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