, asset writedowns,
a discontinued non-core subsidiary, loss on the impairment of intangible
assets, write-off of debt issuance costs, and the write-off of accumulated
deferred tax debits. These expenses resulted in a loss of approximately
$1.29 per share in 1995.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has sufficient credit facilities and liquidity from free cash
flow to meet its current capital and operating requirements.
CASH FLOW
Free cash flow (cash from operations adjusted for cash received from or
utilized in investing activities) totaled $29.9 million in 1997, compared
with a negative $4.4 million in 1996 and positive $59.5 million in 1995.
The 1997 free cash flow included $19.2 million from continuing operations,
versus $14.1 million in 1996 and $70.5 million in 1995. The remaining $10.7
million of free cash flow in 1997 was principally a result of the sale of
non-core distribution businesses.
- 25 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
WORKING CAPITAL AND SHORT-TERM BORROWINGS
Working capital rose to $136.6 million in 1997 from $103.8 million in 1996
and $60.5 million in 1995. The principal causes were higher accounts
receivable, increased cash from operations beyond current capital and
operating requirements, and substantially lower short-term borrowings.
The Company brought inventories back to acceptable levels by year end after
reducing production in response to the lower demand for air conditioning
systems during the cool summer. When the impact of the two distributor
companies are removed, inventory levels were virtually unchanged in 1997 from
1996.
<TABLE>
<CAPTION>
(millions of US dollars) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Inventories 94.5 117.7 85.5
Accounts receivable 96.5 78.0 77.9
Working capital 136.6 103.8 60.5
Short-term borrowings 19.7 39.0 17.7
</TABLE>
Accounts receivable grew by 24 percent to $96.5 million as a result of more
distributors taking advantage of the Company's recently established HVAC
First financing service, increased international sales that take longer to
settle, and an increase in sales close to year end in December 1997.
The $18.5 million increase in accounts receivable was more than offset by the
$23.2 million decrease in inventories. These changes, coupled with a $5.2
million rise in accounts payable, meant that there was minimal change in non-
cash working capital in 1997 compared with 1996.
CREDIT FACILITIES
The Company has negotiated credit facilities separately for the Canadian and
the U.S. operations.
The Canadian operating company has a Cdn. $30 million revolving credit
facility, which is sufficient to meet its needs. The three-year facility was
arranged with a new lender in 1996.
The U.S. operating company has a five-year $70 million receivables purchase
facility with a U.S. lender. This facility was arranged in July 1996 to
replace the $75 million 364-day revolving credit facility scheduled to expire
in January 1997. In July 1997, the U.S. company arranged a $15 million
inventory credit facility. The U.S. operating company has adequate credit
availability and expects to have more than sufficient cash flow from
operations to meet its obligations in 1998.
- 26 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
LONG-TERM DEBT
The U.S. operating company has $140 million of seven-year senior notes
maturing in March 2000. The notes are collateralized by the real and personal
property of the U.S. company other than accounts receivable and inventories.
Long-term debt also includes a $25 million five-year unsecured term loan
arranged for the Company's U.S. holding company which matures in October
2001.
CAPITAL EXPENDITURES
The Company spent approximately $8 million on capital improvements, primarily
at the Lewisburg plant in 1997, compared with $12 million in 1996.
RISKS AND RISK MANAGEMENT
WEATHER RISK: An early and hot summer, or an early and cold winter, can
create a surge in sales. Mild seasons, by contrast, undermine customer
demand. To reduce the costs of exposure to short-term weather risk, the
Company has reduced the time it takes to fulfill a customer's order to 14
days for most products. In 1997, for example, the cool spring and summer
reduced the demand for air conditioning units. The Company responded by
adjusting production levels to avoid a costly inventory build up.
SUPPLIER RISK: For a variety of reasons, a key supplier could be unable to
meet the Company's requirements. Close relations are maintained with 65
companies that provide 95 percent of the material used in manufacturing.
Several suppliers consign inventory and the Company only pays for components
when they are used. Information management systems are integrated with key
suppliers so that they can scan for product use at the end of the production
line, provide an invoice, and replenish inventory.
DISTRIBUTOR RISK: The Company's distribution system consists of approximately
400 independent distributors in the U.S., Canada and internationally.
Distributor risk is managed in part by terminating underperforming
distributors and replacing them with more aggressive ones. The Company also
emphasizes a mutually beneficial partnership with distributors, involving
them in product design, monthly in-plant product audits and other programs.
MARKET RISK: The heating, ventilating and air conditioning business for
residential and light commercial users in North America is approximately a $6
billion a year industry at the manufacturing level and $25 billion at the
final customer level. The Company faces six major
- 27 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
competitors. As the North American industry is mature, no new competitors
are likely. The Company has improved its competitive position through a much
lower cost structure and a change in its product mix.
YEAR 2000 COMPLIANCE RISK: The Company is completing the installation of new
information management systems in 1998 that are year 2000 compliant. The
systems have been customized to embrace all aspects of the Company's
operations from ordering raw materials through to production of finished
products, as well as for financial analysis and disclosure and general
management purposes. A management committee is responsible for ensuring
that all interfacing systems of suppliers and customers will be year 2000
compliant.
TECHNOLOGY RISK: Technological risk is low as technical improvements in
heating and cooling systems tend to be evolutionary over a number of years.
ECONOMIC RISK: The Company faces the normal economic risks of any consumer-
oriented company -- such as changes in interest rates, employment levels,
consumer spending, and general consumer and business confidence in the
economy. Under adverse economic conditions, homeowners and commercial
property owners are more likely to repair rather than replace deteriorated
and older heating or cooling systems. The poor condition of many systems that
have already been repaired, and the introduction of lower-cost entry-level
systems, tend to offset this risk. Internationally, the Company's operations
are concentrated in Latin America and more recently Europe with no exposure
to markets in southeast Asia.
FINANCIAL RISK: The Company's return to profitability, a much lower break-
even point, and adequacy of capital resources have mitigated financial risk.
The Company's capitalization is over leveraged compared with other companies
in and related to the industry.
FORWARD-LOOKING INFORMATION: Certain statements contained in this document
constitute forward-looking statements that are not historical. Forward-
looking statements involve risks and uncertainties, including but not limited
to the risk factors described previously. Actual results could differ
materially from those projected in the forward-looking statements as a result
of these risks and should not be relied upon as a prediction of actual future
results. The Company undertakes no obligation to update any forward-looking
statements to reflect events or circumstances after the date on which such
statement is made, or to reflect the occurrence of unanticipated events.
- 28 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
FUTURE EXPECTATIONS
The long-term strategic plan developed by management in 1996 in consultation
with the Board of Directors was reviewed and updated in 1997. The plan
establishes performance targets for the year 2000 within the framework of a
10-year corporate vision of growth.
The focus of the long-term strategy is to diversify beyond the Company's
traditional core business of selling heating and cooling systems to the
residential market. Key areas of future growth are commercial products,
aftermarket replacement parts and international sales. The emphasis will be
on improving gross margin to ensure profitability from internal growth as
well as acquisitions that complement and augment the strategic plan.
Subsequent to year end, the Company made its first strategic acquisition,
United Electric Company, a profitable Texas company that manufactures
components such as coils and ventilators for commercial heating and cooling
systems.
- 29 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the registrant and its
subsidiaries, together with all notes thereto, are set forth immediately
following this page as pages 32 through 69 of this Annual Report on Form 10-
K.
- ---------------------------------------------------------------------------
ARTHUR ANDERSEN & CO.
- ---------------------------------------------------------------------------
AUDITORS' REPORT
- ---------------------------------------------------------------------------
To the Shareholders
International Comfort Products Corporation
We have audited the consolidated balance sheet of International Comfort
Products Corporation (formerly Inter-City Products Corporation) as at
December 31, 1997 and the consolidated statements of income (loss) and
deficit and changes in financial position for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of International Comfort
Products Corporation as at December 31, 1997 and the results of its
operations and the changes in its financial position for the year then ended
in accordance with accounting principles generally accepted in Canada.
/s/ Arthur Andersen & Co.
February 9, 1998
Mississauga, Canada
- 30 -
<PAGE>
COOPERS chartered 145 King Street West tel.:(416)869-1130
& LYBRAND accountants Toronto, Ontario fax: (416)863-0926
Canada M5H 1V8 direct tel.:941-8237
direct fax: 941-8446
AUDITORS' REPORT
To The Shareholders
Inter-City Products Corporation
We have audited the consolidated balance sheet of Inter-City Products
Corporation as at December 31, 1996 and the consolidated statements of income
and deficit and changes in financial position for the years ended December
31, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Inter-City Products
Corporation as at December 31, 1996 and the results of its operations and the
changes in its financial position for the years ended December 31, 1996 and
1995 in accordance with generally accepted accounting principles.
/s/ Coopers & Lybrand
Coopers & Lybrand
Chartered Accountants
Toronto, Ontario
February 11, 1997
- 31 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 630.7 $ 641.9 $ 532.8
Cost of Sales 503.7 517.8 467.4
- ---------------------------------------------------------------------------
Gross Margin 127.0 124.1 65.4
Selling, General and Administrative Expenses 85.5 90.7 93.2
Asset Writedowns and Restructuring Costs
(note 17) - - 15.5
- ---------------------------------------------------------------------------
Operating Profit (Loss) 41.5 33.4 (43.3)
- ---------------------------------------------------------------------------
Financial Expenses
Interest expense 18.2 19.4 21.7
Amortization of debt issuance costs 1.3 1.8 1.3
Write-off of debt issuance costs - .6 2.1
- ---------------------------------------------------------------------------
19.5 21.8 25.1
- ---------------------------------------------------------------------------
Income (Loss) Before Income Taxes 22.0 11.6 (68.4)
Income Taxes (note 11) - - (12.8)
- ----------------------------------------------------------------------------
Income (Loss) From Continuing Operations 22.0 11.6 (81.2)
Loss From Discontinued Operations (note 16) - (3.1) (12.0)
- ----------------------------------------------------------------------------
Net Income (Loss) 22.0 8.5 (93.2)
Deficit - Beginning of the Year (138.4) (146.9) (53.7)
- ----------------------------------------------------------------------------
Deficit - End of the Year $(116.4) $(138.4) $(146.9)
============================================================================
</TABLE>
Income (Loss) Per Ordinary Share (note 12)
see accompanying notes
- 32 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As at December 31, 1997
(With Comparative Figures as at December 31, 1996 - note 20)
(In Millions of U.S. Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and short-term deposits $ 31.0 $ 17.6
Accounts receivable - trade (less allowance
for doubtful accounts; 1997 - $6.0; 1996 - $7.7) 96.5 78.0
Note receivable (note 2) 7.7 -
Inventories (note 3) 94.5 117.7
Prepaid expenses and other 7.6 6.0
- -------------------------------------------------------------------------
237.3 219.3
- -------------------------------------------------------------------------
Fixed Assets (note 4)
Property, plant and equipment - at cost 214.3 213.2
Accumulated depreciation 120.7 113.0
- -------------------------------------------------------------------------
93.6 100.2
- -------------------------------------------------------------------------
Intangible Assets, net (note 5) 11.0 12.1
Other Assets, net (note 6) 10.1 13.4
- -------------------------------------------------------------------------
$ 352.0 $ 345.0
=========================================================================
</TABLE>
- ---------------------------------- -----------------------------------
Director Director
see accompanying notes
- 33 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As at December 31, 1997
(With Comparative Figures as at December 31, 1996 - note 20)
(In Millions of U.S. Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current Liabilities
Short-term borrowings (note 7) $ 19.7 $ 39.0
Accounts payable 44.8 39.6
Accrued liabilities 26.5 28.2
Product warranty 9.5 8.7
Current portion of long-term debt (note 8) .2 -
- -------------------------------------------------------------------------
100.7 115.5
Long-Term Debt (note 8) 165.6 165.0
Product Warranty 16.2 17.9
Environmental Liabilities 12.9 13.6
Other Long-Term Liabilities 5.1 4.2
- -------------------------------------------------------------------------
300.5 316.2
- -------------------------------------------------------------------------
Commitments and Contingencies (note 15)
SHAREHOLDERS' EQUITY
Ordinary Shares (note 9) 171.2 169.2
Deficit (116.4) (138.4)
Foreign Currency Translation Adjustment (note 10) (3.3) (2.0)
- -------------------------------------------------------------------------
51.5 28.8
- -------------------------------------------------------------------------
$ 352.0 $ 345.0
=========================================================================
</TABLE>
see accompanying notes
- 34 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Cash provided by (used for): 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Income (loss) from continuing operations $ 22.0 $ 11.6 $ (81.2)
Items not involving current cash flows
note 18a) 17.3 20.9 54.4
Changes in working capital (note 18b) (20.1) (18.4) 97.3
- ---------------------------------------------------------------------------
19.2 14.1 70.5
Discontinued Steel Pipe Operation - .5 (.2)
- ---------------------------------------------------------------------------
19.2 14.6 70.3
- ---------------------------------------------------------------------------
INVESTING
Property, plant and equipment (8.5) (11.8) (24.5)
Proceeds on sale of fixed assets .2 1.6 11.8
Proceeds from sale of/(acquisition of)
Coastline and General (note 2) 24.6 (15.3) -
Acquisitions of distribution
companies (note 2) (5.6) - -
Discontinued operations - 6.5 1.9
- ---------------------------------------------------------------------------
10.7 (19.0) (10.8)
- ---------------------------------------------------------------------------
FINANCING
Ordinary shares issued 2.0 .5 .6
Long-term debt issued .8 - -
Refinancing costs - (4.5) (.9)
Discontinued Steel Pipe Operation - (2.1) (1.4)
Other - 2.2 -
- ---------------------------------------------------------------------------
2.8 (3.9) (1.7)
- ---------------------------------------------------------------------------
Increase (Decrease) in Cash (Net Borrowings) 32.7 (8.3) 57.8
Net Borrowings - Beginning of the Year (21.4) (13.1) (70.9)
- ---------------------------------------------------------------------------
Net Cash (Borrowings) - End of the Year $ 11.3 $(21.4) $ (13.1)
===========================================================================
Represented by
Cash and short-term deposits $ 31.0 $ 17.6 $ 13.0
Less: Short-term borrowings (19.7) (39.0) (17.7)
- ---------------------------------------------------------------------------
11.3 (21.4) (4.7)
Discontinued operations - - (8.4)
- ---------------------------------------------------------------------------
$ 11.3 $(21.4) $(13.1)
===========================================================================
</TABLE>
see accompanying notes
- 35 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
International Comfort Products Corporation, formerly Inter-City Products
Corporation, is a Canadian holding company which has two primary operating
subsidiaries: International Comfort Products Corporation (USA) ("ICP (USA)"),
and International Comfort Products Corporation (Canada) ("ICP (Canada)").
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in Canada which differ in certain
respects with accounting principles in the United States. The differences
between GAAP in Canada and the United States as they affect the Company are
described in note 19.
CONSOLIDATION
The consolidated financial statements include the assets, liabilities and
operating results of all subsidiary companies from the dates of acquisition,
on the basis of purchase accounting. All significant intercompany
transactions have been eliminated.
NATURE OF OPERATIONS
The Company manufactures and markets central air conditioning and heating
products for residential and light commercial use primarily in the United
States and Canada. At the end of 1997, the Company's network consisted of
approximately 400 independent distributors, of which one distributor
accounted for approximately 11% of the Company's operating revenue. The
Company's network also includes company-owned distribution centers in Canada,
Mexico, Brazil and Spain.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and foreign operations
are translated into United States dollars at the rate of exchange in effect
at the balance sheet date. Revenues and expenses are translated at the
average exchange rates prevailing during the year. The unrealized translation
gains and losses are accumulated in a separate component of shareholders'
equity.
REVENUE AND EXPENSE RECOGNITION
Product sales are recognized at the time of shipment. Selling, general and
administrative costs are charged to expense as incurred. Service contract
revenue is deferred and amortized into income over the life of the contract
on a straight-line basis.
INVENTORIES
Raw materials and supplies, work in process and finished goods, are valued at
the lower of cost (first-in, first-out) or net realizable value.
- -------------------------------------------------------------------------
- 36 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FIXED ASSETS
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis at the following annual
rates based on the estimated useful lives of the applicable assets:
<TABLE>
<CAPTION>
<S> <C>
Buildings 2.5% - 10%
Machinery, equipment and furniture 5% - 20%
Tooling and drawings 10% - 33%
Land improvements 5% - 10%
</TABLE>
INTANGIBLE AND OTHER ASSETS
Intangible and other assets include amounts paid for patents, tradenames,
goodwill and debt issuance costs. Amortization of intangible assets is
provided on a straight-line basis over various periods, not exceeding twenty
years. The realizability of goodwill and other intangibles is evaluated
periodically as events and circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on undiscounted cash
flow projections. The analyses necessarily involve significant management
judgment regarding such projections and the actual results could differ
materially from these projections. Amortization of debt issuance costs is
provided on a straight-line basis over the term of the related debt.
INCOME TAXES
The Company follows the deferral method of tax allocation in accounting for
income taxes. Under this method, timing differences between accounting and
taxable income result in the recording of deferred income taxes.
PRODUCT WARRANTIES
A liability for estimated warranty expense is established by a charge against
operations at the time products are sold. The subsequent costs incurred for
warranty claims serve to reduce the product warranty liability. The actual
warranty costs the Company will ultimately pay could differ materially from
this estimate. The Company offers and sells extended warranty contracts for
its products through certain distributors. The revenue for such contracts is
deferred and recognized over the life of the contract on a straight-line
basis.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain retirement benefits for its retired employees.
Retirement benefits include health care benefits and life insurance. The
Company accounts for these benefit payments on a cash basis.
- -------------------------------------------------------------------------
- 37 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FINANCIAL INSTRUMENTS
Periodically, the Company enters into interest rate swap agreements and
forward rate agreements to hedge its interest exposure. The fair values of
swap and forward rate agreements are based on current interest rates and any
payments and receipts relating to these agreements are recognized in interest
expense over the period of the respective agreement. All interest rate swaps
are subject to market risks as interest rates fluctuate. The Company is
exposed to credit risk in the event of nonperformance by counterparties. The
Company was not party to any interest rate swap or forward rate agreements
during 1997.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Such estimates include, but are not limited to, allowance for doubtful
accounts, product warranty, product liability, environmental liability, sales
returns and allowances, inventory obsolescence, pension obligation
assumptions, and self-insured medical claims. Actual results could differ
from these estimates.
RECLASSIFICATIONS
Certain comparative figures have been reclassified to conform with current
financial statement presentations.
2. ACQUISITIONS AND DIVESTITURES
Effective January 31, 1998, ICP (USA) acquired United Electric Company
("United Electric") of Wichita Falls, Texas, a manufacturer of air
conditioning components for commercial HVAC systems through a cash payment of
approximately $25.0. United Electric's estimated 1997 sales were
approximately $25.0. This acquisition will be included in the consolidated
financial statements of the Company upon the acquisition date.
- -------------------------------------------------------------------------
- 38 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
2. ACQUISITIONS AND DIVESTITURES (CONT'D)
During 1997, the Company acquired four distributors for total consideration
of approximately $5.6, comprised of cash payments of $3.6 and assumption of
debt of $2.0. The total goodwill recorded on these transactions was
approximately $2.8.
On September 30, 1997, ICP (USA) sold substantially all of the assets and
liabilities of General Heating and Cooling Company ("General"), a heating and
cooling products distributor, and a company-owned factory branch for net book
value of approximately $10.0. The total consideration is comprised of a cash
payment of $2.3 and a current note receivable of $7.7. In 1997, General and
the factory branch contributed operating revenue of approximately $19.2.
On January 27, 1997, ICP (USA) sold Coastline Distribution, Inc.
("Coastline"), a heating and cooling products distributor, and four company-
owned factory branches for net book value of approximately $22.3, the
proceeds of which were used to repay short-term borrowings.
On July 25, 1996, ICP (USA) acquired all of the outstanding shares of
Coastline and General. The purchase price was allocated on the basis of the
fair market value estimates of the net assets acquired as follows:
<TABLE>
<CAPTION>
Net assets acquired
----------------------------------
<S> <C>
Accounts receivable $ 12.8
Inventories 18.1
Fixed assets 1.4
Intangible and other assets 4.2
Current liabilities (20.0)
Long-term debt assumed (16.5)
----------------------------------
Net purchase price $ -
==================================
</TABLE>
- -----------------------------------------------------------------------
- 39 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
3. INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
<S> <C> <C>
Finished goods $ 58.8 $ 86.3
Raw materials and work in process 13.4 15.7
Service parts 22.3 15.7
--------------------------------------------------------
$ 94.5 $ 117.7
========================================================
</TABLE>
4. FIXED ASSETS
Fixed assets are classified as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
Accumu- Accumu-
lated Net lated Net
Depreci- Book Depreci- Book
Cost ation Value Cost ation Value
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Machinery,
equipment and
furniture $ 100.2 $ 59.7 $ 40.5 $ 101.7 $ 58.4 $ 43.3
Buildings and
improvements 51.3 18.0 33.3 51.2 16.6 34.6
Tooling and
drawings 51.3 38.9 12.4 49.0 34.3 14.7
Land and land
improvements 11.5 4.1 7.4 11.3 3.7 7.6
- -----------------------------------------------------------------------------
$ 214.3 $ 120.7 $ 93.6 $ 213.2 $ 113.0 $ 100.2
=============================================================================
</TABLE>
Depreciation expense for the year amounted to $14.2 (1996 - $14.1;
1995 - $14.8).
- -----------------------------------------------------------------------
- 40 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
5. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, are classified
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------
<S> <C> <C>
Goodwill $ 7.0 $ 4.7
Patents 2.4 2.8
Tradenames 1.6 1.7
Customer lists - 2.8
Other intangible assets - .1
------------------------------------------------------
$ 11.0 $ 12.1
======================================================
</TABLE>
Amortization of intangible assets during the year was $.9
(1996 - $1.6; 1995 - $4.0). The accumulated amortization of
intangible assets at December 31, 1997, was $10.5 (1996 -
$9.6).
In 1995, the Company reengineered various business processes
which led to a change in the extent to which certain intangibles
were used in the Company's operations. Impairments were recognized
when the undiscounted expected future operating cash flows
derived from such intangible assets were less than their carrying
values or in the case of certain patents and technology, on the
discontinued use of such identifiable intangibles. The 1995
operating loss included a $1.3 million loss on the impairment of such
intangible assets.
6. OTHER ASSETS
Other assets are classified as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
<S> <C> <C>
Debt issuance costs, less
accumulated amortization $ 4.3 $ 5.7
Due from insurers on
environmental claim (note 15 (b)) 5.0 5.6
Other .8 2.1
-----------------------------------------------------------
$ 10.1 $ 13.4
===========================================================
</TABLE>
- ----------------------------------------------------------------------
- 41 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
7. SHORT-TERM BORROWINGS
The details of short-term borrowings at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------
<S> <C> <C>
ICP (USA) - Receivables Purchase Agreement $ 10.0 $ 27.0
ICP (Canada) 8.8 12.0
Industrias HVH, S.A. - Line of Credit .9 -
-------------------------------------------------------------------
$ 19.7 $ 39.0
===================================================================
</TABLE>
(a) ICP (USA)
Receivables Purchase Agreement
On July 25, 1996, ICP (USA) entered into a five year agreement
to sell on a revolving basis, up to a $70.0 undivided
participation ownership interest in a designated pool of its
accounts receivable. This transfer of receivables does not
constitute a sale for accounting purposes on the basis that all
the significant risks and rewards of ownership of the
receivables are not transferred to the purchaser. Accordingly,
the pool of receivables of $10.0 is included in accounts
receivable at December 31, 1997 (1996 - $27.0). In connection
with the significant change in and amendment to previous
financing agreements, ICP (USA) recorded a write-off of debt
issuance costs of $2.1 in the 1995 consolidated statement of
loss.
The receivables purchase agreement requires ICP (USA) to pay
fees plus certain administrative costs. At December 31, 1997,
the cost of the receivable facility including unused line fees
was 10.4% (1996 - 9.8%). The unamortized transaction fees of
$1.1 are included in Other Assets at December 31, 1997.
Revolving Credit Facility
On July 18, 1997, ICP (USA) entered into a two year $15.0
million revolving credit facility secured by inventories. This
revolving credit facility accrues interest at prime or LIBOR
plus 1.5%. As of December 31, 1997, the Company has no
outstanding balance owing on this facility.
- -----------------------------------------------------------------------
- 42 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
7. SHORT-TERM BORROWINGS (CONT'D)
(b) ICP (CANADA)
ICP (Canada) has a Cdn. $30.0 million revolving credit facility,
of which $8.8 (Cdn $12.6 million) was utilized at December 31,
1997. This three year facility was established on December 19,
1996. ICP (Canada)'s revolving credit facility accrues
interest at prime plus 1.0% per annum or at Bankers' Acceptance
rates plus a stamping fee of 2.0% as selected by the Company
(7.0% at December 31, 1997). All of ICP (Canada)'s assets are
pledged as collateral under its facility which contains
covenants, the most restrictive of which require it to maintain
a certain minimum interest coverage and net worth and precludes
the payment of dividends. At December 31, 1997, the restricted
net assets of ICP (Canada) were approximately $13.0. Subsequent
to year end, ICP (Canada) obtained a waiver of its covenant
breach for the minimum interest coverage ratio which existed at
December 31, 1997.
(c) The maximum amount of short-term borrowings outstanding,
including the advances received under the receivables purchase
agreement at any month-end during the year ended December 31,
1997, was $65.9 (1996 - $64.4). The average short-term
borrowings outstanding, including the advances received under
the receivables purchase agreement, calculated by averaging
month-end balances, during the year ended December 31, 1997, was
$39.2 (1996 - $46.0).
The weighted average interest rate on the outstanding short-term
borrowings at December 31, 1997, was 8.2% (1996 - 7.9%).
Weighted average interest rates are calculated based on actual
interest rates in effect and the short-term borrowings
outstanding as at December 31.
8. LONG-TERM DEBT
(a) The details of long-term debt are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------
<S> <C> <C>
9.75% Senior Notes due March 1, 2000 $ 140.0 $ 140.0
Term bank loan, due 2000 and 2001 25.0 25.0
Note payable .8 -
-------------------------------------------------------------------
165.8 165.0
Current portion of note payable included
in current liabilities .2 -
-------------------------------------------------------------------
$ 165.6 $ 165.0
===================================================================
</TABLE>
- -----------------------------------------------------------------------
- 43 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
8. LONG-TERM DEBT (CONT'D)
(b) ICP (USA)
On March 11, 1993, ICP (USA) issued $140.0 of 9.75% senior
secured notes ("Senior Notes") which are repayable on March 1,
2000. The Senior Notes require mandatory prepayments if ICP
(USA) has certain cash proceeds from asset sales as defined in
the Senior Note agreement. Interest on the Senior Notes is
payable semi-annually in March and September. The Senior Notes
were trading 101.50/102 (bid/offer) at December 31, 1997.
The Senior Notes are collateralized by substantially all the
real and personal property of ICP (USA), other than accounts
receivable and inventories. The Senior Notes indenture contains
covenants which limit certain transactions including the payment
of dividends.
On July 25, 1996, ICP (USA) terminated $20.0 notional amount of
interest rate swaps which had effectively converted this amount
of the Senior Notes to a variable rate of interest. In
connection with the termination of this interest rate swap, ICP
(USA) incurred costs of $1.9 which were deferred and are being
amortized over the remaining term of the Senior Notes. As of
December 31, 1997, the entire $140.0 Senior Notes are fixed at
a rate of 9.75% through the maturity date of March 1, 2000.
(c) CHL HOLDINGS INC.
On December 19, 1996, CHL Holdings Inc., a wholly owned United
States subsidiary of the Company, arranged an unsecured term
bank loan in the amount of $25.0 due in full by October 15,
2001. The Company is required to repay $15.0 in 2000 and $10.0
in 2001. The term bank loan accrues interest at LIBOR plus
0.25% (6.2% at December 31, 1997) and has been guaranteed by a
third party. The guarantor holds a $15.0 subordinated security
interest in ICP (Canada)'s receivables and inventories, and the
shares of ICP (Canada) have been pledged in support of the
guarantee. The pledge agreement contains certain covenants, the
most restrictive of which requires ICP (Canada) to maintain a
minimum level of receivables and inventories in excess of its
borrowings.
(d) Under the provisions of the various loan agreements and
indentures, the Company is required to make installments of $.2,
$.2, $155.2, $10.2, and nil during the next five years beginning
in 1998.
- -----------------------------------------------------------------------------
- 44 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- ---------------------------------------------------------------------------
9. SHARE CAPITAL
(a) ORDINARY SHARES
(i) AUTHORIZED AND OUTSTANDING
The Company is authorized to issue an unlimited number of
ordinary shares. Changes in the issued and outstanding ordinary
shares for the years 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ----------------
Number Amount Number Amount Number Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issued and
outstanding
Beginning of
the year 39,260,322 $169.2 39,042,574 $166.5 38,649,949 $165.9
Issued under
the Employee
Stock Option
Plan 474,200 1.3 - - - -
Issued under
the Share
Ownership
Savings Plan 95,920 .6 201,763 .5 392,625 .6
Issued under
the Directors
Share
Compensation
Arrangement 16,670 .1 15,985 - - -
Receipt of
Funds from
Trustee for
1990 Plan of
Arrangement - - - 2.2 - -
- -----------------------------------------------------------------------------
Issued and
outstanding
End of the year 39,847,112 $171.2 39,260,322 $169.2 39,042,574 $166.5
=============================================================================
</TABLE>
(ii) EMPLOYEE STOCK OPTION PLAN
A maximum of 2,500,000 ordinary shares have been reserved for issuance
to officers and employees of the Company under the Employee Stock
Option Plan. The term of all options cannot exceed ten years from the
date the option is granted and are vested at an annual rate of 20% per
year on a cumulative basis, except in certain circumstances where the
exercise of such options would be accelerated.
The option exercise price is fixed by the Board of Directors at the
time each option is authorized and cannot be less than the weighted
average sales price per share on The Toronto Stock Exchange on the
business day preceding the date of authorization.
- ---------------------------------------------------------------------------
- 45 -<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- ---------------------------------------------------------------------------
9. SHARE CAPITAL (CONT'D)
(a) ORDINARY SHARES (CONT'D)
(ii) EMPLOYEE STOCK OPTION PLAN (CONT'D)
Changes in the share options outstanding from January 1, 1995 to
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Balance - Beginning of the year 1,720,000 776,000 1,281,400
Granted 770,000 1,000,000 -
Exercised (474,200) - -
Canceled (56,000) (56,000) (515,400)
1990 LTIP units converted - - 10,000
----------------------------------------------------------------------
Balance - End of the year 1,959,800 1,720,000 776,000
======================================================================
</TABLE>
The details of the options outstanding at December 31, 1997, at
each exercise price are as follows:
<TABLE>
<CAPTION>
Exercise Price Number of
(Cdn.$) Expiry Date Shares
-----------------------------------------------------------
<S> <C> <C>
$3.10 February 29, 2000 25,000
$3.10 May 30, 2000 25,000
$3.50 August 24, 2001 65,000
$3.10 December 19, 2001 211,000
$2.80 April 16, 2003 723,800
$3.90 July 11, 2003 105,000
$4.20 July 31, 2003 10,000
$4.10 August 23, 2003 15,000
$3.83 November 29, 2003 10,000
$5.20 January 31, 2004 45,000
$5.80 February 28, 2004 15,000
$7.05 April 29, 2004 710,000
---------
1,959,800
=========
</TABLE>
- ----------------------------------------------------------------------
- 46 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
9. SHARE CAPITAL (CONT'D)
(a) ORDINARY SHARES (CONT'D)
(iii) SHARE OWNERSHIP SAVINGS PLAN
Effective July 1, 1992, certain employees of the
Company were eligible to participate in the Company's Share
Ownership Savings Plan (the "Savings Plan"). Generally, the
Savings Plan is available to all non-union employees following
the completion of one year of continuous service with the
Company. The Savings Plan allows eligible employees to
contribute from one to six percent of their salary to the Savings
Plan. The Company is required to match 25% of the employees'
contributions and may make additional annual contributions of up
to 75% of the employees' contribution at its discretion. In
February 1997, the hourly employees began participating in a
hourly savings plan with no matching company contributions. In
1997, the Company's expense with respect to both savings plans
was $.3 (1996- $.1).
(iv) LONG-TERM INCENTIVE PLANS
Effective April 29, 1997, the Company adopted the
1997 Long-Term Incentive Plan (the "1997 Plan") which will
provide deferred compensation opportunities to certain senior
managers of the Company. This deferred cash compensation plan
is based on the awarding of Performance Units, the value of which
is related to the appreciation in the value of the ordinary
shares of the Company.
The 1997 Plan is comprised of (i) Three year Performance Units
which are awarded, valued and paid at the end of a three
calendar year period (the "Performance Period") as designated by
the Pension and Compensation Committee (the "Committee") of the
Board of Directors, and (ii) Long-term Performance Units which
are awarded at the end of the Performance Period, but paid upon
retirement, according to a vesting schedule, and subject to
forfeiture. The initial grant price of the Performance Units is
the value established by the Committee at the beginning of the
Performance Period, to which the future ordinary share price
shall be compared to determine the appreciated value for purposes
of determining the value of Performance Units attributable to
that Performance Period. At the end of the Performance Period,
the number of Performance Units earned, if any, will be based on
the extent to which the established objectives of average three
year earnings per share goals have been achieved. If the
threshold objective is not met, no Performance Units are earned.
If the target objective is exceeded, additional Performance Units
can be earned, up to a predetermined maximum level.
- ---------------------------------------------------------------------------
- 47 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
9. SHARE CAPITAL (CONT'D)
(a) ORDINARY SHARES (CONT'D)
(iv) LONG-TERM INCENTIVE PLANS (CONT'D)
Performance Units shall be valued in the currency of the resident
country of the participant. The value of a Three year Performance
Unit is calculated as the equivalent of the difference in price of
the Company's ordinary shares for the average of the last five
business days of the last calendar year of the Performance Period,
less the Grant Price. The value of a Long-term Performance Unit is
calculated as the equivalent of the difference in price of the
Company's ordinary shares for the average of the six months prior
to termination or retirement, less the grant price.
On April 29, 1997, the Company awarded target thresholds of 177,500
Performance Units and 180,000 Long-term Performance Units to senior
management at a grant price of Cdn. $7.05. The expense for 1997
relating to the 1997 Plan based upon the increase in the Company's
stock price since the date of grant is $.4.
In 1990, the Company adopted a long-term incentive plan (the "1990
Plan"). Under the 1990 Plan, certain key officers and employees of
the Company were granted long-term incentive compensation units
("1990 LTIP Units") the value of which shall be determined by
reference to the appreciation in the market value of the ordinary
shares over stated periods of time. Based on the discretion of the
Board of Directors of the Company, the appreciation in the market
value of the ordinary shares will be distributed to the holder
thereof by payment of cash, issuance of ordinary shares or a
combination thereof.
As at December 31, 1997, 34,000 units from the February 1, 1993
granting were outstanding under the 1990 Plan with an initial
value per unit of Cdn $7.125 and a valuation date of February 1,
1998. In 1997, the Company's expense with respect to the 1990 Plan
was approximately $.1.
- ---------------------------------------------------------------------------
- 48 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- ---------------------------------------------------------------------------
9. SHARE CAPITAL (CONT'D)
(b) PREFERENCE SHARES
The Company is authorized to issue an unlimited number of Class
A preference shares issuable in series and rank senior to the
Class B preference shares and ordinary shares as to dividends and
participation in certain distributions of assets on liquidation.
Any series of the shares may be made convertible into ordinary
shares and have no voting rights as a class. The Company is also
authorized to issue an unlimited number of Class B preference
shares issuable in series and rank senior to ordinary shares and
junior to the Class A preference shares as to dividends and
participation in certain distributions of assets on liquidation.
Any series of the shares may be made convertible into ordinary
shares and have no voting rights as a class.
As of December 31, 1997, the Company has not issued any Class A
or B preference shares.
10. FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The Company adopted the United States dollar as its
reporting currency, effective January 1, 1994. Accordingly, the
foreign currency translation adjustment which is included as
a component of shareholders' equity, represents the
unrealized gain or loss on translation of financial statements of
self-sustaining operations up to December 31, 1997. Prior to
1994, this adjustment represented the unrealized gain or
loss on translation of financial statements of self-sustaining
operations in the United States. Changes during the
respective years are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative unrealized loss at
January 1 $(2.0) $(1.1) $(1.9)
Unrealized gain (loss) on
translation of net assets (1.3) (.9) .8
-----------------------------------------------------------------------
Cumulative unrealized loss
at December 31 $(3.3) $(2.0) $(1.1)
=======================================================================
</TABLE>
The rate of exchange as at December 31, 1997 was U.S.
$1.00 = Cdn. $1.4291 (1996 -U.S. $1.00 = Cdn. $1.3706), and the
average rate for the year was U.S. $1.00 = Cdn. $1.3847 (1996 -
U.S. $1.00 = Cdn. $1.3636; 1995 - U.S. $1.00 = Cdn. $1.3727).
- --------------------------------------------------------------------------
- 49 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
11. INCOME TAXES
The components of income (loss) before income taxes and the
income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes
Canada $ (.3) $ 2.0 $ (1.3)
United States 22.3 9.6 (67.1)
------------------------------------------------------------------------
$ 22.0 $ 11.6 $ (68.4)
------------------------------------------------------------------------
Current income tax provision
(recovery)
Canada - - 1.8
United States .6 - (.4)
-----------------------------------------------------------------------
.6 - 1.4
------------------------------------------------------------------------
Deferred income tax provision
(recovery)
Canada - - 3.9
United States (.6) - 7.5
------------------------------------------------------------------------
(.6) - 11.4
------------------------------------------------------------------------
Total income tax provision (recovery) $ - $ - $ 12.8
========================================================================
</TABLE>
In 1995, the deferred income tax provision of $11.4 represented the
write-off of accumulated deferred income tax debits recorded as of
December 31, 1994. This write-off was required since there was no
longer reasonable assurance as of December 31, 1995, that the timing
differences supporting these deferred tax debits would reverse.
- ------------------------------------------------------------------------
- 50 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -------------------------------------------------------------------------
11. INCOME TAXES (CONT'D)
A reconciliation between the combined statutory and the
effective rate of income tax is provided below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 22.0 $ 11.6 $ (68.4)
Combined statutory tax rate 38.8% 38.8% 38.8%
------------------------------------------------------------------------
Computed income tax
provision (recovery) 8.5 4.5 (26.5)
Increase (decrease) resulting from:
Non-deductible depreciation .3 .3 .8
Unrecognized (recognized) benefit
of losses and expenses (.8) (1.6) 25.7
Prior years' deferred taxes
written-off - - 11.4
Utilization of loss carryforwards (7.7) (3.4) -
Other (.3) .2 1.4
------------------------------------------------------------------------
Actual income tax provision
(recovery) $ - $ - $ 12.8
========================================================================
Effective rate of income not not not
tax recovery meaningful meaningful meaningful
============================================================================
</TABLE>
- 51 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
11. INCOME TAXES (CONT'D)
At December 31, 1997, the Corporation and its subsidiaries
had the following approximate amounts available to reduce future
years' earnings for income tax purposes, the effect of
which has not been recognized in the financial statements.
<TABLE>
<CAPTION>
---------------------------- ------------------------------
Losses for tax purposes United
expiring in Canada States Total
---------------------------- --------------------------------
<S> <C> <C> <C> <C>
1998 $ 3.5 - $ 3.5
1999 6.5 - 6.5
2000 .5 - .5
2001 7.9 - 7.9
2002 5.5 - 5.5
2003 2.9 - 2.9
2004 1.6 - 1.6
2010 - 21.0 21.0
2011 - 4.6 4.6
----------------------------- -------------------------------
Total losses 28.4 25.6 54.0
Other deductions and basis
differences not yet taken as
a deduction for income tax
purposes 9.6 32.1 41.7
---------------------------- -------------------------------
$ 38.0 $ 57.7 $ 95.7
============================ ===============================
</TABLE>
- -------------------------------------------------------------------------
- 52 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -------------------------------------------------------------------------
12. INCOME (LOSS) PER ORDINARY SHARE
The basic income (loss) per ordinary share is calculated on
the weighted average number of shares outstanding during the
respective years as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) to ordinary
shareholders before
discontinued operations $ 22.0 $ 11.6 $ (81.2)
Loss from discontinued operations - (3.1) (12.0)
----------------------------------------------------------------------
Net income (loss) to ordinary
shareholders $ 22.0 $ 8.5 $ (93.2)
======================================================================
Weighted average number of
ordinary shares outstanding
during the year (in millions) 39.664 39.161 38.828
======================================================================
Income (loss) per ordinary share
From continuing operations $ 0.56 $ 0.30 $ (2.09)
After discontinued operations $ 0.56 $ 0.22 $ (2.40)
======================================================================
</TABLE>
The calculation of net income per ordinary share on a fully diluted
basis assumes the exercise of outstanding stock options if such action
would result in dilution of earnings per share. In 1997, fully diluted net
income per ordinary share was approximately $0.54.
- ----------------------------------------------------------------------------
- 53 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
13. PENSION PLANS
The Company and its subsidiaries have various defined
benefit pension plans available to substantially all permanent
full-time employees. The total pension expense for 1997
amounted to $2.9 (1996 - $2.8; 1995 - $3.5) and is comprised
of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C>
Current service costs $ 2.4 $ 2.3 $ 2.3
Interest costs on projected
benefit obligation 4.5 4.1 4.5
Return on assets held
in the plans (4.3) (4.5) (6.2)
Net amortization and deferral .3 .9 2.9
--------------------------------------------------------------------
$ 2.9 $ 2.8 $ 3.5
====================================================================
</TABLE>
The actuarial present value of accrued pension benefits
represents the discounted value of benefits expected to be paid to
plan members, based on projected salaries prorated on service. No
escalation of salaries is used to determine the actuarial present
value of accrued pension benefits where the pension benefit is fixed
and subject to renegotiation.
Certain key assumptions used in determining both the pension
expense for 1997, and the actuarial present value of accrued pension
benefits as at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Canadian U.S.
Plans Plans
---------------------------------------------------------------------
<S> <C> <C>
Discount rate 8.0% 7.5%
Rate of increase of compensation levels 6.0% 4.5%
Expected long-term rates of return on plan assets 8.0% 9.0%
---------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
- 54 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
13. PENSION PLANS (CONT'D)
The status of pension plans at December 31, 1997, is as
follows:
<TABLE>
<CAPTION>
Canadian U.S.
Plans Plans
-------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
Vested benefit obligations $ 13.6 $ 36.9
Nonvested benefit obligations - 3.2
-------------------------------------------------------------------
Accumulated benefit obligations 13.6 40.1
Additional amounts related to
projected salary and wage increases .5 9.2
-------------------------------------------------------------------
Total projected benefit obligations 14.1 49.3
Plan assets at market value 16.6 43.7
-------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligations 2.5 (5.6)
Unrecognized net (gain) loss (1.5) 2.7
Unrecognized prior service cost .2 1.4
Unrecognized net (asset) obligation (.6) 1.1
--------------------------------------------------------------------
Prepaid (accrued) pension cost $.6 $(.4)
====================================================================
</TABLE>
- ---------------------------------------------------------------------------
- 55 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
14. BUSINESS SEGMENTS
The following is an analysis of certain financial
information by business lines and geographical areas for the three
years ended December 31, 1997, 1996 and 1995 as it relates to
operating revenue, operating profit (loss), identifiable assets,
capital expenditures and depreciation and amortization of intangibles.
Operating profit is total revenue less operating expenses which
includes an allocation of corporate expenses. Identifiable assets
include only those assets directly identifiable with those
operations.
<TABLE>
<CAPTION>
Operating Revenue Operating Profit (Loss)
- --------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Heating and cooling
Canada $ 74.0 $ 76.8 $ 79.0 $ .3 $ 3.3 $ (1.0)
United States 556.3 564.7 453.6 41.2 30.2 (38.3)
- --------------------------------------------------------------------------
630.3 641.5 532.6 41.5 33.5 (39.3)
Corporate .4 .4 .2 - (.1) (4.0)
- --------------------------------------------------------------------------
$630.7 $641.9 $532.8 $41.5 $33.4 $(43.3)
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Amortization of
Identifiable Capital Intangibles and
Assets Expenditures Depreciation
- -----------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Heating
and cooling
Canada $ 43.8 $ 46.5 $ 42.2 $ 1.4 $ .4 $ .6 $ .9 $ .6 $ .6
United States 293.1 280.4 251.0 7.1 11.4 23.9 14.2 15.1 17.7
- -----------------------------------------------------------------------------------------
336.9 326.9 293.2 8.5 11.8 24.5 15.1 15.7 18.3
Corporate 15.1 18.1 25.0 - - - - - .5
- -----------------------------------------------------------------------------------------
$352.0 $345.0 $318.2 $ 8.5 $11.8 $24.5 $15.1 $15.7 $18.8
Discontinued ===================================================
Steel Pipe
Operation - - 27.6
- --------------------------------------
$352.0 $345.0 $345.8
======================================
</TABLE>
- ----------------------------------------------------------------------------
- 56 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES
(a) ICP (USA) has been involved in paying the costs of assessing the
extent of, and remediating, environmental contamination at its
Lewisburg manufacturing facility caused by a sudden and accidental
spill in 1980. ICP (USA) has paid for certain investigative
activities and remediation at the manufacturing facility as well
as off-site drum storage locations. At December 31, 1997, the
costs of the remainder of the environmental cleanup, which
management believes are reasonably determinable over a ten year
period, were discounted at 5.5%. At December 31, 1997, ICP (USA)
has an accrual of $3.1 for the cost of this cleanup, of which $2.7
is included in Environmental Liabilities and $.4 in Accrued
liabilities.
The undiscounted cash flows are estimated to be as follows:
<TABLE>
<CAPTION>
----------- ------
Year
----------- ------
<S> <C>
1998 $ .4
1999 .7
2000 .2
2001 .2
2002 .2
Thereafter 1.6
-----
$ 3.3
=====
</TABLE>
In connection with the environmental remediation at the off-site
drum storage locations, ICP (USA) has entered into a cost-sharing
agreement with the previous owner. This agreement calls for each
entity to bear fifty percent of the investigation, cleanup,
monitoring, removal and treatment of the existing drum storage
sites. Additionally, in the event that other drum storage sites
are discovered, ICP (USA) and the previous owner shall bear the
additional costs at a ratio of sixty percent to forty percent,
respectively. The estimated costs to clean up the existing drum
storage sites are included in the amounts detailed above.
- --------------------------------------------------------------------------
- 57 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
(b) In 1991, the Company and Flying J, Inc. ("Flying J") entered into
a cost sharing agreement whereby the Company will participate with
Flying J in the financing of future cleanup activities for
environmental contamination at various refinery sites sold by the
Company to Flying J in 1980. This settlement does not affect
claims by Flying J or the Company against third parties who may be
responsible for contribution to refinery cleanup costs. In 1991,
the Company also reached a settlement with several of its insurance
carriers whereby the insurers will reimburse the Company for a
portion of the expenses the Company will incur in the cleanup
activities at the refineries. Ongoing cleanup activities at four
refinery sites are at different regulatory stages.
Although the scope of the projects is becoming better understood
and defined with the various regulatory agencies, the ultimate
scope of the projects remains uncertain and it is not possible to
definitively estimate the ultimate costs of remediation of such
environmental contamination. At December 31, 1997, the Company has
an accrual of $11.0 for its estimated share of future cleanup
costs, of which $10.2 is included in Environmental Liabilities and
$.8 in Accrued liabilities. The Company has offsetting receivables
due from insurers of $5.0 and $1.8 which are included in Other
Assets and Accounts receivable, respectively.
The undiscounted cash flows are expected to be as follows:
<TABLE>
<CAPTION>
----------- --------
Year
----------- --------
<S> <C>
1998 $ .8
1999 .8
2000 1.5
2001 .5
2002 .5
Thereafter 6.9
--------
$ 11.0
========
</TABLE>
Based on current information prepared by independent environmental
consultants, the Company's share of the cost of environmental
cleanup, discounted at 5.5% is currently estimated to be
approximately $7.2 over the next 21 years. The expected
insurance recoveries discounted at 5.5% are currently estimated to
be approximately $3.6 over the next 21 years.
- ----------------------------------------------------------------------------
- 58 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
(c) In February 1995, an action was commenced against
ICP (Canada) in the Ontario Court (General Division)
(the "Court"), for damages for breach of contract or
negligence in the amount of $4.9 (Cdn $7.0 million), plus
interest and costs, arising out of alleged defective cooling
banks which were designed, manufactured and delivered by Unifin
International, a former division of ICP (Canada) ("Unifin"),
to the plaintiffs between 1981 and 1984.
The Company has filed a statement of Defense with the Court that
denies the plaintiffs' allegations and intends to vigorously
defend its position against the claim. The Company has notified
its primary and umbrella liability insurance carriers for their
possible involvement with this claim. The Company believes that
it has insurance coverage for this claim.
In a similar action, ICP (Canada) was served with an Amended
Summons on January 22, 1998 in an action commenced in the
Supreme Court of New South Wales, Sydney Registry ("Supreme
Court"), alleging that Unifin designed, manufactured and supplied
defective oil coolers to a generator/transformer project in
Australia. The plaintiff pleads that Unifin's negligence caused
the oil coolers to produce aluminum alloy metal contamination of
the transformer cooling oil, in turn causing major damage to the
generators/transformers necessitating major repairs in the amount
of at least approximately $9.0 (Aus $14.0 million).
The Company was not represented on the hearing of an application
for leave to amend the Summons and intends to move the Supreme
Court to contest its jurisdiction, and set aside the substitution
and service of the Amended Summons. While it is too early to
evaluate the merits of the plaintiff's claim against it, the
Company believes that the plaintiff's action should be heard in
the Ontario Court,if at all, and consolidated with the similar
February 1995 action brought in Ontario which is based on
substantially the same allegations of fact.
- ---------------------------------------------------------------------------
- 59 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (CONT'D)
(d) The Company leases certain facilities and equipment under
noncancelable operating leases. Lease rental expense during the
current year amounted to $4.0 (1996 - $5.9; 1995 - $6.8). The
approximate aggregate minimum annual rentals under long-term leases
in future years, excluding capital leases, at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
----------- ------
Year
----------- ------
<S> <C>
1998 $ 2.8
1999 2.0
2000 1.6
2001 .6
2002 .4
Thereafter .6
------
$ 8.0
======
</TABLE>
(e) The Company and its subsidiaries are parties to various other
claims and lawsuits. The Company believes that such proceedings
will not have a material effect on the Company's financial position
or future operating results, although no assurance can be given
with respect to the ultimate outcome for any such litigation.
16. DISCONTINUED OPERATIONS
There were no discontinued operations in 1997. In the
consolidated statements of income (loss), discontinued operations
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Steel Pipe Operations $ (3.1) $ (14.3)
Settlement of Former Resources Claim - 2.9
Utilization of Prior Years' Tax Losses - 1.3
Write-off of Deferred Tax Debit-Flying J
Environmental Provision - (1.9)
- ------------------------------------------------------------------------
$ (3.1) $ (12.0)
========================================================================
</TABLE>
(i) STEEL PIPE OPERATIONS
On May 30, 1996, the Company sold Thompson Pipe and Steel Company,
its wholly owned steel pipe manufacturing subsidiary, for total
consideration of approximately $6.5, including the assumption of bank
indebtedness of approximately $6.1.
- -----------------------------------------------------------------------------
- 60 -<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- ----------------------------------------------------------------------
16. DISCONTINUED OPERATIONS (CONT'D)
Operating results of the Steel Pipe Operation for the five months
ended May 30, 1996, and the year ended December 31, 1995, are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------
<S> <C> <C>
Operating revenue $ 10.9 $ 37.9
---------------------------------------------------------------------
Loss before income taxes (3.1) (8.0)
(Provision for) recovery of income taxes - (.3)
---------------------------------------------------------------------
Loss from Steel Pipe Operation (3.1) (8.3)
Write-down to estimated net realizable value - (5.4)
Estimated disposal costs - (.6)
---------------------------------------------------------------------
$(3.1) $(14.3)
=====================================================================
</TABLE>
(ii) SETTLEMENT OF FORMER RESOURCES CLAIM
In December 1995, the Company received a final cash settlement
resulting from a favorable judgment relating to the Company's
former Resources Operations, which were sold in 1989. The $2.9
received has been recorded as income from discontinued operations.
(iii) UTILIZATION OF PRIOR YEARS' TAX LOSSES
The Company has utilized prior years' tax losses which resulted
from the costs incurred on the sale of the Company's Utilities
and Propane Operations in 1990 to reduce current taxes otherwise
payable from continuing operations.
(iv) WRITE-OFF OF DEFERRED TAX DEBIT - FLYING J
ENVIRONMENTAL PROVISION
In 1995, the deferred tax provision of $1.9 represents the
write-off of a deferred tax debit established in prior years.
This write-off was required since there was no longer reasonable
assurance as of December 31, 1995, that the timing differences
supporting this deferred tax debit would reverse.
- --------------------------------------------------------------------------
- 61 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
17. ASSET WRITEDOWNS AND RESTRUCTURING COSTS
Through the continuation of the business process
reengineering efforts which began in 1993, ICP (USA) identified
in 1995 certain fixed assets which were no longer considered
to be economically viable to the production process. These
assets included a coil delivery system with a carrying value of
$3.4, an automated paint system with a carrying value of $4.1,
and other idle assets with a carrying value of $1.2. ICP (USA)
recognized an impairment loss on these assets of $8.7 which was
included in asset writedowns and restructuring costs in 1995.
In 1995, ICP (Canada) wrote down the carrying value of idle
assets, comprised of machinery and equipment by $1.4 to orderly
liquidation value. This writedown was also included in asset
writedowns and restructuring costs for 1995.
During 1995, the restructuring and reengineering programs
resulted in $2.2 of severance and benefits expense at ICP (USA).
In addition, reductions in salaried personnel at ICP (Canada)
resulted in severance costs of $1.1. Finally, the Company's
decision in December 1995 to move its Canadian Corporate head
office to Lewisburg, Tennessee, resulted in severance and other
retirement benefits of $2.8. The restructuring costs totaling
$6.1 were partially offset by a reduction of prior years'
restructuring accruals of $.7, resulting in a 1995 restructuring
charge of $5.4 which was included in asset writedowns and
restructuring costs.
A rollforward of the restructuring cost accrual is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Balance - Beginning of
the year $ 2.4 $ 6.1 $ 3.6
Restructuring cost provision - - 6.1
Reversals of prior years'
accruals (.4) - (.7)
Payments (.6) (3.7) (2.9)
----------------------------------------------------------------
Balance - End of the year $ 1.4 $ 2.4 $ 6.1
================================================================
</TABLE>
- ---------------------------------------------------------------------
- 62 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
18. DETAILS OF CASH PROVIDED BY (USED FOR) OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>
(a) ITEMS NOT INVOLVING CURRENT
CASH FLOWS
Depreciation and
amortization $ 16.4 $ 17.5 $ 20.1
Deferred income taxes - - 11.4
Asset writedowns - - 10.1
Provision for bad debts .9 2.8 9.7
Write-off of debt
issuance costs - .6 2.1
Other - - 1.0
----------------------------------------------------------------------
$ 17.3 $ 20.9 $ 54.4
======================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C>
(b) CHANGES IN WORKING CAPITAL
Accounts and note receivable $(37.5) $ 5.7 $ 33.8
Inventories 10.2 (14.1) 59.9
Accounts payable, accrued
liabilities and
product warranty 10.2 (15.3) 8.3
Other (3.0) 5.3 (4.7)
-----------------------------------------------------------------------
$(20.1) $(18.4) $ 97.3
=======================================================================
</TABLE>
- ------------------------------------------------------------------------
- 63 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S.
ACCOUNTING PRACTICES
Accounting principles adopted by the Company as reflected in
these consolidated financial statements in accordance with Canadian
GAAP are generally consistent with accounting principles accepted in
the United States ("U.S. GAAP") with certain exceptions. The
following reconciliations reflect the differences in these
accounting principles where applicable to the Company. If accounting
principles generally accepted in the United States were followed, the
effect on the consolidated financial statements would be:
(a) Net income (loss) in accordance with U.S. GAAP
<TABLE>
<CAPTION>
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Income (loss) from continuing
operations (as reported) $ 22.0 $ 11.6 $(81.2)
U.S. GAAP adjustments
Accounting for income taxes (1) (.7) (.7) 2.8
Postretirement benefits, net of
income tax recovery of nil in
1997 (1996 - nil; 1995 - $.5) (2) (1.9) (1.8) (.8)
Loss on early extinguishment of debt,
net of income tax recovery of nil
in 1996 and 1995 (3) - .6 .9
Utilization of prior years' tax
losses from discontinued
operations (4) - - 1.3
Discount on sale of receivables,
net of income tax provision of $.8
in 1995 (5) - - 1.3
----------------------------------------------------------------------
Adjusted income (loss) from
continuing operations 19.4 9.7 (75.7)
Loss from discontinued operations,
net of income taxes - (3.1) (13.3)
-----------------------------------------------------------------------
Income (loss) before
extraordinary item 19.4 6.6 (89.0)
Extraordinary item
Loss on early extinguishment of
debt, net of income tax recovery
of nil in 1996 and 1995 (3) - (.6) (.9)
-----------------------------------------------------------------------
Net income (loss) under U.S. GAAP $ 19.4 $ 6.0 $(89.9)
=======================================================================
</TABLE>
- --------------------------------------------------------------------------
- 64 -<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S.
ACCOUNTING PRACTICES (CONT'D)
<TABLE>
<CAPTION>
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Weighted average number of
ordinary shares outstanding
during the year under U.S.
GAAP (in millions)
Basic 39.664 39.161 38.828
Diluted 40.549 39.254 38.828
Basic income (loss) per
ordinary share under
U.S. GAAP (in dollars)
From continuing operations $ 0.49 $ 0.25 $(1.95)
Before extraordinary item $ 0.49 $ 0.17 $(2.29)
After extraordinary item $ 0.49 $ 0.15 $(2.32)
Diluted income (loss) per
ordinary share under
U.S. GAAP (in dollars)
From continuing operations $ 0.48 $ 0.25 $(1.95)
Before extraordinary item $ 0.48 $ 0.17 $(2.29)
After extraordinary item $ 0.48 $ 0.15 $(2.32)
</TABLE>
- ---------------------------------------------------------------------
- 65 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. ACCOUNTING
PRACTICES (CONT'D)
(1) This reconciliation reflects the application of Statement of
Financial Accounting Standard ("SFAS") No. 109 "Accounting
for Income Taxes." Additionally, the following table outlines
the significant components of the Company's deferred tax assets
(liabilities) as at December 31, 1997 and 1996, under U.S. GAAP
disclosure requirements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1997 UNITED STATES CANADA TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Net operating losses and other carryforwards $ 8.7 $ 12.3 $ 21.0
Product liability and warranty 10.6 .8 11.4
Allowance for doubtful accounts 1.6 - 1.6
Other tax assets 11.9 1.7 13.6
- ------------------------------------------------------------------------------------------
Total deferred tax assets before allowance 32.8 14.8 47.6
Valuation allowance for deferred tax assets (18.2) (14.3) (32.5)
- ------------------------------------------------------------------------------------------
Deferred tax assets 14.6 .5 15.1
- ------------------------------------------------------------------------------------------
Deferred tax liabilities
Tax over book depreciation (12.6) - (12.6)
Other tax liabilities (1.4) (.5) (1.9)
- ------------------------------------------------------------------------------------------
Total deferred tax liabilities (14.0) (.5) (14.5)
- ------------------------------------------------------------------------------------------
Net deferred tax assets $ .6 $ - $ .6
==========================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------
DECEMBER 31, 1996 UNITED STATES CANADA TOTAL
- ------------------------------------------------------------------------------------------
Deferred tax assets
Net operating losses and other carryforwards $ 14.0 $ 12.5 $ 26.5
Product liability and warranty 10.1 .9 11.0
Allowance for doubtful accounts 2.0 - 2.0
Other tax assets 14.1 1.9 16.0
- ------------------------------------------------------------------------------------------
Total deferred tax assets before allowance 40.2 15.3 55.5
Valuation allowance for deferred tax assets (26.3) (14.8) (41.1)
- ------------------------------------------------------------------------------------------
Deferred tax assets 13.9 .5 14.4
- ------------------------------------------------------------------------------------------
Deferred tax liabilities
Tax over book depreciation (12.7) - (12.7)
Other tax liabilities (1.2) (.5) (1.7)
- ------------------------------------------------------------------------------------------
Total deferred tax liabilities (13.9) (.5) (14.4)
- ------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ - $ -
==========================================================================================
</TABLE>
- ----------------------------------------------------------------------
- 66 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S.
ACCOUNTING PRACTICES (CONT'D)
(2) This reconciliation reflects the application of SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than
Pensions", for the Company's U.S. plans. The standard
requires, among other things, the recognition of postretirement
benefits on an accrual basis as opposed to the practice of
recognizing the expense on a cash basis. The application of the
new accounting method, prospectively, results in the transition
obligation of U.S. $9.7 million being amortized on a
straight-line basis over 25 years for hourly employees and 21
years for salaried employees. The effect of applying SFAS 106 was
to decrease net income by $1.9 and $1.8 for 1997 and 1996,
respectively, and increase the net loss by $.8 in 1995. Under
Canadian GAAP, the Company expenses such benefits as incurred.
The net periodic cost for postretirement health care benefits
during 1997, 1996, and 1995, includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Service cost $ 1.0 $ 1.1 $ .7
Interest cost 1.4 1.4 1.3
Amortization of
transition obligation .6 .6 .5
-------------------------------------
$ 3.0 $ 3.1 $ 2.5
=====================================
</TABLE>
In general, retiree health benefits are paid as covered expenses
are incurred. The following table sets forth the funded status
for the Company's postretirement health care plan at December 31,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligations:
Retirees $ 8.8 $ 6.2
Fully eligible active plan
participants 2.7 2.5
Other active plan participants 10.5 10.3
------------------------
Total obligation 22.0 19.0
Unrecognized:
Transition obligation (6.8) (8.1)
Change in actuarial assumptions (7.1) (5.0)
-------------------------
Accrued postretirement benefit $ 8.1 $ 5.9
=========================
</TABLE>
- ---------------------------------------------------------------------
- 67 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND
U.S. ACCOUNTING PRACTICES (CONT'D)
(2) The assumed discount rate was 7.5% and 7.75% at December 31,
1997 and 1996, respectively, and the rate of increase in per
capita costs of covered health care benefits is assumed to
be 6% in 1997, decreasing gradually to 5% by the year 1999.
Increasing the assumed health care cost trend rate by 1
percentage point would increase the accumulated postretirement
obligation as of December 31, 1997, by approximately 13% and
increase net periodic postretirement benefit cost by
approximately 16% in 1997.
(3) Under Canadian GAAP, this item is included in loss from
continuing operations. Under U.S. GAAP, such an item is
treated as an extraordinary item.
(4) There are differences between Canadian and U.S. GAAP in the
presentation of the Statement of Changes in Financial Position
and the Statements of Income (Loss). Under U.S. GAAP, the
utilization of prior years' tax losses is included in loss
from continuing operations in 1995. Accordingly, cash
provided by continuing operations, under U.S. GAAP for
the year ended December 31, 1995, was $71.8. In addition,
U.S. GAAP defines cash and cash equivalents to include cash
and short-term, highly liquid investments, whereas Canadian
GAAP defines cash to include cash, net of short-term
borrowings.
(5) There are differences between Canadian and U.S. GAAP in the
recognition of a transfer of receivables as a sale. Under
Canadian GAAP, for a transfer of receivables to be recognized
as a sale, the transferor must transfer the significant risks
and rewards of ownership of the receivables, whereas U.S. GAAP
focuses on the control of the assets involved.
(b) Additional disclosure required under U.S. GAAP
(1) SFAS 123 permits the Company to continue to apply the recognition
and measurement principles of Accounting Principles Board Opinion
No. 25., "Accounting for Stock Issued to Employees," to its stock
option plan. If the compensation cost for the Company's stock
option plan had been determined based on the fair value at the
grant dates for the 1997 and 1996 options, consistent with the
method provided in SFAS 123, the Company's 1997 and 1996 pro
forma net income and earnings per share would have been $18.5
and $5.7, and $0.47 and $0.15, respectively. The weighted
average fair values of the 1997 and 1996 option grants are
estimated on the dates of grant using the Black-Scholes option
pricing model with the following assumptions: expected volatility
for 1997 and 1996 was 70 percent and 53 percent, respectively;
risk-free interest rates for 1997 and 1996 were 5.7% and 6.6%,
respectively; and expected lives of seven years for both years.
The weighted average fair values of the options granted in 1997
and 1996 were Cdn. $4.39 and Cdn. $1.46, respectively.
- ------------------------------------------------------------------------
- 68 -
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997
(With Comparative Figures for the Years
Ended December 31, 1996 and 1995 - note 20)
(In Millions of U.S. Dollars Unless Otherwise Stated)
- -----------------------------------------------------------------------
19. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S.
ACCOUNTING PRACTICES (CONT'D)
(2) Research and development expenses in 1997, 1996 and 1995 were
$3.0, $2.9, and $2.8, respectively.
(c) Consolidated Balance Sheets
<TABLE>
<CAPTION>
--------------------------------------------------
AMOUNTS AS ADJUSTED
AMOUNTS REPORTED UNDER TO CONFORM WITH U.S.
CANADIAN GAAP GAAP
--------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid
expenses
and other 7.6 6.0 8.8 7.2
Fixed assets 93.6 100.2 95.5 102.3
Intangible
assets 11.0 12.1 14.8 16.3
Accrued
liabilities 26.5 28.2 30.8 32.4
Other long-term
liabilities 5.1 4.2 13.2 9.0
Deficit (116.4) (138.4) (118.2) (140.6)
Shareholders'
equity 51.5 28.8 49.7 26.6
</TABLE>
20. PRIOR YEARS COMPARATIVE FIGURES
The consolidated financial statements as at December 31, 1996 and
for the years ended December 31, 1996 and 1995, were audited by
another public accounting firm which expressed their opinion without
reservation on those consolidated financial statements in their report
dated February 11, 1997.
- 69 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There are no Company disclosures required by Item 304 of Regulation
S-K, 17 C.F.R. Section 229.304.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the 1998 Proxy Statement is incorporated herein by
reference. See also Item 4A, "Executive Officers of the Registrant" in Part
I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
"Compensation of Executive Officers" contained in the 1998 Proxy Statement
is incorporated herein by reference. The matters labeled "Report of the
Compensation and Pension Committee" and "Performance Graphs" contained in
the 1998 Proxy Statement shall not be deemed incorporated by reference into
this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Certain Beneficial Owners and Management" contained
in the 1998 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
"Certain Transactions" contained in the 1998 Proxy Statement is incorporated
herein by reference.
- 70 -
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K:
(1) Financial Statements:
Auditors' Reports
Consolidated Balance Sheets -
December 31, 1997 and December 31, 1996.
Consolidated Statements of Income (Loss) and Deficit -
Years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
Consolidated Statements of Changes in Financial Position -
Years ended December 31, 1997,
December 31, 1996, and December 31, 1995.
Notes to Consolidated Financial Statements -
Years ended December 31, 1997,
December 31, 1996 and December 31, 1995.
(2) Schedules:
Auditors' Reports
Schedule I - Condensed Financial Information of the
Registrant for the Years Ended December 31,
1997, 1996 and 1995.
Schedule II - Consolidated Valuation and Qualifying
Accounts for the Years Ended December 31,
1997, 1996 and 1995.
All other schedules for which provision is made in the applicable
accounting regulation of the Commission are not required under the
related instructions or are inapplicable, and therefore have been
omitted.
(3) Those exhibits required to be filed as Exhibits to this
Annual Report on Form 10-K pursuant to Item 601 of Regulation S-K, 17 C.F.R.
Section 229.601, as follows:
3(i), 4.1 Articles of Incorporation of International Comfort
Products Corporation filed as Exhibit 3(i)/4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
3(ii), 4.2 Bylaws of International Comfort Products Corporation filed
as Exhibit 1.2 to the Company's Annual Report on Form 20-F
for the year ended December
- 71 -
<PAGE>
31, 1993 filed with the Commission on June 29, 1994,
and incorporated herein by this reference
4.3 Indenture dated as of March 1, 1993 between International
Comfort Products Corporation (USA) (f/k/a Inter-City
Products Corporation (USA)) ("ICP (USA)") and United
States Trust Company of New York, as trustee (and
correlative form of Certificate, form of Mortgage, form of
Pledge and Security Agreement and form of Intellectual
Property Security Agreement) relating to ICP (USA)'s
9 3/4% Senior Secured Notes due 2002, filed as Exhibit 4.1
to Amendment No. 3 to ICP (USA)'s Registration Statement
on Form S-1 filed with the Commission on March 2, 1993,
and incorporated herein by this reference
4.4 Master Trust Pooling and Service Agreement, dated as of
July 25, 1996 among Inter-City Products Receivables
Company, L.P.("ICP-Receivables"), ICP (USA) and LaSalle
National Bank, as Trustee filed as Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
4.5 Series 1996-1 Supplement to Master Trust Pooling and
Service Agreement, dated as of July 25, 1996 among ICP
-Receivables, ICP (USA) and LaSalle National Bank, as
Trustee (and correlative form of Class A (Series 1996-1)
Certificate and form of Class B (Series 1996-1)
Certificate, and form of Guaranty from ICP (USA) filed as
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
4.6 Receivables Purchase Agreement dated as of July 25, 1996
among ICP (USA), Inter-City Products Partner Corporation
("ICP-Partner") and ICP-Receivables filed as Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 filed with the Commission
on November 14, 1997, and incorporated herein by this
reference
4.7 Certificate Purchase Agreement (Series 1996-1, Class A)
dated as of July 25, 1996 among ICP-Receivables, ICP
(USA), the Purchasers named therein and The Chicago
Corporation, as Agent filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
4.8 Certificate Purchase Agreement (Series 1996-1, Class B)
dated as of July 25, 1996 among ICP-Receivables, ICP (USA)
and Argos Funding Corp. filed as Exhibit 4.8 to the
Company's Quarterly Report on Form 10-Q for the quarter
- 72 -
<PAGE>
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
4.9 First Amendment to Certificate Purchase Agreement (Series
1996-1, Class A) dated as of December 1, 1996 among ICP
-Receivables, ICP (USA), the Purchasers named therein and
The Chicago Corporation, as Agent filed as Exhibit 4.9 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 filed with the Commission
on November 14, 1997, and incorporated herein by this
reference
4.10 First Amendment to Receivables Purchase Agreement and
Second Amendment to Certificate Purchase Agreement (Series
1996-1, Class A) dated as of January 27, 1997 among ICP
-USA, ICP-Partner, General Heating and Cooling Company,
Coastline Distribution, Inc., ICP-Receivables, Anagram
Funding Corp. and ABN AMRO Chicago Corporation filed as
Exhibit 4.10 to the Company's Quarterly Report on Form 10
-Q for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
4.11 Second Amendment to Receivables Purchase Agreement as of
September 30, 1997 among ICP (USA), ICP-Partner, General
Heating and Cooling Company, ICP-Receivables, Anagram
Funding Corp. and ABN AMRO Chicago Corporation filed as
Exhibit 4.11 to the Company's Quarterly Report on Form 10
-Q for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
10.1 Loan and Security Agreement dated as of July 18, 1997
between ICP (USA) and NationsBank, N.A. filed as Exhibit
4.12 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
10.2 International Comfort Products Corporation Employee Stock
Option Plan filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (File No. 33-90366)
filed with the Commission on March 16, 1995, and
incorporated herein by this reference
10.3 International Comfort Products Corporation Share
Compensation Arrangement for Non-Employee Directors
- 73 -
<PAGE>
10.4 International Comfort Products Corporation Long Term
Incentive Plan filed as Exhibit 10.25 to ICP (USA)'s
Registration Statement on Form S-1 (File No. 33-56238)
filed with the Commission on December 23, 1992, and
incorporated herein by this reference
10.5 Amendment to International Comfort Products Corporation
Long Term Incentive Plan filed as Exhibit 10.11 to
ICP (USA)'s Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission on March 28
1994, and incorporated herein by this reference
10.6 International Comfort Products Corporation 1997 Long Term
Incentive Plan for Senior Management
10.7 ICP (USA) Share Ownership Savings Plan filed as Exhibit
10.26 to ICP (USA)'s Registration Statement on Form S-1
(File No. 33-56238) filed with the Commission on
December 23, 1992, and incorporated herein by this
reference
10.8 Amendments to ICP (USA)'s Share Ownership Savings Plan
10.9 Retirement Plan for Salaried Employees filed as Exhibit
10.27 to ICP (USA)'s Registration Statement on Form S-1
(File No. 33-56238) filed with the Commission on
December 23, 1992, and incorporated herein by this
reference
10.10 Supplemental Retirement Benefit Agreement dated September
1, 1994 with W. Michael Clevy filed as Exhibit 10.16 to
ICP (USA)'s Annual Report on Form 10-K for the year ended
December 31, 1995 filed with the Commission on March 28,
1996, and incorporated herein by this reference
10.11 Termination Agreement with W. Michael Clevy
10.12 Termination Agreement with Stephen L. Clanton
10.13 Termination Agreement with James L. Kirwan *
10.14 Termination Agreement with Herman V. Kling *
10.15 Change in Control Agreement with David P. Cain
10.16 Change in Control Agreement with Francis C. Harrell **
10.17 Change in Control Agreement with Robert C. Henningsen **
- -------------------
* Document not filed because substantially identical to Exhibit 10.12
** Document not filed because substantially identical to Exhibit 10.15
- 74 -
<PAGE>
10.18 Change in Control Agreement with Alexander T. Lim **
10.19 Change in Control Agreement with Augusto H. Millan **
10.20 Change in Control Agreement with H. David Tayler **
10.21 Change in Control Agreement with James R. Wiese **
21 Subsidiaries of International Comfort Products Corporation
23.1 Consent of Arthur Andersen & Co., independent chartered
accountants
23.2 Consent of Coopers & Lybrand, independent chartered
accountants
27 Financial Data Schedule
99.1 Consolidated Financial Statements of International Comfort
Products Corporation (USA)
99.2 Schedule I - Condensed Financial Information
99.3 Schedule II - Consolidated Valuation and Qualifying
Accounts
- -------------------
** Document not filed because substantially identical to Exhibit 10.15
(b) No Current Reports on Form 8-K were filed by the Company during
the last quarter of the period covered by this Annual Report on Form 10-K.
(c) Exhibits -- the response to this portion of Item 14 is submitted
as a separate section of this Report. See Item 14(a).
(d) Financial Statement Schedules -- the response to this portion of
Item 14 is submitted as a separate section of this Report. See Item 14(a).
- 75 -
<PAGE>
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, on this 30th
day of March, 1998. ------
INTERNATIONAL COMFORT PRODUCTS CORPORATION
By:/s/ S. Clanton
---------------------------
Stephen L. Clanton
Senior Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on this 30th day of March, 1998.
------
SIGNATURE TITLE
/s/ Richard W. Snyder Chairman of the Board and Director
- -------------------------
(Richard W. Snyder)
/s/ W. Michael Clevy President and Chief Executive Officer
- -------------------------
(W. Michael Clevy)
/s/ David P. Cain Senior Vice President, General Counsel
- ------------------------- and Secretary
(David P. Cain)
/s/ S.L. Clanton Senior Vice President, Chief Financial
- ------------------------- Officer and Treasurer
(S.L. Clanton)
/s/ Stanley M. Beck Director
- -------------------------
(Stanley M. Beck)
/s/ William G. Davis Director
- -------------------------
(William G. Davis)
/s/ John F. Fraser Director
- -------------------------
(John F. Fraser)
/s/ Roy T. Graydon Director
- -------------------------
(Roy T. Graydon)
- 76 -
<PAGE>
/s/ Marvin G. Marshall Director
- -------------------------
(Marvin G. Marshall)
/s/ Ernest C. Mercier Director
- -------------------------
(Ernest C. Mercier)
/s/ David H. Morris Director
- -------------------------
(David H. Morris)
/s/ David A. Rattee Director
- -------------------------
(David A. Rattee)
/s/ William A. Wilson Director
- -------------------------
(William A. Wilson)
- 77 -
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit No. Description Page Number
- ---------- ---------------------------------- -----------
3(i), 4.1 Articles of Incorporation of International Comfort
Products Corporation filed as Exhibit 3(i)/4.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
3(ii), 4.2 Bylaws of International Comfort Products Corporation filed
as Exhibit 1.2 to the Company's Annual Report on Form 20-F
for the year ended December 31, 1993 filed with the
Commission on June 29, 1994, and incorporated herein by
this reference
4.3 Indenture dated as of March 1, 1993 between International
Comfort Products Corporation (USA) (f/k/a Inter-City
Products Corporation (USA)) ("ICP (USA)") and United States
Trust Company of New York, as trustee (and correlative
form of Certificate, form of Mortgage, form of Pledge and
Security Agreement and form of Intellectual Property
Security Agreement) relating to ICP (USA)'s 9 3/4% Senior
Secured Notes due 2002, filed as Exhibit 4.1 to Amendment
No. 3 to ICP (USA)'s Registration Statement on Form S-1
filed with the Commission on March 2, 1993, and
incorporated herein by this reference
4.4 Master Trust Pooling and Service Agreement, dated as of
July 25, 1996 among Inter-City Products Receivables
Company, L.P.("ICP-Receivables"), ICP (USA) and LaSalle
National Bank, as Trustee filed as Exhibit 4.4 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
4.5 Series 1996-1 Supplement to Master Trust Pooling and
Service Agreement, dated as of July 25, 1996 among ICP
-Receivables, ICP (USA) and LaSalle National Bank, as
Trustee (and correlative form of Class A (Series 1996-1)
Certificate and form of Class B (Series 1996-1)
Certificate, and form of Guaranty from ICP (USA) filed as
Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
<PAGE>
Sequential
Exhibit No. Description Page Number
- ---------- ---------------------------------- -----------
4.6 Receivables Purchase Agreement dated as of July 25, 1996
among ICP (USA), Inter-City Products Partner Corporation
("ICP-Partner") and ICP-Receivables filed as Exhibit 4.6
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 filed with the Commission
on November 14, 1997, and incorporated herein by this
reference
4.7 Certificate Purchase Agreement (Series 1996-1, Class A)
dated as of July 25, 1996 among ICP-Receivables, ICP (USA),
the Purchasers named therein and The Chicago Corporation,
as Agent filed as Exhibit 4.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997 filed with the Commission on November 14, 1997, and
incorporated herein by this reference
4.8 Certificate Purchase Agreement (Series 1996-1, Class B)
dated as of July 25, 1996 among ICP-Receivables, ICP (USA)
and Argos Funding Corp. filed as Exhibit 4.8 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 filed with the Commission on
November 14, 1997, and incorporated herein by this
reference
4.9 First Amendment to Certificate Purchase Agreement (Series
1996-1, Class A) dated as of December 1, 1996 among ICP
-Receivables, ICP (USA), the Purchasers named therein and
The Chicago Corporation, as Agent filed as Exhibit 4.9 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 filed with the Commission
on November 14, 1997, and incorporated herein by this
reference
4.10 First Amendment to Receivables Purchase Agreement and
Second Amendment to Certificate Purchase Agreement (Series
1996-1, Class A) dated as of January 27, 1997 among ICP
-USA, ICP-Partner, General Heating and Cooling Company,
Coastline Distribution, Inc., ICP-Receivables, Anagram
Funding Corp. and ABN AMRO Chicago Corporation filed as
Exhibit 4.10 to the Company's Quarterly Report on Form 10
-Q for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
<PAGE>
Sequential
Exhibit No. Description Page Number
- ---------- ---------------------------------- -----------
4.11 Second Amendment to Receivables Purchase Agreement as of
September 30, 1997 among ICP (USA), ICP-Partner, General
Heating and Cooling Company, ICP-Receivables, Anagram
Funding Corp. and ABN AMRO Chicago Corporation filed as
Exhibit 4.11 to the Company's Quarterly Report on Form 10
-Q for the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
10.1 Loan and Security Agreement dated as of July 18, 1997
between ICP (USA) and NationsBank, N.A. filed as Exhibit
4.12 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 filed with the
Commission on November 14, 1997, and incorporated herein
by this reference
10.2 International Comfort Products Corporation Employee Stock
Option Plan filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed with the
Commission on March 16, 1995, and incorporated herein by
this reference
10.3 International Comfort Products Corporation Share
Compensation Arrangement for Non-Employee Directors
10.4 International Comfort Products Corporation Long Term
Incentive Plan filed as Exhibit 10.25 to ICP (USA)'s
Registration Statement on Form S-1 (File No. 33-56238)
filed with the Commission on December 23, 1992, and
incorporated herein by this reference
10.5 Amendment to International Comfort Products Corporation
Long Term Incentive Plan filed as Exhibit 10.11 to
ICP (USA)'s Annual Report on Form 10-K for the year ended
December 31, 1993 filed with the Commission on March 28,
1994, and incorporated herein by this reference
10.6 International Comfort Products Corporation 1997 Long Term
Incentive Plan for Senior Management
10.7 ICP (USA) Share Ownership Savings Plan filed as Exhibit
10.26 to ICP (USA)'s Registration Statement on Form S-1
(File No. 33-56238) filed with the Commission on
December 23, 1992, and incorporated herein by this
reference
10.8 Amendments to ICP (USA)'s Share Ownership Savings Plan
10.9 Retirement Plan for Salaried Employees filed as Exhibit
10.27 to ICP (USA)'s Registration Statement on Form S-1
(File No. 33-56238) filed with the Commission on
December 23, 1992, and incorporated herein by this
reference
<PAGE>
Sequential
Exhibit No. Description Page Number
- ---------- ---------------------------------- -----------
10.9 Retirement Plan for Salaried Employees filed as Exhibit
10.27 to ICP (USA)'s Registration Statement on Form S-1
(File No. 33-56238) filed with the Commission on
December 23, 1992, and incorporated herein by this
reference
10.10 Supplemental Retirement Benefit Agreement dated September
1, 1994 with W. Michael Clevy filed as Exhibit 10.16 to
ICP (USA)'s Annual Report on Form 10-K for the year ended
December 31, 1995 filed with the Commission on March 28,
1996, and incorporated herein by this reference
10.11 Termination Agreement with W. Michael Clevy
10.12 Termination Agreement with Stephen L. Clanton
10.13 Termination Agreement with James L. Kirwan *
10.14 Termination Agreement with Herman V. Kling *
10.15 Change in Control Agreement with David P. Cain
10.16 Change in Control Agreement with Francis C. Harrell **
10.17 Change in Control Agreement with Robert C. Henningsen **
10.18 Change in Control Agreement with Alexander T. Lim **
10.19 Change in Control Agreement with Augusto H. Millan **
10.20 Change in Control Agreement with H. David Tayler **
10.21 Change in Control Agreement with James R. Wiese **
21 Subsidiaries of International Comfort Products Corporation
23.1 Consent of Arthur Andersen & Co., independent chartered
accountants
23.2 Consent of Coopers & Lybrand, independent chartered
accountants
27 Financial Data Schedule
99.1 Consolidated Financial Statements of International Comfort
Products Corporation (USA)
99.2 Schedule I - Condensed Financial Information
99.3 Schedule II - Consolidated Valuation and Qualifying
Accounts
- -------------------
* Document not filed because substantially identical to Exhibit 10.12
** Document not filed because substantially identical to Exhibit 10.15
<PAGE>
SHARE COMPENSATION ARRANGEMENT FOR
NON-EMPLOYEE DIRECTORS OF INTER-CITY PRODUCTS CORPORATION
Eligibility: The Chairman and all directors of the Corporation
who are not full time employees of the
Corporation ("Participating Directors") must
participate. Participating Directors must be
paid at least 20% of their aggregate annual fees
in Ordinary Shares instead of cash. For the
purposes of this Share Compensation Arrangement,
"aggregate annual fees" in respect of any
director shall include: (i) such director's
annual retainer; (ii) if such director is the
Chairman of a committee of the Board, the annual
retainer paid to such director in respect of such
service; (iii) all fees paid to such director in
respect of attendance at meetings of the Board
or a committee thereof, and (iv) if such director
is also Chairman of the Board, to the extent such
director elects to receive compensation for
services performed as Chairman in lieu of any
retainers or fees to which he is entitled by
virtue of his services as a director, all such
compensation.
Additional Participation:Participating directors may elect to receive all
or any part of their remaining entitlement to
fees in Ordinary Shares instead of cash. At, or
prior to, the first directors' meeting held in
a calendar year, each participating director must
make an election, which will be irrevocable
during the remaining portion of that year, to
receive between 20% to 100% of such directors'
annual entitlement to fees in Ordinary Shares.
Any director who does not make an election at,
or prior to , the first meeting of directors in
a given year will be deemed to have elected to
receive 20% of such director's annual
remuneration in Ordinary Shares.
Method of Election: Notice of a director's election to receive more
than 20% of such director's annual fees in
Ordinary Shares instead of cash must be provided
in writing to the Secretary of the Corporation
at, or prior to, the first meeting of directors
in a calendar year.
Receipt of Shares: Ordinary Shares will be issued to participating
directors at the end of each calendar quarter.
Number of Shares: The number of Ordinary Shares which an eligible
director will be issued at the end of a calendar
quarter will be equal to: the aggregate fees for
which such director is entitled,
<PAGE>
divided by the average closing price of the
Ordinary Shares on the stock exchange prescribed
by the board of directors, during the last five
trading days of the calendar quarter, multiplied
by the 20% to 100% based on the election of the
director as described above.
Form of Payment: Compensation in the form of a share certificate
will be sent to you soon after the close of each
quarter. You may either redeem the certificate
immediately with your broker of choice or you may
retain the certificate for redemption at a later
time.
Termination: The Share Compensation Arrangement will expire
on the earlier of: (i) its termination by the
board of directors, or (ii) 250,000 Ordinary
Shares having been issued to directors pursuant
to the Arrangement.
<PAGE>
Inter-City Products Corporation
1997 LONG-TERM INCENTIVE PLAN
For Senior Management
<PAGE>
ARTICLE I
General
1.1 Establishment of the Plan
The Board of Directors of Inter-City Products Corporation hereby adopts
this Plan which shall be known as the Inter-City Products Corporation,
1997 Long-term Incentive Plan (the "Plan").
1.2 Plan Purpose
The purpose of this Plan is to attract and retain the best possible
executive talent and to motivate senior management employees to focus
attention on longer-term objectives and strategic initiatives, and to
further align their interests with those of the shareholders of Inter-City
Products Corporation. This Plan will provide deferred compensation
opportunities to certain senior managers of the Company. Such deferred
compensation shall be based on the award of Performance Units, the value
of which is related to the appreciation in the value of the common stock
of the company.
1.3 Plan Administration
(a) The Plan shall be Administered by the Compensation and Pension
Committee ("Committee") of the Board Of Directors. Subject to the
Committee's approval, the Chief Executive Officer of Inter-City Products
Corporation ("CEO") may assist in, and make recommendations regarding, the
administration of the Plan. The Senior Vice President, Human Resources
of Inter-City Products Corporation will be responsible for the day-to-day
administration of the Plan following any administrative guidelines
approved from time-to-time by the Committee.
(b) Subject to the limitations of the Plan, the Committee shall, based on
recommendations by the CEO: (i) select from the senior management
employees of Inter-City Products Corporation those who shall participate
in the Plan and be granted Performance Units ("Participants"), (ii) make
awards in such forms and amounts as it shall determine, (iii) impose such
limitations, restrictions, and conditions upon such awards as it shall
deem appropriate, (iv) interpret the Plan and adopt, amend, and rescind
administrative guidelines and other rules and regulations relating to the
Plan, (v) correct any defect or omission or reconcile any inconsistency
in this Plan or in any award granted hereunder, and (vi) make all other
necessary determinations and take all other actions necessary or advisable
for the implementation and administration of the Plan. The Committee's
determinations on matters within its authority shall be conclusive and
binding upon Inter-City Products Corporation and all other Persons.
(c) All expenses associated with the Plan shall be borne by Inter-City
Products Corporation subject to such allocation to its subsidiaries,
affiliates, and operating units as it deems appropriate.
Page 1
<PAGE>
ARTICLE II
Definitions
2.1 Definitions:
Whenever used herein, the following terms shall have the meaning set forth
below, unless otherwise expressly provided.
(a) "Award Trigger" shall mean a minimum level of performance, which the
Committee may establish for a Performance Period, that must be achieved
before calculated awards are payable.
(b) "Board" shall mean the Board of Directors of Inter-City Products
Corporation or the Board of Directors of a subsidiary or affiliate as
authorized by the Board of Directors of Inter-City Products Corporation.
(c) "Change-in-Control" shall mean a transaction or event or series of
transactions or events involving the Company or the outstanding voting
shares of the Company, proposed or commenced, which will result in (i) a
change-in-control or effective control of the Company; (ii) all or
substantially all of the outstanding voting shares of the Company being
acquired or exchanged, whether pursuant to an amalgamation, arrangement,
consolidation, or other similar transaction, for consideration which
reflects a determination of the value of the outstanding voting shares of
the Company, by a person or persons dealing at-arms-length with the
Company; or (iii) a sale of substantially all of the Company's assets to
a person or persons dealing at-arms-length with the company.
(d) "Committee" shall mean members the Compensation and Pension Committee,
who are not Plan Participants, who have been appointed by the Board, and
who have been given responsibility for administration of the Plan.
(e) "For-cause" Termination shall mean termination of a Participant's
employment by the Company, due to (i) the Participant's serious, willful
misconduct in respect of, or failure to perform, his/her duties; (ii)
commission of a felony or perpetration of a material fraud or material
crime involving moral turpitude; (iii) willful failure to comply with any
material applicable laws with respect to the execution of the Company's
business; (iv) theft, fraud, embezzlement, dishonesty, or other conduct
which has resulted, or is likely to result in material economic damage to
the Company, or resulted or intended to result in direct or indirect gain
to, or personal enrichment of the Participant.
(f) "Formula Award" shall mean the award, earned in the form of
Performance Units, by a Participant under this Plan, and based on actual
three-year results against performance goals established for the
Performance Period.
Page 2
<PAGE>
(g) "Grant Price" shall mean the value established by the Committee at the
beginning of a Performance Period, from which future common stock price
shall be compared to the determine the appreciated value for purposes of
determining the value of Performance Units attributable to that
Performance Period. Grant Price for each Performance Period shall appear
in the attached Individual Award Calculation Worksheet for each
Participant.
(h) "Inter-City Products Corporation" shall mean Inter-City Products
Corporation and its subsidiaries and affiliates.
(i) "Maximum Award" shall mean shall mean the award, in the form of
Performance Units, earned by a Participant when Maximum Performance levels
are met.
(j) "Maximum Performance" shall mean the achievement of "maximum" results
against performance goals for a Plan Year, for which Maximum Awards are
payable, and above which no additional award is payable.
(k) "Participant" shall mean a senior manager employed by Inter-City
Products Corporation, meeting the defined eligibility criteria for
participation in the Plan, and approved for participation by the
Committee.
(l) "Performance Period" shall mean a three calendar-year period
designated by the committee.
(m) "Performance Unit" shall mean a fictional unit of deferred cash
compensation credited to a participant's Performance Unit Account, whose
value is determined by the increase in price of common stock over the
Grant Price, until such time as cash payment of the value of the
Performance Unit Account is made to the participant.
(i) Three-year Performance Units shall mean those Performance
Units awarded, valued and paid at the end of a Performance
Period.
(ii) Long-term Performance Units shall mean those Performance Units
awarded at the end of a Performance Period, but paid upon
retirement, according to a vesting schedule, and subject to
forfeiture. Eligibility for Long-term Performance Units is
generally limited to The CEO and Senior Vice Presidents of the
Company.
(n) Performance Unit Account shall mean the record of Long-term
Performance Units awarded to a Participant under the Plan. The
Performance Unit Account is solely for accounting purposes and shall not
require a segregation of Company assets.
(o) "Target Award" shall mean shall mean the award, in the form of
Performance Units, earned by a Participant when Target Performance levels
are met.
Page 3
<PAGE>
(p) "Target Performance" shall mean the achievement of expected or
"target" results against performance goals for a Performance Period, and
for which Target Awards are payable.
(q) "Threshold Award" shall mean the award, in the form of Performance
Units, earned by a Participant when Threshold Performance levels are met.
(r) "Threshold Performance" shall mean the achievement of the minimum or
"threshold" results against performance goals for a Performance Period,
for which Threshold Awards are payable, and below which no award is
payable.
ARTICLE III
Eligibility and Participation
3.1 Eligibility
Eligibility for participation in the Plan shall be limited to the Chief
Executive Officer and those senior managers of Inter-City Products
Corporation that meet criteria established from time to time by the
Committee.
3.2 Participation
Participation in the Plan shall be based on recommendations by the Chief
Executive Officer of Inter-City Products Corporation or his designee,
subject to the approval of the Committee.
3.31 Partial Year Participation
Participants who become eligible after the beginning of a Performance
Period, but prior to the first calendar day of the last year of the
Performance Period, may participate for the Performance Period on a pro-
rata basis determined by the number of calendar months of actual
participation. Such situations may include, but are not limited to (i)
new hires, and/or (ii) when an executive is promoted or transferred from
an ineligible position.
3.32 Committee Discretion
The Committee, in its sole discretion, retains the right to prohibit or
allow participation in the initial Performance Period of eligibility for
any of the aforementioned Employees. Participants for each Performance
Period shall appear in the attached Individual Award Calculation Worksheet
for each Participant.
Page 4
<PAGE>
ARTICLE IV
Annual Award Determination
4.1 Award Trigger
Prior to the beginning of the Performance Period, but no later than the
last calendar day of the first year of the Performance Period, the
Committee may establish an Award Trigger. The trigger will generally
reflect a minimum level of acceptable performance that must be achieved,
before calculated Formula Awards are payable. The purpose of the Award
Trigger is to ensure the viability of the overall organization if
calculated awards are to be paid. The Award Trigger may be a single or
multiple measure of organization and/or individual performance and may
reflect financial and/or quality factors. In the event the Committee
establishes an Award Trigger for a Performance Period, it shall appear in
the attached Individual Award Calculation Worksheet for each Participant.
4.2 Performance Goals
Prior to the beginning of the Performance Period, but no later than the
last calendar day of the first year of the Performance Period, the
Committee shall establish Performance Goals for Threshold, Target, and
Maximum Performance levels. The goals may be based on any combination of
organizational and individual success factors. Performance goals will
generally be related to, but not limited to financial success measures.
Goals may be assigned varying numerical weights to be used in calculating
the Annual Award. These "Goal Weights" shall generally reflect the
relative importance of a success factor for the Performance Period.
After Performance Goals are established, the Committee shall align the
performance levels with the award levels, such that the level of
achievement of the pre-established Performance Goals at the end of the
Performance Period will determine the Formula Award. Goals, Goal Weights,
and Award Levels shall appear in the Individual Award Calculation
Worksheet for each Participant.
4.3 Award Opportunities
Prior to the beginning of the Performance Period, but no later than the
last calendar day of the first year of the Performance Period, the
Committee shall establish Threshold, Target, and Maximum Award levels,
stated as numbers of Performance units, for each Participant. The
established award opportunities shall generally be determined by
organization level, age, and length-of service.
Page 5
<PAGE>
4.4 Individual Award Calculation Worksheet
For each Performance Period, after Performance Goals and award
opportunities have been established for the period, each Participant shall
receive an "Individual Award Calculation Worksheet". The Individual Award
Calculation Worksheet shall contain the Participant's Performance Goals
for Threshold, Target, and Maximum Performance levels; Goal Weights; and
Threshold , Target, and Maximum Award levels. Once approved by the
Committee, the Individual Award Calculation Worksheets shall be deemed to
be a part of, and have the full force and effect of this Plan document.
4.5 Adjustment of Performance Goals
The Committee shall have sole discretion to increase or decrease the
Formula Award up to twenty percent (20%) for each Participant, for a
Performance Period, based upon, but not limited to, its determination of
an individual Participant's contribution to the Company's success.
The Committee shall also have sole discretion to adjust the Performance
Goals and Award Opportunities for each Participant, resulting in either
an increased or decreased award, during a Performance Period if it
determines that external changes or other unanticipated business
conditions have materially affected the fairness of the goals and unduly
influenced the Participant's ability to meet them. Examples of such
conditions include, but are not limited to, Acts of God; merger,
acquisition, or divestiture; reorganization; transfers; and staff
additions and reductions.
4.6 Award Determination
At the end of each Performance Period, after audited financial results are
available, Performance Period awards, in the form of Performance Units,
shall be computed for each Participant and approved by the Committee.
4.7 Valuation Of Performance Units
(a) Performance Units shall be valued in the currency of the resident
country of the Participant, based on Company common stock prices listed
on the stock exchange of that country. In the event a Participant is a
resident of neither the United States, Canada, nor other country in which
Company common stock is traded on a recognized exchange, his/her
Performance units will be valued in Canadian Dollars based on Company
common stock prices listed on the Toronto Stock Exchange, and converted
using the average exchange rate for the five (5) business days preceding
the date of valuation as quoted in the Wall Street Journal.
Page 6
<PAGE>
(b) Three-year Performance Unit - The value of a Three-year Performance
Unit shall be calculated as the equivalent of the difference in price of
Company common stock for the average of the last five (5) business days
of the last calendar year of the Performance Period, less the Grant Price,
so long as that difference is more than zero dollars ($0.00).
(c) Long-term Performance Unit - The value of a Long-term Performance Unit
shall be calculated as the equivalent of the difference in price of
Company common stock for the average of the six (6) months prior to
termination or retirement, less the Grant Price, so long as that
difference is more than zero dollars ($0.00).
4.8 Dividends and Other Adjustments
In the event of a common stock dividend, subdivision, or consolidation,
the Committee shall adjust the number of Performance Units in a
Participant's Performance Unit Account as it deems appropriate, in its
sole discretion. In the event such adjustment results in additional
Performance Units, such Performance Units shall be subject to the vesting
requirements and risk of forfeiture as if they were awarded upon the date
of adjustment.
ARTICLE V
Payment of Awards
5.1 Form and Timing of Payment
(a) Three-year Performance Units earned for a Performance Period shall be
payable in cash, in one (1) lump sum, as soon as practicable after the end
of each Performance Period, as determined by the Committee in its sole
discretion, but no later than two and one-half months after Performance
Period end.
(b) Long-term Performance Units earned for a Performance Period shall be
payable in cash, in one (1) lump sum, upon retirement, or termination
other than For-cause, as determined by the Committee in its sole
discretion, and subject to vesting as follows:
<TABLE>
<CAPTION>
<S> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S>
Participant's
Age at
Termination 56 57 58 59 60 61 62 63 64 65
Vested Percent
of Performance
Share Account
Balance 15% 30% 45% 60% 75% 80% 85% 90% 95% 100%
</TABLE>
In the event a Participant is not fully (100%) vested in his/her
Performance Share Account upon termination other than For-cause, the
Committee, in its sole discretion, may fully vest the Participant in
his/her Performance Unit Account.
Page 7
<PAGE>
5.2 Payment of Partial Awards
In the event a Participant no longer meets the eligibility criteria as set
forth in the Plan during the course of a particular Performance Period,
the Committee may, in its sole discretion, pay a partial award for the
portion of the Performance Period the employee was a Participant, computed
as determined by the Committee.
5.3 Unsecured Interest.
No participant or any other party claiming an interest in amounts earned
under the Plan shall have any interest whatsoever in any specific asset
of Inter-City Products Corporation. To the extent that any party acquires
a right to receive payments under the Plan, such right shall be equivalent
to that of an unsecured general creditor of Inter-City Products
Corporation.
ARTICLE VI
Termination of Employment
6.1 Termination of Employment
In the event a Participant's employment is terminated by reason other than
For-cause or voluntary resignation, the Formula Award determined in
accordance with Section 4.6 herein shall be reduced to reflect
participation prior to termination only. The reduced award shall be based
upon the number of calendar months of participation during the Performance
Period prior to termination. In the case of a Participant's disability,
the employment termination shall be deemed to have occurred on the date
the Committee determines the definition of disability, as per the
Company's then group long-term disability insurance benefit for senior
managers, to have been satisfied.
The Formula Award thus determined shall be payable as soon as practicable
following the end of the year in which employment termination occurred,
or sooner, as determined by the Committee in its sole discretion.
In the event a Participant's employment is terminated For-cause, (of which
the Committee shall be the sole judge), or voluntary resignation, all of
the Participant's rights to an Formula Award for the Performance Period
then in progress shall be forfeited. However, the Committee, in its sole
discretion, may pay a partial award for the portion of that Performance
Period that the Participant was employed by Inter-City Products
Corporation, computed as determined by the Committee.
In the event a Participant's employment is terminated other than For-
cause, the vested balance of the Participant's Performance Unit Account
is payable as soon as practicable following the end of the year in which
employment termination occurred, or sooner, as determined by the Committee
in its sole discretion.
Page 8
<PAGE>
ARTICLE VII
Rights of Participants
7.1 Employment
Nothing in the Plan shall interfere with or limit in any way the right of
Inter-City Products Corporation to terminate any Participant's employment
at any time, nor confer upon any Participant any right to continue in the
employ of Inter-City Products Corporation.
7.2 Non - transferability
No right or interest of any Participant in the Plan shall be assigned or
transferred, or subject to any lien, directly, by operation of law, or
otherwise, including, but not limited to, execution, levy, garnishment,
attachment, pledge, and bankruptcy.
ARTICLE VIII
Beneficiary Designation
8.1 Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan is to be paid in case of
his or her death before he or she receives any or all of such benefit.
Each designation will revoke all prior designations by the same
Participant and will be effective only when filed by the Participant in
writing with the Administrator during his or her lifetime. In the absence
of any such designation, or if the designated beneficiary is no longer
living, benefits shall be paid to the surviving member(s) of the following
classes of beneficiaries, with preference for classes in the order listed
below:
(a) Participant's spouse (unless the parties were divorced or legally
separated by court decree); (b) Participant's children (including children
by adoption); (c) Participant's parents (including parents by adoption);
or (d) Participant's executor or administrator.
Payments of benefits, in accordance with Section 6.1, shall be made
exclusively to the member(s) of the first class, in the order listed
above, which has surviving member(s). If that class has more than one (1)
member, benefit payments shall be made in equal share among members of
that class.
Page 9
<PAGE>
ARTICLE IX
Change in Control
9.1 Change-in-Control
(a) In the event of a Change-in-Control of Inter-City Products
Corporation, a Participant as of the date of the Change-in-Control, shall
be entitled to, for the Performance Period in which the Change-in-Control
occurs, the greatest of:
The Formula Award determined using: (i) actual results to the date of the
Change-in-Control; (ii) the Participant's Target Award; or (iii) a number
of Performance Units determined at the sole discretion of the Committee,
as constituted immediately prior to the Change in Control.
(b) The Committee, as constituted immediately prior to the Change-in-
Control, shall determine how performance should be measured for purposes
of the Formula Award calculation in Section 9.1(a). The Committee's
determination shall be conclusive and final.
In the event a Participant is not fully (100%) vested in his/her
Performance Share Account upon Change-in-Control, the Performance Share
Account balance shall be fully (100%) vested effective the day prior to
the date of the Change-in-Control.
The Formula Award and Performance Share Account balance shall be payable
in cash to the Participant as soon as administratively possible, but no
later than thirty (30) days following a Change-in-Control.
ARTICLE X
Amendment and Modification
10.1 Amendment and Modification
The Committee, in its sole discretion, without notice, at any time and
from time to time, may modify or amend, in whole or in part, any or all
of the provisions of the Plan, or suspend or terminate it entirely;
provided, however, that no such modification, amendment, suspension, or
termination may, without the consent of a Participant (or his or her
beneficiary in the case of the death of the Participant), reduce the right
of a Participant (or his or her beneficiary, as the case may be) to a
payment or distribution hereunder to which he or she is otherwise
entitled.
Page 10
<PAGE>
ARTICLE XI
Miscellaneous
11.1 Governing Law
The Plan, and all agreements hereunder, shall be governed by and construed
in accordance with the laws of the State of Tennessee and shall comply to
the extent necessary with the requirements of the Toronto Stock Exchange.
11.2 Withholding Taxes
The Company shall have the right to deduct from all payments under the
Plan any Federal, state, or local taxes required by law to be withheld
with respect to such payments. The Participant or the Participant's
Beneficiary or Beneficiaries are responsible for payment of all taxes
related to a payment under the Plan, and shall reimburse the Company for
any such taxes in the event the Company advances payment on behalf of the
Participant.
11.3 Gender and Number
Except where otherwise indicated by the context, any masculine term used
herein shall include the feminine, the plural shall include the singular,
and the singular shall include the plural.
11.4 Severability
In the event any provision of the Plan shall be held illegal or invalid
for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
11.5 Costs of the Plan
All costs of implementing and administering the Plan shall be borne by
Inter-City Products Corporation.
11.6 Successors
All obligations of Inter-City Products Corporation under the Plan shall
be binding upon any successor to Inter-City Products Corporation, whether
the existence of such successor is the result of a direct or indirect
purchase, merger consolidation, or otherwise, of all or substantially all
of the business and/or assets of Inter-City Products Corporation.
Page 11
<PAGE>
SUPPLEMENT
(Effective as of January 23, 1997)
to the
INTER-CITY PRODUCTS SALARIED EMPLOYEES
SHARE OWNERSHIP SAVINGS PLAN
Prior to January 23, 1997, Participants in the Plan included salaried
employees working in the branch sales operations of Inter-City Products
Corporation (USA) (the "Company") at Atlanta, Georgia, Charlotte, North
Carolina, Savage, Maryland, and Pomona, California. Effective as of
January 23, 1997 the Company sold such branch sales operations, in a sale
of assets transaction, to Watsco, Inc. (the "Buyer"). Legal counsel for
the Company has determined that under existing precedents, such sale,
which involved a termination of employment of the Participants affected
by the sale (the "Transferred Employees"), was, due to the relatively
small number of nonvested Participants affected by such sale, not a
"partial termination" of the Plan requiring acceleration of vesting of
their account balances to 100 percent.
The Company desires to permit the Transferred Employees who were not
vested at the time of the sale to continue to earn out their vesting in
their employer contribution accounts under the Plan, provided that they
allow such accounts to remain in the Plan until such accounts become
vested at the earlier to occur of five years of Continuous Service or two
Years of Participation, reflecting employment with the Buyer.
NOW, THEREFORE, the following additional provisions shall apply to the
Transferred Participants effective as of January 23, 1997:
(1) CONTINUOUS SERVICE. Notwithstanding the termination of employment
with the Company of the Transferred Participants effective as of January
23, 1997, such Participants' years of Continuous Service shall include,
in addition to service credited under section 3.5 of the Plan, their
employment with the Buyer after January 22, 1997.
(2) YEARS OF PARTICIPATION. Furthermore, such persons' Years of
Participation under the Plan shall include, in addition to years credited
under section 3.6 of the Plan, their years of employment with the Buyer
after January 22, 1997.
- 1 -
<PAGE>
(3) RETIREMENT WITH WATSCO, INC. The Company shall arrange with the
Transferred Participants for such persons to notify the Company when they
terminate employment with the Buyer, so that they may be allowed to apply
for a distribution under the Plan.
(4) IN-SERVICE WITHDRAWALS. Notwithstanding the Transferred Employees'
termination of employment with the Company, while they remain in the
employment of the Buyer they may continue to apply for hardship
withdrawals, Rollover Account withdrawals, and age 59 1/2 withdrawals,
subject to the eligibility requirements and other conditions of sections
6.1-6.3 of the Plan.
(5) DISTRIBUTIONS. Distributions under the Plan shall be made to the
Transferred Participants in accordance with Article VII of the Plan only
upon their termination of employment with the Buyer.
**********
IN WITNESS WHEREOF, the Company has caused this supplement to the Plan to
be signed and its corporate seal to be hereunto affixed by its duly
authorized officers effective as of January 23, 1997, on this day of
1997.
INTER-CITY PRODUCTS CORPORATION (USA)
By:-----------------------------------
Its President
-----------
ATTEST:
By
----------------------------
Its Secretary
------
(Corporate Seal)
- 2 -
<PAGE>
AMENDMENT
(Effective as of June 23, 1997 and August 1, 1997)
to the
INTER-CITY PRODUCTS CORPORATION (USA)
SALARIED EMPLOYEES SHARE OWNERSHIP SAVINGS PLAN
The Inter-City Products Corporation (USA) Salaried Employees Share
Ownership Savings Plan, as last amended and restated effective as of
January 1, 1997 (the "Plan"), is hereby further amended as follows,
effective as of the dates specified in parts A and B below:
A. AMENDMENTS EFFECTIVE AS OF JUNE 23, 1997.
1. By substituting the following for section 2.1(g) of the Plan:
"(g) "Company" means --
(1) on and after June 23, 1997, International Comfort
Products Corporation (USA), a subsidiary of
International Comfort Products Corporation, a Canadian
corporation, and any organization that is successor
thereto that adopts and continues the Plan;
(2) from the Effective Date through June 22, 1997, Inter-
City Products Corporation (USA), a subsidiary of Inter-
City Products Corporation, a corporation continued under
the Canada Business Corporations Act; and
(3) for periods prior to the Effective Date, primarily for
purposes of administering the participation and service
provisions in Article III of the Plan, certain
predecessor entities, namely Heil-Quaker Corporation,
Heil-Quaker Home Systems, Inc., Heil Co., Florence Stove
Company, and Whirlpool Corporation.
2. By substituting "International Comfort Products Corporation
(USA)" for "Inter-City Products Corporation (USA)" on
signature page 57 of the Plan.
3. By substituting "International Comfort Products Corporation
(USA)" for "Inter-City Products Corporation" wherever the
latter name appears in sections 2.1(c)(1), 2.1(u), 2.1(w)(1),
4.4, 5.8 and 10.1 of the Plan.
- 1 -
<PAGE>
4. By substituting the following for section 2.1(cc) of the Plan:
"(cc) "Plan" means, on and after June 23, 1997, the
"International Comfort Products Corporation (USA),
Salaried Employees Share Ownership Savings Plan" as
provided herein and as subsequently amended from time
to time. (Plan #003) From the Effective Date
through June 22, 1997, the Plan was referred to as
the "Inter-City Products Corporation (USA) Salaried
Employees Share Ownership Savings Plan."
B. AMENDMENTS EFFECTIVE AS OF AUGUST 1, 1997.
5. By substituting the following for sections 4.1(a) and (b) of
the Plan pertaining to Participant Pre-Tax Contributions.
"(a) INITIAL CONTRIBUTIONS. Effective as of August 1, 1997,
a Participant, so long as he remains a Participant, may
elect (on a form furnished by the Administrator and in
accordance with the Administrator's rules) to reduce his
Compensation by payroll reduction equal to --
(1) 1-15 percent of his Compensation paid to him for
each pay period in the case of non-Highly
Compensated Employees; or
(2) 1, 2, 3, 4, 5, or 6 percent of his Compensation
paid to him each pay period, in the case of Highly
Compensated Employees.
Payroll reductions may begin as of any Enrollment Date
provided that payroll reduction and related forms are
received by a specified time prior to such Enrollment
Date. The amount by which the Participant's
Compensation is reduced shall be contributed by the
Employer on his behalf to the Plan as his Pre-Tax
Contribution and shall be invested in accordance with
section 5.4.
(b) ADJUSTMENTS. Adjustments in the amount of any
Participant's Pre-Tax Contributions among the
percentages specified in (a) above may be made by the
Participant as of the first day of any month by filing
with the Employer a written notice of such change (on
a form furnished by the Administrator and in accordance
with the Administrator's rules) by a specified time
prior to the first of
- 2 -
<PAGE>
the month as of which he desires such adjustment to be
effective. On change shall be permitted each month.
6. By substituting the following for section 4.2(a) and (b) of
the Plan:
"(a) MONTHLY MATCHING CONTRIBUTIONS. Effective as of July
1, 1995, each month the Employer shall contribute to the
Trust on behalf of Participants who made Pre-Tax
Contributions for the month an amount, which, when
increased by the total amount of any forfeitures
credited under section 7.3, shall be equal to 25 percent
of the Participants' Pre-Tax Contributions up to 6
percent of Compensation made during that month pursuant
to section 4.1
(b) DISCRETIONARY MATCHING CONTRIBUTIONS. For the Plan Year
beginning on January 1, 1995 and for each Plan Year
thereafter, the Employer may, in its discretion,
contribute an additional annual Matching Contribution
to the Trust on behalf of Participants who made Pre-Tax
Contributions for the Plan Year and are eligible to
share in the annual Matching Contribution as provided
in section 4.2(e) below. The annual Matching
Contribution shall be a percentage, not to exceed 75
percent, of such Participant's aggregate Pre-Tax
Contributions up to 6 percent of Compensation for that
Plan Year."
7. By substituting the following for section 4.2(e) of the Plan:
"(e) ALLOCATION. Effective as of August 1, 1997, the
Employer's monthly Matching Contribution shall be
allocated and credited as of the last day of each month
to the Employer Contributions Accounts of all persons
who made Pre-Tax Contributions under section 4.1 during
such month and who are Salaried Employees at any time
during such month. Such allocation and credit shall be
in the proportion that such Pre-Tax Contributions up to
6 percent of Compensation of each such Participant for
such month bear to such aggregate Pre-Tax Contributions
up to 6 percent of Compensation of all such Participants
for such month. Employer discretionary Matching
Contributions shall be allocated in a similar manner as
of the end of each Plan Year, except that a Participant
shall be eligible to share in
- 3 -
<PAGE>
such annual allocation only if he was an Employee on the
last day of such year or if his termination of
employment during such year was due to retirement,
Disability, or death as described in sections 7.1-7.3."
**********
IN WITNESS WHEREOF, the Company has caused this amendment to be signed and
its corporate seal to be hereunto affixed by its duly authorized officers
on this day of , 1997, but effective as of the dates
specified in Parts A and B above.
INTERNATIONAL COMFORT PRODUCTS
CORPORATION (USA)
By:-----------------------------------
Its
-------------------------------
ATTEST:
By
----------------------------
Its
-------------------------
- 4 -
<PAGE>
September 1, 1994
Mr. Michael Clevy
420 Hatfield Drive
Franklin, Tennessee 37064
Dear Mr. Clevy:
This Letter Agreement shall set forth the termination arrangements in the
event of termination of your employment with INTER-CITY PRODUCTS
CORPORATION (USA), a corporation having its head office in City of
LaVergne, Tennessee ("Employer") as hereinafter provided;
1. As used herein, the term "Termination" shall mean:
(i) a termination of your employment by the Employer, for any
reason whatsoever other than for cause;
(ii) a material adverse change in your status, scope and authority
(whether or not accompanied by a change of title); or
(iii) a material adverse change in salary, benefits or other usual
compensation of the Executive.
Notwithstanding any other provision contained herein to the contrary, the
occurrence of any event described in subparagraphs (ii) and (iii) above,
shall be considered to be a "termination" if and only if you notify the
Employer in writing, within sixty (60) days of such event, that in your
reasonable belief such an event has occurred. The date which you cease
to work for the Employer shall be the Termination Date.
2. In the event of your termination you shall be entitled to the following
Termination Benefits:
<PAGE>
-2-
2.1 Salary Continuance. You shall continue to be paid your annual salary
at the same rate and on the same basis as such salary was payable
immediately prior to Termination for a period of twenty-four (24) months
commencing on the date following the Termination Date (the "Termination
Period"). Notwithstanding the foregoing, in no event shall the
Termination Period extend beyond your Normal Retirement Date, as that term
is defined in the Retiring Allowance Agreement, between Inter-City
Products Corporation (USA) and Michael Clevy, dated September 1, 1994.
2.2 Continuation of Benefits. You shall continue to receive all
benefits, including without limitation the provision of an automobile and
club memberships to which you were entitled (and receiving) at the
Termination Date for the Termination Period.
2.3 (a) Single Sum Option. At your option, in lieu of the cash payments
and continuation of benefits during the Termination Period, described in
the preceding paragraphs 2.1 and 2.2 of this Agreement, you may elect,
within one hundred and eighty (180) days of the Termination date, to
receive a single sum payment equal to the aggregate face value of such
amounts (without any discount or present valuation).
(b) Determination of Single Sum Amount. The determination of this
aggregate face value shall be made by the Employer's actuaries and benefit
consultants and, absent manifest error, shall be final, binding, and
conclusive upon the parties.
(c) Effect on Retiring Allowance. Notwithstanding the fact that you
exercise this single sum option, you shall remain entitled to the
retirement benefits set forth below.
(d) Unused or accrued vacation. You will be paid for any unused or
accrued vacation to the effective date of termination.
<PAGE>
-3-
2.4 Automobile Option. At the end of the Termination Period, you shall
have the option to purchase any automobile furnished by the Employer for
your use. The exercise price of this option shall be the net book value,
as set forth on the Employer's books, or the Lessor's, of the automobile
at such time. you shall also be entitled to have any club membership
provided by the Employer transferred into your name without charge.
2.5 Effect on Retiring Allowance. (a) Notwithstanding any other
provision contained herein to the contrary, the Service utilized in
calculating your Retiring Allowance benefit, shall be increased by a
period of twenty-four (24) months and the salary paid or payable during
said twenty-four (24) months shall be considered in the calculation of
Earnings and/or Final Average Earnings; and
(b) You shall receive a Retiring Allowance as determined for Normal
Retirement calculated in accordance with Section 3.01 of the Retiring
Allowance Agreement.
<PAGE>
-4-
Please acknowledge your acceptance of and consent to the terms of this
Agreement. Any and all prior termination agreements, whether written or
oral, which may have existed shall be null and void and of no further
force and effect on your execution of this Letter Agreement.
Very truly yours
INTER-CITY PRODUCTS CORPORATION (USA)
By: /s/
-----------------------------------
Title:
-----------------------------------
Accepted:
/s/
- -------------------------------------
<PAGE>
June 11, 1996
Mr. Stephen L. Clanton
38 Meadowbrook Country Club Est.
Ballwin, Missouri 63011
Dear Steve:
Following your discussions with Mike Clevy and other senior members of
management over the last several weeks, it gives me great pleasure to
offer you the position of Senior Vice President and Chief Financial
Officer for Inter-City Products Corporation. In this assignment you will
be responsible for all financial support functions including Information
Technology for Inter-City Products Corporation and all subsidiary groups.
In this key management position you will report directly to Mike Clevy,
President and Chief Executive Officer.
The compensation, perquisites and relocation assistance associated with
the position are as follows:
Salary
* $14,167 per month.
Bonus
* A bonus up to 30% of base salary based on the Corporation meeting
its financial objectives and you meeting the specified objectives
established for the position in the fiscal year. This assumes
the Company meets the Operating Plan goal and you achieve 100%
of your MBOs to be established shortly upon you joining the
Company.
<PAGE>
Mr. Stephen L. Clanton
Page 2
June 11, 1996
Stock Options
* An award of 45,000 shares subject to the approval of the Toronto
Stock Exchange (TSE), you will be immediately eligible to
exercise 20% of the shares granted under the Option. Thereafter,
20% per year becomes exercisable for the next four years. In the
event the TSE does not approve the plan as submitted, the options
will become vested at the rate of 20% after six months and 20%
per year thereafter. The strike price will be the closing price
listed on the TSE the last day prior to the Directors meeting
approving such award.
Car
* Lease vehicle in accordance with our policies and guidelines for
this key management position. You will be eligible to receive
a leased vehicle in the Buick Park Avenue, Lincoln Town Car
Executive Series or a similar priced vehicle.
Country Club
* The Company will pay the initiation fee and monthly dues
associated with a country club membership.
Pension
* Automatic participation in our defined benefit pension plan and
voluntary participation is available in our employee share
ownership savings program (401K).
Life Insurance
* Automatic participation in accordance with our standard policy
and procedures for employees.
Health and Disability
* Participation in accordance with our standard policy and
procedures for employees. You may elect a Health Maintenance
Organization (HMO) or a Preferred Provider Organization (PPO)
with 90% paid in-network and 80% paid out-of-network.
Vacation
* Vacation is accrued at the rate of two days per month for ten
months during the year in accordance with our standard policy and
procedures for executive employees (20 days per calendar year).
Relocation
* Relocation of household goods.
* Reimbursement of usual fees associated with the purchase of a
residence in the Nashville areas and sale of your former
residence.
* Temporary living expenses of 30 days.
* Transportation for your spouse for two house-hunting trips.
* Weekly transportation to and from Missouri during your temporary
living period.
<PAGE>
Mr. Stephen L. Clanton
Page 3
June 11, 1996
Termination
* In the event that you are terminated by the Company from the
employment of the Company other than for cause, you will receive
a base salary and continuation of your health care, automobile
lease and club dues for a twelve (12) month period. At the
Company's discretion, the payment may be paid as a lump-sum or
paid in monthly installments. Further, this payment will be made
provided you agree not to work in the employment of another
company involved, directly or indirectly, in the design,
manufacture or sale of heating and air conditioning equipment for
a twelve (12) month period following termination.
We are looking forward to your acceptance of this offer and an employment
date of July 1, 1996, but no later than July 15, 1996. You will have 48
hours from the date of receipt of this offer to accept or decline.
Further, this offer is conditional on satisfactory reference check by Elan
Pratzer & Partners Inc. within 24 hours after we receive notice of your
acceptance and upon the satisfactory completion of a routine drug screen
which is given to all employees. As a reminder, you should bring a copy
of your drivers license and birth certificate when you begin employment
since this is required by Inter-City Products Corporation (USA) under the
Immigration Act of 1986. Upon acceptance, please sign the extra copy
enclosed and return to my office for the files.
If you have any questions or need additional information, please contact
me.
Sincerely,
/s/
Robert C. Henningsen
c: M. Clevy
M. Marshall
E. Pratzer
ACCEPTED: /s/
------------------------------------ ------------------------
Stephen L. Clanton Date
Attachments: Proxy Statement
First Quarter 1996 Report
1995 Annual Report
Benefits Summary Plan Description
<PAGE>
March 29, 1995
Mr. David Cain
4601 Churchwood Drive
Nashville, Tennessee 37220
Dear Mr. Cain:
The Board of Directors of the Company recognizes the valuable contribution
you have made to the Company and wishes to ensure your continuing
commitment. Accordingly, the Company is prepared to agree, and this
letter will evidence such agreement, that in the event of a termination
of your employment following a change in control of the Company, the
following will apply:
1. For the purposes of this Agreement, a "Termination" shall be deemed
to have occurred if (i) a Change in Control of the Company occurs; and
(ii) one or more of the following takes place within two years from the
date of such Change in Control:
(a) a termination of your employment by the Company, for
any reason whatsoever other than for cause;
(b) a material adverse change in your status, scope and
authority (whether or not accompanied by a change of
title); or
(c) a material adverse change in your salary, benefits or
other usual compensation.
Notwithstanding anything else in this Agreement, the occurrence of any
event described in subparagraphs (b) and (c) above shall be considered a
Termination if and only if you notify the Company in writing, within sixty
(60) days of such event, that in your reasonable belief such an event has
occurred.
2. For the purposes of this Agreement, a "Change in Control" shall
mean a transaction or event or series of transactions or events involving
the Company or the outstanding voting shares of the Company, proposed or
commenced, which will result in
<PAGE>
-2-
(i) a change in control or effective control of the Company, (ii) all or
substantially all of the outstanding voting shares of the Company being
acquired or exchanged, whether pursuant to an amalgamation, arrangement,
consolidation or other similar transaction, for consideration which
reflects a determination of the value of the outstanding voting shares of
the Company, by a person or persons dealing at-arms-length with the
Company or (iii) a sale of all or substantially all of the Company's
assets to a person or persons dealing at-arms-length with the Company.
3. In the event of a Termination, you shall be entitled to the
following benefits:
(a) Salary Continuance. You shall continue to be paid
your annual salary at the same rate and on the same
basis as such salary was payable immediately prior to
Termination for a period of twelve (12) months
commencing on the date following the date of the
Termination (the "Termination Period").
(b) Continuation of Benefits. You shall continue to
receive all benefits to which you are entitled (and
receiving) at the date of your termination for the
Termination Period.
(c) Unused or Accrued Vacation. You will be paid for any
unused or accrued vacation to the effective date of
the termination.
4. At your option, in lieu of the cash payments and continuations of
benefits during the Termination Period described in preceding
subparagraphs 4(a) and 4(b) of this Agreement, you may elect, within one
hundred and eighty (180) days of the date of your termination, to receive
a single sum payment equal to the aggregate face value of such amounts
(without any discount or present valuation). The determination of this
aggregate face value shall be made by the Company's actuaries and benefit
consultants and, absent manifest error, shall be final, binding and
conclusive upon the parties.
Nothing in this Agreement shall effect your rights during your employment
to receive increases in compensation, responsibilities or duties or to
participate in and receive benefits from any pension plan, benefit plan
or profit sharing plans.
<PAGE>
-3-
The Company agrees that it will assign this Agreement to any successor
Company and ensure that its terms are continued.
If the foregoing is agreed to by you, please signify your agreement by
executing the enclosed duplicate of this letter and returning the same to
us upon which this letter as so agreed upon shall constitute an Agreement
between us.
INTER-CITY PRODUCTS CORPORATION (USA)
By: /s/
-------------------------------------
Title:
---------------------------------
The foregoing is agreed and accepted:
/s/
- ----------------------------------------
<PAGE>
Subsidiaries of International Comfort Products Corporation<F1>
State or other Jurisdiction
Name of Incorporation or Organization
- ------------------------------------- ---------------------------------
ICP Property and Casualty Corporation British Columbia, Canada
CHL Holdings, Inc. Delaware, USA
International Comfort Products
Corporation (Canada) Canada
ICP International Holdings, Inc. Cayman Islands, B.W.I.
ICP Petroleum, Inc.<F2> Delaware, USA
International Comfort Products
Corporation (USA)<F2> Delaware, USA
G.C. McDonald Supply Limited<F3> Ontario, Canada
Fast Parts de Mexico S.A. de C.V.<F4> Mexico
United Electric Company<F5> Delaware, USA
Tempstar Distributing, Inc.<F5> Delaware, USA
Fast Parts do Brasil Ltda<F5> Brazil
Industrias HVH, S.A.<F5> Spain
GHC Holdings, Inc.<F5> Delaware, USA
Inter-City Products Partner
Corporation<F5> Delaware, USA
Continental VAV, Inc.<F6> Texas
General Heating & Cooling Company<F7> Delaware, USA
United Electric Company, L.P.<F8> Texas
Inter-City Products Receivables
Company, L.P.<F9> Tennessee, USA
[FN]
<F1>
All subsidiaries are wholly-owned unless otherwise indicated.
<F2>
Subsidiaries of CHL Holdings, Inc.
<F3>
Subsidiary of International Comfort Products Corporation (Canada).
<F4>
Subsidiary of ICP International Holdings, Inc.
<F5>
Subsidiary of International Comfort Products Corporation (USA).
<F6>
Subsidiary of United Electric Company.
<F7>
Subsidiary of GHC Holdings, Inc.
<F8>
General Partner is Continental VAV, Inc.; limited partner is
United Electric Company.
<F9>
General Partner is Inter-City Products Partner Corporation;
limited partner is International Comfort Products Corporation (USA).
</FN>
<PAGE>
ARTHUR ANDERSEN & CO.
- -----------------------------------------------------------------------------
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
- -----------------------------------------------------------------------------
As independent chartered accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K into International Comfort Products
Corporation's (formerly Inter-City Products Corporation) previously filed
registration statement No. 33-90366.
/s/ Arthur Andersen & Co.
March 30, 1998
Mississauga, Canada
<PAGE>
COOPERS chartered 145 King Street West tel.:(416)869-1130
& LYBRAND accountants Toronto, Ontario fax: (416)863-0926
Canada M5H 1V8 direct tel.:941-8237
direct fax: 941-8446
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of International Comfort Products Corporation (formerly Inter-City
Products Corporation) on Form S-8 (File No. 33-90366) of our report
dated February 11, 1997 on our audits of the consolidated financial
statements as of December 31, 1996 and for the years ended December
31, 1996 and 1995, which report is included in this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand
Toronto, Ontario
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS
SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL
STATEMENTS OF INTERNATIONAL
COMFORT PRODUCTS CORPORATION
FOR THE PERIOD ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-START> JAN-01-1997
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,000
<SECURITIES> 0
<RECEIVABLES> 96,500
<ALLOWANCES> 6,000
<INVENTORY> 94,500
<CURRENT-ASSETS> 237,300
<PP&E> 214,300
<DEPRECIATION> 120,700
<TOTAL-ASSETS> 352,000
<CURRENT-LIABILITIES> 100,700
<BONDS> 165,600
<COMMON> 171,200
0
0
<OTHER-SE> (116,400)
<TOTAL-LIABILITY-AND-EQUITY> 352,000
<SALES> 630,700
<TOTAL-REVENUES> 630,700
<CGS> 503,700
<TOTAL-COSTS> 503,700
<OTHER-EXPENSES> 85,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,200
<INCOME-PRETAX> 22,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,000
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.54
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
- -----------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------------------------------------------
To International Comfort Products Corporation (USA):
We have audited the accompanying consolidated balance sheet of International
Comfort Products Corporation (USA) (formerly Inter-City Products Corporation
(USA)) (a Delaware corporation) and subsidiaries as of December 31, 1997 and
the related consolidated statements of operations, changes in stockholder's
equity, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Comfort
Products Corporation (USA) and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Nashville, Tennessee
February 9, 1998
- -----------------------------------------------------------------------------
1
<PAGE>
COOPERS Coopers & Lybrand L.L.P.
& LYBRAND
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
International Comfort Products Corporation (USA)
We have audited the accompanying consolidated balance sheet of International
Comfort Products Corporation (USA) (formerly Inter-City Products Corporation
(USA)) as of December 31, 1996, and the related statements of operations,
changes in stockholder's equity, and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of International
Comfort Products Corporation (USA) as of December 31, 1996, and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 11, 1997
- -----------------------------------------------------------------------------
2
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $ 470.2 $ 587.2 $ 576.6
Cost of Sales 420.7 478.0 464.3
- -----------------------------------------------------------------------------
Gross Margin 49.5 109.2 112.3
Selling, General and
Administrative Expenses 81.0 81.8 73.6
Asset Writedowns and
Restructuring Costs (note 14) 10.9 - -
- -----------------------------------------------------------------------------
Operating Profit (Loss) (42.4) 27.4 38.7
- -----------------------------------------------------------------------------
Financial Expenses
Discount on sale of receivables 3.1 - -
Interest expense 15.8 16.9 16.2
Amortization of debt
issuance costs 1.0 1.8 1.1
- -----------------------------------------------------------------------------
19.9 18.7 17.3
- -----------------------------------------------------------------------------
Income (Loss) Before Income
Taxes and Extraordinary Item (62.3) 8.7 21.4
Income Taxes (note 9) .8 - -
- -----------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Item (61.5) 8.7 21.4
Extraordinary Item (note 7a)
Loss on early extinguishment
of debt (.9) (.6) -
- -----------------------------------------------------------------------------
Net Income (Loss) $ (62.4) $ 8.1 $ 21.4
=============================================================================
</TABLE>
See accompanying notes to financial statements
- -----------------------------------------------------------------------------
3
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 11.9 $ 24.6
Accounts receivable, net of allowance
for doubtful accounts (1996 - $6.0;
1997 - $4.8) 72.1 97.1
Note receivable (note 3) - 7.7
Inventories (note 4) 92.3 69.9
Prepaid expenses and other 4.3 4.6
- -----------------------------------------------------------------------------
180.6 203.9
- -----------------------------------------------------------------------------
Fixed Assets (note 5)
Property, plant and equipment 200.4 199.9
Accumulated depreciation and amortization 101.8 109.3
- -----------------------------------------------------------------------------
98.6 90.6
- -----------------------------------------------------------------------------
Intangible and Other Assets, net (note 6) 21.9 17.3
- -----------------------------------------------------------------------------
$ 301.1 $ 311.8
=============================================================================
</TABLE>
See accompanying notes to financial statements
- -----------------------------------------------------------------------------
4
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
Current Liabilities
Checks outstanding in excess of bank balance $ 5.1 $ 6.9
Short-term borrowings (note 7) 27.0 10.8
Accounts payable 32.7 37.7
Accrued interest 4.6 4.6
Accrued liabilities 22.2 16.8
Product warranty 7.8 8.6
- -----------------------------------------------------------------------------
99.4 85.4
Long-Term Debt (note 8) 140.0 140.0
Product Warranty 16.6 15.0
Deferred Income and Other 2.1 2.2
Environmental Liability 2.7 2.7
Accrued Retiree Medical 4.9 8.1
- -----------------------------------------------------------------------------
265.7 253.4
- -----------------------------------------------------------------------------
Commitments And Contingencies (note 12)
STOCKHOLDER'S EQUITY
Preferred stock - $100,000 par value;
2,000 shares authorized; 130 shares
Series A issued and outstanding at
redemption value 13.0 13.0
Common stock - $1 par value; 3,000 shares
authorized; 1,000 shares issued and
outstanding - -
Additional paid-in capital 99.7 99.7
Deficit (63.3) (40.3)
Advances to parent (14.0) (14.0)
- -----------------------------------------------------------------------------
35.4 58.4
- -----------------------------------------------------------------------------
$ 301.1 $ 311.8
=============================================================================
</TABLE>
See accompanying notes to financial statements
- -----------------------------------------------------------------------------
5
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Advances
Preferred Common Paid-In to
Stock Stock Capital Deficit Parent Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 $ 13.0 $ - $ 99.7 $ (7.9) $ (10.0) $ 94.8
Pension
obligation
adjustment - - - (.7) - (.7)
Advances to parent - - - - (4.0) (4.0)
Net loss - - - (62.4) - (62.4)
----------------------------------------------------------
Balances at
December 31, 1995 13.0 - 99.7 (71.0) (14.0) 27.7
Pension
obligation
adjustment - - - (.4) - (.4)
Net income - - - 8.1 - 8.1
----------------------------------------------------------
Balances at
December 31, 1996 13.0 - 99.7 (63.3) (14.0) 35.4
Pension
obligation
adjustment - - - 1.6 - 1.6
Net income - - - 21.4 - 21.4
----------------------------------------------------------
Balances at
December 31, 1997 $ 13.0 $ - $ 99.7 $ (40.3) $ (14.0) $ 58.4
==========================================================
</TABLE>
See accompanying notes to financial statements
- -----------------------------------------------------------------------------
6
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (62.4) $ 8.1 $ 21.4
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization 18.3 17.7 16.6
Provision for bad debts 8.5 2.4 .6
Loss on early extinguishment of debt .9 .6 -
Asset writedowns 10.1 - -
Gain on sale of fixed assets 1.3 - -
Deferred income taxes (.8) - -
Changes in operating assets and liabilities
Accounts and note receivable (18.2) (3.8) (39.8)
Inventories 54.0 (11.3) 4.8
Accounts payable, accrued liabilities
and product warranty .8 (4.0) 7.8
Other 4.5 .8 (1.1)
- -----------------------------------------------------------------------------
Net cash provided by
operating activities 17.0 10.5 10.3
- -----------------------------------------------------------------------------
Cash flows from investing activities
Purchases of property, plant and
equipment (23.6) (11.2) (6.9)
Proceeds on sale of fixed assets 10.8 1.6 -
Proceeds from sale of /(acquisition of)
Coastline and General (note 3) - (15.3) 24.6
Acquisition of distribution
company (note 3) - - (1.0)
Advances to parent (4.0) - -
- -----------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (16.8) (24.9) 16.7
- -----------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds (payments) on
short-term borrowings 1.4 25.6 (16.2)
Checks outstanding in excess
of bank balance (.7) .2 1.9
Debt issuance costs (.9) (4.0) -
- -----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (.2) 21.8 (14.3)
- -----------------------------------------------------------------------------
Net increase in cash - 7.4 12.7
Cash - Beginning of the year 4.5 4.5 11.9
- -----------------------------------------------------------------------------
Cash - End of the year $ 4.5 $ 11.9 $ 24.6
=============================================================================
</TABLE>
Supplemental cash flow information:
Cash payments for interest for the years ended December 31, 1995, 1996 and
1997 were $14.2, $16.1, and $15.8, respectively.
See accompanying notes to financial statements
- -----------------------------------------------------------------------------
7
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
International Comfort Products Corporation (USA) (formerly Inter-City
Products Corporation (USA)) (the "Company") is a wholly owned subsidiary of
CHL Holdings Inc. ("CHL"), which is a wholly owned subsidiary of
International Comfort Products Corporation ("ICP") (formerly Inter-City
Products Corporation) a Canadian corporation. Both the Company and CHL are
incorporated in the state of Delaware.
The Company manufactures and markets central air conditioning and heating
products for residential and light commercial use primarily in the United
States and Canada. At the end of 1997, the Company's network consisted of
approximately 350 independent distributors, of which one distributor
accounted for approximately 12% of the Company's operating revenue. The
Company's network also included four company-owned centers primarily
servicing the international market.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the assets, liabilities and
operating results of all subsidiary companies from the date of acquisition,
on the basis of purchase accounting. All significant intercompany
transactions have been eliminated.
Revenue and Expense Recognition
Product sales are recognized at the time of shipment. Selling, general and
administrative costs are charged to expense as incurred. Service contract
revenue is deferred and amortized into income over the life of the contract
on a straight-line basis. Severance and employee benefits costs relating to
the Company's downsizing in 1995 were included in restructuring costs.
Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments with an original maturity of three
months or less to be cash equivalents.
Accounts Receivable
The Company extends credit to its customers generally without collateral. On
July 25, 1996, the Company entered into an agreement to sell on a revolving
basis, up to a $70.0 undivided participation ownership interest in a
designated pool of its accounts receivable (see note 7(a)).
- -----------------------------------------------------------------------------
8
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Inventories
Inventories are valued at the lower of cost or estimated net realizable value
with cost determined by the first-in, first-out method (see note 4).
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization are provided principally on a straight-line basis at the
following annual rates based on the estimated useful lives of the applicable
assets:
<TABLE>
<CAPTION>
<S> <C>
Land improvements 5% - 10%
Building and improvements 2.5% - 10%
Machinery and equipment 5% - 20%
Furniture and fixtures 5% - 20%
Tooling and drawings 10% - 33%
</TABLE>
Maintenance, repairs and minor replacements are charged to operations as
incurred; major replacements and improvements are capitalized. The cost of
assets sold or retired and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in income for the
period.
Intangible and Other Assets
Intangible and other assets include amounts paid for patents, tradenames,
goodwill and debt issuance costs (see note 6). Amortization of intangible
and other assets is provided on a straight-line basis over various periods,
not exceeding twenty years. The realizability of goodwill and other
intangibles is evaluated periodically as events or circumstances indicate a
possible inability to recover their carrying amount. Such evaluation is
based on undiscounted cash flow projections. The analyses necessarily
involve significant management judgement regarding such projections and the
actual results could differ materially from these projections. Amortization
of debt issuance costs is provided on a straight-line basis over the term of
the related debt.
- -----------------------------------------------------------------------------
9
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Income Taxes
The Company's operations are included in the consolidated federal income tax
return filed by CHL. Federal income taxes for the Company are provided on a
separate tax return basis and are payable to CHL under a tax sharing
agreement. Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date (see note 9).
Product Warranties
A liability for estimated warranty expense is established by a charge against
operations at the time products are sold. The subsequent costs incurred for
warranty claims serve to reduce the product warranty liability. The actual
warranty costs the Company will ultimately pay could differ materially from
this estimate.
Deferred Income
Deferred income represents unearned revenue from extended warranty contracts.
The Company offers and sells extended warranty contracts for its products
through certain distributors. The revenue for such contracts is deferred and
recognized over the life of the contract on a straight-line basis.
Fair Value of Financial Instruments
Periodically, the Company enters into interest rate swap agreements and
forward rate agreements to hedge its interest exposure. The fair values of
swap and forward rate agreements are based on current interest rates and any
payments and receipts relating to these agreements are recognized in interest
expense over the period of the respective agreement. All interest rate swaps
are subject to market risks as interest rates fluctuate. The Company is
exposed to credit risk in the event of nonperformance by counterparties. The
Company was not party to any interest rate swap or forward rate agreements
during 1997. The carrying amounts of cash and cash equivalents, accounts
receivable, note receivable, short-term borrowings, and accounts payable
approximate fair value because of the short-term nature of these accounts.
The fair value of the Company's long-term debt is based upon quoted market
prices.
- -----------------------------------------------------------------------------
10
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Such estimates include, but are not limited to, allowance for doubtful
accounts, product warranty, product liability, environmental liability, sales
returns and allowances, inventory obsolescence, pension obligation
assumptions, and self-insured medical claims. Actual results could differ
from these estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued two statements,
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." Each is effective
for financial statement periods beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for the way public
companies report information about operating segments in annual financial
statements. The Company does not expect the adoption of these standards to
have a material effect on the Company's financial position and results of
operations.
Reclassifications
Certain comparative figures have been reclassified to conform with current
financial statement presentation.
3. ACQUISITIONS AND DIVESTITURES
Effective January 31, 1998, the Company acquired United Electric Company
("United Electric") of Wichita Falls, Texas, a manufacturer of air
conditioning components for commercial HVAC systems through a cash payment of
approximately $25.0. United Electric's estimated 1997 sales were
approximately $25.0. This acquisition will be included in the consolidated
financial statements of the Company upon the acquisition date.
In November 1997, the Company acquired a distribution company for total
consideration of approximately $2.1, comprised of cash payments of $1.0 and
assumption of debt of $1.1. The total goodwill recorded on this transaction
was approximately $1.2.
- -----------------------------------------------------------------------------
11
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
3. ACQUISITIONS AND DIVESTITURES (CONT'D)
On September 30, 1997, the Company sold substantially all of the assets and
liabilities of General Heating and Cooling Company ("General"), a heating and
cooling products distributor, and a company-owned factory branch for net book
value of approximately $10.0. The total consideration is comprised of a cash
payment of $2.3 and a current note receivable of $7.7. In 1997, General and
the factory branch contributed operating revenue of approximately $19.2.
On January 27, 1997, the Company sold Coastline Distribution, Inc.
("Coastline"), a heating and cooling products distributor, and four company-
owned factory branches for net book value of approximately $22.3, the
proceeds of which were used to repay short-term borrowings.
On July 25, 1996, the Company acquired all of the outstanding shares of
Coastline and General. The purchase price was allocated on the basis of the
fair market value estimates of the net assets acquired as follows:
<TABLE>
<CAPTION>
-----------------------------------
<S> <C>
Net assets acquired
Accounts receivable $ 12.8
Inventories 18.1
Fixed assets 1.4
Intangible and other assets 4.2
Current liabilities (20.0)
Long-term debt (16.5)
-----------------------------------
Net purchase price $ -
===================================
</TABLE>
4. INVENTORIES
Inventories are classified as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Finished goods $ 67.2 $ 38.6
Raw materials and work-in-process 11.9 11.4
Service parts 13.2 19.9
------ ------
Total $ 92.3 $ 69.9
====== ======
</TABLE>
- -----------------------------------------------------------------------------
12
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
5. FIXED ASSETS
Property, plant and equipment are comprised of the following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
------ ------
Land $ 1.6 $ 1.6
Land improvements 8.8 8.9
Buildings and improvements 45.3 44.8
Machinery and equipment 91.1 89.0
Furniture and fixtures 2.8 1.3
Tooling 41.0 43.4
Drawings 7.3 7.3
Construction in progress 2.5 3.6
------ ------
200.4 199.9
Less: Accumulated depreciation
and amortization 101.8 109.3
------ ------
$ 98.6 $ 90.6
====== ======
</TABLE>
Depreciation expense for the year amounted to $13.8 (1996 - $14.0; 1995 -
$14.2).
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets, net of accumulated amortization, are comprised
of the following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
------ ------
Goodwill $ 8.4 $ 8.9
Debt issuance costs 5.3 3.9
Patents 2.8 2.4
Tradenames 1.7 1.6
Other assets .8 .5
Customer lists 2.8 -
Other intangible assets .1 -
------ ------
$ 21.9 $ 17.3
====== ======
</TABLE>
Amortization of intangible assets (including the amortization of debt
issuance costs) during the year was $2.8 (1996 - $3.7; 1995 - $4.1). The
accumulated amortization of intangible assets at December 31, 1997 was $20.0
(1996 - $17.2).
- -----------------------------------------------------------------------------
13
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
6. INTANGIBLE AND OTHER ASSETS (CONT'D)
In 1995, the Company reengineered various business processes, which led to a
change in the extent to which certain intangibles were used in the Company's
operations. Impairments were recognized when the undiscounted expected future
operating cash flows derived from such intangible assets were less than their
carrying values or in the case of certain patents and technology, on the
discontinued use of such identifiable intangibles. The 1995 operating loss
included a $1.3 million loss, classified in selling, general and
administrative expenses, on the impairment of such intangible assets.
7. SHORT-TERM BORROWINGS
(a) Receivables Purchase Agreement
On July 25, 1996, the Company entered into a five year agreement to sell on
a revolving basis, up to a $70.0 undivided participation ownership interest
in a designated pool of its accounts receivable. This transfer of
receivables does not constitute a sale for accounting purposes on the basis
that all the significant risks and rewards of ownership of the receivables
are not transferred to the purchaser. Accordingly, the pool of receivables
of $10.0 is included in accounts receivable at December 31, 1997 (1996 -
$27.0). In connection with the significant change in and amendment to
previous financing agreements, the company wrote off debt issuance costs of
$.9 and $.6 for 1995 and 1996, respectively, which were accounted for as
extraordinary items in the consolidated statement of operations.
The receivables purchase agreement requires the Company to pay fees plus
certain administrative costs. At December 31, 1997, the combined cost of the
receivable facility including unused line fees was 10.4% (1996 - 9.8%). The
unamortized transaction fees of $1.1 are included in Intangible and Other
Assets as of December 31, 1997. The maximum amount of borrowings under the
receivables purchase agreement at any month-end during the year ended
December 31, 1997 was $53.0 (1996 - $48.0). The average borrowing
outstanding under the receivables purchase agreement, calculated by averaging
month-end balances, during the year ended December 31, 1997 was $28.0 (1996 -
$29.3).
(b) Revolving Credit Facility
On July 18, 1997, the Company entered into a two year $15.0 million revolving
credit facility secured by inventories. This revolving credit facility
accrues interest at prime or LIBOR plus 1.5%. As of December 31, 1997, the
Company had no outstanding balance owing on this facility.
- -----------------------------------------------------------------------------
14
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
8. LONG-TERM DEBT
On March 11, 1993, the Company issued $140.0 of 9.75% senior secured notes
("Senior Notes") which are repayable on March 1, 2000. The Senior Notes
require mandatory prepayments if the Company has certain cash proceeds from
asset sales as defined in the Senior Note agreement. Interest on the Senior
Notes is payable semi-annually in March and September. The Senior Notes were
trading 101.5/102 (bid/offer) at December 31, 1997. The Senior Notes are
collateralized by substantially all the real and personal property of the
Company, other than accounts receivable and inventories. The Senior Notes
indenture contains covenants which limit certain transactions including the
payment of dividends.
On July 25, 1996, the Company terminated $20.0 notional amount of interest
rate swaps which had effectively converted this amount of the Senior Notes to
a variable rate of interest. In connection with the termination of this
interest rate swap, the Company incurred costs of $1.9 which were deferred
and are being amortized over the remaining term of the Senior Notes. As of
December 31, 1997, the entire $140.0 Senior Notes are fixed at a rate of
9.75% through the maturity date of March 1, 2000.
9. INCOME TAXES
The components of the benefits (expense) of income taxes for 1995, 1996, and
1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $ .5 $ - $ (1.7)
State (.3) - -
-------- -------- --------
.2 - (1.7)
-------- -------- --------
Deferred:
Federal 19.5 (2.6) (6.3)
State 3.7 (.5) -
-------- -------- --------
23.2 (3.1) (6.3)
-------- -------- --------
(Increase)/decrease in
valuation allowance (22.6) 3.1 8.0
-------- -------- --------
$ .8 $ - $ -
======== ======== ========
</TABLE>
- -----------------------------------------------------------------------------
15
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
9. INCOME TAXES (CONT'D)
The difference between the actual income tax benefit/(expense) and the amount
expected by applying the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Expected income tax benefit
(expense) at statutory federal
rate of 34% $ 21.5 $ (2.8) $ (7.3)
State income taxes, net of
federal tax 2.2 (.2) (.8)
Amortization of goodwill (.1) (.1) (.1)
(Increase)/decrease in valuation
allowance (22.6) 3.1 8.0
Other items (.2) - .2
-------- -------- -------
Actual income tax benefit $ .8 $ - $ -
======== ======== =======
</TABLE>
The Company's deferred tax assets/(liabilities) include temporary differences
relating to the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Product liability and warranty $ 10.9 $ 10.6
Operating loss carry forward 9.2 .8
Allowance for doubtful accounts 4.1 1.6
Employee benefits 2.4 3.7
Alternative minimum tax (AMT) credits 2.0 3.7
Environmental costs 1.3 1.1
Vacation accrual 1.2 1.2
Other 1.9 3.4
------- -------
Total deferred income tax assets 33.0 26.1
Valuation allowance (19.5) (11.5)
------- -------
13.5 14.6
------- -------
Deferred income tax liabilities:
Fixed assets (12.7) (12.7)
Inventory (.8) (.2)
------- -------
Total deferred tax liabilities (13.5) (12.9)
------- -------
Net deferred income taxes $ - $ 1.7
======= =======
</TABLE>
As of December 31, 1997, the net deferred tax asset of $1.7 is included in
prepaid expenses and other.
- -----------------------------------------------------------------------------
16
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
9. INCOME TAXES (CONT'D)
The deferred income tax assets have been reduced by a valuation allowance due
to the weight of available evidence that it is more likely than not that the
tax benefits will not be realized.
The Company has approximately $2.0 of loss carryforwards for tax purposes at
December 31, 1997, the use of which is limited to future taxable earnings
prior to their expiration dates, which extend through 2010. Non-expiring AMT
credits of $3.7 remain at December 31, 1997.
10. EMPLOYEE BENEFIT PLANS
(a) Pension Plans
The Company maintains two non-contributory defined benefit pension plans
covering substantially all full time employees. The Company's funding policy
is to contribute annually an amount that can be deducted for income tax
purposes. The assets of the plans, which are primarily stocks and bonds,
include 270,000 ordinary shares of ICP with a cost of $.9 and a market value
of $2.2 at December 31, 1997.
The assumed rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
for the salaried employees plan was 4.5% in both 1996 and 1997. The assumed
rate of return used in determining the actuarial present value of accumulated
plan benefits and projected benefit obligation was 7.75% in 1996 and 7.5%
for 1997. The expected long-term rate of return on assets was 9.0% in both
1996 and 1997.
(i) Salaried Employees Plan
Net pension cost for the salaried plan for 1995, 1996 and 1997, included the
following components:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current service cost $ 1.5 $ 1.5 $ 1.6
Interest costs on projected
benefit obligation 1.9 1.9 2.2
Return on plan assets (3.0) (2.0) (6.4)
Net amortization and deferral 1.5 .6 4.8
-------- -------- -------
$ 1.9 $ 2.0 $ 2.2
======== ======== =======
</TABLE>
- -----------------------------------------------------------------------------
17
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(a) Pension Plans (Cont'd)
(i) Salaried Employees Plan (Cont'd)
In 1995, the Company recognized curtailment and settlement losses of $.2 and
$.3, respectively, associated with reductions in the salaried workforce.
The following table sets forth the salaried plan's funded status and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ (18.2) $ (21.6)
Nonvested (3.3) (2.2)
-------- --------
Accumulated benefit obligation $ (21.5) $ (23.8)
======== ========
Projected benefit obligation for service
rendered to date $ (27.9) $ (32.9)
Plan assets at market value 21.9 28.9
-------- --------
Plan assets below projected benefit obligation (6.0) (4.0)
Unrecognized net loss 4.9 2.3
Unrecognized prior service cost .3 .3
Unrecognized net obligation 1.2 1.0
-------- --------
Prepaid (accrued) pension cost $ .4 $ (.4)
======== ========
</TABLE>
(ii) Hourly Employees Plan
Net pension cost for the hourly plan for 1995, 1996 and 1997, included the
following components:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Current service cost $ .4 $ .6 $ .5
Interest costs on projected
benefit obligation .8 1.0 1.1
Return on plan assets (1.6) (1.2) (3.3)
Net amortization and deferral .9 .4 2.4
-------- -------- -------
$ .5 $ .8 $ .7
======== ======== =======
</TABLE>
- -----------------------------------------------------------------------------
18
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(a) Pension Plans (Cont'd)
(ii) Hourly Employees Plan (Cont'd)
The following table sets forth the hourly plan's funded status and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ (13.4) $ (14.9)
Nonvested (.6) (.9)
-------- --------
Accumulated benefit obligation $ (14.0) $ (15.8)
======== ========
Projected benefit obligation for service
rendered to date $ (14.0) $ (15.8)
Plan assets at market value 11.4 14.8
-------- --------
Plan assets below projected benefit obligation (2.6) (1.0)
Unrecognized net loss 1.9 .2
Unrecognized prior service cost 1.3 1.3
Unrecognized net (asset) (.1) -
Adjustment required to recognize minimum
liability (3.1) (1.4)
-------- --------
Accrued pension cost $ (2.6) $ (.9)
======== ========
</TABLE>
At December 31, 1996, the adjustment required to recognize the additional
minimum liability had increased to $3.1 and, accordingly, the Company
recorded an additional $.4 adjustment to retained earnings. At December 31,
1997, the adjustment required to recognize the additional minimum liability
had decreased to $1.4 and, accordingly, the Company recorded a favorable
adjustment of $1.6 to retained earnings. The remaining minimum liability of
$1.8 and $1.4 is reflected in accrued liabilities at December 31, 1996 and
1997, respectively.
- -----------------------------------------------------------------------------
19
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(b) Postretirement Medical Benefits
The Company provides postretirement health care benefits to substantially all
employees and accrues the cost of postretirement health care benefits within
the employees' active service periods.
The net periodic cost for postretirement health care benefits during 1995,
1996, and 1997 includes the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Service cost $ .7 $ 1.1 $ 1.0
Interest cost 1.3 1.4 1.4
Amortization of transition
obligation .5 .6 .6
-------- -------- -------
$ 2.5 $ 3.1 $ 3.0
======== ======== =======
</TABLE>
In general, retiree health benefits are paid as covered expenses are
incurred. The following table sets forth the funded status for the Company's
postretirement health care plan at December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ 6.2 $ 8.8
Fully eligible active plan participants 2.5 2.7
Other active plan participants 10.3 10.5
-------- --------
Total obligation 19.0 22.0
Unrecognized:
Transition obligation (8.1) (6.8)
Change in actuarial assumptions (5.0) (7.1)
-------- --------
Accrued postretirement benefit $ 5.9 $ 8.1
======== ========
</TABLE>
The assumed discount rate was 7.75% at December 31, 1996 and 7.5% at December
31, 1997, and the rate of increase in the per capita costs of covered health
care benefits is assumed to be 6.0% in 1997 (6.5% in 1996), decreasing
gradually to 5% by the year 1999. Increasing the assumed health care cost
trend rate by 1 percentage point would increase the accumulated
postretirement benefit obligation as of December 31, 1997, by approximately
13% and increase net periodic postretirement benefit cost by approximately
16% in 1997.
- -----------------------------------------------------------------------------
20
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(c) Employee Stock Option Plan
ICP and its subsidiaries provide an Employee Stock Option Plan (the "Option
Plan") to officers and certain employees of the Company. The term of all
options cannot exceed ten years from the date the option is granted and are
vested at an annual rate of 20% per year on a cumulative basis, except in
certain circumstances where the exercise of such options would be
accelerated. The option exercise price is fixed by ICP's Board of Directors
at the time each option is authorized and cannot be less than the weighted
average sales price per ordinary share on the Toronto Stock Exchange on the
business day preceding the date of authorization.
Changes in the outstanding share options from January 1, 1995 to December 31,
1997 for the Company's officers and employees are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - Beginning of the year 320,000 320,000 1,235,000
Granted - 915,000 705,000
Exercised - - (84,200)
Cancelled - - (34,000)
- --------------------------------------------------------------------------
Balance - End of the year 320,000 1,235,000 1,821,800
==========================================================================
</TABLE>
The details of the options outstanding at December 31, 1997 at each price are
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Exercise Price (Cdn $) Expiry Date Number of Shares
---------------------------------------------------------------------
<S> <C> <C>
$3.10 February 29, 2000 25,000
$3.50 August 24, 2001 65,000
$3.10 December 19, 2001 205,000
$2.80 April 16, 2003 681,800
$3.90 July 11, 2003 105,000
$4.20 July 31, 2003 10,000
$4.10 August 23, 2003 15,000
$3.83 November 29, 2003 10,000
$5.20 January 31, 2004 45,000
$7.05 April 29, 2004 660,000
---------------------------------------------------------------------
1,821,800
=====================================================================
</TABLE>
- -----------------------------------------------------------------------------
21
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(c) Employee Stock Option Plan (Cont'd)
In October 1995, the FASB released SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123 permits the Company to continue to apply the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," to ICP's stock option
plan. If the compensation costs for ICP's stock option plan had been
determined based on the fair value at the grant dates for the 1996 and 1997
options, consistent with the method provided in SFAS 123, the Company's pro
forma net income would have been $7.8 and $20.6 for 1996 and 1997,
respectively. The weighted average fair values of the 1996 and 1997 option
grants are estimated on the date of grant using the Black-Scholes option-
pricing model with the following assumptions: expected volatility for 1996
and 1997 was 53 percent and 70 percent, respectively; risk-free interest
rates for 1996 and 1997 were 6.6% and 5.7%, respectively; and expected lives
of seven years for both 1996 and 1997. The weighted average fair value of
the options granted in 1996 and 1997 was Cdn. $1.47 and Cdn. $4.38,
respectively.
(d) Long-Term Incentive Plan
Effective April 29, 1997, ICP adopted the 1997 Long-Term Incentive Plan (the
"1997 Plan") which will provide deferred compensation opportunities to
certain senior managers of the Company. This deferred cash compensation plan
is based on the awarding of Performance Units, the value of which is related
to the appreciation in the value of the ordinary shares of ICP.
The 1997 Plan is comprised of (i) Three year Performance Units which are
awarded, valued and paid at the end of a three calendar year period (the
"Performance Period") as designated by the Pension and Compensation Committee
(the "Committee") of the Board of Directors, and (ii) Long-term Performance
Units which are awarded at the end of the Performance Period, but paid upon
retirement, according to a vesting schedule, and subject to forfeiture. The
initial grant price of the Performance Units is the value established by the
Committee at the beginning of the Performance Period, to which the future
ordinary share price shall be compared to determine the appreciated value for
purposes of determining the value of Performance Units attributable to that
Performance Period. At the end of the Performance Period, the number of
Performance Units earned, if any, will be based on the extent to which the
established objectives of average three year earnings per share goals have
been achieved. If the threshold objective is not met, no Performance Units
are earned. If the target objective is exceeded, additional Performance
Units can be earned, up to a predetermined maximum level.
- -----------------------------------------------------------------------------
22
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONT'D)
(d) Long-Term Incentive Plan (Cont'd)
Performance Units shall be valued in the currency of the resident country of
the participant. The value of a Three year Performance Unit is calculated as
the equivalent of the difference in price of ICP's ordinary shares for the
average of the last five business days of the last calendar year of the
Performance Period, less the Grant Price. The value of a Long-term
Performance Unit is calculated as the equivalent of the difference in price
of ICP's ordinary shares for the average of the six months prior to
termination or retirement, less the grant price.
On April 29, 1997, the Company awarded target thresholds of 165,000
Performance Units and 170,000 Long-term Performance Units to senior
management at a grant price of Cdn. $7.05. The expense for 1997 relating to
the 1997 Plan based upon the increase in ICP's stock price since the date of
grant is $.4.
In 1990, ICP adopted a long-term incentive plan (the "1990 Plan"). Under the
1990 Plan, certain key officers and employees of the Company were granted
long-term incentive compensation units the value of which shall be determined
by reference to the appreciation in the market value of the ordinary shares
over stated periods of time. Based on the discretion of the Board of
Directors of ICP, the appreciation in the market value of the ordinary shares
will be distributed to the holder thereof by payment of cash, issuance of
ordinary shares or a combination thereof.
As of December 31, 1997, 26,000 units from the February 1, 1993 granting were
outstanding under the 1990 Plan with an initial value per unit of Cdn $7.125
and a valuation date of February 1, 1998. In 1997, the Company's expense
with respect to the 1990 Plan was approximately $.1.
(e) Share Ownership Savings Plan
In July 1992, the Company adopted the Share Ownership Savings Plan (the
"Savings Plan") for all non-union employees following the completion of one
year of continuous service with the Company. The Savings Plan allows
eligible employees to contribute from one to six percent of their salary to
a trust which in turn purchases ordinary shares of ICP. The Company is
required to match 25% of the employees' contributions and may make additional
annual contributions of up to 75% of the employees' contributions at its
discretion. In February 1997, the hourly employees began participating in a
new savings plan with no matching company contributions. In 1997, the
Company's expense relative to both savings plans was $.3 (1996 - $.1; 1995 -
$.1).
- -----------------------------------------------------------------------------
23
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Company had sales to heating and cooling subsidiaries of ICP in the
amounts of $16.6, $22.6 and $25.1 for the fiscal years 1995, 1996 and 1997,
respectively. The Company also charged for engineering and certain
administrative services provided to ICP's affiliates in the amounts of $.5,
$.1 and $.1 for the fiscal years 1995, 1996 and 1997, respectively.
Receivables from these affiliates were included in accounts receivable at
December 31, 1996 and 1997 and amounted to $10.4 and $16.1, respectively.
The Company had purchases from a heating and cooling subsidiary of ICP in the
amounts of $5.1, $6.9, and $6.6 for the fiscal years 1995, 1996 and 1997,
respectively. Payables to this affiliate for purchases and other
transactions were included in accounts payable at December 31, 1996 and 1997
and amounted to $1.4 and $1.3, respectively.
ICP provides management services to its subsidiaries, including the Company,
relating to administrative, financial, risk management and various other
services. ICP also provides the Company with the services of certain of its
executive officers. In consideration for such services, the Company was
charged approximately $1.7, $2.3 and $1.9 as operating expenses for the
fiscal years 1995, 1996 and 1997, respectively. Payables to ICP in the
amount of $1.4 were included in accounts payable at December 31, 1996. Under
the tax sharing agreement described in note 2, the Company had a payable to
CHL of $1.0 and $3.6 at December 31, 1996 and 1997, respectively.
Advances to parent represents a $13.0 advance to and a $1.0 note from CHL.
The advance is non-interest bearing and contains no stated terms of
repayment. The non-interest bearing note is repayable upon demand.
The preferred stock relates to 130 shares of Series A preferred stock issued
to CHL. Dividends accrue at a local bank's base lending rate (6.2% at
December 31, 1997), are cumulative, and have preference to dividends on
common stock. The preferred stock is redeemable at the option of the Company
at any time, in whole or in part, at its redemption value of $100,000.00 per
share plus accrued and unpaid dividends. Undeclared and unaccrued dividends
in arrears were $3.8 and $4.6 at December 31, 1996 and 1997, respectively.
- -----------------------------------------------------------------------------
24
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
(a) The Company is committed under noncancelable operating leases involving
certain facilities and equipment. Total rental expense for 1995, 1996,
and 1997, under all leases, was approximately $5.0, $4.7, and $2.8,
respectively.
Future minimum rental commitments as of December 31, 1997 for
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1.7
1999 1.3
2000 .9
2001 .3
2002 .2
------
$ 4.4
======
</TABLE>
(b) The Company has been involved in paying the costs of assessing the
extent of, and remediating, environmental contamination at its
Lewisburg manufacturing facility caused by a sudden and accidental
spill in 1980. The Company has paid for certain investigative
activities and initial remediation at the manufacturing facility as
well as off-site drum storage locations. At December 31, 1997, the
cost of the remainder of the environmental cleanup, which management
believes are reasonably determinable over a ten year period, were
discounted at 5.5%.
At December 31, 1997, the Company has an accrual of $3.1 for the cost
of this cleanup, of which $2.7 is included in Environmental Liability
and $.4 in Accrued liabilities.
The undiscounted cash flows are estimated to be as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ .4
1999 .7
2000 .2
2001 .2
2002 .2
Thereafter 1.6
-----
$ 3.3
=====
</TABLE>
- -----------------------------------------------------------------------------
25
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION (USA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended December 31, 1995, 1996, and 1997
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES (CONT'D)
In connection with the environmental remediation at the off-site drum
storage locations, the Company has entered into a cost-sharing
agreement with the previous owner. This agreement calls for each
entity to bear fifty percent of the investigation, cleanup, monitoring,
removal and treatment of the existing drum storage sites.
Additionally, in the event that other drum storage sites are
discovered, the Company and the previous owner shall bear the
additional costs at a ratio of sixty percent to forty percent,
respectively. The estimated costs to clean up the existing drum
storage sites are included in the amounts detailed above.
(c) The Company and its subsidiaries are parties to various other claims
and lawsuits. The Company believes that such proceedings will not have
a material effect on the Company's financial position and future
operating results, although no assurance can be given with respect to
the ultimate outcome for any such litigation.
13. RESEARCH AND DEVELOPMENT COSTS
Research and development costs were $2.8, $2.9, and $3.0 in 1995, 1996
and 1997, respectively.
14. ASSET WRITEDOWNS AND RESTRUCTURING COSTS
Through the continuation of the business process reengineering effort
which began in 1993, the Company identified in 1995 certain fixed
assets which were no longer considered to be economically viable to the
production process. These assets included a coil delivery system with
a carrying value of $3.3, an automated paint system with a carrying
value of $4.1, and other idle assets with a carrying value of $1.2. The
Company recognized an impairment loss on these assets of $8.6 which was
included in asset writedowns and restructuring costs in 1995. In
addition, the Company recorded severance and benefits expense of $2.3
during 1995 as a result of restructuring and reengineering programs.
- -----------------------------------------------------------------------------
26
<PAGE>
ARTHUR ANDERSEN & CO.
- -----------------------------------------------------------------------------
AUDITORS' REPORT
- -----------------------------------------------------------------------------
To International Comfort Products Corporation:
We have audited, in accordance with auditing standards generally accepted in
Canada, the 1997 consolidated financial statements of International Comfort
Products Corporation (formerly Inter-City Products Corporation) and have
issued our report thereon dated February 9, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
financial statement schedules listed in the index under item 14 are the
responsibility of the Company's management and are presented for the purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. These schedules for 1997 have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
February 9, 1998
Mississauga, Canada
<PAGE>
COOPERS chartered 145 King Street West tel.:(416)869-1130
& LYBRAND accountants Toronto, Ontario fax: (416)863-0926
Canada M5H 1V8 direct tel.:941-8237
direct fax: 941-8446
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS TO THE
DIRECTORS OF INTER-CITY PRODUCTS CORPORATION
Our report on the consolidated financial statements of Inter-City Products
Corporation as of December 31, 1996 and for the two years then ended is
included on page 31 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedules as listed in the index on page 71 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included herein.
/s/ Coopers & Lybrand
Coopers & Lybrand
Chartered Accountants
Toronto, Ontario
February 11, 1997
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
Schedule I - Condensed Financial Information
Non-Consolidated Statements of Income (Loss) and Deficit
For the Years Ended December 31, 1997, 1996 and 1995
(In Millions of U.S. Dollars)
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Administrative fees charged to
subsidiaries $ 2.4 $ 2.8 $ 2.4
Operating Expenses 2.6 3.1 3.1
Restructuring Costs - - 2.8
- -------------------------------------------------------------------------
Operating Loss (.2) (.3) (3.5)
- -------------------------------------------------------------------------
Financial Items
Interest charged to subsidiaries - - 4.5
Other interest income .1 .6 .8
Gain (loss) on foreign exchange .5 - (.3)
- -------------------------------------------------------------------------
.6 .6 5.0
- -------------------------------------------------------------------------
Income Before Income Taxes .4 .3 1.5
Income Taxes - - (1.7)
- -------------------------------------------------------------------------
Income (Loss) Before Equity Share of
Net Income (Loss) From Subsidiaries .4 .3 (.2)
Equity Share of Net Income (Loss)
From Subsidiaries 21.6 11.3 (81.0)
- -------------------------------------------------------------------------
Income (Loss) From Continuing Operations 22.0 11.6 (81.2)
- -------------------------------------------------------------------------
Discontinued Operations
Steel Pipe Operations - (3.1) (14.3)
Settlement of former Resources claim - - 2.9
Utilization of prior years' tax losses - - 1.3
Write-off of deferred tax debit -
Flying J environmental provision - - (1.9)
- -------------------------------------------------------------------------
- (3.1) (12.0)
- -------------------------------------------------------------------------
Net Income (Loss) 22.0 8.5 (93.2)
Deficit - Beginning of the Year (138.4) (146.9) (53.7)
- -------------------------------------------------------------------------
Deficit - End of the Year $(116.4) $(138.4) $(146.9)
=========================================================================
see accompanying notes
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
Schedule I - Condensed Financial Information
Non-Consolidated Balance Sheets
As of December 31, 1997 and 1996
(In Millions of U.S. Dollars)
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 2.9 $ 3.5
Accounts receivable and other .5 .6
Accounts receivable -
subsidiary companies 11.1 10.3
- ---------------------------------------------------------------------
14.5 14.4
- ---------------------------------------------------------------------
Investments
Shares of subsidiary companies
at equity 10.3 (11.4)
Advances to subsidiary companies 27.1 27.6
- ---------------------------------------------------------------------
37.4 16.2
- ---------------------------------------------------------------------
Fixed Assets, net .2 .2
- ---------------------------------------------------------------------
$ 52.1 $ 30.8
=====================================================================
LIABILITIES
Accounts payable and
accrued liabilities $ .6 $ 2.0
- ---------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Ordinary Shares 171.2 169.2
Deficit (116.4) (138.4)
Foreign Currency Translation Adjustment (3.3) (2.0)
- ---------------------------------------------------------------------
51.5 28.8
- ---------------------------------------------------------------------
$ 52.1 $ 30.8
=====================================================================
</TABLE>
see accompanying notes
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
Schedule I - Condensed Financial Information
Non-Consolidated Statements of Changes in Financial Position
For the Years Ended December 31, 1997, 1996 and 1995
(In Millions of U.S. Dollars)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cash provided by (used for): 1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Operations
Income (loss) before equity share of
net income (loss) from subsidiaries $ .4 $ .3 $ (.2)
Items not involving current cash flows
Gain (loss) on foreign exchange
and other (.6) - .8
Changes in operating working capital
Accounts receivable and other .1 5.3 (5.2)
Accounts receivable -
subsidiary companies (.8) (7.8) (3.5)
Accounts payable and accrued liabilities (1.4) (4.0) 3.8
- ------------------------------------------------------------------------
(2.3) (6.2) (4.3)
- ------------------------------------------------------------------------
Investment
Investment in and advances to
subsidiaries (.3) (.4) (.4)
Proceeds on sale of fixed assets - .2 -
Discontinued operations and other - - 4.2
- ------------------------------------------------------------------------
(.3) (.2) 3.8
- ------------------------------------------------------------------------
Financing
Ordinary shares issued 2.0 .5 .6
Funds from Trustee for 1990
Plan of Arrangement - 2.2 -
- ------------------------------------------------------------------------
2.0 2.7 .6
- ------------------------------------------------------------------------
Increase (Decrease) in Cash (.6) (3.7) .1
Cash - Beginning of the year 3.5 7.2 7.1
- ------------------------------------------------------------------------
Cash - End of the year $ 2.9 $ 3.5 $ 7.2
========================================================================
</TABLE>
see accompanying notes
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
Schedule I - Condensed Financial Information
Notes to Non-Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
(In Millions of U.S. Dollars)
- ------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These financial statements have been prepared for management purposes.
They have been prepared in accordance with generally accepted accounting
principles except that the accounts of subsidiary companies have not been
consolidated herein. Investments in shares of subsidiary companies have
been accounted for using the equity method. Consolidated financial
statements of the Company for the year ended December 31, 1997 have been
issued to the shareholders.
2. GUARANTEE
The Company has provided a guarantee in respect of short-term borrowings
of International Comfort Products Corporation (Canada).
<PAGE>
INTERNATIONAL COMFORT PRODUCTS CORPORATION
Schedule II - Consolidated Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(In Millions of U.S. Dollars)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Charge to
----------- Accounts
Balance Written Balance
at Costs Off Net at
Beginning and of End of
Description of Period Expenses Other<F1> Recoveries Period
============================================================================
<S> <C> <C> <C> <C> <C>
1997
(a) Allowance
for Doubtful
Accounts $ 7.7 $ 0.9 $ (.7) $ (1.9) $ 6.0
============================================================================
(b)
Product
Warranty
Current $ 8.7 $ 1.0 $ - $ (0.2) $ 9.5
Non-current 17.9 10.7 .1 (12.5) 16.2
- ----------------------------------------------------------------------------
$ 26.6 $ 11.7 $ .1 $ (12.7) $ 25.7
============================================================================
1996
(a) Allowance
for Doubtful
Accounts
Current $ 7.6 $ 3.2 $ .2 $ (3.3) $ 7.7
Non-current 5.0 - - (5.0) -
- ---------------------------------------------------------------------------
$ 12.6 $ 3.2 $ .2 $ (8.3) $ 7.7
===========================================================================
(b) Product
Warranty
Current $ 8.8 $ 2.0 $ - $ (2.1) $ 8.7
Non-current 15.7 14.4 - (12.2) 17.9
- ---------------------------------------------------------------------------
$ 24.5 $ 16.4 $ - $ (14.3) $ 26.6
===========================================================================
1995
(a) Allowance
for Doubtful
Accounts
Current $ 9.6 $ 4.7 $ - $ (6.7) $ 7.6
Non-current - 5.0 - - 5.0
- ---------------------------------------------------------------------------
$ 9.6 $ 9.7 $ - $ (6.7) $ 12.6
===========================================================================
(b) Product
Warranty
Current $ 9.2 $ (.4) $ - $ - $ 8.8
Non-current 13.6 12.0 - (9.9) 15.7
- ---------------------------------------------------------------------------
$ 22.8 $ 11.6 $ - $ (9.9) $ 24.5
===========================================================================
</TABLE>
[FN]
<F1>
These amounts are mainly due to the effect of the change in foreign
currency translation rates and divestitures, net of acquisitions.
</FN>
