<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1997
REGISTRATION NO. 333-35329
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FEDDERS NORTH AMERICA, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 3585 22-2103510
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
FEDDERS CORPORATION
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 3585 22-2562390
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
505 MARTINSVILLE ROAD
LIBERTY CORNER, NEW JERSEY 07938-0813
(908)604-8686
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
CO-REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT N. EDWARDS, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
505 MARTINSVILLE ROAD
LIBERTY CORNER, NEW JERSEY 07938-0813
(908)604-8686
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
PAUL G. HUGHES, ESQ.
CUMMINGS & LOCKWOOD
FOUR STAMFORD PLAZA
P.O. BOX 120
STAMFORD, CT 06904
(203)327-1700
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997
PROSPECTUS
$100,000,000
[FEDDERS NORTH AMERICA LOGO]
OFFER TO EXCHANGE
ALL OUTSTANDING
9 3/8% SENIOR SUBORDINATED NOTES
DUE 2007
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
9 3/8% SENIOR SUBORDINATED NOTES
DUE 2007
AS FULLY AND UNCONDITIONALLY GUARANTEED ON A SENIOR SUBORDINATED BASIS AS
DESCRIBED HEREIN BY
FEDDERS CORPORATION
Fedders North America, Inc., a Delaware corporation (the "Company") hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with the Prospectus, the "Exchange Offer"), to
exchange its 9 3/8% Senior Subordinated Notes due 2007 (the "Notes") which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for each of the outstanding 9 3/8% Senior
Subordinated Notes due 2007 (the "Original Notes") of the Company, of which
$100,000,000 principal amount is outstanding.
The Notes will evidence the same debt as the Original Notes (which they
replace) and will be issued under and entitled to the benefits of the Indenture
dated August 18, 1997 (the "Indenture") relating to the Original Notes. The form
and terms of the Notes will be the same in all material respects as the form and
terms of the Original Notes, except that the Notes will have been registered
under the Securities Act and therefore, will not bear legends restricting their
transfer.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JANUARY 16, 1998, UNLESS EXTENDED.
The Notes will be guaranteed (the "Guarantee") on a senior subordinated
basis by Fedders Corporation ("Fedders Corporation" or the "Guarantor"), the
sole stockholder of the Company. The Notes and the Guarantee will be general
unsecured obligations of the Company and the Guarantor, respectively. The Notes
will be subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) of the Company and pari passu or senior in right of
payment to any other existing and future indebtedness of the Company. The
Guarantee will be subordinated in right of payment to all existing and future
Guarantor Senior Indebtedness (as defined) and pari passu or senior in right of
payment to any existing and future indebtedness of the Guarantor. As of August
31, 1997, after giving pro forma effect to the complete application of proceeds
from the offering of the Original Notes, the aggregate principal amount of
Senior Indebtedness and Guarantor Senior Indebtedness to which the Notes and the
Guarantee would have been subordinated would have been approximately $3.9
million and $10.0 million, respectively. The Indenture governing the Notes will
permit the Company and its Restricted Subsidiaries (as defined) to incur
additional indebtedness, subject to certain limitations. See "Description of
Notes." The Indenture will not place any limitation on Fedders Corporation or
its subsidiaries other than the Company.
The Company will accept for exchange any and all Original Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m. New York City time,
on January 16, 1998, unless the Exchange Offer is extended (the "Expiration
Date"). The Exchange Offer is not conditioned upon any minimum principal amount
of Original Notes being tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions which may be waived by the Company. The
Company has agreed to pay the expenses of the Exchange Offer. There will be no
cash proceeds to the Company from the Exchange Offer. See "Use of Proceeds."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF ORIGINAL NOTES WHO TENDER THEIR ORIGINAL
NOTES IN THE EXCHANGE OFFER.
THE NOTES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION" OR "SEC") OR ANY OTHER
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY, NOR HAS THE SEC
OR ANY SUCH COMMISSION OR REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Prospectus is December , 1997
<PAGE> 3
HOLDERS OF ORIGINAL NOTES ARE NOT TO CONSTRUE THE CONTENTS OF THIS
PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH SUCH HOLDER SHOULD CONSULT
ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX, BUSINESS,
FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE OFFER. NEITHER THE COMPANY NOR THE
GUARANTOR IS MAKING ANY REPRESENTATIONS TO ANY HOLDER OF THE ORIGINAL NOTES
REGARDING THE LEGALITY OF AN EXCHANGE BY SUCH HOLDER UNDER APPROPRIATE LEGAL
INVESTMENT OR SIMILAR LAWS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE EXCHANGE OFFER IS NOT BEING
MADE TO, NOR WILL THE COMPANY AND THE GUARANTOR ACCEPT SURRENDERS FOR EXCHANGE
FROM, HOLDERS OF ORIGINAL NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER
OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE
SKY LAWS OF SUCH JURISDICTION.
IN MAKING A DECISION REGARDING THE EXCHANGE OFFER, PROSPECTIVE INVESTORS
MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY, THE GUARANTOR AND THE TERMS
OF THE EXCHANGE OFFER, INCLUDING THE MERITS AND RISKS INVOLVED. THE EXCHANGE
OFFER IS BEING MADE ON THE BASIS OF THIS PROSPECTUS. ANY DECISION TO EXCHANGE
ORIGINAL NOTES FOR NOTES IN THE EXCHANGE OFFER MUST BE BASED ON THE INFORMATION
CONTAINED OR INCORPORATED HEREIN.
THE INFORMATION CONTAINED IN THIS PROSPECTUS WAS OBTAINED FROM THE COMPANY,
THE GUARANTOR AND OTHER SOURCES BELIEVED BY THE COMPANY AND THE GUARANTOR TO BE
RELIABLE. NOTHING CONTAINED IN THIS PROSPECTUS IS, OR SHALL BE RELIED UPON AS, A
PROMISE OR REPRESENTATION, WHETHER AS TO THE PAST OR THE FUTURE. THIS PROSPECTUS
CONTAINS SUMMARIES, BELIEVED TO BE ACCURATE, OF CERTAIN TERMS OF CERTAIN
DOCUMENTS, BUT REFERENCE IS MADE TO THE ACTUAL DOCUMENTS, COPIES OF WHICH WILL
BE MADE AVAILABLE UPON REQUEST, FOR THE COMPLETE INFORMATION CONTAINED THEREIN.
ALL SUCH SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY THIS REFERENCE.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR.
THE INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF AND SUBJECT TO CHANGE,
COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME NOR ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR THE GUARANTOR SINCE THE DATE
HEREOF.
Notes issued upon consummation of the Exchange Offer will be represented by
one or more permanent Global Notes (as defined) in definitive, fully registered
form deposited with a custodian for, and registered in the name of a nominee of,
DTC. Beneficial interests in such permanent Global Notes will be shown on, and
transfers thereof will be effected through, records maintained by DTC and its
participants, including Euroclear and CEDEL. See "Description of Notes--Book
Entry, Delivery and Form."
Market data used throughout this Prospectus were obtained from internal
surveys and industry publications. Industry publications generally indicate that
the information contained therein has been obtained
i
<PAGE> 4
from sources believed to be reliable but that the accuracy and completeness of
such information is not guaranteed. The Company and Fedders Corporation have not
independently verified such market data. Similarly, internal surveys, while
believed to be reliable, have not been verified by any independent source.
------------------------
This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Those statements include,
among other things, the discussions of the Company's and Fedders Corporation's
business strategy and expectations concerning the Company's and Fedders
Corporation's market position, future operations, margins, profitability,
liquidity and capital resources. Holders of Original Notes desiring to
participate in the Exchange Offer are cautioned that reliance on any
forward-looking statement involves risks and uncertainties and that, although
the Company and Fedders Corporation believe that the assumptions on which the
forward-looking statements contained herein and incorporated by reference are
based are reasonable, any of those assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also
could be incorrect. The uncertainties in this regard include, but are not
limited to, those identified herein under "Risk Factors." In light of these and
other uncertainties, the inclusion or incorporation of a forward-looking
statement herein should not be regarded as a representation by the Company or
Fedders Corporation that the Company's or Fedders Corporation's plans and
objectives will be achieved.
ii
<PAGE> 5
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the pro forma and
historical financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus. The "Company"
includes Fedders North America, Inc. (a wholly owned subsidiary of Fedders
Corporation) and the Company's subsidiaries. References in this Prospectus to
international operations and operations of Melcor Corporation ("Melcor") refer
to the operations of Fedders Corporation and not to the operations of the
Company. In addition, such operations of Fedders Corporation will not be subject
to any of the covenants of the Notes.
THE COMPANY
The Company believes it is the largest manufacturer of room air
conditioners in North America based on unit sales. The Company markets a
complete line of room air conditioners and dehumidifiers, principally for the
U.S. residential market through its brand names, FEDDERS(R), EMERSON QUIET
KOOL(R) and AIRTEMP(R). The Company sells its products primarily to national and
regional retail chains, home improvement centers and buying groups, as well as
to distributors and, under private label, to retailers and original equipment
manufacturers ("OEM's"), including other U.S. room air conditioner
manufacturers. The Company's wholly owned subsidiary Rotorex Company, Inc.
("Rotorex") manufactures and sells a broad line of rotary compressors,
principally for use in the Company's room air conditioners but also for sale to
other manufacturers of air conditioners. The Company has positioned its brands
across most price points, emphasizing quality and value for retailers and
consumers.
The Company believes its share of the U.S. market for room air conditioners
was approximately 30% for fiscal 1997 and 28.5% and 26.7% in fiscal years 1996
and 1995, respectively. The Company believes its market share growth and
profitability have been primarily attributable to its: (i) low cost production
achieved through continuous manufacturing improvements, including a 1992
restructuring, and a global sourcing strategy; (ii) broad range of high quality
products with strong brand recognition; (iii) strong relationships with leading
retailers; (iv) accurate-response manufacturing and just-in-time delivery
capabilities; and (v) principal focus on one product.
Fedders Corporation, together with its predecessor corporations, has been a
leader in heat transfer technology for more than 100 years. Founded in Buffalo,
NY, Fedders Corporation originally manufactured automobile radiators and has
been producing room air conditioners for 50 years. Fedders Corporation's
operations are conducted through the Company (its principal subsidiary), Fedders
International, Inc. (which markets and sells room air conditioners outside North
America), Fedders Xinle Co. Ltd. (a Chinese manufacturing joint venture formed
in 1995 and 60% owned by Fedders Corporation) ("Fedders Xinle") and Melcor
(which manufactures thermoelectric heat/cool modules). Fedders Xinle intends to
market its products directly within China, to export markets around the world
through Fedders International, Inc. and to North America through the Company.
Over the past five years, Fedders Corporation has dramatically improved its
financial performance with an increase in net sales and EBITDA (as defined) from
$158.6 million and $6.3 million, respectively, in fiscal 1993 to net sales and
EBITDA of $314.1 million and $42.2 million, respectively, in fiscal 1997. The
Company believes that much of this improvement is the direct result of a 1992
restructuring (the "Restructuring") in which Fedders Corporation closed two
manufacturing facilities, aggressively accelerated cost reduction measures,
established a new strategy for diversifying its geographical distribution of
sales by focusing on large retail customers, including home improvement centers,
and implemented flexible accurate-response manufacturing to respond better to
its customers' demands.
1
<PAGE> 6
COMPETITIVE STRENGTHS AND COMPANY STRATEGY
The Company's strategy is to continue to capitalize on its competitive
strengths, including the following:
LOW COST PRODUCER. The Company believes it has positioned itself as the
low cost producer in the United States. Significant cost savings achieved since
1993 were a key factor in the Company's ability to increase operating margins
from 1.2% in fiscal 1993 to 10.1% in fiscal 1997. The Company has achieved
significant cost reduction through:
- Emphasis on global sourcing of components and raw materials to
reduce costs and ensure quality;
- Continuous improvement in manufacturing efficiencies and in
designing cost out of the product based, in part, on one of its core
competencies, expertise in heat transfer technology;
- Minimizing fixed costs while maximizing production flexibility, in
part as a result of the Restructuring, which included a reduction in its
manufacturing facilities after the acquisition of Emerson Quiet Kool and
the elimination of duplicative management and operational and
administrative departments;
- Low labor content and flexible manufacturing that allow the Company
to reduce variable costs dramatically when demand for its products
fluctuates. The direct labor cost component of the Company's products is
generally less than the cost of freight and duty to import air conditioners
into the United States from many offshore locations, resulting in favorable
price comparisons with imported goods.
HIGH QUALITY PRODUCTS WITH STRONG MULTIPLE BRANDS. The Company
manufactures a complete line of window and through-the-wall room air
conditioners to meet a broad range of consumer preferences. It believes it has
developed a reputation among its customers and consumers for producing high
quality products at competitive prices. The FEDDERS, EMERSON QUIET KOOL, and
AIRTEMP brands each has a long history and is well known in the marketplace. On
a private label basis, the Company also manufactures, in various sizes, a
portion of the room air conditioners of other U.S. OEM's. All of the Company's
U.S. manufacturing facilities, including Rotorex, have received the highest
level of quality certification, ISO 9001, for their quality management systems
from the International Standards Organization.
STRONG RELATIONSHIPS WITH LEADING RETAILERS. Beginning in the early
1990's, the Company recognized a significant shift in the U.S. market for room
air conditioners as major regional and national retailers began replacing
wholesale distributors as the primary customers for the industry. The Company
believes it has distinguished itself from its competitors by effectively
penetrating this rapidly growing customer base and by working closely with its
customers to improve their marketing of the Company's products. The Company
estimates that leading retailers currently represent more than 50% of the total
room air conditioner market in the United States.
ACCURATE-RESPONSE MANUFACTURING. During the 1990's, the Company
reengineered its manufacturing processes and distribution systems in order to
meet the delivery requirements, including "in-season" orders, of its major
retailing customers who increasingly sought to minimize their inventories. The
Company believes that its accurate-response manufacturing capability, by which
it can adjust both total production quantities and product mix on a timely
basis, has been a key factor in its ability to gain market share from its
competitors.
PRODUCT FOCUS. Fedders Corporation has a 100-year history of experience in
heat transfer technology, including 50 years of experience in the manufacturing
of room air conditioners. Many of the Company's competitors produce a broad
range of consumer products, and the Company believes that such competitors have
historically given less attention to the development and expansion of their room
air conditioning businesses than the Company. Room air conditioners have been,
and continue to be, the Company's primary business focus.
2
<PAGE> 7
INDUSTRY
The U.S. room air conditioner market is the third largest in the world with
average annual sales of 3.7 million units for the last ten calendar years. The
industry has experienced significant consolidation with a reduction from 18
major domestic manufacturing operations in 1975 to six in 1997.
Sales of room air conditioners in the domestic market vary from year to
year according to the weather which also affects shipments in the following year
due to carry-over inventory. The Company believes that demand is principally
driven by the replacement market. Unlike major household appliances and central
air conditioning systems, the sale of room air conditioners is not dependent on
the construction of new homes.
Fedders Corporation believes that the international market for room air
conditioners outside the United States is approximately five times the size of
the U.S. market, measured on a unit basis. Demand for air conditioners outside
of North America accelerated in recent years, including in the largest overseas
markets of Japan, China and the rest of Southeast Asia, and continues to grow
rapidly with the increasing disposable income of populous nations in hot weather
climates.
3
<PAGE> 8
THE EXCHANGE OFFER
Securities Offered......... $100,000,000 principal amount of 9 3/8% Senior
Subordinated Notes due 2007. The terms of the Notes
and the Original Notes are identical in all
material respects, except for certain transfer
restrictions and registration rights relating to
the Original Notes and except for certain
Liquidated Damages provisions relating to the
Original Notes described below under "--Summary
Description of the Notes."
Issuance of Original Notes;
Registration Rights...... The Original Notes were issued on August 18, 1997
to Donaldson, Lufkin & Jenrette Securities
Corporation and Goldman, Sachs & Co.,
(collectively, the "Initial Purchasers"), which
placed the Original Notes with "qualified
institutional buyers" (as such term is defined in
Rule 144A promulgated under the Securities Act). In
connection therewith, the Company and Fedders
Corporation executed and delivered for the benefit
of the holders of the Original Notes a certain
registration rights agreement (the "Registration
Rights Agreement"), pursuant to which the Company
and Fedders Corporation agreed (i) to file a
registration statement (the "Registration
Statement") on or prior to 45 days after August 18,
1997 with respect to the Exchange Offer and (ii) to
use their best efforts to cause the Registration
Statement to be declared effective by the
Commission on or prior to 120 days after August 18,
1997. In certain circumstances, the Company and
Fedders Corporation will be required to provide a
shelf registration statement (the "Shelf
Registration Statement") to cover resales of the
Original Notes by the holders thereof. If the
Company and Fedders Corporation do not comply with
their obligations under the Registration Rights
Agreement, the Company will be required to pay
Liquidated Damages to holders of the Original Notes
under certain circumstances. See "The Exchange
Offer--Registration Rights; Liquidated Damages."
Holders of Original Notes do not have any appraisal
rights in connection with the Exchange Offer.
The Exchange Offer......... The Notes are being offered in exchange for a like
principal amount of Original Notes. The issuance of
the Notes is intended to satisfy the obligations of
the Company and Fedders Corporation contained in
the Registration Rights Agreement. Based upon the
position of the staff of the Commission set forth
in no-action letters issued to third parties in
other transactions substantially similar to the
Exchange Offer, the Company and Fedders Corporation
believe that the Notes issued pursuant to the
Exchange Offer may be offered for resale, resold
and otherwise transferred by holders thereof (other
than (i) any such holder that is an "affiliate" of
the Company or Fedders Corporation within the
meaning of Rule 405 under the Securities Act, (ii)
an Initial Purchaser who acquired the Original
Notes directly from the Company solely in order to
resell pursuant to Rule 144A of the Securities Act
or any other available exemption under the
Securities Act or (iii) a broker-dealer who
acquired the Original Notes as a result of market
making or other trading activities) without further
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such Notes are acquired in the
ordinary course of such holder's business and such
4
<PAGE> 9
holder is not participating and has no arrangement
with any person to participate in a distribution
(within the meaning of the Securities Act) of such
Notes. Each broker-dealer that receives Notes for
its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale for such Notes. Although
there has been no indication of any change in the
staff's position, there can be no assurance that
the staff of the Commission would make a similar
determination with respect to the resale of the
Notes. See "Risk Factors."
Procedures for Tendering... Tendering holders of Original Notes must complete
and sign the Letter of Transmittal in accordance
with the instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents, to the
Exchange Agent, either with the Original Notes to
be tendered or in compliance with the specified
procedures for guaranteed delivery of Original
Notes. Holders of the Original Notes desiring to
tender such Original Notes in exchange for Notes
should allow sufficient time to ensure timely
delivery. Certain brokers, dealers, commercial
banks, trust companies and other nominees may also
effect tenders by book-entry transfer. Holders of
Original Notes registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee are urged to contact such person promptly
if they wish to tender Original Notes pursuant to
the Exchange Offer. Letters of Transmittal and
certificates representing Original Notes should not
be sent to the Company or Fedders Corporation. Such
documents should only be sent to the Exchange
Agent. Questions regarding how to tender and
requests for information should be directed to the
Exchange Agent. See "The Exchange Offer--Procedures
for Tendering Original Notes."
Tenders, Expiration Date;
Withdrawal............... The Exchange Offer will expire the earlier of (i)
5:00 p.m., New York City time, on January 16, 1998
or (ii) the date when all Original Notes have been
tendered, or such later date and time to which it
is extended, provided it may not be extended beyond
January 27, 1998. The tender of Original Notes
pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Original
Note not accepted for exchange for any reason will
be returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
See "The Exchange Offer--Terms of the Exchange
Offer; Period for Tendering Original Notes" and
"--Withdrawal Rights."
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions, all of which may be waived by the
Company and Fedders Corporation, including the
absence of (i) threatened or pending proceedings
seeking to restrain the Exchange Offer or resulting
in a material delay to the Exchange Offer; (ii) a
general suspension of trading on any national
securities exchange or in the over-the-counter
market; (iii) a banking moratorium; (iv) a
commencement of war, armed hostilities or other
similar international calamity directly or
indirectly involving the United States; and (v)
change or threatened change in the business,
properties,
5
<PAGE> 10
assets, liabilities, financial condition,
operations, results of operations or prospects of
the Company and its subsidiaries taken as a whole
or of Fedders Corporation and its subsidiaries
taken as a whole that, in the sole judgment of the
Company and Fedders Corporation, is or may be
adverse to the Company and Fedders Corporation.
The Company shall not be required to accept for
exchange, or to issue Notes in exchange for, any
Original Notes, if at any time before the
acceptance of such Original Notes for exchange or
the exchange of Notes for such Original Notes, any
of the foregoing events occurs which, in the sole
judgment of the Company and Fedders Corporation,
make it inadvisable to proceed with the Exchange
Offer and/or with such acceptance for exchange or
with such exchange. If the Company and Fedders
Corporation fail to consummate the Exchange Offer
because the Exchange Offer is not permitted by
applicable law or Commission policy, it will file
with the Commission a Shelf Registration Statement
to cover resales of the Transfer Restricted
Securities (as defined) by the holders thereof who
satisfy certain conditions. If the Company fails to
consummate the Exchange Offer or file a Shelf
Registration Statement in accordance with the
Registration Rights Agreement, the Company will pay
Liquidated Damages to each holder of Transfer
Restricted Securities until the cure of all
defaults. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Original Notes being tendered for exchange. See
"The Exchange Offer--Registration Rights;
Liquidated Damages" and "--Certain Conditions to
the Exchange Offer."
Federal Income Tax
Consequences............. For federal income tax purposes, the exchange
pursuant to the Exchange Offer will not result in
any income, gain or loss to the holders, the
Company or Fedders Corporation assuming the fair
market value of the Original Notes equals the fair
market value of the Notes. See "Federal Income Tax
Consequences."
Use of Proceeds............ There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Appraisal Rights........... Holders of Original Notes will not have dissenters'
rights or appraisal rights in connection with the
Exchange Offer.
Exchange Agent............. State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer.
CONSEQUENCES OF NOT EXCHANGING THE ORIGINAL NOTES
Holders of Original Notes who do not exchange their Original Notes for
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company and Fedders Corporation do not currently anticipate that they will
register the Original Notes under the Securities Act. See "Risk
Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange
Offer--Consequences of Exchanging Original Notes."
6
<PAGE> 11
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the Notes and the Original Notes are identical in all material
respects, except (i) for certain transfer restrictions and registration rights
relating to the Original Notes and (ii) that, if the Exchange Offer is not
consummated by January 27, 1998, subject to certain exceptions, with respect to
the first 90-day period immediately following thereafter, the Company will be
obligated to pay Liquidated Damages to each holder of Original Notes in an
amount equal to $.05 per week for each $1,000 principal amount of Original
Notes, as applicable, held by such holder. The amount of the Liquidated Damages
will increase by an additional $.05 per week with respect to each subsequent
90-day period until the Exchange Offer is consummated, or any other Registration
Default (as defined) is cured, up to a maximum of $.40 per week for each $1,000
principal amount of Original Securities, as applicable.
The Notes will bear interest from the most recent date to which interest
has been paid on the Original Notes or, if no interest has been paid on the
Original Notes, from August 18, 1997. Accordingly, registered holders of Notes
on the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid
from August 18, 1997. Original Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Original Notes whose Original Notes are accepted for exchange will not
receive any payment in respect of interest on such Original Notes otherwise
payable on any interest payment date which occurs on or after consummation of
the Exchange Offer.
THE NOTES
Securities Offered......... $100,000,000 aggregate principal amount of 9 3/8%
Senior Subordinated Notes due 2007.
Maturity Date.............. August 15, 2007.
Interest Payment Dates..... Interest on the Notes will accrue at the rate of
9 3/8% per annum, payable semi-annually in cash in
arrears on February 15 and August 15 of each year,
commencing February 15, 1998.
Optional Redemption........ On or after August 15, 2002, the Company may redeem
the Notes, at the redemption prices set forth
herein, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
redemption. Notwithstanding the foregoing, at any
time prior to August 15, 2000, the Company may
redeem up to 30% of the aggregate principal amount
of the Notes originally issued with the net
proceeds of one or more Equity Offerings at a
redemption price equal to 109.375% of the principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages, if any, to the date of
redemption; provided that at least 70% in aggregate
principal amount of the Notes originally issued
remains outstanding after each such redemption and
that any such redemption occurs within 60 days of
such Equity Offering. See "Description of
Notes--Redemption of Notes--Optional Redemption."
Ranking.................... The Notes will be subordinated in right of payment
to all existing and future Senior Indebtedness of
the Company, including all obligations under the
Credit Agreement (as defined), and pari passu or
senior in right of payment to any other existing
and future indebtedness of the Company. The
Indenture will limit the incurrence by the Company
and its Restricted Subsidiaries of additional
Indebtedness. As of August 31, 1997, after giving
pro forma effect to the complete application of
proceeds from the offering of the Original Notes,
the aggregate principal amount of Senior
Indebtedness outstanding would have been $3.9
million.
7
<PAGE> 12
Guarantee.................. The Notes will be fully and unconditionally
guaranteed on a senior subordinated basis by
Fedders Corporation. The Guarantee will be
subordinated in right of payment to all future
Guarantor Senior Indebtedness and pari passu or
senior in right of payment to any other existing or
future indebtedness of Fedders Corporation to the
same extent that the Notes are subordinated to
Senior Indebtedness of the Company. As of August
31, 1997, after giving pro forma effect to the
complete application of proceeds from the offering
of the Original Notes, the aggregate principal
amount of Guarantor Senior Indebtedness outstanding
would have been $10.0 million.
Change of Control.......... Upon a Change of Control, the Company will be
required to make an offer to purchase all of the
outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of repurchase. See "Description of
Notes--Change of Control."
Certain Covenants.......... The Indenture contains certain covenants which,
among other things, limit the ability of the
Company and its Restricted Subsidiaries to: (i)
incur additional Indebtedness and issue preferred
stock; (ii) repay certain other Indebtedness; (iii)
pay dividends or make certain other distributions;
(iv) repurchase equity interests; (v) consummate
certain asset sales; (vi) enter into certain
transactions with affiliates; (vii) enter into sale
and leaseback transactions; (viii) incur liens;
(ix) merge or consolidate with any other person; or
(x) sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of
the assets of the Company. In addition, under
certain circumstances, the Company will be required
to make an offer to purchase the Notes at a price
equal to the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any,
to the date of purchase, with the proceeds of
certain Asset Sales. See "Description of Notes."
Use of Proceeds............ The Company will receive no proceeds from the
issuance of the Notes upon consummation of the
Exchange Offer. The net proceeds from the offering
of the Original Notes were used by the Company to
pay a dividend of approximately $72.3 million to
Fedders Corporation which was used to redeem its
8 1/2% Convertible Subordinated Debentures due 2012
in the aggregate amount of approximately $22.3
million (approximately $21.8 million aggregate
principal amount and accrued interest of
approximately $0.5 million) and which it is
anticipated will be used to fund a stock repurchase
in an aggregate amount of approximately $50.0
million of which $4.4 million was repurchased as of
August 31, 1997. The remaining net proceeds will be
used by the Company (i) to prepay various capital
leases in an aggregate amount of up to
approximately $5.8 million and (ii) to reduce any
amounts outstanding under its revolving credit
facility and for general corporate purposes. See
"Use of Proceeds" and "Description of Certain
Indebtedness."
RISK FACTORS
Holders of the Original Notes should carefully consider all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors" in connection with the Exchange
Offer.
8
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The following table sets forth summary historical consolidated financial
information of Fedders Corporation which has been derived from and should be
read in conjunction with the audited consolidated financial statements and
related notes thereto appearing elsewhere or incorporated by reference in this
Prospectus and "Management's Discussion and Analysis of Results of Operations
and Financial Condition of Fedders Corporation."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
--------------------------------
1995 1996 1997
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales......................................................................... $316,494 $371,772 $314,100
Gross profit...................................................................... 67,125 83,028 70,076
Selling, general and administrative expenses...................................... 29,472 32,040 38,347
Operating income.................................................................. 37,653 50,988 31,729
Net interest expense.............................................................. 1,962 952 3,430
Income taxes...................................................................... 6,187 19,108 10,103
Net income........................................................................ 29,504 31,158 18,764
OTHER DATA:
EBITDA(1)......................................................................... $ 44,143 $ 57,796 $ 42,232
Depreciation and amortization..................................................... 7,519 6,578 9,935
Capital expenditures(2)........................................................... 9,041 7,043 9,236
Gross profit margin............................................................... 21.2% 22.3% 22.3%
DATA AS ADJUSTED(3):
Total interest expense............................................................ $ 10,632
Ratio of EBITDA to total interest expense......................................... 4.0x
Ratio of total debt to EBITDA..................................................... 2.5x
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1997
---------------------------------
ACTUAL AS ADJUSTED(3)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 110,393 $ 58,967
Working capital.................................................................. 141,736 92,139
Total assets..................................................................... 329,014 329,014
Long-term debt (including current portion)....................................... 115,380 109,546
Total stockholders' equity....................................................... 145,687 100,095
</TABLE>
9
<PAGE> 14
- ---------------
(1) EBITDA represents income before income taxes plus net interest expense and
depreciation and amortization (excluding amortization of debt discounts and
deferred financing costs). While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of Fedders Corporation
and the Company to meet their future debt service, capital expenditures and
working capital requirements. In addition, Fedders Corporation and the
Company believe that certain investors find EBITDA to be a useful tool for
measuring the ability of Fedders Corporation and the Company to service
their debt. EBITDA is not necessarily a measure of Fedders Corporation's or
the Company's ability to fund cash needs.
(2) Fiscal 1995 amount includes buyout of $1,750 of equipment under lease.
(3) Information presented reflects adjustments as if the offering of the
Original Notes had been completed at the beginning of the period presented
and the proceeds had been applied as described in "Use of Proceeds." As
adjusted amounts as of August 31, 1997 reflect the application of net
proceeds from the offering of the Original Notes to the extent that such
application is not already reflected in the historical amounts as of that
date.
(4) The Company is a wholly owned subsidiary of Fedders Corporation. The
following table sets forth historical financial information of the Company
which have been derived from and should be read in conjunction with, the
supplemental condensed consolidating financial statements appearing in note
14 to the Fedders Corporation consolidated financial statements appearing
elsewhere or incorporated by reference in this Prospectus. Note references
in the following table are to the notes preceding this note.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------
1995 1996 1997
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales................................................................................... $311,363 $356,392 $271,874
Gross profit................................................................................ 65,770 79,475 65,004
Operating income............................................................................ 39,255 54,208 38,874
OTHER DATA:
EBITDA...................................................................................... $ 45,316 $ 60,279 $ 46,721
Capital expenditures(3)..................................................................... 4,286 4,983 7,131
Gross profit margin......................................................................... 21.1% 22.3% 23.9%
DATA AS ADJUSTED(4):
Total interest expense...................................................................... $ 10,136
Ratio of EBITDA to total interest expense................................................... 4.6x
Ratio of total debt to EBITDA............................................................... 2.3x
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1997
---------------
ACTUAL
<S> <C>
BALANCE SHEET DATA:
Total assets............................................................................................... $ 165,892
Long-term debt (including current portion)................................................................. 109,216
Total stockholders' equity................................................................................. 21,155
</TABLE>
10
<PAGE> 15
RISK FACTORS
Holders of the Original Notes should consider carefully the risk factors
set forth below, as well as other information contained herein and incorporated
by reference, before tendering their Original Notes in the Exchange Offer.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Issuance of the Notes in exchange for the Original Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Original Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Original
Notes desiring to tender such Original Notes in exchange for Notes should allow
sufficient time to ensure timely delivery. The Company and Fedders Corporation
are under no duty to give notification of defects or irregularities with respect
to tenders of Original Notes for exchange. Holders of Original Notes who do not
exchange their Original Notes for Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Original Notes as
set forth in the legend thereon. In general, the Original Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company and Fedders Corporation do not
currently anticipate that they will register the Original Notes under the
Securities Act. In addition, upon the consummation of the Exchange Offer the
rights of holders of Original Notes which remain outstanding to have such
Original Notes registered under the Securities Act and such holders' other
rights under the Registration Rights Agreement will be very limited. To the
extent that Original Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered, or tendered but unaccepted, Original Notes
could be adversely affected. See "The Exchange Offer--Consequences of Not
Exchanging Original Notes."
Based on interpretations by the staff of the Commission, the Company and
Fedders Corporation believe that the Notes issued pursuant to the Exchange Offer
in exchange for Original Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act, (ii) an Initial
Purchaser who acquired the Original Notes directly from the Company solely in
order to resell pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or (iii) a broker-dealer who
acquired the Original Notes as a result of market making or other trading
activities) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Notes. The Company and Fedders Corporation have not, however, sought their
own no-action letter from the staff of the Commission. Although there has been
no indication of any change in the staff's position, there can be no assurance
that the staff of the Commission would make a similar determination with respect
to the resale of the Notes. Any holder that cannot rely upon such prior staff
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, unless such sale is made pursuant to an exemption from such
requirements. See "The Exchange Offer--Purpose of the Exchange Offer."
SUBORDINATION
The Notes will be general unsecured obligations of the Company, and both
payments under the Notes and payments under the Guarantee will be subordinated
in right of payment to all existing and future Senior Indebtedness and Guarantor
Senior Indebtedness, as the case may be. As of August 31, 1997, after giving pro
forma effect to the complete application of proceeds from the offering of the
Original Notes, the aggregate principal amount of Senior Indebtedness and
Guarantor Senior Indebtedness to which the Notes and the Guarantee would have
been subordinate would have been approximately $3.9 million and $10.0 million,
respectively. The Indenture will limit the incurrence by the Company and its
Restricted Subsidiaries of additional Indebtedness, subject to certain financial
condition tests, all of which may be Senior Indebtedness.
11
<PAGE> 16
The Indenture will not limit the ability of the Guarantor to incur additional
Guarantor Senior Indebtedness. By reason of the subordination provisions of the
Indenture, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of the Company or Fedders Corporation, other
creditors who are holders of Senior Indebtedness and Guarantor Senior
Indebtedness must be paid in full before payment of amounts due on the Notes.
Accordingly, there may be insufficient assets remaining after such payments to
pay amounts due on the Notes.
In addition, the Company and the Guarantor may not pay principal of,
premium, if any, or interest on, or any other amounts owing in respect of, the
Notes, or purchase, redeem or otherwise retire the Notes, or make any deposit
pursuant to defeasance provisions for the Notes, if Designated Senior
Indebtedness (as defined in the Indenture) is not paid when due, unless such
default is cured or waived or has ceased to exist or such Designated Senior
Indebtedness has been repaid in full. Under certain circumstances, no payments
may be made for a specified period with respect to the principal of, premium, if
any, and interest on, and any other amounts owing in respect of, the Notes if a
default, other than a payment default, exists with respect to Designated Senior
Indebtedness unless such default is cured, waived or has ceased to exist or such
indebtedness has been repaid in full. If any Event of Default (as defined)
occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes due and
payable immediately. In such an event, the subordination provisions of the
Indenture would prohibit any payments to holders of the Notes unless and until
such obligations (and any other accelerated Senior Indebtedness) have been
repaid in full. See "Description of Notes--Subordination."
The Company's and Fedders Corporation's subsidiaries may in the future
incur Indebtedness. Holders of such Indebtedness will have a claim against the
assets of such subsidiaries that will rank prior to the claim of the holders of
the Notes and the Guarantee. As of August 31, 1997, subsidiaries of Fedders
Corporation (other than the Company and its subsidiaries) had $6.2 million of
outstanding Indebtedness.
Because of the subordination provisions of the Notes and the Guarantee, and
after the occurrence of certain events, creditors whose claims are senior to the
Notes or the Guarantee may recover more, ratably, than the holders of the Notes.
See "Description of Notes--Subordination."
SEASONALITY AND SUMMER WEATHER CONDITIONS
The Company's results of operations and financial condition are principally
dependent on the manufacture and sale of room air conditioners, the demand for
which is highly seasonal in North American markets. Seasonally low volume sales
are not sufficient to offset fixed costs, resulting in operating losses at
certain times of the year. In addition, the Company's working capital needs are
seasonal, with the greatest utilization of lines of credit occurring early in
the calendar year. See "Business--Seasonality of Business" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition of
Fedders Corporation."
The Company's business is primarily dependent on the demand for room air
conditioners in North America. As a result, unseasonably cool temperatures
during the summer in principal domestic markets have an adverse effect on the
industry and on the Company's operations. While a cool summer in several major
markets in a given year would likely result in reduced sales and earnings for a
single fiscal year, consecutive cool summers in such major markets could have a
material adverse effect on the Company's business. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition of Fedders
Corporation."
DEPENDENCE ON PRINCIPAL CUSTOMERS
The Company's largest customer accounted for 27%, 30% and 26% of Fedders
Corporation's net sales in fiscal years 1997, 1996 and 1995, respectively. One
other customer accounted for 10% of Fedders Corporation's net sales in fiscal
1995. Two retailers each accounted for at least 10% of Fedders Corporation's net
sales in fiscal 1997. While the Company has done business with most of its
principal customers for a number of years, agreements with principal customers
are reached annually and are based on purchase orders. There can be no assurance
that sales to principal customers will continue at the same levels; further,
continuation of the relationships is dependent upon the customers' satisfaction
with the price, quality and delivery of the
12
<PAGE> 17
Company's products. While management believes its relationships with its
customers are satisfactory, in the event of the loss of a significant segment of
business that the Company were unable to replace with new orders, the Company
would be materially adversely affected. See "Business."
COMPETITION
The Company's business is highly competitive and the principal market in
which it participates is mature. The Company's competitors include a number of
domestic and foreign manufacturers of air conditioners and other appliances,
many of which are substantially larger and have greater financial resources than
the Company. Competitive factors could require price reductions or increased
spending on product development, marketing and sales that could adversely affect
the Company's profit margins. See "Business--Competition."
RESTRICTIVE COVENANTS LIMITING THE COMPANY'S ABILITY TO REPAY THE NOTES
The Indenture restricts, among other things, the Company's and its
Restricted Subsidiaries' ability to pay dividends or make certain other
restricted payments, to incur additional Indebtedness, to encumber or sell
assets, to enter into transactions with affiliates, to enter into certain
guarantees of Indebtedness, to make restricted investments, to merge or
consolidate with any other entity and to transfer or lease all or substantially
all of their assets. The Indenture does not place any limitation on Fedders
Corporation or its subsidiaries other than the Company. The Company's revolving
credit facility requires the Company to satisfy certain financial condition
tests. The Company's ability to meet those tests can be affected by events
beyond its control, and there can be no assurance that the Company will meet
those tests. A breach of any of these covenants could result in a default under
the Company's revolving credit facility and the Indenture. Upon the occurrence
of an event of default under the Company's revolving credit facility, the
lenders thereunder could elect to declare all amounts outstanding under the
Company's revolving credit facility, together with accrued interest, to be
immediately due and payable. If the Company were unable to repay those amounts,
such lenders could proceed against the collateral granted to them to secure that
Indebtedness. If the Notes were to be accelerated, there can be no assurance
that the assets of the Company would be sufficient to repay the Notes in full.
Substantially all of the assets of Fedders Corporation, including the Company
and its subsidiaries, are pledged as security under the Company's revolving
credit facility. See "Description of Certain Indebtedness."
LEVERAGE AND DEBT SERVICE
As of August 31, 1997, adjusted for the complete application of the
proceeds from the offering of the Original Notes, the Company's total
Indebtedness, on a consolidated basis, was approximately $109.5 million,
representing approximately 52% of the Company's total capitalization. The
Company's leverage may have important consequences for the Company including:
(i) the ability of the Company to obtain additional financing for acquisitions,
working capital, capital expenditures or other purposes, if necessary, may be
impaired or such financing may not be on terms favorable to the Company; (ii) a
portion of the Company's cash flow will be used to pay the Company's interest
expense and under certain conditions to repay Indebtedness, which will reduce
the funds that would otherwise be available to the Company for its operations
and future business opportunities; (iii) a substantial decrease in net operating
cash flows or an increase in expenses of the Company could make it difficult for
the Company to meet its debt service requirements and force it to modify its
operations; (iv) the Company may be more highly leveraged than its competitors,
which may place it at a competitive disadvantage; and (v) the Company's leverage
may make it more vulnerable to a downturn in its business or the economy
generally. Any inability of the Company to service its Indebtedness or obtain
additional financing, as needed, would have a material adverse effect on the
Company.
The Company's ability to pay interest and principal on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control.
There can be no assurance that the Company will have adequate cash available to
make required principal and interest payments.
13
<PAGE> 18
WORKING CAPITAL REQUIREMENTS
Because of the seasonal nature of the Company's business, its working
capital requirements are significantly higher at certain times of the year. If
amounts required to fund the Company's working capital requirements are not
available from Fedders Corporation or under the Company's revolving credit
facility, the Company would need to seek an increase in the borrowing limit
under its revolving credit facility or an alternative source of working capital.
Such additional working capital may not be available on terms satisfactory to
the Company. Unavailability of needed working capital could have a material
adverse effect on the Company's business and its results of operations. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of Fedders Corporation."
CHANGE OF CONTROL PROVISIONS; LIMITATION ON RIGHTS OF REPAYMENT
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the outstanding Notes at 101% of the principal amount
thereof plus accrued and unpaid interest thereon and Liquidated Damages, if any,
to the date of repurchase. The exercise by the holders of the Notes of their
right to require the Company to repurchase the Notes upon a Change of Control
could also cause a default under other Indebtedness of the Company, even if the
Change of Control itself does not, because of the financial effect of such
repurchase on the Company. The Company's ability to pay cash to the holders of
the Notes upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that, in the event of a Change of
Control, the Company will have, or will have access to, sufficient funds or will
be contractually permitted under the terms of outstanding Indebtedness to pay
the required purchase price for all the Notes tendered by holders upon a Change
of Control. See "Description of Notes--Mandatory Offers to Purchase
Notes--Change of Control."
CONTROL BY PRINCIPAL STOCKHOLDERS
The Company is a wholly owned subsidiary of Fedders Corporation.
Approximately 99.8% of the Class B Stock of Fedders Corporation is beneficially
owned by Salvatore Giordano, Sal Giordano, Jr., Joseph Giordano and members of
their families. Through their holdings of Class B Stock, these persons will
have, under certain circumstances, the power to elect a majority of the Board of
Directors and to determine the policies of Fedders Corporation and of the
Company, the persons constituting the management of Fedders Corporation and of
the Company and the outcome of certain significant corporate actions requiring
stockholder approval. See "Security Ownership of Directors and Executive
Officers of Fedders Corporation."
DEPENDENCE ON KEY EXECUTIVES
Management believes that the performance of the Company has been, and will
continue to be, dependent upon the efforts of the principal executive officers
of the Company. Although the Company and Fedders Corporation have designed
incentive and compensation programs to retain key employees, including options
to purchase stock of Fedders Corporation, no assurance can be given as to the
continued availability of the principal executive officers. The Company believes
that its future success will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel, and the loss of some
or all of these principal executive officers could have a material adverse
effect on the Company. See "Management."
INTERNATIONAL OPERATIONS AND THE FOREIGN CORRUPT PRACTICES ACT
Fedders Corporation has dedicated resources to participating in the
international market by establishing operations in China through Fedders Xinle,
a joint venture entered into with Ningbo General Air Conditioner Factory, and
intends to continue such involvement through other production and joint venture
agreements. International manufacturing and sales are subject to inherent risks,
including labor unrest, political instability, restrictions on transfer of
funds, export duties and quotas, domestic and foreign customs and tariffs,
current and changing regulatory environments, difficulty in obtaining
distribution and support and potentially adverse
14
<PAGE> 19
tax consequences. There can be no assurance that these factors will not have a
material adverse effect on Fedders Corporation's international operations or
sales or upon its financial condition and results of operations.
To the extent that the Company and Fedders Corporation conduct operations
and sell their products outside the United States, the Company and Fedders
Corporation are subject to the Foreign Corrupt Practices Act (the "FCPA"), which
generally prohibits U.S. companies and their intermediaries from bribing foreign
officials for the purpose of obtaining or keeping business or licenses or
otherwise obtaining favorable treatment. Although the Company and Fedders
Corporation have taken precautions to comply with the FCPA, there can be no
assurance that such precautions will protect the Company and Fedders Corporation
against liability under the FCPA, particularly as a result of actions which may
in the past have been taken or which may be taken in the future by agents and
other intermediaries for whose actions the Company or Fedders Corporation may be
held liable under the FCPA. In particular, the Company and Fedders Corporation
may be held responsible for actions taken by its strategic or local partners
even though such strategic or local partners are themselves typically foreign
companies which are not subject to the FCPA, and the Company or Fedders
Corporation has no ability to control such strategic or local partners. Any
determination that the Company or Fedders Corporation has violated the FCPA
could have a material adverse effect on the Company and Fedders Corporation.
AVAILABILITY OF AND FLUCTUATION IN THE COST OF RAW MATERIALS
The Company's operations are dependent on the supply of various raw
materials, including steel, copper and aluminum, from domestic and foreign
suppliers. The Company obtains substantially all of its supply of steel, copper
and aluminum pursuant to purchase orders. The Company does not typically enter
into long-term supply contracts relating to these raw materials. Although to
date the Company has been able to obtain sufficient quantities of steel, copper
and aluminum for its manufacturing processes, supply interruptions or cost
increases, to the extent that the Company is not able to pass these costs on to
its customers, could adversely affect the Company's future results of
operations. See "Business--Raw Materials."
LABOR RELATIONS
Approximately 49% of the Company's employees in the United States are
represented by unions. The Company and the union representing employees of
Rotorex were unable to reach agreement prior to the expiration of their
collective bargaining agreement in August 1997, and the employees covered by the
collective bargaining agreement struck. Rotorex continues to operate using
temporary workers. Two collective bargaining agreements with the unions
representing employees in the Company's Effingham, Illinois plant are scheduled
to expire in October 1998. There can be no assurance as to the results of
negotiations of future collective bargaining agreements, whether future
collective bargaining agreements will be negotiated without production
interruptions or the possible impact of future collective bargaining agreements,
or the negotiation thereof, on the Company's financial condition and results of
operations. See "Business--Employees."
GOVERNMENT REGULATION
The Company is subject to various federal, state and local laws affecting
its business. Room air conditioners are subject to federal regulations providing
for minimum energy efficiency rating ("EER") requirements. Achieving required
EER's results from a combination of an efficient compressor and the design of
the air conditioning system using the compressor. Current proposed rule-making
by the Energy Department under the National Appliance Energy Conservation Act
would have the effect of increasing minimum required EER's. In the event the new
regulations are adopted, the efficiency of certain air conditioner models would
have to be increased. It is not certain at present if the proposed regulations
will be adopted and, if they are, when the requirements would become effective.
Although the Company believes it is currently in material compliance with the
EER requirements and does not believe that the adoption of new EER regulations
will adversely affect the result of operations of the Company, there can be no
assurance that changes in
15
<PAGE> 20
government regulations which adversely affect the industry and the Company will
not occur in the future. See "Business -- Government Regulation."
IMPACT OF ENVIRONMENTAL REGULATION
The products manufactured by the Company currently use
hydrochlorofluorocarbons ("HCFC's") as the refrigerant. The production of HCFC's
for use in new equipment is currently scheduled to be phased out as of the year
2010 in the United States, and the production of HCFC's for the servicing of
existing equipment is currently scheduled to be phased out as of the year 2020
in the United States. Chemical producers are currently developing
environmentally acceptable alternative refrigerants for use in room air
conditioners that are expected to be available in advance of any now-proposed
phase-out deadlines for the current refrigerant. There can be no assurance that
the Company will be able to develop cost effective products that utilize
alternative refrigerants. See "Business -- Environmental Matters."
FRAUDULENT TRANSFER CONSIDERATIONS
A substantial portion of the proceeds of the offering of the Original Notes
has been used to pay a dividend to enable Fedders Corporation to repay certain
Indebtedness assumed in the 1996 Merger and to repurchase capital stock of
Fedders Corporation. Under fraudulent transfer law, if a court were to find, in
a lawsuit by an unpaid creditor or representative of creditors of the Company,
that the Company received less than fair consideration or reasonably equivalent
value for incurring the Indebtedness represented by the Original Notes or the
Notes, and, at the time of such incurrence, the Company (i) was insolvent or was
rendered insolvent by reason of such incurrence, (ii) was engaged or about to
engage in a business or transaction for which its remaining property constituted
unreasonably small capital or (iii) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts mature, such court could,
among other things, (a) void all or a portion of the Company's obligations to
the holders of the Notes and/or (b) subordinate the Company's obligations to the
holders of the Notes to other existing and future Indebtedness of the Company,
the effect of which would be to entitle such other creditors to be paid in full
before any payment could be made on the Notes. The measure of insolvency for
purposes of determining whether a transfer is avoidable as a fraudulent transfer
varies depending upon the law of the jurisdiction which is being applied.
Generally, however, a debtor would be considered insolvent if the sum of all of
its liabilities were greater than the value of all of its property at a fair
valuation, or if the present fair salable value of the debtor's assets were less
than the amount required to repay its probable liability on its debts as they
become absolute and mature. There can be no assurance as to what standard a
court would apply in order to determine solvency. To the extent that proceeds
from the sale of the Original Notes were used to pay a dividend to Fedders
Corporation, a court may find that the Company did not receive fair
consideration or reasonably equivalent value for the incurrence of the
Indebtedness represented thereby or for the incurrence of the Indebtedness
represented by the Original Notes.
On the basis of its historical financial information, its recent operating
history as discussed in "Management's Discussion and Analysis of Results of
Operations and Financial Condition of Fedders Corporation" and other factors,
the Company believes that, after giving effect to the offering of the Original
Notes and the Exchange Offer, the Company was and will be solvent, did and will
have sufficient capital for the business in which it is engaged and did not and
will not have incurred debts beyond its ability to pay such debts as they
mature. There can be no assurance, however, that a court would necessarily agree
with these conclusions.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFERS
The Notes are being offered to holders of the Original Notes. The Original
Notes were issued on August 18, 1997 to a small number of institutional
investors and are eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screen based, automated market for trading of securities
eligible for resale under Rule 144A. The Notes are new securities for which
there currently is no market. Although the Initial Purchasers have advised the
Company and Fedders Corporation that they currently intend to make a market in
the Notes, they are not
16
<PAGE> 21
obligated to do so and may discontinue such market making at any time without
notice. The Company and Fedders Corporation do not intend to list the Notes on
any national securities exchange or to seek the admission thereof to trading in
the National Association of Securities Dealers Automated Quotation System.
Accordingly, no assurance can be given that an active market will develop for
any of the Notes or as to the liquidity of the trading market for any of the
Notes. If a trading market does not develop or is not maintained, holders of the
Notes may experience difficulty in reselling such Notes or may be unable to sell
them at all. If a market for the Notes develops, any such market may be
discontinued at any time. If a trading market develops for the Notes, future
trading prices of such Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's and Fedders Corporation's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition of the Company and Fedders Corporation, the
Notes may trade at a discount from their principal amount.
17
<PAGE> 22
ORGANIZATIONAL CHART
- ---------------
(1) The Company and several of its subsidiaries manufacture and market room air
conditioners, dehumidifiers and rotary compressors primarily for sale to the
North American marketplace, which includes Canada and Mexico.
(2) Fedders International, Inc. markets and sells room air conditioners,
including split-type air conditioners, and rotary compressors in the
international marketplace, which includes all areas of the world other than
North America. Its Asian subsidiary also operates a research and development
center for developing new products for the international marketplace.
(3) Fedders Investment Corporation, through Fedders Xinle, manufactures room air
conditioners, including split-type air conditioners, for sale primarily to
all areas of the world other than North America.
(4) Melcor manufactures solid state heat pump modules that perform electrically
the same cooling and heating functions as refrigerant-based compressors and
absorption refrigerators. Melcor's customers are OEM's that primarily use
the modules for cooling purposes in applications such as refrigerators,
laboratory, scientific, medical and restaurant equipment, as well as
telecommunications and computer equipment.
18
<PAGE> 23
USE OF PROCEEDS
The Company will receive no proceeds from the issuance of the Notes upon
consummation of the Exchange Offer. The net proceeds of the offering of the
Original Notes were used by the Company to pay a dividend of approximately $72.3
million to Fedders Corporation which was used to redeem its 8 1/2% Convertible
Subordinated Debentures due 2012 (which were assumed by Fedders Corporation in
August 1996 in connection with the 1996 Merger) in the aggregate amount of
approximately $22.3 million (approximately $21.8 million aggregate principal
amount and accrued interest of approximately $0.5 million) and which it is
anticipated will be used to fund a stock repurchase in an aggregate amount of
approximately $50.0 million of which $4.4 million was repurchased as of August
31, 1997. The remaining net proceeds will be used by the Company (i) to prepay
various capital leases in an aggregate amount of up to approximately $5.8
million and (ii) to reduce any amounts outstanding under its revolving credit
facility and for general corporate purposes.
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
borrowing and capitalization of Fedders Corporation as of August 31, 1997 as set
forth in the audited consolidated financial statements of Fedders Corporation
and as adjusted to give effect to the offering of the Original Notes and the
application of the net proceeds therefrom as described in "Use of Proceeds."
This table should be read in conjunction with the consolidated financial
statements, including notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 31, 1997
-----------------------------
(IN THOUSANDS) AS
ACTUAL ADJUSTED(1)
<S> <C> <C>
Cash and cash equivalents (2)....................................... $ 110,393 $ 58,967
======== ========
Short-term borrowing................................................ -- --
======== ========
Long-term debt (including current portion):
9 3/8% Senior Subordinated Notes due 2007, net of $477 discount
(3)........................................................... 99,523 99,523
Fedders Xinle 15.175% promissory note.......................... 6,131 6,131
1% Promissory note payable to the State of Illinois (3)........ 3,859 3,859
Capital lease obligations (3).................................. 5,867 33
-------- --------
Total long-term debt........................................... 115,380 109,546
Stockholders' equity................................................ 145,687 100,095
-------- --------
Total capitalization...................................... $ 261,067 $ 209,641
======== ========
</TABLE>
- ---------------
(1) Adjusted to reflect the complete application of the net proceeds from the
offering of the Original Notes as described in "Use of Proceeds" to the
extent that such application is not already reflected in the August 31, 1997
amounts, including additional stock repurchases totaling approximately $45.6
million and the prepayment of various capital leases in an aggregate amount
of up to approximately $5.8 million.
(2) Prior to the consummation of the offering of the Original Notes, the Company
had transferred, on a daily basis in the regular course of business
consistent with the Company's cash management practice, all of its available
cash to the Guarantor and the intercompany receivable created by such
transfers was forgiven upon completion of the offering of the Original
Notes.
(3) These represent obligations of the Company, except for $33 of capital leases
which are the obligation of Fedders Corporation.
19
<PAGE> 24
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected historical consolidated financial
information of Fedders Corporation which has been derived from and should be
read in conjunction with the audited consolidated financial statements and
related notes thereto appearing elsewhere or incorporated by reference in this
Prospectus, and "Management's Discussion and Analysis of Results of Operations
and Financial Condition of Fedders Corporation."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales............................................................. $158,602 $231,572 $316,494 $371,772 $314,100
Gross profit.......................................................... 27,744 49,263 67,125 83,028 70,076
Selling, general and administrative expenses.......................... 25,837 25,358 29,472 32,040 38,347
Operating income (loss)............................................... 1,907 23,905 37,653 50,988 31,729
Net interest expense.................................................. 4,247 4,102 1,962 952 3,430
Income tax (benefit).................................................. (565) 594 6,187 19,108 10,103
Net income (loss)(1).................................................. (1,775) 20,989 29,504 31,158 18,764
Net income (loss) attributable to common stockholders................. (1,775) 20,989 29,504 31,007 16,344
Net income (loss) per share(1)........................................ (0.05) 0.53 0.72 0.74 0.40
DIVIDENDS DECLARED PER SHARE:
Preferred........................................................... -- -- -- $ 0.050 $ 0.318
Common.............................................................. -- -- $ 0.020 0.080 0.080
Class A............................................................. -- -- 0.020 0.080 0.080
Class B............................................................. -- -- 0.018 0.072 0.072
OTHER DATA:
EBITDA(2)............................................................. $ 6,317 $ 32,252 $ 44,143 $ 57,796 $ 42,232
Depreciation and amortization......................................... 5,646 9,374 7,519 6,578 9,935
Capital expenditures(3)............................................... 2,379 2,634 9,041 7,043 9,236
Ratio of earnings to fixed charges(4)................................. -- 4.6x 11.5x 17.6x 6.2x
Gross profit margin................................................... 17.5% 21.3% 21.2% 22.3% 22.3%
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 8,553 $ 34,869 $ 57,707 $ 90,295 $110,393
Working capital (deficit)............................................. 16,959 38,373 56,123 86,817 141,736
Total assets.......................................................... 81,285 100,653 136,775 290,220 329,014
Long-term debt (including current portion)............................ 25,590 17,943 5,106 40,406 115,380
Total stockholders' equity(5)......................................... 24,229 49,317 82,542 159,751 145,687
</TABLE>
20
<PAGE> 25
- ---------------
(1) During the first quarter of fiscal 1994, Fedders Corporation adopted
Statement of Financial Accounting Standard No. 109 "Accounting for Income
Taxes" which resulted in a tax benefit of $1,780 or $0.04 per share from the
cumulative effect of an accounting change.
(2) EBITDA represents income before income taxes plus net interest expense and
depreciation and amortization (excluding amortization of debt discounts and
deferred financing costs). While EBITDA should not be construed as a
substitute for operating income or a better indicator of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of Fedders Corporation
and the Company to meet their future debt service, capital expenditures and
working capital requirements. In addition, Fedders Corporation and the
Company believe that certain investors find EBITDA to be a useful tool for
measuring the ability of Fedders Corporation and the Company to service
their debt. EBITDA is not necessarily a measure of Fedders Corporation's or
the Company's ability to fund cash needs.
(3) Fiscal 1995 amount includes buyout of $1,750 of equipment under lease.
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
net income, income taxes and fixed charges (consisting of interest expense,
the estimated interest component of rent expense and amortization of fees
related to debt financing) by fixed charges. For the fiscal year ended
August 31, 1993 earnings were insufficient to cover fixed charges by
approximately $2,340.
(5) In September 1996, Fedders Corporation announced a stock repurchase of up to
$25,000 of Common and/or Class A Stock. During fiscal 1997, Fedders
Corporation repurchased approximately 4.3 million shares of Class A Stock at
an average price of $5.78 per share for a total of $25,041.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF FEDDERS CORPORATION
The Company believes it is the largest manufacturer of room air
conditioners in North America based on units sold. The Company estimates that
its share of the domestic market for room air conditioners increased to
approximately 30% in fiscal 1997 from 28.5% in fiscal 1996 and 26.7% in fiscal
1995. This estimate is based on general industry information as shipment data is
no longer published by an industry trade association. The Company has strong
relationships with retailers, which it has formed by establishing flexible,
accurate-response manufacturing to accommodate customers' increasingly seasonal
delivery requirements.
The Company's business is largely domestic and is affected by summer
weather in major domestic markets. Product is shipped primarily in the second
half of the fiscal year since leading retailers require just-in-time delivery.
Cool summer weather in key U.S. markets in fiscal 1996 increased industry
inventories at some manufacturers (excluding the Company) and at retailers at
the beginning of fiscal 1997 and reduced fiscal 1997 results all year long. By
the end of the 1997 selling season, retail inventories declined to more
customary levels, which the Company believes positions U.S. manufacturers for a
better year in fiscal 1998, assuming normal weather.
In August 1996, Fedders Corporation acquired NYCOR, which, through its
subsidiary Rotorex, manufactured rotary compressors principally for use in room
air conditioners, and, through Melcor, manufactured thermoelectric modules.
Rotorex, which has been the primary supplier of compressors to the Company for
25 years, was transferred to the Company as a capital contribution by Fedders
Corporation. The Company believes that a dedicated supply of compressors
improves its flexibility to accurately respond to the just-in-time requirements
of its customers.
In November 1995, Fedders Corporation entered into a joint venture in
Ningbo, China to manufacture air conditioners for export and for the Chinese
market.
RESULTS OF OPERATIONS
The following table sets forth certain financial results of Fedders
Corporation, expressed as a percentage of net sales, for the indicated fiscal
periods. International sales comprised 14.4% of net sales in fiscal 1997, 6.6%
in 1996 and 4.1% in 1995. (See also note 14 to the consolidated Financial
Statements of Fedders Corporation included elsewhere in this Prospectus for
financial information pertaining to the Company.)
OPERATING RESULTS OF FEDDERS CORPORATION AS A PERCENT OF NET SALES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
AUGUST 31,
----------------------
1995 1996 1997
<S> <C> <C> <C>
Gross profit........................................................... 21.2% 22.3% 22.3%
Selling, general and administrative expenses........................... 9.3 8.6 12.2
Operating income....................................................... 11.9 13.7 10.1
Net interest expense................................................... 0.6 0.3 1.1
Pre-tax income......................................................... 11.3 13.5 9.2
</TABLE>
FISCAL YEAR ENDED AUGUST 31, 1997 VERSUS FISCAL YEAR ENDED AUGUST 31, 1996
Net sales of Fedders Corporation decreased 15.5% in fiscal 1997 from record
sales in fiscal 1996 and were similar to net sales in fiscal 1995. The sales
decrease reflects large end-of-season industry inventories of room air
conditioners due to the cool summer weather in fiscal 1996. Fedders
Corporation's fiscal 1997 international sales of $45.0 million increased by 84%
following a 90% gain in fiscal 1996.
The gross profit of Fedders Corporation declined in fiscal 1997 by 15.6%
due to the sales decline. The gross profit margin remained at 22.3% in 1997 due
primarily to changes in customer and product mix offset, in part, by lower
absorption of factory overhead expense due to lower production levels.
22
<PAGE> 27
Selling, general and administrative expenses ("SG&A") of Fedders
Corporation increased to 12.2% of net sales in fiscal 1997 from 8.6% in fiscal
1996 due, in part, to lower sales. SG&A increased by $6.3 million from the prior
year primarily as a result of expenses related to operations acquired in the
1996 Merger, including $1.8 million of amortization of goodwill and $1.9 million
of compressor research and development expense. SG&A also increased in fiscal
1997 due to infrastructure expansion to support the future growth of
international business.
Net interest expense of Fedders Corporation increased in fiscal 1997 by
$2.5 million and as a percent of sales to 1.1% from 0.3% in fiscal 1996 due to
interest paid on the 8 1/2% Convertible Subordinated Debentures due 2012 that
were assumed in the 1996 Merger and were called at the end of fiscal 1997.
Net income of Fedders Corporation decreased to $18.8 million in fiscal 1997
from a record $31.2 million in fiscal 1996 and reflects an effective tax rate of
35.0% versus 38.0% in fiscal 1996, principally due to a lower effective state
tax rate and the release of prior-year tax provisions no longer required in the
current year.
Net income attributable to common stockholders in fiscal 1997 reflects the
dividend requirement of $2.4 million paid on the Fedders Corporation Convertible
Preferred Stock issued in connection with the 1996 Merger and which was fully
redeemed in September 1997.
FISCAL YEAR ENDED AUGUST 31, 1996 VERSUS FISCAL YEAR ENDED AUGUST 31, 1995
At the beginning of fiscal 1996, domestic industry inventories had been
depleted by three consecutive hot summers. Net sales of Fedders Corporation
increased 17% during fiscal 1996, to a record level, for the third consecutive
year of significant gains. Industrywide, unit shipments for the domestic market
increased by 14% during fiscal 1996, according to an industry trade association.
The gross profit margin of Fedders Corporation increased by more than one
full percentage point during fiscal 1996 to 22.3%, primarily as a result of
increased efficiency in plant utilization due to the higher sales volume and
somewhat lower commodity prices, compared with fiscal 1995 when copper costs had
increased sharply.
SG&A of Fedders Corporation increased by $2.6 million, or 9% in fiscal
1996, including a $2.0 million provision for an early retirement program. SG&A
decreased as a percent of sales for the third consecutive year to 8.6% from 9.3%
in fiscal 1995.
Net interest expense of Fedders Corporation in fiscal 1996 decreased by
$1.0 million and as a percent of sales to 0.3% from 0.6% in the prior year as
long-term debt was minimal prior to the 1996 Merger and because cash on hand
increased compared with fiscal 1995.
In fiscal 1996, Fedders Corporation returned to a full federal tax rate
after utilizing its net operating loss carryforwards during fiscal 1995. As a
result, the effective tax rate was 38.0% in fiscal 1996 compared with 17.3% in
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company issued $100 million principal amount of the Original Notes near
fiscal year-end, and Fedders Corporation ended fiscal 1997 with cash increasing
to $110.4 million at August 31, from $90.3 million a year earlier. Working
capital requirements historically are seasonal. Cash balances peak in August,
while the greatest use of credit lines occurs early in the calendar year.
Net cash used in operations by Fedders Corporation in fiscal 1997 amounted
to $8.8 million. Accounts receivable increased by $1.1 million, still reflecting
normally low end-of-season levels. Ending inventories increased by $9.4 million
reflecting an increase in domestic finished goods, as retailers ordered
conservatively, and in international finished goods due to increasing volume.
Accounts payable decreased by $5.9 million as less raw material was
received in the month of August than in the prior year. Accrued expenses and
accrued income taxes decreased $7.0 million and $5.4 million,
23
<PAGE> 28
respectively, as a result of lower marketing and tax accruals related to lower
sales and lower income, respectively.
Net cash used in investing activities by Fedders Corporation consisted
primarily of capital expenditures of $9.2 million.
Net cash provided by financing activities of Fedders Corporation in fiscal
1997 amounted to $37.7 million. This resulted primarily from $96.0 million of
net proceeds from the offering of the Original Notes, which were used, in part,
to fully redeem the Debentures for $22.1 million, including accrued interest.
Fedders Corporation completed the repurchase of $25.0 million or 4.3 million
shares, of its Class A Stock under a repurchase program announced in September
1996. In July 1997, Fedders Corporation announced an authorization to repurchase
up to an additional $50 million of its outstanding stock. Proceeds from the
issuance of the Original Notes also were used to repurchase $4.4 million of
Preferred Stock. In September 1997, Fedders Corporation redeemed all outstanding
Preferred Stock at the rate of 1.022 shares of Class A Stock per share of
Preferred Stock.
During fiscal 1997, Fedders Corporation's revolving credit facility was
increased to $50 million from $40 million, the rate of interest on the facility
decreased to the prime rate from the prime rate plus 1.5% and the maturity was
extended to February 2000. The revolving credit facility is collateralized by
substantially all of Fedders Corporation's assets. See "Description of Certain
Indebtedness." Dividend payments amounted to $5.6 million in fiscal 1997.
Management believes that the cash, earnings and borrowing capacity of the
Company and Fedders Corporation are adequate to meet the needs of its operations
and long-term credit requirements, including capital expenditures and debt
maturities.
Upon completion of the sale of the Original Notes, the debt of Fedders
Corporation and the Company as a percentage of their respective total
capitalization increased and their net interest expense increased. Management
anticipates that cash flow from operations and availability under the revolving
credit facility will be sufficient to finance the liquidity needs of Fedders
Corporation and the Company for the foreseeable future.
RECENT ACCOUNTING STANDARDS
See Note 1 of the Notes to Consolidated Financial Statements for
information pertaining to recent accounting standards.
24
<PAGE> 29
BUSINESS
GENERAL
The Company believes it is the largest manufacturer of room air
conditioners in the United States based on units sold. An industry innovator for
the past 50 years, the Company has increased its U.S. market share to
approximately 30.0% in fiscal 1997 from approximately 10% in fiscal 1985. The
Company manufactures and sells a complete line of room air conditioners,
including window and through-the-wall units, and dehumidifiers, principally for
use in U.S. residential markets. The Company's products are marketed under the
FEDDERS, EMERSON QUIET KOOL and AIRTEMP brand names primarily to national and
regional retail chains, home improvement centers, and buying groups, as well as
to distributors and, under private label, to retailers and other OEM's,
including other U.S. room air conditioner manufacturers.
Based primarily on the Company's results, Fedders Corporation has achieved
significant increases in net sales and EBITDA in recent years. From fiscal 1994
through fiscal 1997, Fedders Corporation's net sales increased from $231.6
million to $314.1 million, and EBITDA increased from $32.3 million to $42.2
million, representing compound annual growth rates of 10.7% and 9.4%,
respectively.
The Company believes its market share growth and profitability have been
primarily attributable to its: (i) low cost production achieved through
continuous manufacturing improvements, including the Restructuring, and a global
sourcing strategy; (ii) broad range of high quality products with strong brand
recognition; (iii) strong relationships with leading retailers; (iv)
accurate-response manufacturing and just-in-time delivery capabilities; and (v)
principal focus on one product.
In August 1996, Fedders Corporation acquired NYCOR which, through its
subsidiary Rotorex, manufactured rotary compressors principally for use in room
air conditioners and, through its subsidiary Melcor, manufactured specialized
thermoelectric heating and cooling modules. Prior to the acquisition, Rotorex
was the primary supplier of compressors to the Company for use in its room air
conditioners for 25 years. After the 1996 Merger, all of the capital stock of
Rotorex was transferred to the Company as a capital contribution by Fedders
Corporation. The Company believes that a dedicated supply of compressors is
critical to the Company's accurate-response and just-in-time delivery of its
seasonal products.
Fedders Corporation is leveraging its expertise in room air conditioning to
penetrate the much larger and rapidly expanding global market. In November 1995,
Fedders Corporation entered into the Fedders Xinle joint venture with the Ningbo
General Air Conditioner Factory of Ningbo, China. Fedders Xinle is 60% owned by
Fedders Corporation and intends to market its products both within China and,
through Fedders International, Inc., to export markets around the world. Fedders
Xinle also may produce product for the Company to sell to U.S. customers, which
further enhances the sales and marketing flexibility of the Company through
another source of capacity.
COMPETITIVE STRENGTHS AND COMPANY STRATEGY
The Company's strategy is to continue to capitalize on its competitive
strengths, including the following:
LOW COST PRODUCER. The Company believes it has positioned itself as the
low cost producer in the United States. Significant cost savings achieved since
1992 were a key factor in the Company's ability to increase operating margins
from 1.2% in fiscal 1993 to 10.1% in fiscal 1997. The Company has achieved
significant cost reduction through:
- Emphasis on global sourcing of components and raw materials to
reduce costs and ensure quality;
- Continuous improvement in manufacturing efficiencies and in
designing cost out of the product based, in part, on one of its core
competencies, expertise in heat transfer technology;
- Minimizing fixed costs while maximizing production flexibility, in
part as a result of the Restructuring, which included a reduction in its
manufacturing facilities after the acquisition of Emerson
25
<PAGE> 30
Quiet Kool and the elimination of duplicative management and operational
and administrative departments;
- Low labor content and flexible manufacturing that allow the Company
to reduce variable costs dramatically when demand for its products
fluctuates. The direct labor cost component of the Company's products is
generally less than the cost of freight and duty to import air conditioners
into the United States from many offshore locations, resulting in favorable
price comparisons with imported goods.
HIGH QUALITY PRODUCTS WITH STRONG MULTIPLE BRANDS. The Company
manufactures a complete line of window and through-the-wall room air
conditioners to meet a broad range of consumer preferences. It believes it has
developed a reputation among its customers and consumers for producing high
quality products at competitive prices. The FEDDERS, EMERSON QUIET KOOL, and
AIRTEMP brands each has a long history and is well known in the marketplace. On
a private label basis, the Company also manufactures, in various sizes, a
portion of the room air conditioners of other U.S. OEM's. All of the Company's
U.S. manufacturing facilities, including Rotorex, have received the highest
level of quality certification, ISO 9001, for their quality management systems
from the International Standards Organization.
STRONG RELATIONSHIPS WITH LEADING RETAILERS. Beginning in the early
1990's, the Company recognized a significant shift in the U.S. market for room
air conditioners as major regional and national retailers began replacing
wholesale distributors as the primary customers for the industry. The Company
believes it has distinguished itself from its competitors by effectively
penetrating this rapidly growing customer base and by working closely with its
customers to improve their marketing of the Company's products. The Company
estimates that leading retailers currently represent more than 50% of the total
room air conditioner market in the United States.
ACCURATE-RESPONSE MANUFACTURING. During the 1990's, the Company
reengineered its manufacturing processes and distribution systems in order to
meet the delivery requirements, including "in-season" orders, of its major
retailing customers, who increasingly sought to minimize their inventories. The
Company believes that its accurate-response manufacturing capability, by which
it can adjust both total production quantities and product mix on a timely
basis, has been a key factor in its ability to gain market share from its
competitors.
PRODUCT FOCUS. Fedders Corporation has a 100-year history of experience in
heat transfer technology, including 50 years of experience in the manufacturing
of room air conditioners. Many of the Company's competitors produce a broad
range of consumer products, and the Company believes that such competitors have
historically given less attention to the development and expansion of their room
air conditioning businesses than the Company. Room air conditioners have been,
and continue to be, the Company's primary business focus.
INDUSTRY
The U.S. room air conditioner market is the third largest in the world with
average annual sales of 3.7 million units for the last 10 calendar years.
Domestically, room air conditioners are marketed in two basic styles: the window
unit which is installed directly into a window and the through-the-wall unit
which is installed through an outside wall of the consumer's residence.
Sales of room air conditioners in the domestic market vary from year to
year according to the weather, especially in the major markets of the Northeast
and the upper Midwest. Unusual summer weather affects manufacturers' shipments
primarily in the following year. A cool summer reduces consumer demand and
unsold inventory is carried over to the following year. An unusually hot summer
depletes industry inventories, and the distribution system must be refilled to
meet the following year's demand. The Company believes that demand is
principally driven by the replacement market. Unlike major household appliances
and central air conditioning systems, the sale of room air conditioners is not
dependent on the construction of new homes.
The distribution of air conditioners in North America changed significantly
in the early 1990's. Sales are now made primarily directly to retailers, in
contrast to the 1980's, when wholesale distributors accounted for
26
<PAGE> 31
the majority of the industry's business. Additionally, in recent years the
Company's customers, now primarily retailers, changed their purchasing patterns
to minimize inventories. In response to these changes, the Company developed
accurate-response manufacturing and just-in-time delivery, to accommodate
customers' requirements in this highly seasonal business, while simultaneously
minimizing the Company's need to carry large inventories of finished goods.
The room air conditioning industry grew rapidly in the 1950's and 1960's
and then experienced substantial consolidation in the 1970's and 1980's. In the
early 1990's, two cold summers encouraged other domestic competitors to withdraw
from the business. In 1975 there were 18 major manufacturing operations
competing in the industry domestically, which have been reduced to six in 1997.
Fedders Corporation believes that the international market for room air
conditioners outside the United States is approximately five times the size of
the U.S. market, measured on a unit basis. Demand for air conditioners outside
of North America accelerated in recent years, including in the largest overseas
markets of Japan, China and the rest of Southeast Asia, and continues to grow
rapidly with the increasing disposable income of populous nations in hot weather
climates. Because freight costs to ship room air conditioners are high relative
to the product cost, international markets are often most efficiently served by
local production. While international room air conditioner sales in units
exceeded those of the United States by an almost 5-to-1 ratio in 1996, the
international dollar volume is estimated by the Company to be 15 times greater,
due to preference abroad for more expensive split-type units. The dollar value
of the entire world market was estimated by the Company to be approximately $18
billion in 1996--of which the U.S. share was estimated to be approximately $1.25
billion.
ESTIMATED ROOM AIR CONDITIONER FACTORY SHIPMENTS
(MILLIONS OF UNITS)
<TABLE>
<CAPTION>
SOUTHEAST ASIA EUROPE, MIDDLE
UNITED (EXCLUDING EAST,
STATES(1) JAPAN(2) JAPAN)(2) AFRICA(2) OTHER(2)
<S> <C> <C> <C> <C> <C>
1988........................ 4.4 4.6 2.8 1.8 1.1
1989........................ 4.7 4.8 3.1 2.3 0.8
1990........................ 3.8 6.3 2.9 2.4 1.0
1991........................ 2.5 7.2 4.1 2.4 0.9
1992........................ 2.6 5.9 5.5 2.9 0.9
1993........................ 2.8 5.1 5.8 2.6 0.9
1994........................ 3.9 7.1 6.8 2.6 1.1
1995........................ 4.4 7.7 7.3 2.6 1.3
1996........................ 4.5 8.1 8.4 2.8 1.5
</TABLE>
- ------------------------------
(1) Source: Association of Home Appliance Manufacturers, Chicago, Illinois
(2) Source: Japan Refrigeration & Air Conditioning Industry Association as
reported by Japan Air Conditioning, Heating and Refrigeration News
PRODUCTS
The Company manufactures and sells a complete line of window and
through-the-wall room air conditioners domestically, principally for the
residential market. The Company's air conditioners are manufactured in
capacities ranging from 5,000 BTU (British Thermal Units) to 32,000 BTU. These
models comprise distinct product lines marketed by the Company primarily under
the brands FEDDERS, EMERSON QUIET KOOL and AIRTEMP. The Company also
manufactures products under various private labels. The Company has positioned
its brands across most price points, emphasizing quality and value for retailers
and consumers.
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<PAGE> 32
The Company also manufactures and markets a line of household
dehumidifiers, ranging in capacity from 30 to 50 pints per 24 hours, and its
Rotorex subsidiary manufactures and sells a broad line of rotary compressors,
principally for use in the Company's room air conditioners but also for sale to
other manufacturers of air conditioners. Third party sales of compressors are
expected to represent less than 2% of total sales of Fedders Corporation in
fiscal 1997.
Fedders Xinle also manufactures split-type room air conditioners, in which
the condensing unit is installed separately outdoors, in capacities from 7,000
to 40,000 BTU, for both residential and commercial use in international markets.
MARKETS AND DISTRIBUTION
In North America, the Company markets room air conditioners and
dehumidifiers principally to national and regional retail chains, home
improvement centers and retail buying groups. These retail chains and retail
buying groups (comprising retailers which negotiate as groups the prices at
which they will purchase the Company's products) represent approximately 10,000
retail outlets marketing room air conditioners throughout the United States. The
Company also markets its air conditioners under private label to both retailers
and OEM's.
The Company's sales, marketing and service departments are headquartered in
Whitehouse, New Jersey. The 25 sales persons, in conjunction with marketing
employees, are proactive in working with customers to assist them in maximizing
their profitability and market share through responsive changes in product mix
and marketing. Utilizing eight regional distribution centers, the Company
provides next-day delivery to all major U.S. markets, which is critical during
heat waves that stimulate retail sales. Additionally, the Company has instituted
computerized systems, including electronic data interchange (EDI), to
accommodate major high-volume retailers that require suppliers to replenish
inventories frequently and on short notice.
To support and service its customers and the ultimate consumer, the Company
has established a network of more than 3,000 independent servicers throughout
the United States. These independent servicers are local tradespeople who are
screened and monitored by the Company.
The Company promotes its FEDDERS and EMERSON QUIET KOOL brands of air
conditioners through advertising, primarily in trade publications. Many of the
Company's customers advertise and promote the Company's products at their own
expense.
Fedders Corporation expects to increase its participation overseas through
strategic alliances, primarily under production and joint venture agreements,
based in part on its expertise, technological capability and well-established
global sourcing program. With the establishment of Fedders Xinle, Fedders
Corporation is strategically positioned to: sell FEDDERS brand products in China
and to low-import-duty markets outside of China; provide private label products
for OEM's with established sales and service organizations worldwide, including
China; and establish assembly operations within each major trading block that
has protective duties in order to import subassemblies or semi-finished goods
from the China facility.
PRODUCTION AND PROPERTIES
The Company currently manufactures its air conditioners in two owned
facilities in the United States--a 650,000 square foot facility in Effingham,
Illinois and a 232,000 square foot facility in Columbia, Tennessee with a
combined annual capacity of approximately 2,000,000 units. The Company has
sufficient production capacity for domestic needs for the foreseeable future.
Fedders Corporation also manufactures air conditioners, through Fedders
Xinle, in a facility owned by the joint venture in Ningbo, People's Republic of
China. Capacity of the facility, which currently is approximately 200,000 air
conditioners, is being increased to 500,000 units in fiscal 1998.
Rotorex currently manufactures all of its compressors in a 200,000 square
foot facility owned by Rotorex in Walkersville, Maryland. Rotorex recently made
several investments to enhance manufacturing efficiencies,
28
<PAGE> 33
including automation of the assembly process. The current capacity of
approximately 1,500,000 units is sufficient to meet compressor requirements of
the Company and Rotorex's other compressor customers.
The Company owns or leases the following principal facilities:
<TABLE>
<CAPTION>
APPROXIMATE SQUARE
LOCATION PRINCIPAL FUNCTION FEET OF FLOOR AREA
<S> <C> <C>
Effingham, Illinois........... Manufacturing of air conditioners 650,000
(Owned)
Manufacturing of air conditioners
Columbia, Tennessee(1)........ and 232,000
(Owned) dehumidifiers
Walkersville, Maryland(2)..... Manufacturing of rotary compressors 200,000
(Owned)
Whitehouse, NJ................ Sales and marketing headquarters 17,000
(Leased)
Princeton, NJ................. Research and design center 6,000
(Leased)
</TABLE>
- ------------------------------
(1) Owned by Columbia Specialities, Inc., a wholly owned subsidiary of the
Company.
(2) Owned by Rotorex.
Fedders Corporation leases facilities in Liberty Corner, New Jersey, as its
corporate and international headquarters and leases a research and design center
in Singapore. In Lawrence Township, New Jersey, Melcor owns one facility and
leases another one for the manufacture and assembly, respectively, of its
thermoelectric modules.
RAW MATERIALS
The principal raw materials used for production of room air conditioners
are steel, copper and aluminum, which the Company obtains 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.
QUALITY ASSURANCE
One of the key elements of the Company's and Fedders Corporation's strategy
is a commitment to a single worldwide standard of quality. Each of the Company's
manufacturing facilities has earned the highest level of certification--ISO
9001--for its quality management system under the International Standards
Organization. The ISO 9000 program is an internationally recognized benchmark of
quality management systems within a production facility. The same level of
quality will be required at all international manufacturing facilities as well,
including Fedders Xinle.
The Company's product is backed by a warranty policy that 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. Fedders Corporation's total warranty
claim expense decreased significantly from fiscal 1993 to fiscal 1996 while
sales nearly doubled during the period.
SEASONALITY OF BUSINESS
The Company's results of operations and financial condition are principally
dependent on the manufacture and sale of room air conditioners, the demand for
which is highly seasonal in North American markets. Seasonally low volume sales
are not sufficient to offset fixed costs, resulting in seasonal operating losses
at certain times of the year. In addition, the Company's working capital needs
are seasonal, with 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 of Fedders Corporation." Fedders Corporation
regularly reviews working capital components with a view to maintaining the
lowest level consistent with
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<PAGE> 34
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. The Company's fiscal year end, August 31, coincides
with the end of the seasonal room air conditioner sales cycle. Accordingly,
backlog at that time of the year is insignificant.
COMPETITION
Domestically, 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 Co., Ltd. and
Sharp Corporation. Many of the Company's competitors are substantially 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. The Company believes that it competes
effectively with its multiple brand strategy of providing competitively priced,
high quality products on a just-in-time basis.
Internationally, the competitors of Fedders Corporation vary depending on
the market. Some markets, such as China, are served by many local manufacturers.
Other markets are dominated by foreign manufacturers of air conditioners and
electronics products including Matsushita Electric Industrial Co., Ltd., Toshiba
Corporation, Hitachi, Ltd., Mitsubishi Electric Corporation and Sanyo Electric
Trading Co., Ltd., all of which also manufacture compressors. Fedders
Corporation believes that it can compete effectively with its strategy of
manufacturing low cost air conditioners locally, controlling its supply of
compressors and utilizing its global sourcing network.
GOVERNMENT REGULATION
The Company and Fedders Corporation are subject to various federal, state
and local laws affecting its business. Room air conditioners are subject to
federal regulations providing for EER requirements. The Company and Fedders
Corporation believe they are currently in material compliance with the EER
requirements. Achieving required EER's results from a combination of an
efficient compressor and the design of the air conditioning system using the
compressor. Current proposed rule-making by the Energy Department under the
National Appliance Energy Conservation Act would have the effect of increasing
minimum required EER's. In the event the new regulations are adopted, the
efficiency of certain air conditioner models would have to be increased. It is
not certain at present if the proposed regulations will be adopted and, if they
are, when the requirements would become effective. Regardless of the adoption of
these proposed regulations, the Company and Fedders Corporation are continually
seeking to improve the efficiency of their air conditioners and compressors in
order to remain competitive in the markets they serve. The Company and Fedders
Corporation do not believe that the adoption of currently contemplated EER
regulations will adversely affect the results of operations of Fedders
Corporation.
EMPLOYEES
The Company has approximately 2,300 employees. The total number of
employees of Fedders Corporation, including the Company, is approximately 3,000,
including approximately 500 at Fedders Xinle. The current contracts with two
unions representing employees of the Effingham, Illinois plant are scheduled to
expire in October 1998. The Company and the union representing employees of
Rotorex were unable to reach agreement prior to the expiration of their
collective bargaining agreement in August 1997, and the employees covered by the
collective bargaining agreement are on strike. Rotorex continues to operate
using temporary replacement workers. The Company believes that this strike will
not have a material adverse effect on its financial condition or results of
operations. The Company considers its relations with employees to be generally
satisfactory.
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<PAGE> 35
RESEARCH AND DEVELOPMENT
Research and development of room air conditioner technology and design is
conducted at the Effingham facility, and compressor research and development is
based at Rotorex. During fiscal 1996, the Company established a research and
design center in Princeton, New Jersey for the development of innovative, non-
vapor compression products that will take advantage of the Company's domestic
distribution strengths. In fiscal 1997, Fedders Corporation spent approximately
$6.3 million on research and development, including activities at its Singapore
facility which focuses on products for the international market.
INTELLECTUAL PROPERTY
Fedders Corporation attempts to register its material trademarks and trade
names both domestically and in key foreign markets. While the Company believes
that its trademarks such as FEDDERS, EMERSON QUIET KOOL, AIRTEMP and ROTOREX are
well known and enhance the marketing of its products, the Company does not
consider the successful conduct of its business to be dependent upon such
trademarks. Fedders Corporation aggressively protects its trademarks and other
intellectual property rights worldwide.
ENVIRONMENTAL MATTERS
The Company's and Fedders Corporation's operations are subject to various
United States and foreign environmental statutes and regulations, including laws
and regulations dealing with storage, treatment, discharge and disposal of
hazardous materials, substances and wastes and that affect the production of
chemical refrigerants used in the operation of some of the Company's products.
The refrigerant used in room air conditioners is an HCFC that is to be phased
out of use in new products on January 1, 2010 in the United States. Chemical
producers are currently developing environmentally acceptable alternative
refrigerants for use in room air conditioners that are expected to be available
in advance of any now-proposed phase-out deadlines for the current refrigerant.
Modifications to the design of the Company's products may be necessary in order
to utilize alternative refrigerants. The cost of the substitution of alternative
refrigerants is not currently expected to have a material adverse impact on
Fedders Corporation.
The Company and Fedders Corporation believe they are currently in material
compliance with applicable environmental laws and regulations. Fedders
Corporation did not make capital expenditures on environmental matters during
the year ended August 31, 1996 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,
1997.
The Company has recently been identified as a potentially responsible party
("PRP") by the federal Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), at the PCB Treatment Inc. Site (the "Site") located in Kansas City,
Kansas and in Kansas City, Missouri, based on the delivery there of certain
materials from its Effingham, Illinois facility. CERCLA imposes strict and, in
certain circumstances, joint and several liability on PRP's for response costs
and natural resource damages at waste sites. In view of the substantial number
of other PRP's at the Site and the relatively small volume of material sent by
the Company to the Site, the Company does not believe it will incur any material
liability for this matter.
The Company has identified a groundwater problem at its Walkersville,
Maryland facility and has been advised of a potential air pollution problem at
its Effingham, Illinois facility. Based upon available information, the Company
does not expect the cost of investigation or any required remediation relating
to these matters to have a material adverse effect on its results of operations.
LITIGATION
Fedders Corporation is a party to various litigation matters incidental to
the conduct of its business. Fedders Corporation does not believe that the
outcome of any of the matters in which it is currently involved will have a
material adverse effect on its financial condition or results of its operations.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the directors
and executive officers of the Company as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Salvatore Giordano......... 86 Chairman of the Board
Sal Giordano, Jr........... 59 President and Chief Executive Officer and Director
Joseph Giordano............ 64 Director
S. A. Muscarnera........... 57 Director
C. A. Keen................. 72 Director
Howard S. Modlin........... 66 Director
William J. Brennan......... 69 Director
Clarence Russel Moll....... 83 Director
Anthony E. Puleo........... 62 Director
Robert L. Laurent, Jr...... 42 Executive Vice President, Finance and Administration
and Chief Financial Officer
Gerald C. Senion........... 50 Group Vice President and Chief Operating Officer
Kent E. Hansen............. 50 Senior Vice President and Secretary
Thomas A. Kroll............ 43 Controller
Robert N. Edwards.......... 51 Vice President and General Counsel
</TABLE>
Salvatore Giordano has been Chairman of the Board of Directors of the
Company since 1976 and Chairman of the Board of Directors of Fedders Corporation
since 1945. Mr. Giordano is the father of Sal Giordano, Jr. and Joseph Giordano
and the uncle of S. A. Muscarnera.
Sal Giordano, Jr. has been President and Chief Executive Officer of the
Company since 1997 and was previously President and Chief Operating Officer of
the Company, a position he held for more than five years. Mr. Giordano has also
been Vice Chairman, President and Chief Executive Officer of Fedders Corporation
since 1988. He has been a Director of the Company since 1976 and a Director of
Fedders Corporation since 1965.
Joseph Giordano has served as a Director of the Company since 1976 and was
Senior Vice President of the Company and Fedders Corporation for more than five
years prior to his retirement from that position in August 1992.
S. A. Muscarnera has been a Director of the Company and of Fedders
Corporation since 1983. Mr. Muscarnera was Senior Vice President and Secretary
of the Company and Fedders Corporation from 1986 to August 1996. Mr. Muscarnera
joined Fedders Corporation over 39 years ago and has served in capacities
including legal and human resources.
C. A. Keen has been a Director of the Company and of Fedders Corporation
since August 1996. Mr. Keen was a Vice President of the Company for over 20
years, with responsibilities including treasury, marketing and international
sales and sourcing.
Howard S. Modlin has served as a Director of the Company and of Fedders
Corporation since 1977. Mr. Modlin has been a partner or officer at Weisman,
Celler Spett & Modlin P.C., and predecessors, a law firm that has rendered legal
services to the Company and/or to Fedders Corporation for more than 25 years. He
is also a Director of General DataComm Industries, Inc. and Trans-Lux
Corporation.
William J. Brennan has served as a Director of the Company and of Fedders
Corporation from 1980 to 1987 and 1989 to the present. He is also a Director of
CSM Environmental Systems, Inc. He has been a financial consultant since 1988.
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<PAGE> 37
Clarence Russel Moll has served as a Director of the Company since 1976 and
of Fedders Corporation since 1967. Dr. Moll has also been President Emeritus of
Widener University since 1991 and is a Director of Ironworkers Savings Bank.
Anthony E. Puleo has served as a Director of the Company and of Fedders
Corporation since 1994. Mr. Puleo has also been President of Puleo Tree Co., an
importer of Christmas items and garden furniture, since 1992. Prior thereto, he
was President of Boulderwood Corporation, a retailer of summer and Christmas
products.
Robert L. Laurent, Jr. has been Executive Vice President, Finance and
Administration and Chief Financial Officer of the Company and of Fedders
Corporation since 1993. Mr. Laurent joined Fedders Corporation in 1980 and has
served as internal auditor, plant controller, corporate controller and Vice
President, Finance. He has been Chief Financial Officer of the Company and
Fedders Corporation since 1989.
Gerald C. Senion became Group Vice President and Chief Operating Officer of
the Company in July 1997. Prior to joining the Company, Mr. Senion was employed
by Frigidaire Corporation for approximately 20 years, most recently as Group
Vice President of the Frigidaire Home Products Company, Home Comfort Division
and the Electrolux Global Home Comfort Products Division.
Kent E. Hansen has been Senior Vice President and Secretary of the Company
and of Fedders Corporation since August 1996. Mr. Hansen also served as Vice
President and General Counsel of the Company and of Fedders Corporation from
October 1989 to September 1992. From September 1992 to August 1996, he was Vice
President, Finance and General Counsel and Chief Financial Officer of NYCOR.
Thomas A. Kroll was Controller of the Company from 1992 to 1995 and has
been Controller since 1997. He has been Controller of Fedders Corporation since
1995. Prior to 1992, he was Controller of Emerson Quiet Kool.
Robert N. Edwards joined the Company and Fedders Corporation in 1992 as
Senior Counsel. He was promoted to General Counsel of the Company and of Fedders
Corporation in 1994 and Vice President in 1995. Prior to joining the Company,
Mr. Edwards was Vice President, General Counsel and Secretary of Information
Science Incorporated, a manufacturer of computer software.
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<PAGE> 38
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
OF FEDDERS CORPORATION
As of October 27, 1997, each director of Fedders Corporation and each
executive officer of Fedders Corporation named in the Summary Compensation Table
under "Executive Compensation" and all directors and executive officers of
Fedders Corporation as a group, owned beneficially the number of shares of
Fedders Corporation's 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. The Fedders Corporation's Class A Stock has no voting rights
except as provided under Delaware Law.
<TABLE>
<CAPTION>
SHARES
AMOUNT AND SUBJECT TO
NATURE OF ACQUISITION PERCENT
NAME OF INDIVIDUAL BENEFICIAL WITHIN 60 OF CLASS
TITLE OF CLASS OR PERSONS IN GROUP OWNERSHIP DAYS(12) OWNED(13)
- ---------------- ------------------------ ---------- ---------- -------------
<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 0 Less than 1%
S.A. Muscarnera......... 55,000 0 Less than 1%
C.A. Keen............... 10,700
Robert L. Laurent,
Jr...................... 115,000 0 Less than 1%
All directors and
executive
officers as a group..... 525,310 0 2.77%
Class A Stock Salvatore Giordano...... 1,567,855(4)(5) 167,314 7.68%
Sal Giordano, Jr........ 1,550,547(4)(6)(7) 829,066 10.23%
Joseph Giordano......... 1,200,897(4)(7)(8) 161,875 6.03%
Howard S. Modlin........ 310,581(9) 171,564 2.14%
Clarence Russel Moll.... 69,867(10) 60,000 Less than 1%
William J. Brennan...... 136,623 159,376 1.31%
Anthony E. Puleo........ 0 24,375 Less than 1%
S.A. Muscarnera......... 105,868 343,750 1.97%
C.A. Keen............... 29,016 142,500 Less than 1%
Robert L. Laurent,
Jr...................... 101,851 440,590 2.37%
Kent E. Hansen.......... 23,940 50,000 Less than 1%
Gary J. Nahai........... 0 55,262 Less than 1%
All directors and
executive
officers as a group..... 4,112,590 2,695,581 27.11%
Class B
Stock(13) Salvatore Giordano...... 2,262,566(11) 0 99.82%
Sal Giordano, Jr........ 2,262,566(11) 0 99.82%
Joseph Giordano......... 2,262,566(11) 0 99.82%
All directors and
executive
officers as a group..... 2,262,566 0 99.82%
Ownership of Common
Stock, Class A Stock,
and Class B Stock
combined, by all
directors and executive
officers as a group..... 6,900,466 2,695,581 20.69%
</TABLE>
- ---------------
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<PAGE> 39
(1) The amount shown includes 1,100 shares which are held by a corporation in
which Messrs. Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano are
officers, directors and stockholders, and share voting and investment power
over such shares.
(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) Includes 327,681 shares which are held by corporations in which Messrs.
Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano are officers,
directors and stockholders, and share voting and investment power over such
shares.
(5) Includes 204,292 shares held of record by Mr. Giordano's wife, and 157,722
shares held of record by Mr. Giordano's wife in trust for their
grandchildren, as to which Mr. Giordano disclaims beneficial ownership.
(6) Includes 18,119 shares held of record by Mr. Giordano's wife, 89,254 shares
held of record by Mr. Giordano's wife in trust for their grandchildren, as
to which Mr. Giordano disclaims beneficial ownership, and 71,630 shares
held by Mr. Giordano in trust as trustee for himself.
(7) Includes 345,625 shares held in trust, as to which Messrs. Sal Giordano,
Jr. and Joseph Giordano share voting and investment power.
(8) Includes 71,630 shares held by Mr. Giordano in trust as trustee for himself
and 58,865 shares held by Mr. Giordano in trust for his children.
(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) Shares are owned by Giordano Holding Corporation as to which Messrs.
Salvatore Giordano, Sal Giordano, Jr. and Joseph Giordano share voting and
investment power.
(12) The amounts shown are the number of shares held under options exercisable
within 60 days.
(13) 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 Fedders
Corporation's Charter, 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, 3,998,835 shares
constituting 9.12%; Mr. Sal Giordano, Jr., 4,643,279 shares constituting
10.43%; Mr. Joseph Giordano, 3,639,248 shares constituting 8.30% and all
directors and executive officers as a group 9,596,047 shares constituting
20.69%. The share totals for Messrs. Salvatore Giordano, Sal Giordano, Jr.
and Joseph Giordano include 2,591,347 shares which are held by corporations
in which they are officers, directors and stockholders and share voting and
investment power over such shares.
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<PAGE> 40
EXECUTIVE COMPENSATION
The following information is furnished as to all compensation paid by
Fedders Corporation and its subsidiaries during fiscal 1997, 1996 and 1995 to
each of the five highest paid executive officers of Fedders Corporation as of
August 31, 1997 whose aggregate direct compensation for fiscal 1997 exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ ------------
(B) (C) (D) (G) (I)
ALL OTHER
FISCAL SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
- ------------------------------------------------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salvatore Giordano............................... 1997 523,000(3) 412,320 120,000 28,060
Chairman of the Board of 1996 268,258 492,660 120,000 22,827
Directors of Fedders Corporation 1995 245,354 520,365 77,314 3,097,691(2)
and the Company
Sal Giordano, Jr................................. 1997 579,800(3) 412,320 120,000 42,550
Vice Chariman, President 1996 352,007 492,660 120,000 35,634
and Chief Executive Officer 1995 341,530 520,365 139,066 32,424
of Fedders Corporation
and the Company
Robert L. Laurent, Jr. .......................... 1997 250,500 206,160 60,000 14,564
Executive Vice President 1996 250,000 246,330 30,000 16,003
Finance and Administration, and 1995 226,489 260,183 50,590 15,281
Chief Financial Officer
of Fedders Corporation
and the Company
Kent E. Hansen................................... 1997 186,000 51,540 20,000 8,306
Senior Vice President and 1996 -- -- -- --
Secretary of Fedders Corporation 1995 -- -- -- --
and the Company
Gary J. Nahai.................................... 1997 150,000 16,875 15,000 5,006
Vice President and 1996 111,440 14,414 16,824 3,776
President, Fedders International, Inc. 1995 93,333 5,000 9,375 2,950
</TABLE>
- ------------------------------
(1) Includes Fedders Corporation's contribution to savings and investment
retirement plans up to the 3% offered to all employees of Fedders
Corporation in 1997, 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 Fedders Corporation from the proceeds of such policies
(Mr. Sal Giordano, Jr. $12,787; Mr. Robert L. Laurent, Jr. $879; and Mr.
Kent Hansen $1,180).
(2) Includes a special award granted to Mr. Giordano in recognition of more than
fifty years of extraordinary and exemplary service to Fedders Corporation as
its President or Chairman, overseeing the significant growth of Fedders
Corporation from a $7,000,000 automobile radiator manufacturer to the
leading manufacturer of room air conditioners in North America.
(3) Reflects the terms of the merger agreement between Fedders Corporation and
NYCOR, requiring that all employees and directors be placed in the same
economic position following the merger, as they were immediately prior
thereto.
36
<PAGE> 41
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company entered into its revolving credit facility (the "Credit
Agreement") on December 23, 1992. The Company and all of its direct and indirect
subsidiaries, each of which will be a Restricted Subsidiary as of the date of
issuance of the Notes, are parties to the Credit Agreement as borrowers or
guarantors of the borrowers' obligations. The Credit Agreement provides for
loans to the Company of up to $50 million based upon certain customary
percentages of accounts receivable and inventory of the Company. The obligations
of the Company under the Credit Agreement are guaranteed by Fedders Corporation.
Substantially all of the assets of Fedders Corporation, the Company and its
subsidiaries are pledged as collateral under the Credit Agreement. While the
Credit Agreement is intended principally to provide financing for the Company's
working capital requirements, the Company may use up to $15 million of the
amount available thereunder for general corporate purposes.
At the option of the Company, borrowings under the Credit Agreement bear
interest at a rate per annum (i) based upon the London interbank offered rate
("LIBOR") plus 2 3/4% (provided that not more than 80% of loans outstanding at
any time may be based upon LIBOR) or (ii) equal to the prime rate of CoreStates
Bank, N.A. In addition, the Company must pay (i) an unused line fee of 0.5% per
month on the amount by which $40 million exceeds the average outstanding daily
principal balance of loans outstanding, (ii) an early termination fee equal to
1% of the maximum availability if the Credit Agreement is terminated on or
before February 1, 1998 and 0.5% of the maximum availability if the Credit
Agreement is terminated after such date and prior to February 1, 2000, the
expiration date of the Credit Agreement and (iii) a service fee of $60,000
annually.
Borrowings under the Credit Agreement are secured by collateral assignments
or other security interests in (i) all material contracts to which the Company
and the Restricted Subsidiaries are parties, (ii) substantially all property,
plant, equipment and other tangible assets of the Company and the Restricted
Subsidiaries, (iii) all receivables of the Company and the Restricted
Subsidiaries, (iv) all intellectual property and other intangible assets of the
Company and the Restricted Subsidiaries and (v) the capital stock of the
Restricted Subsidiaries.
The Credit Agreement contains negative covenants that limit the ability of
the Company and the Restricted Subsidiaries to (i) create liens and other
encumbrances, (ii) incur indebtedness, (iii) enter into transactions with
affiliates, (iv) make loans, investments or guarantees and (v) pay dividends. In
addition, the Company must maintain (i) consolidated net worth of not less than
$10 million and (ii) consolidated working capital of not less than $6 million.
The Credit Agreement contains customary events of default, including, but
not limited to (i) non-payment of principal or interest, (ii) breach of any
term, covenant, condition or provision of the Credit Agreement, (iii) material
breach of representations and warranties, (iv) bankruptcy, insolvency or
assignment for the benefit of creditors, (v) material adverse change in the
business, assets or financial condition of the Company and (vi) a change in
control of the Company.
37
<PAGE> 42
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company and Fedders Corporation to
satisfy their obligations pursuant to the Registration Rights Agreement, which
requires the Company and Fedders Corporation to use their best efforts to effect
the Exchange Offer. See "--Registration Rights; Liquidated Damages."
The Company and Fedders Corporation are making the Exchange Offer in
reliance upon the position of the staff of the Commission set forth in certain
no-action letters addressed to other parties in other transactions. However, the
Company and Fedders Corporation have not sought their own no-action letter and
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Based on these interpretations by the staff of the Commission, the Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) any such holder that is an
"affiliate" of the Company or Fedders Corporation within the meaning of Rule 405
under the Securities Act, (ii) an Initial Purchaser who acquired the Original
Notes directly from the Company solely in order to resell pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act, or (iii) a broker-dealer who acquired the Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Notes are acquired in the ordinary course of such holder's
business and such holder is not participating and has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Notes. Any holder who tenders Original
Notes in the Exchange Offer for the purpose of participating in a distribution
of the Notes could not rely on such interpretations by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, unless such sale is made pursuant to an exemption from such
requirements.
Holders of Original Notes not tendered will not have only limited
continuing registration rights and the Original Notes not exchanged will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the markets for the Original Notes could be adversely affected.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY OR FEDDERS CORPORATION NOR
THE COMPANY OR FEDDERS CORPORATION MAKES ANY RECOMMENDATION TO HOLDERS OF
ORIGINAL NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR ORIGINAL NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF ORIGINAL
NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF SO, THE AGGREGATE AMOUNT OF ORIGINAL NOTES TO TENDER AFTER READING
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING THEIR ADVISERS, IF
ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the Original Notes, the Company entered
into the Registration Rights Agreement with the Initial Purchasers of the
Original Notes.
Holders of Notes (other than as set forth below) are not entitled to any
registration rights with respect to the Notes. Pursuant to the Registration
Rights Agreement, holders of Original Notes are entitled to certain registration
rights. Under the Registration Rights Agreement, the Company and Fedders
Corporation have agreed, for the benefit of the holders of the Original Notes,
that they will, at their cost, (i) within 45 days after the date of the original
issue of the Original Notes, file the Registration Statement with the Commission
and (ii) within 150 days after the date of original issuance of the Original
Notes, use their best efforts to cause such Registration Statement to be
declared effective under the Securities Act. The Registration Statement of
38
<PAGE> 43
which this Prospectus is a part constitutes the Registration Statement. If (i)
the Company and Fedders Corporation are not permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any holder of Transfer Restricted Securities (as
defined) notifies the Company and Fedders Corporation within the specified time
period that (A) due to a change in law or policy it is not entitled to
participate in the Exchange Offer, (B) due to a change in law or policy it may
not resell the Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and this Prospectus is not appropriate or available for
such resales by such holder or (C) it is a broker-dealer and acquired the Notes
directly from the Company or an affiliate of the Company, the Company will file
with the Commission the Shelf Registration Statement to cover resales of the
Transfer Restricted Securities by the holders thereof who satisfy certain
conditions relating to the provision of information in connection with the Shelf
Registration Statement. The Company and Fedders Corporation will use their best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Original Note, until (i) the date of
which such Transfer Restricted Security has been exchanged in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a
Transfer Restricted Security for a Note, the date on which such Note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the Prospectus contained in the Registration Statement, (iii) the
date on which such security has been effectively registered under the Securities
Act and disposed of in accordance with the Shelf Registration Statement or (iv)
the date on which such security is distributed pursuant to Rule 144 under the
Act.
The Registration Rights Agreement also provides that, (i) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company and Fedders Corporation will commence the Exchange Offer and use
their best efforts to issue on or prior to 30 business days after the date on
which the Registration Statement was declared effective by the Commission, Notes
in exchange for all Transfer Restricted Securities tendered prior thereto in the
Exchange Offer and (ii) if obligated to file the Shelf Registration Statement,
the Company and Fedders Corporation will file the Shelf Registration Statement
with the Commission on or prior to 45 days after such filing obligation arises
and use their best efforts to cause the Shelf Registration Statement to be
declared effective by the Commission on or prior to 120 days after such
obligation arises. The Company and Fedders Corporation shall use their best
efforts to keep such Shelf Registration Statement continuously effective,
supplemented and amended until the second anniversary of the date on which the
Shelf Registration Statement becomes effective or such shorter period that will
terminate when all the Notes covered by the Shelf Registration Statement have
been sold pursuant to the Shelf Registration Statement. If (a) the Company and
Fedders Corporation fail to file any of the registration statements required by
the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such registration statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Registration Statement, or (d) the Shelf Registration Statement or the
Registration Statement is declared effective but thereafter, subject to certain
exceptions, ceases to be effective or usable in connection with resales of
Transfer Restricted Securities during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay Liquidated Damages to each
holder of Transfer Restricted Securities, with respect to the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to $.05 per week for each $1,000 principal amount of Notes held by
such holder. The amount of the Liquidated Damages will increase by an additional
$.05 per week with respect to each subsequent 90-day period until all
Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.40 per week for each $1,000 principal amount of Notes, as
applicable. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Transfer Restricted Securities will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Transfer
Restricted
39
<PAGE> 44
Securities included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING ORIGINAL NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Original Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means the earlier of
(i) 5:00 p.m., New York City time, on January 16, 1998 or (ii) the date when all
Original Notes have been tendered; provided, however, that if the Company and
Fedders Corporation, in their sole discretion, have extended the period of time
for which the Exchange Offer is open, the term "Expiration Date" means the
latest time and date to which the Exchange Offer is extended; provided further
that in no event will the Exchange Offer be extended beyond January 27, 1998.
The Company and Fedders Corporation may extend the Exchange Offer at any time
and from time to time by giving oral or written notice to the Exchange Agent and
by timely public announcement. Without limiting the manner in which the Company
and Fedders Corporation may choose to make any public announcement and subject
to applicable law, the Company and Fedders Corporation shall have no obligation
to publish, advertise or otherwise communicate any such public announcement
other than by issuing a release to an appropriate news agency. During any
extension of the Exchange Offer, all Original Notes previously tendered pursuant
to the Exchange Offer will remain subject to the Exchange Offer. The Company and
Fedders Corporation intend to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Original Notes is outstanding. This Prospectus, together with the Letter
of Transmittal, is first being sent on or about December 15, 1997, to all
holders of Original Notes known to the Company. The Company's obligation to
accept Original Notes for exchange pursuant to the Exchange Offer is subject to
certain conditions as set forth under "--Certain Conditions to the Exchange
Offer" below.
The terms of the Notes and the Original Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Original Notes and certain rights to receive Liquidated Damages.
See "--Registration Rights; Liquidated Damages." The Original Notes were, and
the Notes will be, issued under the Indenture and both the Original Notes and
the Notes are entitled to the benefits of the Indenture.
Original Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any Original Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Original Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified below under "--Certain Conditions to the Exchange
Offer." The Company and Fedders Corporation will give oral or written notice of
any amendment, nonacceptance or termination to the holders of the Original Notes
as promptly as practicable. Any amendment to the Exchange Offer will not limit
the right of holders to withdraw tendered Original Notes prior to the Expiration
Date. See "--Withdrawal Rights."
PROCEDURES FOR TENDERING ORIGINAL NOTES
The tender to the Company and Fedders Corporation of Original Notes by a
holder thereof as set forth below and the acceptance thereof by the Company and
Fedders Corporation will constitute a binding agreement between the tendering
holder and the Company and Fedders Corporation upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Original
Notes for exchange pursuant to the Exchange Offer
40
<PAGE> 45
must transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to State
Street Bank and Trust Company (the "Exchange Agent") at one of the addresses set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Original Notes must be received by
the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Original Notes, if such procedure is available, into the Exchange Agent's
account at The Depository Trust Company (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF ORIGINAL NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE
SENT TO THE COMPANY OR FEDDERS CORPORATION.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Original Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the
Original Notes who has not completed the box entitled "Special Issuance and
Delivery Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution (as defined
below). In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantees
must be by a firm which is a member of an approved Signature Guarantee Medallion
Program (collectively, "Eligible Institutions"). If Original Notes are
registered in the name of a person other than the signer of the Letter of
Transmittal, the Original Notes surrendered for exchange must be endorsed by, or
be accompanied by a written instrument or instruments of transfer or exchange,
in satisfactory form as determined by the Company and Fedders Corporation in
their sole discretion, duly executed by the registered holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Original Notes tendered for exchange will be
determined by the Company and Fedders Corporation in their sole discretion,
which determination shall be final and binding. The Company and Fedders
Corporation reserve the absolute right to reject any and all tenders of any
particular Original Notes not properly tendered or to not accept any particular
Original Notes which acceptance might, in the judgment of the Company, Fedders
Corporation or their counsel, be unlawful. The Company and Fedders Corporation
also reserve the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to any particular Original Notes either
before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Original Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer as
to any particular Original Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the
Company and Fedders Corporation shall be final and binding on all parties.
Unless waived, all defects or irregularities in connection with tenders of
Original Notes for exchange must be cured within such reasonable period of time
as the Company and Fedders Corporation shall determine. Neither the Company,
Fedders Corporation, the Exchange Agent nor any other person shall be under any
duty to give notification of any defect or irregularity with respect to any
tender of Original Notes for exchange, nor shall any of them incur any liability
for failure to give such notification. The Exchange Agent intends to use
reasonable efforts to give notification of such defects and irregularities.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Original Notes, such Original Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name or names of the registered holder or holders that appear on
the Original Notes.
If the Letter of Transmittal or any Original Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or
41
<PAGE> 46
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company and Fedders Corporation, proper evidence
satisfactory to the Company and Fedders Corporation of their authority to so act
must be submitted.
By tendering, each holder will represent to the Company and Fedders
Corporation that, among other things, the Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Notes, whether or not such person is the holder and such
person has no arrangement with any person to participate in the distribution of
the Notes. If any holder or any such other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company or Fedders Corporation, is
engaged in or intends to engage in or has an arrangement or understanding with
any person to participate in a distribution of such Notes to be acquired
pursuant to the Exchange Offer, or acquired the Original Notes as a result of
market making or other trading activities, such holder or any such other person
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Original Notes
properly tendered and will issue the Notes promptly after acceptance of the
Original Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company and Fedders Corporation shall be deemed to
have accepted properly tendered Original Notes for exchange when, as and if the
Company and Fedders Corporation have given oral or written notice thereof to the
Exchange Agent, with written confirmation of any oral notice to be given
promptly thereafter.
For each Original Note accepted for exchange, the holder of such Original
Note will receive a Note having a principal amount equal to that of the
surrendered Original Note. Accordingly, registered holders of Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Original Notes, or, if no
interest has been paid on the Original Notes, from August 18, 1997. Original
Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer. Holders of Original Notes whose
Original Notes are accepted for exchange will not receive any payment in respect
of accrued interest on such Original Notes otherwise payable on any interest
payment date, the record date for which occurs on or after consummation of the
Exchange Offer.
In all cases, issuance of Notes for Original Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Original Notes or a timely
Book-Entry Confirmation of such Original Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility, (ii) a properly completed and duly executed
Letter of Transmittal and (iii) all other required documents. If any tendered
Original Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer, or if Original Notes are submitted for a
greater amount than the holder desires to exchange, such unaccepted or
nonexchanged Original Notes will be returned without expense to the tendering
holder thereof (or, in the case of Original Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such nonexchanged
Original Notes will be credited to an account maintained with such Book-Entry
Transfer Facility) designated by the tendering holder as promptly as practicable
after the expiration or termination of the Exchange Offer.
42
<PAGE> 47
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Original Notes by causing the
Book-Entry Transfer Facility to transfer such Original Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Original Notes desires to tender such
Original Notes and the Original Notes are not immediately available, or time
will not permit such holder's Original Notes or other required documents to
reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, the tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent has received from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
of the corresponding exhibit to the Registration Statement of which this
Prospectus constitutes a part (by telegram, telex, facsimile transmission, mail
or hand delivery), setting forth the name and address of the holder of Original
Notes and the amount of Original Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Original Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the certificates for all
physically tendered Original Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal, are received by the Exchange Agent within three NYSE trading
days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Original Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Original Notes to be withdrawn, identify the Original
Notes to be withdrawn (including the amount of such Original Notes), and (where
certificates for Original Notes have been transmitted) specify the name in which
such Original Notes are registered, if different from that of the withdrawing
holder. If certificates for Original Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Original Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Original Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company and Fedders Corporation, whose determination shall be final and
binding on all parties. Any Original Notes which have been tendered for exchange
but which are not exchanged for any reason will be returned to the holder
thereof without cost to such holder (or, in the case of Original Notes tendered
by book-entry transfer
43
<PAGE> 48
into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Original Notes will
be credited to an account with such Book-Entry Transfer Facility specified by
the holder) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Original Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Original Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company and
Fedders Corporation shall not be required to accept for exchange, or to issue
Notes in exchange for, any Original Notes and may terminate or amend the
Exchange Offer, if at any time before the acceptance of such Original Notes for
exchange or the exchange of the Notes for such Original Notes, any of the
following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company and Fedders Corporation to accept for exchange or
exchange some or all of the Original Notes pursuant to the Exchange Offer;
or any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the
Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any government or governmental authority, domestic or foreign, or
any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or foreign,
that in the sole judgment of the Company and Fedders Corporation might
directly or indirectly result in any of the consequences referred to in
clauses (i) or (ii) above or, in the sole judgment of the Company and
Fedders Corporation, might result in the holders of Notes having
obligations with respect to resales and transfers of Notes which are
greater than those described in the interpretation of the Commission
referred to on the cover page of this Prospectus, or would otherwise make
it inadvisable to proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company and Fedders Corporation to complete the transactions
contemplated by the Exchange Offer, (iii) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or any limitation by any governmental agency or authority which
adversely affects the extension of credit or (iv) a commencement of a war,
armed hostilities or other similar international calamity directly or
indirectly involving the United States, or, in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer, a
material acceleration or worsening thereof; or
(c) any change (or development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole or of
Fedders Corporation and its subsidiaries taken as a whole that, in the sole
judgment of the Company or Fedders Corporation, is or may be adverse to the
Company or Fedders Corporation, or the Company or Fedders Corporation shall
have become aware of facts that, in the sole judgment of the Company or
Fedders Corporation, have or may have an adverse effect on the value of the
Original Notes or the Notes.
Holders of Original Notes will have registration rights and the right to
Liquidated Damages as described under "--Registration Rights; Liquidated
Damages" if the Company fails to consummate the Exchange Offer.
To the Company's and Fedders Corporation's knowledge as of the date of this
Prospectus, none of the above events has occurred.
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<PAGE> 49
The foregoing conditions are for the sole benefit of the Company and
Fedders Corporation and may be asserted by the Company and Fedders Corporation
regardless of the circumstances giving rise to any such condition or may be
waived by the Company and Fedders Corporation in whole or in part at any time
and from time to time in their sole discretion. The failure by the Company and
Fedders Corporation at any time to exercise any of the foregoing rights shall
not be deemed a waiver of any such right and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
In addition, the Company and Fedders Corporation will not accept for
exchange any Original Notes tendered, and no Notes will be issued in exchange
for any such Original Notes, if at such time any stop order shall be threatened
or in effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal and Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the addresses
set forth below. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
Deliver to: State Street Bank and Trust Company, Exchange Agent:
<TABLE>
<S> <C> <C>
By Hand Delivery: By Overnight Courier: By Mail:
State Street Bank and State Street Bank and State Street Bank and
Trust Company Trust Company Trust Company
Corporate Trust Department Corporate Trust Department Corporate Trust Department
Two International Place Two International Place, P.O. Box 778
Fourth Floor, 4th Floor Boston, Massachusetts 02110
Corporate Trust Window Boston, Massachusetts 02110
Boston, Massachusetts 02110
</TABLE>
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will, however, pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related document to
the beneficial owners of Original Notes, and in handling tenders for their
customers. The expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent and printing, accounting,
registration, and legal fees, will be paid by the Company and are estimated to
be approximately $.5 million.
TRANSFER TAXES
Holders who tender their Original Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register Notes in the name of, or request that Original
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
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<PAGE> 50
APPRAISAL RIGHTS
HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
CONSEQUENCES OF NOT EXCHANGING ORIGINAL NOTES
Holders of Original Notes who do not exchange their Original Notes for
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company and Fedders Corporation do not currently anticipate that they will
register the Original Notes under the Securities Act. Based upon no-action
letters issued by the staff of the Commission to third parties, the Company and
Fedders Corporation believe the Notes issued pursuant to the Exchange Offer in
exchange for the Original Notes may be offered for resale, resold or otherwise
transferred by a Holder thereof (other than any (i) holder which is an
"affiliate" of the Company or Fedders Corporation within the meaning of Rule 405
under the Securities Act, (ii) an Initial Purchaser who acquired the Original
Notes directly from the Company solely in order to resell pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act, or (iii) a broker-dealer who acquired the Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Notes are acquired in the ordinary course of such holder's
business and such holder is not participating and has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Notes. However, the Company and Fedders
Corporation have not sought their own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and does
not intend to engage in, a distribution of Notes, and has no arrangement or
understanding to participate in a distribution of Notes. If any holder is an
affiliate of the Company or Fedders Corporation, is engaged in or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the Notes to be acquired pursuant to the Exchange Offer, or
acquired the Original Notes as a result of market making or other trading
activities, such holder (i) could not rely on the relevant determinations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Each broker-dealer that receives Notes for its own
account in exchange for Original Notes must acknowledge that such Original Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities and that it will deliver a prospectus in connection
with any resale of such Notes. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdiction or an exemption from registration or qualification
is available and is complied with. The Company and Fedders Corporation have
agreed to register or qualify the sale of the Notes in such jurisdictions only
in limited circumstances and subject to certain conditions.
ACCOUNTING TREATMENT
The exchange of the Notes for the Original Notes will have no impact on the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. Expenses of the Exchange
Offer and expenses related to the Original Notes will be amortized, pro rata,
over the term of the Notes.
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<PAGE> 51
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to the Indenture among the Company, the
Guarantor and State Street Bank and Trust Company, as trustee (the "Trustee").
As used under this caption "Description of Notes" other than "-- Book Entry,
Delivery and Form," the term "Notes" refers collectively to the Notes issued
upon consummation of the Exchange Offer and the Original Notes. The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), as in effect on the date of original issuance of the Notes. The
Notes are subject to all such terms, and holders of the Notes are referred to
the Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the provisions of the Indenture does not purport to be complete and
is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below.
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate each of its existing Subsidiaries, Subsidiaries formed by
the Company or Subsidiaries acquired by the Company after the original issuance
of the Notes as Non-Restricted Subsidiaries. Non-Restricted Subsidiaries will
not be subject to any of the covenants set forth in the Indenture.
The Notes will be limited to $100,000,000 in aggregate principal amount and
will mature on August 15, 2007. The Notes will bear interest at the rate set
forth on the front cover of this Prospectus. Interest on the Notes is payable
semi-annually in cash in arrears on February 15 and August 15 in each year,
commencing February 15, 1998, to holders of record of Notes at the close of
business on the February 1 or August 1 immediately preceding such interest
payment date. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance of the Original Notes. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Notes will be issued in denominations
of $1,000 and integral multiples thereof.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office of the Paying Agent and Registrar in New York, New York. Holders of Notes
must surrender their Notes to the Paying Agent to collect principal payments,
and the Company may pay principal and interest by check and may mail checks to a
holder's registered address; provided that all payments with respect to Global
Notes and Certificated Notes, the holders of which have given wire transfer
instructions to the Company, will be required to be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof.
The Registrar may require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection with certain transfers or
exchanges. See "--Transfer and Exchange." The Trustee will initially act as
Paying Agent and Registrar. The Company may change the Paying Agent or Registrar
without prior notice to holders of Notes, and the Company or any of its
Subsidiaries may act as Paying Agent or Registrar.
SUBORDINATION
The payment of principal of, and premium, interest and Liquidated Damages,
if any, on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full of all Senior Indebtedness, whether
outstanding on the date of the Indenture or thereafter incurred. The Indenture
permits the incurrence of additional Senior Indebtedness in the future.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Indebtedness will be entitled to
receive payment in full of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the holders
of Notes will be entitled to receive any payment with respect to the Notes, and
until all Obligations with respect to Senior Indebtedness are paid in full, any
distribution to which the holders of Notes would be entitled shall be made to
the holders of Senior
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<PAGE> 52
Indebtedness (except that holders of Notes may receive payments made from the
trust described under "--Satisfaction and Discharge of the Indenture") if (i) a
default in the payment of the principal of or premium, if any, or interest on
Senior Indebtedness occurs and is continuing beyond any applicable period of
grace or (ii) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its maturity and the
Trustee receives a written notice (with a copy to the Company) of such other
default (a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Indebtedness; payments on the Notes shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date on which
the applicable Payment Blockage Notice is received by the Trustee, unless the
maturity of any Designated Senior Indebtedness has been accelerated. No new
period of payment blockage may be commenced unless and until 360 days have
elapsed since the date of receipt by the Trustee of the immediately prior
Payment Blockage Notice. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall be, or
be made, the basis for a subsequent Payment Blockage Notice (it being understood
that any subsequent action, or any breach of any covenant for a period
commencing after the date of receipt by the Trustee of such Payment Blockage
Notice, that, in either case, would give rise to such a default pursuant to any
provisions under which a default previously existed or was continuing shall
constitute a new default for this purpose).
The Indenture requires that the Company promptly notify holders of Senior
Indebtedness if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. As of August
31, 1997, after giving pro forma effect to the complete application of proceeds
from the offering of the Original Notes, the aggregate principal amount of
Senior Indebtedness outstanding would have been approximately $3.9 million. The
Indenture limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness, that the Company and its
subsidiaries can incur. See "--Certain Covenants--Limitation on Incurrence of
Indebtedness."
GUARANTEE
The Guarantor irrevocably and unconditionally guarantees on a senior
subordinated basis the performance and punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes, whether for principal of, or interest or
Liquidated Damages, if any, on the Notes, expenses, indemnification or otherwise
(all such obligations guaranteed by the Guarantor being herein called the
"Guaranteed Obligations"). The Guarantor's assets consist primarily of the
common stock of the Company and of the common stock of its Subsidiaries which
conduct the international operations of the Guarantor and the operations of
Melcor and, accordingly, its ability to perform under its Guarantee will be
dependent on the financial condition and net worth of its Subsidiaries,
including the Company.
The Guarantee is a continuing guarantee and shall (a) remain in full force
and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon the Guarantor and its successors, transferees and assigns and (c)
inure to the benefit of and be enforceable by the Trustee, the holders of the
Notes and their successors, transferees and assigns.
SUBORDINATION OF GUARANTEE
Payments on the Guarantee will be subordinated, as set forth in the
Indenture, in right of payment to the prior payment in full of all Guarantor
Senior Indebtedness. The terms of such subordination will be substantially
similar to the subordination terms applicable to the Notes.
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<PAGE> 53
"Guarantor Senior Indebtedness" means, with respect to the Guarantor, the
Guarantor's guarantee of the Company's obligations under the Credit Agreement
and any other Indebtedness of the Guarantor (other than as otherwise provided in
this definition), whether outstanding on the date of the Indenture or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Guarantee. Notwithstanding the
foregoing, "Guarantor Senior Indebtedness" will not include (i) Indebtedness
evidenced by the Guarantee; (ii) Indebtedness of the Guarantor that is
subordinate or junior in right of payment to any other Indebtedness of the
Guarantor; (iii) Indebtedness of the Guarantor which, when incurred and without
respect to any other election under Section 1111(b) of Title 11, United States
Code, is without recourse to the Guarantor; (iv) Indebtedness which is
represented by Disqualified Stock of the Guarantor; (v) any liability for
foreign, federal, state, local or other taxes owed or owing by the Guarantor;
(vi) Indebtedness of the Guarantor to a Subsidiary or any other Affiliate of the
Guarantor or any of such Affiliate's subsidiaries; (vii) that portion of any
Indebtedness which, when incurred, is issued in violation of the Indenture; and
(viii) trade payables owed or owing by the Guarantor.
REDEMPTION OF NOTES
Optional Redemption. The Notes may not be redeemed at the option of the
Company prior to August 15, 2002. During the 12-month period beginning on August
15 of the years indicated below, the Notes will be redeemable, at the option of
the Company, in whole or in part, on at least 30 but not more than 60 days'
notice to each holder of Notes to be redeemed, at the redemption prices
(expressed as percentages of the principal amount) set forth below, plus any
accrued and unpaid interest and Liquidated Damages, if any, to the redemption
date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002.............................................. 104.688%
2003.............................................. 103.125%
2004.............................................. 101.563%
2005 and thereafter............................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before August 15, 2000,
the Company may (but will not have the obligation to) redeem for cash up to 30%
of the original aggregate principal amount of the Notes at a redemption price of
109.375% of the principal amount thereof, in each case plus any accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net proceeds of an Equity Offering; provided that at least 70% of the
original principal amount of the Notes remains outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption will
occur within 60 days of the date of the closing of such Equity Offering.
Mandatory Redemption. Except as set forth below under "--Mandatory Offers
to Purchase Notes--Change of Control" and "--Asset Sales," the Company is not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the Notes.
MANDATORY OFFERS TO PURCHASE NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of Notes shall have the
right to require the Company to purchase all or any part (equal to $1,000 or an
integral multiple thereof) of such holder's Notes pursuant to an Offer (as
defined) at a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase. The Company shall furnish to the Trustee, at least
14 days before notice of an Offer is mailed to all holders of Notes pursuant to
the procedures described below under "--Procedures for Offers," notice that the
Offer is being made. Transactions constituting a Change of Control are not
limited to hostile takeover transactions not approved by the current management
of the Company. Except as described under "--Change of Control," the Indenture
does
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<PAGE> 54
not contain provisions that permit the holders of Notes to require the Company
to purchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring, including an issuer recapitalization or similar
transaction with management. Consequently, the Change of Control provisions will
not afford any protection in a highly leveraged transaction, including such a
transaction initiated by the Company, management of the Company or an affiliate
of the Company, if such transaction does not result in a Change of Control. In
addition, because the obligations of the Company with respect to the Notes are
subordinated to all Senior Indebtedness of the Company and all obligations of
the Company's subsidiaries, existing or future Senior Indebtedness of the
Company or obligations of the Company's subsidiaries may prohibit the Company
from repurchasing the Notes upon a Change of Control. Moreover, the ability of
the Company to repurchase Notes following a Change of Control will be limited by
the Company's then-available resources. The Change of Control provisions may not
be waived by the Board of Directors of the Company or the Trustee without the
consent of holders of at least a majority in principal amount of the Notes. See
"--Amendment, Supplement and Waiver."
The Company expects that prepayment of the Notes following a Change of
Control would, and the exercise by holders of Notes of the right to require the
Company to purchase Notes may, constitute a default under the Credit Agreement
or under Senior Indebtedness of the Company. In the event a Change of Control
occurs, the Company will likely be required to refinance the Senior Indebtedness
outstanding under the Credit Agreement and the Notes. If there is a Change of
Control, any Senior Indebtedness under the Credit Agreement could be
accelerated. Moreover, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required repurchases
of the Notes. The financing of the purchases of Notes could additionally result
in a default under the Credit Agreement or other indebtedness of the Company.
The occurrence of a Change of Control may also have an adverse impact on the
ability of the Company to obtain additional financing in the future.
Asset Sales. The Indenture provides that the Company may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset
Sale (including the sale of any of the Capital Stock of any Restricted
Subsidiary) providing for Net Proceeds in excess of $5,000,000 unless the Net
Proceeds from such Asset Sale are applied (in any manner otherwise permitted by
the Indenture) to one or more of the following purposes in such combination as
the Company shall elect: (a) an investment in another asset or business in the
same line of business as, or a line of business similar to that of, the line of
business of the Company and its Restricted Subsidiaries at the time of the Asset
Sale; provided that such investment occurs on or prior to the 365th day
following the date of such Asset Sale (the "Asset Sale Disposition Date"), (b)
to reimburse the Company or its Subsidiaries for expenditures made, and costs
incurred, to repair, rebuild, replace or restore property lost, damaged or taken
to the extent that the Net Proceeds consist of insurance proceeds received on
account of such loss, damage or taking, (c) the purchase, redemption or other
prepayment or repayment of outstanding Senior Indebtedness or Indebtedness of
the Company's Restricted Subsidiaries on or prior to the 365th day following the
Asset Sale Disposition Date or (d) an Offer expiring on or prior to the Purchase
Date (as defined herein). The Indenture also provides that the Company may not,
and may not permit any Restricted Subsidiary to, directly or indirectly,
consummate an Asset Sale unless at least 70% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash,
cash equivalents or marketable securities; provided that, solely for purposes of
calculating such 70% of the consideration, the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance sheet
or in the notes thereto, excluding contingent liabilities and trade payables) of
the Company or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Notes) that are assumed by the transferee of any
such assets and (y) any notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are promptly, but in no
event more than 30 days after receipt, converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received), shall be
deemed to be cash and cash equivalents for purposes of this provision. Any Net
Proceeds from any Asset Sale that are not applied or invested as provided in the
first sentence of this paragraph shall constitute "Excess Proceeds."
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<PAGE> 55
When the aggregate amount of Excess Proceeds exceeds $6,500,000 (such date
being an "Asset Sale Trigger Date"), the Company shall make an Offer (an "Asset
Sale Offer") to all holders of Notes to purchase the maximum principal amount of
the Notes then outstanding that may be purchased out of Excess Proceeds, at an
offer price in cash in an amount equal to 100% of principal amount thereof plus
any accrued and unpaid interest to the Purchase Date in accordance with the
procedures set forth in the Indenture. Notwithstanding the foregoing, to the
extent that any or all of the Net Proceeds of an Asset Sale are prohibited or
delayed by applicable local law from being repatriated to the United States, the
portion of such Net Proceeds so affected will not be required to be applied as
described in this or the preceding paragraph, but may be retained for so long,
but only for so long, as the applicable local law prohibits repatriation to the
United States.
To the extent that any Excess Proceeds remain after completion of an Asset
Sale Offer, the Company may use such remaining amount for general corporate
purposes. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
Although the Credit Agreement will permit the Company to pay interest on
the Notes, dividends for other purposes, such as repurchases of Notes by the
Company upon an Asset Sale, will not be permitted under the terms of the Credit
Agreement. Accordingly, the Company would need to seek the consent of its
lenders under the Credit Agreement in order to repurchase Notes with the Net
Proceeds of an Asset Sale.
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
Indenture, the Company shall mail a notice to each holder of Notes at such
holder's registered address stating: (a) that an offer (an "Offer") is being
made pursuant to a Change of Control or an Asset Sale Trigger Date, as the case
may be, the length of time the Offer shall remain open and the maximum principal
amount of Notes that will be accepted for payment pursuant to such Offer, (b)
the purchase price, the amount of accrued and unpaid interest as of the purchase
date, and the purchase date (which shall be no earlier than 30 days and no later
than 60 days from the date such notice is mailed (the "Purchase Date")), and (c)
such other information required by the Indenture and applicable law and
regulations.
On the Purchase Date for any Offer, the Company will, to the extent
required by the Indenture and such Offer, (1) in the case of an Offer resulting
from a Change of Control, accept for payment all Notes or portions thereof
tendered pursuant to such Offer and, in the case of an Offer resulting from an
Asset Sale Trigger Date, accept for payment the maximum principal amount of
Notes or portions thereof tendered pursuant to such Offer that can be purchased
out of Excess Proceeds, (2) deposit with the Paying Agent the aggregate purchase
price of all Notes or portions thereof accepted for payment and any accrued and
unpaid interest on such Notes as of the Purchase Date, and (3) deliver or cause
to be delivered to the Trustee all Notes tendered pursuant to the Offer. The
Paying Agent shall promptly mail to each holder of Notes or portions thereof
accepted for payment an amount equal to the purchase price for such Notes plus
any accrued and unpaid interest thereon, and the Trustee shall promptly
authenticate and mail (or cause to be transferred by book entry) to such holder
of Notes accepted for payment in part a new Note equal in principal amount to
any unpurchased portion of the Notes and any Note not accepted for payment in
whole or in part shall be promptly returned to the holder thereof. The Company
will publicly announce the results of the Offer on or as soon as practicable
after the Purchase Date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an offer
required to be made by the Company to repurchase the Notes as a result of a
Change of Control or an Asset Sale Trigger Date. To the extent that the
provisions of any securities laws or regulations conflict with provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Indenture by virtue thereof.
Selection and Notice. In the event of a redemption or purchase of less
than all of the Notes, the Notes to be redeemed or purchased will be chosen by
the Trustee pro rata, by lot or by any other method that the Trustee considers
fair and appropriate and, if the Notes are listed on any securities exchange, by
a method that complies with the requirements of such exchange; provided that, if
less than all of a holder's Notes are to be
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redeemed or accepted for payment, only principal amounts of $1,000 or multiples
thereof may be selected for redemption or accepted for payment. On and after any
redemption or purchase date, interest shall cease to accrue on the Notes or
portions thereof called for redemption or accepted for payment. Notice of any
redemption or offer to purchase will be mailed at least 30 days but not more
than 60 days before the redemption or purchase date to each holder of Notes to
be redeemed or purchased at such holder's registered address.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on account
of the Company's or such Restricted Subsidiary's Capital Stock or other Equity
Interests (other than dividends or distributions payable in Capital Stock or
other Equity Interests (other than Disqualified Stock) of the Company and
dividends or distributions payable by a Restricted Subsidiary to a Restricted
Subsidiary or to the Company); (ii) purchase, redeem or otherwise acquire or
retire for value any Capital Stock or other Equity Interests of the Company or
any of its Restricted Subsidiaries; (iii) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled final maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes; or (iv) make any Restricted Investment
(all such dividends, distributions, purchases, redemptions, acquisitions,
retirements, prepayments and Restricted Investments being collectively referred
to as "Restricted Payments"), if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving pro
forma effect thereto, the Company shall not be able to issue $1.00 of
additional Indebtedness pursuant to the first sentence of the "Limitation
on Incurrence of Indebtedness" covenant; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of original issuance of the Notes,
without duplication, exceeds the sum of (1) 50% of the aggregate
Consolidated Net Income (including, for this purpose, gains or losses from
Asset Sales) of the Company (or, in case such aggregate is a loss, 100% of
such loss) for the period (taken as one accounting period) from the
beginning of the fiscal quarter commencing March 1, 1997 and ended as of
the Company's most recently ended fiscal quarter at the time of such
Restricted Payment; plus (2) 100% of the aggregate net cash proceeds and
the fair market value of any property or securities (as determined by the
Board of Directors in good faith) received by the Company from the issue or
sale of Capital Stock or other Equity Interests of the Company subsequent
to the date of original issuance of the Notes (other than (x) Capital Stock
or other Equity Interests issued or sold to a Restricted Subsidiary and (y)
the issuance or sale of Disqualified Stock); plus (3) the amount by which
the principal amount of and any accrued interest on either (A) Indebtedness
of the Company or (B) any Indebtedness of any Restricted Subsidiary is
reduced on the Company's consolidated balance sheet upon the conversion or
exchange other than by a Restricted Subsidiary subsequent to the date of
original issuance of the Notes of any Indebtedness of the Company or any
Restricted Subsidiary (not held by the Company or any Restricted
Subsidiary) for Capital Stock or other Equity Interests (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair market value of any other property or securities (as determined by the
Board of Directors in good faith), distributed by the Company or any
Restricted Subsidiary (to persons other than the Company or any other
Restricted Subsidiary) upon such conversion or exchange); plus (4) if any
Non-Restricted Subsidiary is redesignated as a Restricted Subsidiary, the
value of the Restricted Payment that would result if such Subsidiary were
redesignated as a Non-Restricted Subsidiary at such time, as determined in
accordance with the second paragraph of the "Designation of
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Restricted and Non-Restricted Subsidiaries" covenant; provided, however,
that for purposes of this clause (4), the value of any redesignated
Non-Restricted Subsidiary shall be reduced by the amount that any such
redesignation replenishes or increases the amount of Restricted Investments
permitted to be made pursuant to clause (ii) of the next sentence.
Notwithstanding the foregoing, clauses (b) and (c) shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would
comply with all covenants of such Indenture (including, but not limited to,
the "Limitation on Restricted Payments" covenant); provided that payments
made pursuant to this paragraph shall count as a Restricted Payment for
purposes of the calculation in paragraph (c) of this covenant;
(ii) the payment by the Company of a dividend to the Guarantor on the
date of issuance of the Original Notes from the proceeds received from the
issuance of the Original Notes not to exceed $72 million in cash; provided
that payments made pursuant to this paragraph (ii) shall not count as a
Restricted Payment for purposes of the calculation in paragraph (c) of this
covenant;
(iii) any payment by the Company of a dividend to the Guarantor on the
date of issuance of the Original Notes or prior to the date of issuance of
the Original Notes in an amount equal to the intercompany receivable on
such date from Fedders Corporation; provided that payments made pursuant to
this paragraph (iii) shall not count as a Restricted Payment for purposes
of the calculation in paragraph (c) of this covenant;
(iv) the redemption, repurchase, retirement or other acquisition of
any Capital Stock or other Equity Interests of the Company or any
Restricted Subsidiary in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company)
of other Capital Stock or other Equity Interests of the Company (other than
any Disqualified Stock) or the redemption, repurchase, retirement or other
acquisition of any Capital Stock or other Equity Interests of any
Restricted Subsidiary in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to the Company or a Subsidiary of
the Company) of other Capital Stock or other Equity Interests of such
Restricted Subsidiary; provided that, in each case, any net cash proceeds
that are utilized for any such redemption, repurchase, retirement or other
acquisition, and any Net Income resulting therefrom, shall be excluded from
paragraph (c) of this covenant;
(v) Restricted Investments made or received in connection with the
sale, transfer or disposition of any business, properties or assets of the
Company or any Restricted Subsidiary; provided that, if such sale, transfer
or disposition constitutes an Asset Sale, the Company complies with the
"Asset Sale" provisions of the Indenture, and such Restricted Investments
shall not count as a Restricted Payment for purposes of the calculation in
paragraph (c) of this covenant;
(vi) the payment of a dividend to the Guarantor in order to allow the
Guarantor to pay its regular quarterly dividend in respect of the
Guarantor's Convertible Preferred Stock, Common Stock, Class A Stock and
Class B Stock; provided that payments made pursuant to this paragraph (vii)
shall count as a Restricted Payment for purposes of the calculation in
paragraph (c) of this covenant;
(vii) cash dividends or loans from the Company to the Guarantor
pursuant to the Services Agreement but in no event exceeding 4% of the
revenues of the Company and its Restricted Subsidiaries for the immediately
preceding four fiscal quarters; provided, that payments made pursuant to
this paragraph (vii) shall not count as a Restricted Payment for purposes
of the calculation in paragraph (c) of this covenant;
(viii) payments to the Guarantor in an amount equal to the amount of
income tax that the Company would have paid had it filed consolidated tax
returns on a separate company basis in any given tax year; provided that
payments made pursuant to this paragraph (viii) shall not count as a
Restricted Payment for purposes of the calculation in paragraph (c) of this
covenant; and
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(ix) $3,000,000; provided that payments made pursuant to this
paragraph (ix) shall count as a Restricted Payment for purposes of the
calculation in paragraph (c) of this covenant.
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the Notes) unless the
Company's Cash Flow Coverage Ratio for its four full fiscal quarters next
preceding the date such additional Indebtedness is issued would have been at
least 2.0 to 1 on or prior to August 31, 1999 and at least 2.25 to 1 thereafter
determined on a Pro Forma Basis (including, for this purpose, any other
Indebtedness incurred since the end of the applicable four-quarter period) as if
such additional Indebtedness and any other Indebtedness issued since the end of
such four-quarter period had been issued at the beginning of such four-quarter
period.
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of the Company and/or its Restricted Subsidiaries
under the Credit Agreement as measured on such date of issuance in an
aggregate principal amount outstanding on any such date of issuance not
exceeding the greater of (x) the sum of (A) 75% of the book value of the
accounts receivable of the Company and its Restricted Subsidiaries on a
consolidated basis and (B) 60% of the book value of the inventory of the
Company and its Restricted Subsidiaries on a consolidated basis or (y)
$50,000,000;
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
connection with capital leases, purchase money obligations, capital
expenditures or similar financing transactions relating to their
properties, assets and rights up to $10,000,000 in aggregate principal
amount;
(iii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount of up to $10,000,000; and
(iv) Other Permitted Indebtedness.
Notwithstanding the foregoing, no Restricted Subsidiary shall under any
circumstances issue a guarantee of any Indebtedness of the Company except for
guarantees issued by Restricted Subsidiaries pursuant to the "Limitation on
Guarantees of Company Indebtedness by Restricted Subsidiaries" covenant;
provided, however, that the foregoing will not limit or restrict guarantees
issued by Restricted Subsidiaries in respect of Indebtedness of other Restricted
Subsidiaries.
Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, enter into
any sale and leaseback transaction; provided that the Company may enter into a
sale and leaseback transaction if (i) the Company could have incurred
Indebtedness in an amount equal to the Attributable Debt relating to such sale
and leaseback transaction pursuant to the Company's Cash Flow Coverage Ratio
test set forth in the first sentence of the covenant "Limitation on Incurrence
of Indebtedness", and (ii) the net cash proceeds of such sale and leaseback
transaction are at least equal to the fair market value (as determined in good
faith by the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee) of the property that is the subject of such sale and
leaseback transaction and (iii) the transfer of assets in such sale and
leaseback transaction is permitted by, and the proceeds of such transaction are
applied in compliance with, the covenant "Asset Sales."
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
upon any property or asset now owned or hereafter acquired by them, or any
income or profits therefrom, or assign or convey any right to receive income
therefrom; provided, however, that in addition to creating Permitted Liens on
its properties or assets, the Company and any of its Restricted Subsidiaries may
create any Lien upon any of their properties or assets (including, but not
limited to, any Capital Stock of its Subsidiaries) if the Notes are equally and
ratably secured.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to,
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directly or indirectly, create or otherwise cause or suffer to exist or become
effective, any encumbrance or restriction on the ability of any Restricted
Subsidiary to: (a) pay dividends or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits,
owned by the Company or any Restricted Subsidiary, or pay any Indebtedness owed
to, the Company or any Restricted Subsidiary, (b) make loans or advances to the
Company, or (c) transfer any of its properties or assets to the Company, except
for such encumbrances or restrictions existing under or by reason of:
(i) applicable law,
(ii) Indebtedness permitted (A) under the first sentence of the first
paragraph of the "Limitation on Incurrence of Indebtedness" covenant, (B)
under clauses (i) or (iii) of the second paragraph of the "Limitation on
Incurrence of Indebtedness" covenant or clauses (i), (v), (vi) or (viii) of
the definition of Other Permitted Indebtedness, or (C) by agreements and
transactions permitted under the "Limitation on Restricted Payments"
covenant,
(iii) customary provisions restricting subletting or assignment of any
lease or license of the Company or any Restricted Subsidiary,
(iv) any instrument governing Indebtedness or any other encumbrance or
restriction of a person acquired by the Company or any Restricted
Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person,
so acquired,
(v) the Credit Agreement,
(vi) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant or clauses (i), (v) or (viii) of the
definition of Other Permitted Indebtedness; provided that the encumbrances
and restrictions created in connection with such Refinancing Indebtedness
are no more restrictive in any material respect with regard to the
interests of the holders of Notes than the encumbrances and restrictions in
the refinanced Indebtedness, or
(vii) the terms of purchase money obligations, but only to the extent
such purchase money obligations restrict or prohibit the transfer of the
property so acquired.
Nothing contained in this covenant shall prevent the Company from entering
into any agreement or instrument providing for the incurrence of Permitted Liens
or restricting the sale or other disposition of property or assets of the
Company or any of its Restricted Subsidiaries that are subject to Permitted
Liens.
Limitation on Transactions With Affiliates. The Indenture provides that
neither the Company nor any of its Restricted Subsidiaries may make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or dispose of any properties or assets to, or for the benefit
of, or purchase or lease any property or assets from, or enter into or amend any
contract, agreement or understanding with, or for the benefit of, an Affiliate
(each such transaction or series of related transactions that are part of a
common plan are referred to as an "Affiliate Transaction"), except in good faith
and on terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction on an arm's length basis from an unrelated person.
The Indenture further provides that the Company will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by the Company and its
Restricted Subsidiaries in excess of $3,500,000 (including cash and non-cash
payments and benefits valued at their fair market value by the Board of
Directors of the Company in good faith) unless the Company delivers to the
Trustee:
(i) a resolution of the Board of Directors of the Company stating that
the Board of Directors (including a majority of the disinterested
directors, if any) has, in good faith, determined that such Affiliate
Transaction complies with the provisions of the Indenture, and
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(ii) (A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction
involving the transfer of real property, fixed assets or equipment, either
directly or by a transfer of 50% or more of the Capital Stock of a
Restricted Subsidiary which holds any such real property, fixed assets or
equipment, a written appraisal from a nationally recognized appraiser,
experienced in the review of similar types of transactions or (C) with
respect to any Affiliate Transaction not otherwise described in (A) and (B)
above, a written certification from a nationally recognized professional or
firm experienced in evaluating similar types of transactions, in each case,
stating that the terms of such transaction are fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will
not apply to:
(i) transactions between the Company and any wholly owned Restricted
Subsidiary or between wholly owned Restricted Subsidiaries;
(ii) transactions permitted by the covenant "Limitation on Restricted
Payments";
(iii) compensation paid to officers, employees or consultants of the
Company or any subsidiary as determined in good faith by the Company's
Board of Directors or executives; or
(iv) transactions between the Company and the Guarantor or between the
Company and a Subsidiary of the Guarantor in the ordinary course of
business on terms substantially consistent with past practice.
Limitation on Senior Subordinated Indebtedness. The Company will not,
directly or indirectly, incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Notes and expressly rank subordinate in
right of payment to any Senior Indebtedness.
Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries. The Indenture provides that the Company will not permit any
Restricted Subsidiary, directly or indirectly, to guarantee any Indebtedness of
the Company other than the Notes (the "Other Company Indebtedness") unless (A)
such Restricted Subsidiary contemporaneously executes and delivers a
supplemental indenture to the Indenture providing for a guarantee of payment of
the Notes then outstanding by such Restricted Subsidiary to the same extent as
the guarantee of payment (the "Other Company Indebtedness Guarantee") of the
Other Company Indebtedness (including waiver of subrogation, if any) and (B) if
the Other Company Indebtedness guaranteed by such Restricted Subsidiary is
Senior Indebtedness, the guarantee for the Notes shall be subordinated in right
of payment with the Other Company Indebtedness Guarantee provided, however, that
the provisions of this covenant do not apply to guarantees by any Restricted
Subsidiary of the Company's Indebtedness under the Credit Agreement as in effect
on the date of issuance of the Original Notes.
Each guarantee of the Notes created by a Restricted Subsidiary pursuant to
the provisions described in the foregoing paragraph shall be in form and
substance satisfactory to the Trustee and shall provide, among other things,
that it will be automatically and unconditionally released and discharged upon
(i) any sale, exchange or transfer permitted by the Indenture of (a) all of the
Company's Capital Stock in such Restricted Subsidiary or (b) the sale of all or
substantially all of the assets of the Restricted Subsidiary and upon the
application of the Net Proceeds from such sale in accordance with the
requirements of the "Asset Sales" provisions described herein or (ii) the
release or discharge of the Other Company Indebtedness Guarantee that resulted
in the creation of such guarantee of the Notes.
Designation of Restricted and Non-Restricted Subsidiaries. The Indenture
provides that, subject to the exceptions described below, from and after the
date of original issuance of the Notes, the Company may designate any existing
or newly formed or acquired Subsidiary as a Non-Restricted Subsidiary; provided
that either (A) the Subsidiary to be so designated has total assets of
$1,000,000 or less or (B) immediately before and after giving effect to such
designation: (1) the Company could incur $1.00 of additional Indebtedness
pursuant to the first sentence of the "Limitation on Incurrence of Indebtedness"
covenant determined on a Pro
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Forma Basis; (2) no Default or Event of Default shall have occurred and be
continuing; and (3) all Investments made by the Company or by a Restricted
Subsidiary of the Company in such Restricted Subsidiary which is being
designated a Non-Restricted Subsidiary prior to or on the date such Restricted
Subsidiary is being designated a Non-Restricted Subsidiary shall have been
permitted pursuant to the covenant "Limitation on Restricted Payments" as if all
of such Restricted Payments had been made on the day such Restricted Subsidiary
is designated a Non-Restricted Subsidiary (to the extent not previously included
as a Restricted Payment) in the amount of the greater of (i) the fair market
value (as determined by the Board of Directors of the Company in good faith) of
the Equity Interests of such Subsidiary held by the Company and its Restricted
Subsidiaries on such date or (ii) the amount of the Investments determined in
accordance with GAAP made by the Company and any of its Restricted Subsidiaries
in such Restricted Subsidiary; and (4) all transactions between the Subsidiary
to be so designated and its Affiliates remaining in effect are permitted
pursuant to the "Limitation on Transactions with Affiliates" covenant.
A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary.
The Company may not, and may not permit any Restricted Subsidiary to, take any
action or enter into any transaction or series of transactions that would result
in a Person becoming a Restricted Subsidiary (whether through an acquisition,
the redesignation of a Non-Restricted Subsidiary or otherwise, but not including
through the creation of a new Restricted Subsidiary) unless, immediately before
and after giving effect to such action, transaction or series of transactions,
(a) the Company could incur at least $1.00 of additional Indebtedness pursuant
to the first sentence of "Limitation on Incurrence of Indebtedness" on a Pro
Forma Basis and (b) no Default or Event of Default shall have occurred and be
continuing.
The designation of a Subsidiary as a Restricted Subsidiary or the removal
of such designation is required to be made by a resolution adopted by a majority
of the Board of Directors of the Company stating that the Board of Directors has
made such designation in accordance with the Indenture, and the Company is
required to deliver to the Trustee such resolution together with an Officers'
Certificate certifying that the designation complies with the Indenture. Such
designation will be effective as of the date specified in the applicable
resolution which may not be before the date the applicable Officers' Certificate
is delivered to the Trustee.
MERGER OR CONSOLIDATION
The Indenture provides that each of the Company and the Guarantor shall not
consolidate or merge with or into, or sell, lease, convey or otherwise dispose
of all or substantially all of its assets to, any person (any such
consolidation, merger or sale being a "Disposition") unless: (a) the successor
corporation of such Disposition or the corporation to which such Disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (b) the
successor corporation of such Disposition or the corporation to which such
Disposition shall have been made expressly assumes the Obligations of the
Company or the Guarantor, as the case may be, pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee, under the Indenture
and the Notes; (c) immediately after such Disposition, no Default or Event of
Default shall exist; and (d) the corporation formed by or surviving any such
Disposition, or the corporation to which such Disposition shall have been made,
shall (i) have Consolidated Net Worth (immediately after the Disposition but
prior to giving any pro forma effect to purchase accounting adjustments
resulting from the Disposition) equal to or greater than the Consolidated Net
Worth of the Company or the Guarantor, as the case may be, immediately preceding
the Disposition, and (ii) be permitted immediately after the Disposition by the
terms of the Indenture to issue at least $1.00 of additional Indebtedness
pursuant to the first sentence of the covenant "Limitation on Incurrence of
Indebtedness" determined on a Pro Forma Basis. The limitations in the Indenture
on the Company's ability to make a Disposition described in this paragraph do
not restrict the Company's ability to sell less than all or substantially all of
its assets, such sales being governed by the "Asset Sales" provisions of the
Indenture as described herein.
Prior to the consummation of any proposed Disposition, the Company shall
deliver to the Trustee an Officers' Certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture.
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PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES
So long as the Notes are outstanding, whether or not the Guarantor is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Guarantor shall submit for filing with the Commission the annual
reports, quarterly reports and other documents relating to the Guarantor and its
Subsidiaries that the Guarantor would have been required to file with the
Commission pursuant to Section 13 or 15(d) if the Guarantor were subject to such
reporting requirements. The Guarantor will also provide to all holders of Notes
and file with the Trustee copies of such annual reports, quarterly reports and
other documents required to be furnished to stockholders generally under the
Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that an Event of Default is: (a) a default for 30
days in payment of interest on the Notes; (b) a default in payment when due of
principal or premium, if any, with respect to the Notes; (c) failure by the
Company to comply with the provisions described under the captions "--Mandatory
Offers to Purchase Notes--Change of Control," "--Certain Covenants--Limitation
on Restricted Payments," "--Certain Covenants--Limitation on Incurrence of
Indebtedness" or "--Merger or Consolidation;" (d) the failure of the Company to
comply with any of its other agreements or covenants in, or provisions of, the
Indenture or the Notes and the Default continues for the period, if applicable,
and after the notice specified in the next paragraph; (e) a default by the
Company, the Guarantor or any Restricted Subsidiary under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
Restricted Subsidiary (or the payment of which is guaranteed by the Company or
any Restricted Subsidiary), whether such Indebtedness or guarantee now exists or
shall be created hereafter, if (1) either (A) such default results from the
failure to pay principal of or interest on any such Indebtedness (after giving
effect to any extensions thereof) or (B) as a result of such default the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity, and (2) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or, because of the acceleration of the maturity
thereof, aggregates in excess of $2,500,000; (f) a failure by the Company or any
Restricted Subsidiary to pay final judgments (not covered by insurance)
aggregating in excess of $2,500,000 which judgments a court of competent
jurisdiction does not rescind, annul or stay within 45 days after their entry;
and (g) certain events of bankruptcy or insolvency involving the Company, the
Guarantor or any Significant Subsidiary. In the case of any Event of Default
pursuant to clause (a) or (b) above occurring by reason of any willful action
(or inactions) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have to pay
pursuant to a redemption of Notes as described under "--Redemption of
Notes--Optional Redemption," an equivalent premium shall also become and be
immediately, due and payable to the extent permitted by law.
A Default or Event of Default under clause (d) is not an Event of Default
under the Indenture until the Trustee or the holders of at least 25% in
principal amount of the Notes then outstanding notify the Company of the Default
and the Company does not cure the Default within 30 days after receipt of the
notice. A Default or Event of Default under clause (g) of the preceding
paragraph will result in the Notes automatically becoming due and payable
without further action or notice.
Upon the occurrence of an Event of Default, the Trustee or the holders of
at least 25% in principal amount of the then outstanding Notes may declare all
Notes to be due and payable by notice in writing to the Company and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice") and the same shall become immediately
due and payable. The holders of a majority in principal amount of the Notes then
outstanding under the Indenture, by notice to the Trustee, may rescind any
declaration of acceleration of such Notes and its consequences (if the
rescission would not conflict with any judgment or decree) if all existing
Events of Default (other than the nonpayment of principal of or interest on such
Notes that shall have become due by such declaration) shall have been cured or
waived. Subject to certain limitations, holders of a majority in principal
amount of the Notes then outstanding may direct the Trustee in its exercise of
any trust or power. Holders of the Notes may not enforce the Indenture,
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except as provided therein. The Trustee may withhold from holders of Notes
notice of any continuing Default or Event of Default (except a Default or an
Event of Default in payment of principal, premium, if any, or interest) if the
Trustee determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may on behalf of all holders of such Notes waive any existing
Default or Event of Default under the Indenture and its consequences, except a
continuing Default in the payment of the principal of, or premium, if any, or
interest on, such Notes, which may only be waived with the consent of each
holder of the Notes affected.
Upon any payment or distribution of assets of the Company and its
subsidiaries in a total or partial liquidation, dissolution, reorganization or
similar proceeding, including a Default under clause (g) above involving certain
events of bankruptcy or insolvency of the Company or a Significant Subsidiary,
there may not be sufficient assets remaining to satisfy the claims of any
holders of Notes given the effective structural subordination of the Notes to
the obligations of the Subsidiaries of the Company.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon an executive officer of the
Company becoming aware of any Default or Event of Default, a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES AND STOCKHOLDERS
No officer, employee, director or stockholder of the Company shall have any
liability for any Obligations of the Company under the Notes or the Indenture,
or for any claim based on, in respect of, or by reason of, such Obligations or
the creation of any such Obligation. Each holder of the Notes by accepting a
Note waives and releases all such liability, and such waiver and release is part
of the consideration for issuance of the Notes. The foregoing waiver may not be
effective to waive liabilities under the federal securities laws and the
Commission is of the view that such a waiver is against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Company at any time may terminate all its obligations under the Notes,
the Guarantor's Guaranteed Obligations and the Indenture ("legal defeasance
option"), except for certain obligations (including those with respect to the
defeasance trust (as defined herein) and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes). The Company
at any time may terminate (1) its obligations under the "Change of Control" and
"Asset Sales" provisions described herein and the covenants described under
"Certain Covenants" and certain other covenants in the Indenture, (2) the
operation of clauses (c), (d), (e), and (f) contained in the first paragraph of
the "Events of Default and Remedies" provisions described herein and (3) the
limitations contained in clauses (c) and (d) under the "Merger or Consolidation"
provisions described herein (collectively, a "covenant defeasance option").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes shall not be accelerated because of an
Event of Default specified in clauses (c), (d), (e) or (f) in the first
paragraph under the "Events of Default and Remedies" provisions described herein
or because of the Company's failure to comply with clauses (c) and (d) under the
"Merger or Consolidation" provisions described herein.
To exercise either defeasance option with respect to the Notes outstanding,
the Company must irrevocably deposit in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations (as defined in the Indenture) for
the payment of principal of, premium, if any, and unpaid interest on the Notes
then outstanding to redemption or maturity, as the case may be, and must comply
with certain other conditions, including the passage of 91 days and the delivery
to the Trustee of an opinion of counsel to the effect that holders of such Notes
will not recognize income, gain or loss for federal income tax purposes as a
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result of such deposit and defeasance and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred (and, in the case
of legal defeasance only, such opinion of counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable federal income tax
law).
TRANSFER AND EXCHANGE
Holders of Notes may transfer or exchange their Notes in accordance with
the Indenture, but the Registrar may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and to pay any taxes
and fees required by law or permitted by the Indenture, in connection with any
such transfer or exchange. Neither the Company nor the Registrar is required to
issue, register the transfer of, or exchange (i) any Note selected for
redemption or tendered pursuant to an Offer, or (ii) any Note during the period
between (a) the date the Trustee receives notice of a redemption from the
Company and the date the Notes to be redeemed are selected by the Trustee or (b)
a record date and the next succeeding interest payment date. The registered
holder of a Note will be treated as its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Notes then outstanding under the Indenture, and any existing Default or
Event of Default (other than a payment default) or compliance with any provision
may be waived with the consent of the holders of a majority in principal amount
of the Notes then outstanding under the Indenture. Without the consent of any
holder of Notes, the Company and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption by a successor corporation of the Company's
obligations to the holders of Notes in the case of a Disposition, to comply with
the Trust Indenture Act, or to make any change that does not materially
adversely affect the legal rights of any holder of Notes.
Without the consent of each holder of Notes affected, the Company may not
(i) reduce the principal amount of Notes whose holders must consent to an
amendment to the Indenture or a waiver under the Indenture; (ii) reduce the rate
on or change the interest payment time of the Notes, or alter the redemption
provisions with respect thereto (other than the provisions relating to the
covenants described above under the caption "--Mandatory Offers to Purchase
Notes--Change of Control" and "--Asset Sales") or the price at which the Company
is required to offer to purchase the Notes; (iii) reduce the principal of or
change the fixed maturity of the Notes; (iv) make the Notes payable in money
other than stated in the Notes; (v) make any change in the provisions concerning
waiver of Defaults or Events of Default by holders of the Notes, or rights of
holders of the Notes to receive payment of principal or interest; or (vi) waive
any default in the payment of principal of, premium, if any, or unpaid interest
on, and Liquidated Damages, if any, with respect to the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee, if
it becomes a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and has not been cured), the Trustee will be required, in the exercise of its
power, to use the degree of care and skill of a prudent person in similar
circumstances in the conduct of its own affairs. Subject to the provisions of
the Indenture, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at
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the request of any of the holders of the Notes, unless such holders shall have
offered to the Trustee security and indemnity satisfactory to it.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the Indenture.
Reference is made to the Indenture for the definition of all other terms used in
the Indenture.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company, (ii) any spouse, immediate family member or other
relative who has the same principal residence as any person described in clause
(i) above, (iii) any trust in which any such persons described in clause (i) or
(ii) above has a beneficial interest, and (iv) any corporation or other
organization of which any such persons described above collectively owns 10% or
more of the equity of such entity.
"Asset Sale" means the sale, lease, conveyance or other disposition by the
Company or a Restricted Subsidiary of assets or property whether owned on the
date of original issuance of the Notes or thereafter acquired, in a single
transaction or in a series of related transactions; provided that Asset Sales
will not include such sales, leases, conveyances or dispositions in connection
with (i) the surrender or waiver of contract rights or the settlement, release
or surrender of contract, tort or other claims of any kind, (ii) the sale of
inventory in the ordinary course of business, (iii) a sale-leaseback of assets
within one year following the acquisition of such assets, (iv) the grant of any
license of patents, trademarks, registration therefor and other similar
intellectual property, (v) a transfer of assets by the Company or a Restricted
Subsidiary to the Company or a Restricted Subsidiary, (vi) the designation of a
Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to the
"Designation of Restricted and Non-Restricted Subsidiaries" covenant, (vii) the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company as permitted under "--Merger or Consolidation," (viii) the
sale or disposition of obsolete equipment or other obsolete assets, (ix)
Restricted Payments permitted by the "Limitations on Restricted Payments"
covenant, or (x) the exchange of assets for other non-cash assets that (a) are
useful in the business of the Company and its Restricted Subsidiaries and (b)
have a fair market value at least equal to the fair market value of the assets
being exchanged (as determined in good faith by the Board of Directors or the
board of directors of the Restricted Subsidiary which owns such assets).
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means the Company's board of directors or any
authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of corporate stock, including any
Preferred Stock.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) any provision for taxes based on
income or profits to the extent such income or profits were included in
computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to
the extent deducted in computing Consolidated Net Income, plus (c) the
amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs), plus (d) all
depreciation and all other non-cash charges (including, without limitation,
those charges relating to purchase accounting adjustments and LIFO adjustments),
to the extent deducted in computing Consolidated Net Income, plus (e) any
interest income, to the extent such income was not included in computing
Consolidated Net Income, plus (f) all dividend payments on Preferred Stock
(whether or not paid in cash) to the extent deducted in computing Consolidated
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Net Income; provided, however, that, if any such calculation includes any period
during which an acquisition or sale of a person or the incurrence or repayment
of Indebtedness occurred, then such calculation for such period shall be made on
a Pro Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and person, the
ratio of: (i) Cash Flow, divided by (ii) the sum of Consolidated Interest
Expense (except dividends paid or payable in additional shares of Capital Stock
(other than Disqualified Stock)) in each case, without duplication; provided,
however, that if any such calculation includes any period during which an
acquisition or sale of a person or the incurrence or repayment of Indebtedness
occurred, then such calculation for such period shall be made on a Pro Forma
Basis.
"Change of Control" means the occurrence of any of the following: (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding the Existing Stockholders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the Company or of the
Guarantor; or (ii) the Company or the Guarantor consolidates with, or merges
with or into, another person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any person, or
any person consolidates with, or merges with or into, the Company or the
Guarantor, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company or of the Guarantor is converted into or exchanged
for cash, securities or other property, other than any such transaction where
(A) the outstanding Voting Stock of the Company or of the Guarantor is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or (2) cash, securities and other property
in an amount which could be paid by the Company as a Restricted Payment under
the Indenture and (B) immediately after such transaction no "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
excluding the Existing Stockholders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
Voting Stock of the surviving or transferee corporation; or (iii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company or of the Guarantor (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who are entitled to
vote to elect such new director and were either directors at the beginning of
such period or persons whose election as directors or nomination for election
was previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company or of the Guarantor then in office.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries to another person may be uncertain.
"Commission" means the Securities and Exchange Commission.
"Consolidated Interest Expense" means, for any given period and person, the
aggregate of (i) the interest expense in respect of all Indebtedness of such
person and its Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount on any such Indebtedness, all non-cash interest payments, the interest
portion of any deferred payment obligation and the interest component of capital
lease obligations, but excluding amortization of deferred financing fees if such
amortization would otherwise be included in interest expense) and (ii) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Restricted
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Subsidiary) on any series of Preferred Stock of such Person and its Restricted
Subsidiaries payable to a party other than the Company or a wholly owned
Subsidiary, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, on a
consolidated basis and in accordance with GAAP; provided, however, that for the
purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense shall be
calculated on a Pro Forma Basis.
"Consolidated Net Income" means, for any given period and person, the
aggregate of the Net Income of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that: (i) the Net Income of any person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
shall be excluded, (ii) the Net Income (but not loss) of any Person that is not
a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person, (iii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iv) the cumulative effect of a
change in accounting principles shall be excluded, (v) income or loss
attributable to discontinued operations shall be excluded; and (vi) all other
extraordinary, unusual or nonrecurring gains or losses shall be excluded;
provided, however, that for purposes of determining the Cash Flow Coverage
Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" means, with respect to any person at any date, the
sum of (i) the consolidated stockholders' equity of such person less the amount
of such stockholders' equity attributable to Disqualified Stock of such person
and its Subsidiaries (Restricted Subsidiaries, in the case of the Company), as
determined on a consolidated basis in accordance with GAAP consistently applied
and (ii) the amount of any Preferred Stock of such person not included in the
stockholders' equity of such person in accordance with GAAP, which Preferred
Stock does not constitute Disqualified Stock.
"Credit Agreement" means collectively, the Accounts Financing Agreement
between Columbia Specialties, Inc., and Congress Financial Corporation dated
December 23, 1992 and the Accounts Financing Agreement by and among Fedders
North America, Inc., Emerson Quiet Kool Corporation and Congress Financial
Corporation dated December 23, 1992, together with all loan documents and
instruments thereunder (including, without limitation, any guarantee agreements,
covenant supplements and security documents), in each case as such agreements
may be amended (including any amendment and restatement thereof), supplemented
or otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including,
without limitation, increasing the amount of available borrowings thereunder,
and all Obligations with respect thereto, in each case, to the extent permitted
by the "Limitation on Incurrence of Indebtedness" covenant or adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the Credit Agreement and (ii) any other Senior Indebtedness permitted
under the Indenture the principal amount of which is $20,000,000 or more and
that has been designated by the Company as Senior Indebtedness.
"Disqualified Stock" with respect to any person means any Capital Stock or
Equity Interests that by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or
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otherwise, or is redeemable at the option of the holder thereof, in whole or in
part on, or prior to, the maturity date of the Notes, or any Capital Stock or
Equity Interests in any Restricted Subsidiary of such person.
"Equity Interests" means Capital Stock or partnership interests or
warrants, options or other rights to acquire Capital Stock or partnership
interests (but excluding (i) any debt security that is convertible into, or
exchangeable for, Capital Stock or partnership interests, and (ii) any other
Indebtedness or Obligation).
"Equity Offering" means a public or private offering by the Company or
Fedders Corporation for cash of Capital Stock or other Equity Interests and all
warrants, options or other rights to acquire Capital Stock, other than an
offering of Disqualified Stock.
"Existing Stockholders" means the officers and directors of each of the
Company and the Guarantor on the date of issuance of the Original Notes and
their respective Affiliates and family members and trusts for the benefit of any
of the foregoing.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect in the United States from time to time. All financial and
accounting determinations and calculations under the Indenture will be made in
accordance with GAAP.
"Hedging Obligations" means, with respect to any person, the Obligations of
such persons under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange contracts,
currency swap agreements or similar agreements, and (iii) other agreements or
arrangements designed to protect such person against fluctuations, or otherwise
to establish financial hedges in respect of, exchange rates, currency rates or
interest rates.
"Indebtedness" means, with respect to any person, (i) any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or representing the deferred and unpaid balance
of the purchase price of any property (including pursuant to capital leases),
except any such balance that constitutes an accrued expense or a trade payable,
and any Hedging Obligations, if and to the extent such indebtedness (other than
a Hedging Obligation) would appear as a liability upon a balance sheet of such
person prepared on a consolidated basis in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee of items that
would be included within this definition; (ii) Disqualified Stock of such
person; or (iii) Preferred Stock issued by a Restricted Subsidiary of such
person.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person. For the purposes of the "Limitation on Restricted
Payments" covenant, the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by the Company or
any of its Restricted Subsidiaries, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment, reduced by the payment of dividends or distributions in connection
with such Investment or any other amounts received by the Company or any
Restricted Subsidiary in respect of such Investment to the extent not included
in Consolidated Net Income.
"issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
For this definition, the terms "issuing," "issuer," "issuance" and "issued" have
meanings correlative to the foregoing.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell and any filing of or
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
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"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP, excluding, however, any gain or
loss, together with any related provision for taxes, realized in connection with
any Asset Sale (including, without limitation, dispositions pursuant to sale and
leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or similar
account established in connection with any such Asset Sale, but, in either such
case, only as and when so received) received by the Company or any of its
Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the cash
expenses of such Asset Sale (including, without limitation, the payment of
principal of, and premium, if any, and interest on, Indebtedness required to be
paid as a result of such Asset Sale (other than the Notes) and legal,
accounting, management and advisory and investment banking fees and sales
commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion
of cash proceeds that the Company determines in good faith should be reserved
for post-closing adjustments, it being understood and agreed that on the day
that all such post-closing adjustments have been determined, the amount (if any)
by which the reserved amount in respect of such Asset Sale exceeds the actual
post-closing adjustments payable by the Company or any of its Restricted
Subsidiaries shall constitute Net Proceeds on such date.
"Non-Restricted Subsidiary" means any Subsidiary of the Company other than
a Restricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal fees
and expenses), reimbursement obligations and other liabilities payable to the
holder of such Indebtedness under the documentation governing such Indebtedness,
and any other claims of such holder arising in respect of such Indebtedness.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and its Restricted Subsidiaries
existing as of the date of original issuance of the Notes and all
related Obligations as in effect on such date;
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation
claims) issued in the ordinary course of business, or other Indebtedness
in respect of reimbursement-type obligations regarding workers'
compensation claims;
(iii) Refinancing Indebtedness; provided that: (A) the principal
amount of such Refinancing Indebtedness shall not exceed the outstanding
principal amount of Indebtedness (including unused commitments)
extended, refinanced, renewed, replaced, substituted or refunded plus
any amounts incurred to pay premiums, fees and expenses in connection
therewith, and (B) the Refinancing Indebtedness shall have a Weighted
Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced,
renewed, replaced, substituted or refunded;
(iv) intercompany Indebtedness of and among the Company and its
wholly owned Restricted Subsidiaries (excluding guarantees by Restricted
Subsidiaries of Indebtedness of the Company not issued in compliance
with the "Limitation on Guarantees of Company Indebtedness by Restricted
Subsidiaries" covenant);
(v) Indebtedness of any Non-Restricted Subsidiary created after the
date of original issuance of the Notes; provided that such Indebtedness
is nonrecourse to the Company and its Restricted Subsidiaries and the
Company and its Restricted Subsidiaries have no Obligations with respect
to such Indebtedness;
(vi) Indebtedness of the Company and its Restricted Subsidiaries
under Hedging Obligations;
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(vii) Indebtedness of the Company and its Restricted Subsidiaries
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business;
(viii) guarantees by a Restricted Subsidiary of Indebtedness of the
Company if the Indebtedness so guaranteed is permitted under the
Indenture and the Notes are guaranteed by such Restricted Subsidiary to
the extent required by the "Limitation on Guaranties of Company
Indebtedness by Restricted Subsidiaries" covenant;
(ix) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds
in the ordinary course of business; and
(x) intercompany Indebtedness of the Company to the Guarantor;
provided such Indebtedness does not bear interest.
"Permitted Liens" means: with respect to the Company and its
Restricted Subsidiaries,
(1) Liens for taxes, assessments, governmental charges or claims which
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(2) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(3) Liens incurred on deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(4) Liens incurred on deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance and return of money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money);
(5) easements, rights-of-way, zoning or other restrictions, minor
defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any of its Restricted Subsidiaries incurred in the ordinary
course of business;
(6) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(7) judgment and attachment Liens not giving rise to an Event of
Default;
(8) leases or subleases granted to others not interfering in any
material respect with the business of the Company or any of its Restricted
Subsidiaries;
(9) Liens securing Indebtedness under Hedging Obligations;
(10) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements;
(11) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by the Company or its Restricted Subsidiaries in
the ordinary course of business;
(12) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
66
<PAGE> 71
(13) Liens existing on the date of original issuance of the Original
Notes and any extensions, refinancings, renewals, replacements,
substitutions or refundings thereof;
(14) any Lien granted to the Trustee and any substantially equivalent
Lien granted to any trustee or similar institution under any indenture for
Senior Indebtedness permitted by the terms of the Indenture;
(15) Liens securing Senior Indebtedness or Indebtedness of a
Restricted Subsidiary if such Indebtedness is incurred pursuant to the
Credit Agreement or is permitted to be incurred pursuant to the first
sentence of the covenant "Limitation on Incurrence of Indebtedness";
(16) Liens securing Indebtedness of the Company and its Restricted
Subsidiaries in connection with capital leases, sale and leaseback
transactions, purchase money obligations, capital expenditures or similar
financing transactions, which Indebtedness is permitted under the covenant
"Limitation on Incurrence of Indebtedness" or "Sale and Leaseback
Transactions";
(17) Liens on property existing at the time of acquisition thereof by
the Company or a Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such acquisition; and
(18) additional Liens at any one time outstanding in respect of
properties or assets where aggregate fair market value does not exceed
$2,000,000 (the fair market value to be determined on the date such Lien is
granted on such properties or assets).
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Pro Forma Basis" means, for purposes of determining Consolidated Net
Income in connection with the Cash Flow Coverage Ratio (including in connection
with the "Limitation on Restricted Payments" covenant, the "Designation of
Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or
Consolidation" covenant, the incurrence of Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant),
giving pro forma effect to (x) any acquisition or sale of a Person, business or
asset, related incurrence, repayment or refinancing of Indebtedness or other
related transactions, including any Restructuring Charges which would otherwise
be accounted for as an adjustment permitted by Regulation S-X under the
Securities Act or on a pro forma basis under GAAP, or (y) any incurrence,
repayment or refinancing of any Indebtedness and the application of the proceeds
therefrom, in each case, as if such acquisition or sale and related
transactions, restructurings, consolidations, cost savings, reductions,
incurrence, repayment or refinancing were realized on the first day of the
relevant period permitted by Regulation S-X under the Securities Act or on a pro
forma basis under GAAP. Furthermore, in calculating the Cash Flow Coverage
Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the determination date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the determination date;
(2) if interest on any Indebtedness actually incurred on the determination date
may optionally be determined at an interest rate based upon a factor of a prime
or similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the determination date will be deemed to have been in
effect during the relevant period; and (3) notwithstanding clause (1) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to interest rate swaps or similar
interest rate protection Hedging Obligations, shall be deemed to accrue at the
rate per annum resulting after giving effect to the operation of such
agreements.
"Refinancing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute for or refund
the Notes or Indebtedness contemplated by clause (i) of the definition of Other
Permitted
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<PAGE> 72
Indebtedness or any Indebtedness issued to so extend, refinance, renew, replace,
substitute for or refund such Indebtedness.
"Restricted Investment" means any Investment in any person; provided that
Restricted Investments will not include: (i) Investments in marketable
securities and other negotiable instruments permitted by the Indenture; (ii)
Investments in the Company; (iii) Investments in any Restricted Subsidiary or in
a Person that becomes a Restricted Subsidiary as a result of such investment
(provided that any Investment in a Restricted Subsidiary or in a Person that
becomes a Restricted Subsidiary is made for fair market value (as determined by
the Board of Directors in good faith)); or (iv) Investments which exist on the
date of the issuance of the Original Notes. The amount of any Restricted
Investment shall be the amount of cash and the fair market value at the time of
transfer of all other property (as determined by the Board of Directors in good
faith) initially invested or paid for such Restricted Investment, plus all
additions thereto, without any adjustments for increases or decreases in value
of or write-ups, write-downs or write-offs with respect to, such Restricted
Investment.
"Restricted Subsidiary" means: (i) any Subsidiary of the Company existing
on the date of issuance of the Original Notes, and (ii) any other Subsidiary of
the Company formed, acquired or existing after the date of issuance of the
Original Notes that is designated as a "Restricted Subsidiary" by the Company
pursuant to a resolution approved by a majority of the Board of Directors;
provided, however, that the term Restricted Subsidiary shall not include any
Subsidiary of the Company that has been redesignated by the Company pursuant to
a resolution approved by a majority of the Board of Directors as a
Non-Restricted Subsidiary in accordance with the "Designation of Restricted and
Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have
subsequently been redesignated a Restricted Subsidiary in accordance with clause
(ii) of this definition.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the date of issuance of the
Notes or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Indebtedness" shall also
include the principal of, premium, if any, interest (including any interest
accruing subsequent to the filing of a petition of bankruptcy at the rate
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of, all monetary obligations (including guarantees thereof) of
every nature of the Company under the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities. "Senior Indebtedness"
shall not include (i) any Indebtedness of the Company to a Subsidiary of the
Company, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Subsidiary of the Company
(including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Stock, (v) any liability for federal, state, local or other taxes
owed or owing by the Company, (vi) that portion of any Indebtedness incurred in
violation of the Indenture provisions set forth under "Limitation on Incurrence
of Indebtedness" and (vii) any Indebtedness which is, by its express terms,
subordinated in right of payment to any other Indebtedness of the Company.
"Services Agreement" means the Services Agreement dated as of July 31, 1997
between the Company and Fedders Corporation.
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<PAGE> 73
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that would be a "significant subsidiary" as defined in clause (2) of the
definition of such term in Rule 1-02 of Regulation S-X under the Securities Act
and the Exchange Act.
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all Equity
Interests having ordinary voting power for the election of directors or other
governing body of such entity are owned by such person (regardless of whether
such Equity Interests are owned directly by such person or through one or more
Subsidiaries).
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect the board of directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the sum of the product(s)
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) which will elapse between such date and
the making of such payment.
BOOK-ENTRY, DELIVERY AND FORM
The Notes initially will be in the form of one or more registered global
notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the Trustee, as custodian for
DTC, in New York, New York, and registered in the name of DTC or its nominee, in
each case for credit to the accounts of DTC's Direct and Indirect Participants
(as defined below).
Transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
(including, if applicable, those of Euroclear and CEDEL), which may change from
time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form. See "--Transfers of Interests in Global Notes
for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations, including
Euroclear and CEDEL. Access to DTC's system is also available to other entities
that clear through or maintain a direct or indirect, custodial relationship with
a Direct Participant (collectively, the "Indirect Participants"). DTC may hold
securities beneficially owned by other persons only through the Direct
Participants or Indirect Participants and such other persons' ownership interest
and transfer of ownership interest will be recorded only on the records of the
Direct Participants and/or Indirect Participants, and not on the records
maintained by DTC.
DTC has also advised the Company that, pursuant to DTC's procedures, (i)
upon deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Company with portions of the principal amount of
the Global Notes allocated by the Company to such Direct Participants, and (ii)
DTC will maintain records of the ownership interests of such Direct Participants
in the Global Notes and the
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<PAGE> 74
transfer of ownership interests by and between Direct Participants. DTC will not
maintain records of the ownership interests of, or the transfer of ownership
interests by and between, Indirect Participants or other owners of beneficial
interests in the Global Notes. Direct Participants and Indirect Participants
must maintain their own records of the ownership interests of, and the transfer
of ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes, including those of customers' securities accounts held through
Euroclear or CEDEL, may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive, certificated form, of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in a Global Note to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn act on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in a Global Note to pledge such interest to persons
or entities that are not Direct Participants in DTC, or otherwise to take
actions in respect of such interests, may be affected by the lack of physical
certificates evidencing such interests. For certain other restrictions on the
transferability of the Notes see "--Transfers of Interests in Global Notes for
Certificated Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Company, the Guarantor and the
Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, Liquidated Damages, if any, and
interest on Global Notes registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under the
Indenture. Consequently, neither the Company, the Trustee nor any agent of the
Company or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Direct Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Direct Participant's or Indirect
Participant's records relating to the beneficial ownership interests in any
Global Notes or (ii) any other matter relating to the actions and practices of
DTC or any of its Direct Participants or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, the Company or the Guarantor. Neither the Company, the Guarantor nor
the Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Notes, and the
Company, the Guarantor and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee as the registered
owner of the Notes for all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures and will be settled in immediately available
funds. Transfers between Indirect Participants (other than Indirect Participants
who hold an interest in the Notes through Euroclear or CEDEL) who hold an
interest through a Direct Participant will be effected in accordance with the
procedures of such Direct Participant but generally will settle in immediately
available funds. Transfers between and among Indirect Participants who hold
interests in the
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<PAGE> 75
Notes through Euroclear and CEDEL will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Because of time zone differences, the securities accounts of an Indirect
Participant who holds an interest in the Notes through Euroclear or CEDEL
purchasing an interest in a Global Note from a Direct Participant in DTC will be
credited, and any such crediting will be reported to Euroclear or CEDEL during
the European business day immediately following the settlement date of DTC in
New York. Although recorded in DTC's accounting records as of DTC's settlement
date in New York, Euroclear and CEDEL customers will not have access to the cash
amount credited to their accounts as a result of a sale of an interest in a
Global Note to a DTC Participant until the European business day for Euroclear
or CEDEL immediately following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"--Transfers of Interests in Global Notes for Certificated Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Notes among Direct
Participants, Euroclear and CEDEL, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. None of the Company, the Guarantor or the Trustee will have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective Direct Participants and Indirect Participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Notes and the Company thereupon fails to appoint a successor
depositary within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Certificated Notes or (iii)
there shall have occurred and be continuing a Default or an Event of Default
with respect to the Notes. In any such case, the Company will notify the Trustee
in writing that, upon surrender by the Direct Participants and Indirect
Participants of their interest in such Global Note, Certificated Notes will be
issued to each person that such Direct Participants and Indirect Participants
and the DTC identify as being the beneficial owner of the related Notes.
Beneficial interests in Global Notes held by any Direct Participant or
Indirect Participant may be exchanged for Certificated Notes upon request to
DTC, by such Direct Participant (for itself or on behalf of an Indirect
Participant), to the Trustee in accordance with customary DTC procedures.
Certificated Notes delivered in exchange for any beneficial interest in any
Global Note will be registered in the names, and issued in any approved
denominations, requested by DTC on behalf of such Direct Participants or
Indirect Participants (in accordance with DTC's customary procedures).
Neither the Company, the Guarantor nor the Trustee will be liable for any
delay by the holder of the Global Notes or DTC in identifying the beneficial
owners of Notes, and the Company, the Guarantor and the Trustee may conclusively
rely on, and will be protected in relying on, instructions from the holder of
the Global Notes or DTC for all purposes.
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Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) be made by wire transfer of immediately available same day
funds to the accounts specified by the holder of interests in such Global Note.
With respect to Certificated Notes, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available same day funds to the accounts specified by
the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. The Company expects that secondary
trading in the Certificated Notes will also be settled in immediately available
funds.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Notes for its own account as a result of
market-making activities or other trading activities in connection with the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Notes. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Notes received in exchange for Original Notes where such
Original Notes were acquired as a result of market-making activities or other
trading activities.
The Company and Fedders Corporation will receive no proceeds in connection
with the Exchange Offer. Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Notes or a combination of such methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such Notes. Any broker-dealer that
resells Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act.
FEDERAL INCOME TAX CONSEQUENCES
TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of an Original Note for a Note pursuant to the Exchange Offer
will not be taxable to the exchanging holders for federal income tax purposes
assuming the fair market value of the Original Note equals the fair market value
of the Note. As a result (i) an exchanging holder will not recognize any gain or
loss on the exchange, (ii) the holding period for the Note will include the
holding period for the Original Note and (iii) the basis of the Note will be the
same as the basis of the Original Note.
The Exchange Offer will result in no federal income tax consequences to a
nonexchanging holder.
The preceding discussion reflects the opinion of Cummings & Lockwood,
counsel to the Company, as to the material federal income tax consequences
expected to result from the Exchange Offer. The discussion is for general
information only and does not constitute tax advice. Each holder should consult
its own tax adviser as to these and any other federal income tax consequences of
the Exchange Offer as well as any tax consequences to it under state, local or
other law. This summary is based on the current provisions of the Internal
Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial
authority and administrative rulings and practice. Those consequences could be
modified by future changes in the relevant law (which changes could be applied
retroactively).
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LEGAL MATTERS
Certain legal matters with respect to the legality of the Notes will be
passed upon for the Company by Cummings & Lockwood, Stamford, Connecticut.
Certain legal matters relating to the Notes will be passed upon for the Initial
Purchasers by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The consolidated balance sheets of Fedders Corporation as of August 31,
1997 and 1996, and the related consolidated statements of operations, cash flows
and stockholders' equity for each of the three years in the period ended August
31, 1997, which are included or incorporated herein, have been audited by BDO
Seidman, LLP, independent certified public accountants as set forth in their
report thereon included or incorporated herein. Such consolidated financial
statements are included or incorporated herein in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
AVAILABLE INFORMATION
Fedders Corporation is subject to the information requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the Commission. Reports, proxy and information statements and other
information filed by Fedders Corporation can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material also
can be reviewed through the Commission's Electronic Data Gathering, Analysis,
and Retrieval System, which is publicly available through the Commission's Web
site (http://www.sec.gov). In addition, certain classes of securities of Fedders
Corporation are listed on the New York Stock Exchange, and such material can be
inspected at the public reference facilities of such exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed with the Commission by Fedders Corporation is
incorporated by reference in this Prospectus: its Annual Report on Form 10-K for
the fiscal year ended August 31, 1997. Any statement contained in such report
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in a subsequent report filed by
Fedders Corporation under the Exchange Act modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Fedders Corporation will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of any such person, a copy
of the document incorporated herein by reference (other than exhibits to such
document unless such exhibits are specifically incorporated by reference into
such document). Written or telephone requests should be directed to the
Secretary of Fedders Corporation at its principal executive offices, which are
located at 505 Martinsville Road, P.O. Box 813, Liberty Corner, New Jersey
07938; telephone number: (908) 604-8686; facsimile number: (908) 604-0715.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Statements of Operations for the Years Ended August 31, 1995, 1996 and
1997................................................................................ F-2
Consolidated Balance Sheets as of August 31, 1996 and 1997............................ F-3
Consolidated Statements of Cash Flows for the Years Ended August 31, 1995, 1996 and
1997................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended August 31, 1995,
1996 and 1997....................................................................... F-5
Notes to Consolidated Financial Statements............................................ F-6
Report of Independent Certified Public Accountants.................................... F-20
Quarterly Financial Data (unaudited).................................................. F-21
</TABLE>
F-1
<PAGE> 79
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................ $316,494 $371,772 $314,100
Costs and expenses:
Cost of sales.......................................... 249,369 288,744 244,024
Selling, general and administrative.................... 29,472 32,040 38,347
-------- -------- --------
278,841 320,784 282,371
-------- -------- --------
Operating income......................................... 37,653 50,988 31,729
Minority interest in joint venture....................... -- 230 568
Interest expense (net of interest income of $751, $1,410
and $920 for the years ended August 31, 1995, 1996 and
1997, respectively).................................... (1,962) (952) (3,430)
-------- -------- --------
Income before income taxes............................... 35,691 50,266 28,867
Federal, state and foreign income taxes.................. 6,187 19,108 10,103
-------- -------- --------
Net income............................................... 29,504 31,158 18,764
Preferred stock dividend requirement..................... -- 151 2,420
-------- -------- --------
Net income attributable to common
stockholders........................................... $ 29,504 $ 31,007 $ 16,344
======== ======== ========
Primary earnings per share............................... $ 0.72 $ 0.74 $ 0.40
======== ======== ========
Dividends declared per share:
Preferred.............................................. -- $ 0.050 $ 0.318
Common................................................. $ 0.020 0.080 0.080
Class A................................................ 0.020 0.080 0.080
Class B................................................ 0.018 0.072 0.072
</TABLE>
See accompanying notes.
F-2
<PAGE> 80
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1996 1997
-------- --------
(DOLLARS IN
THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 90,295 110,393
Accounts receivable (less allowances of $1,952 $1,834 in 1996 and
1997, respectively)............................................... 7,975 9,060
Inventories.......................................................... 53,446 62,887
Deferred income taxes................................................ 3,584 4,070
Other current assets................................................. 3,366 8,917
-------- --------
Total current assets................................................... 158,666 195,327
Net property, plant and equipment...................................... 62,872 63,994
Deferred income taxes.................................................. 7,364 6,374
Goodwill............................................................... 58,556 56,858
Other assets........................................................... 2,762 6,461
-------- --------
$290,220 $329,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 1,889 $ 1,891
Accounts payable..................................................... 16,514 10,591
Income taxes payable................................................. 15,391 10,027
Accrued expenses..................................................... 38,055 31,082
-------- --------
Total current liabilities.............................................. 71,849 53,591
Long-term debt......................................................... 38,517 113,489
Other long-term liabilities:
Warranty............................................................. 3,679 2,780
Other................................................................ 10,816 8,427
Minority interest in joint venture..................................... 5,608 5,040
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $1 par value, 15,000,000 shares authorized,
7,643,061 and 6,809,184 issued at August 31, 1996 and 1997,
respectively...................................................... 7,643 6,809
Common Stock, $1 par value, 80,000,000 shares authorized, 18,989,798
and 18,989,898 issued at August 31, 1996 and 1997, respectively... 18,990 18,990
Class A Stock, $1 par value, 60,000,000 shares authorized, 19,415,916
and 20,074,281 shares issued at August 31, 1996 and 1997,
respectively...................................................... 19,416 20,074
Class B Stock, $1 par value, 7,500,000 shares authorized, 2,266,706
and 2,266,606 issued and outstanding at August 31, 1996 and 1997,
respectively...................................................... 2,267 2,267
Additional paid-in capital........................................... 87,728 85,702
Retained earnings (deficit).......................................... 23,865 37,024
Treasury stock, at cost, 4,334,800 shares of Class A Stock at August
31, 1997.......................................................... -- (25,041)
Cumulative translation adjustment...................................... (158) (138)
-------- --------
Total stockholders' equity............................................. 159,751 $145,687
-------- --------
$290,220 $329,014
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 81
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income................................................. $29,504 $31,158 $ 18,764
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization......................... 7,519 6,578 9,935
Tax benefit related to stock options exercised........ 2,900 437 479
Deferred income taxes................................. (5,406) (1,717) 504
Changes in operating assets and liabilities (net of the
effect of the merger in 1996):
Accounts receivable, net.............................. 3,993 4,402 (1,085)
Inventories........................................... (10,972) (7,856) (9,441)
Other current assets.................................. (219) (628) (5,551)
Other assets.......................................... 175 (568) (335)
Accounts payable...................................... 276 (2,887) (5,923)
Accrued expenses...................................... 6,617 3,784 (6,973)
Income taxes payable.................................. 8,373 6,243 (5,364)
Other long-term liabilities........................... 1,643 3,151 (3,288)
Other................................................. 184 (226) (548)
-------- ------- --------
Net cash provided by (used in) operations.................... 44,587 41,871 (8,826)
-------- ------- --------
Investing activities:
Additions to property, plant and equipment................. (9,041) (7,043) (9,236)
Disposal of property, plant and equipment.................. 521 535 428
-------- ------- --------
Net cash used in investing activities........................ (8,520) (6,508) (8,808)
-------- ------- --------
Financing activities:
Net proceeds from issuance of 9 3/8% senior subordinated
notes................................................... -- -- 96,025
Repayment and redemption of 8 1/2% convertible subordinated
debentures.............................................. -- -- (22,806)
Repayments of NYCOR short-term borrowing................... -- (3,000) --
Repayments of long-term debt............................... (13,866) (678) (1,992)
Proceeds from stock options exercised...................... 692 1,868 1,727
Net proceeds from (repayments of) Fedders Xinle
financing............................................... -- 6,282 (168)
Repayment of Fedders Xinle short-term debt................. -- (3,396) --
Purchase of Preferred Stock................................ -- -- (4,408)
Purchase of Class A Stock.................................. -- -- (25,041)
Cash dividends............................................. (797) (3,252) (5,605)
Expenses related to the NYCOR merger....................... -- (599) --
Proceeds from notes due on common stock purchases.......... 742 -- --
-------- ------- --------
Net cash (used in) provided by financing activities.......... (13,229) (2,775) 37,732
-------- ------- --------
Net increase in cash and cash equivalents.................... 22,838 32,588 20,098
Cash and cash equivalents at beginning of period............. 34,869 57,707 90,295
-------- ------- --------
Cash and cash equivalents at end of period................... $57,707 $90,295 $110,393
======== ======= ========
Supplemental disclosures:
Net interest paid............................................ $ 1,904 $ 2,249 $ 3,406
Net income taxes paid (refunded)............................. 492 13,513 14,090
Noncash investing and financing activities:
The issuance of 7,643,036 shares of Convertible Preferred
Stock at a price of $6.25 in exchange for all the
outstanding shares of Common, Class A and Class B stock of
NYCOR (note 13)............................................ -- $47,769
</TABLE>
See accompanying notes.
F-4
<PAGE> 82
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED CUMULATIVE NOTES DUE ON
PREFERRED COMMON CLASS A CLASS B PAID-IN EARNINGS TRANSLATION COMMON STOCK TREASURY
STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENTS PURCHASES STOCK
--------- ------- ------- ------- ---------- -------- ----------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 $ -- $ --
Net income................... -- -- -- -- -- 31,158 -- -- --
Issuance of Preferred
Stock...................... $ 7,643 -- -- -- 40,126 -- -- -- --
Expenses related to the NYCOR
merger..................... -- -- -- -- (599) -- -- -- --
Tax benefit related to stock
options exercised.......... -- -- -- -- 437 -- -- -- --
Conversion of Class B to
Common Stock............... -- 1 -- -- -- -- -- -- --
Dividends declared........... -- -- -- -- -- (3,252) -- -- --
Stock options exercised...... -- -- 585 -- 1,283 -- -- -- --
Foreign currency
translation................ -- -- -- -- -- -- (173) -- --
------ ------- ------- ------ ------- ------- ---- ---- ------
August 31, 1996.............. $ 7,643 $18,990 $19,416 $2,267 $ 87,728 $23,865 $(158) -- --
Net income................... -- -- -- -- -- 18,764 -- -- --
Conversion of Preferred to
Class A Stock.............. (129) -- 129 -- -- -- -- -- --
Purchase of Preferred
Stock...................... (705) -- -- -- (3,703) -- -- -- --
Tax benefit related to stock
options exercised.......... -- -- -- -- 479 -- -- -- --
Dividends declared........... -- -- -- -- -- (5,605) -- -- --
Purchase of Class A Stock.... -- -- -- -- -- -- -- -- (25,041)
Stock options exercised...... -- -- 529 -- 1,198 -- -- -- --
Foreign currency
translation................ -- -- -- -- -- -- 20 -- --
------ ------- ------- ------ ------- ------- ---- ---- ------
August 31, 1997.............. $ 6,809 $18,990 $20,074 $2,267 $ 85,702 $37,024 $(138) -- $(25,041)
====== ======= ======= ====== ======= ======= ==== ==== ======
</TABLE>
See accompanying notes.
F-5
<PAGE> 83
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND STOCK OPTION AMOUNTS, EXCEPT PER SHARE AND MARKET DATA, ARE IN
THOUSANDS.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Fedders Corporation and all of its wholly-owned and majority-owned 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
Fedders Corporation'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. Fedders Corporation'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 Fedders Corporation's option.
Foreign currency translation
Assets and liabilities of Fedders Corporation'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
Fedders Corporation 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. Fedders Corporation 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:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Finished goods........................................... $21,711 $32,233
Work in process.......................................... 6,652 6,631
Raw materials and supplies............................... 25,083 24,023
------- -------
$53,446 $62,887
======= =======
</TABLE>
F-6
<PAGE> 84
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
AUGUST 31,
ESTIMATED ---------------------
USEFUL LIFE 1996 1997
--------------- -------- --------
<S> <C> <C> <C>
Land and improvements.......................... $ 3,830 $ 3,924
Buildings...................................... 20 to 30 years 23,915 24,349
Machinery and equipment........................ 5 to 12 years 84,887 87,421
Machinery and equipment under capital leases... 12 years 8,191 8,647
-------- -------
Property, plant and equipment.................. 120,823 124,341
Accumulated depreciation....................... 57,951 60,347
-------- -------
$ 62,872 $ 63,994
======== =======
</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
$2,694 in 1996. Accumulated depreciation includes $297 and $1,005 of
depreciation related to equipment under capital leases in 1996 and 1997,
respectively.
Goodwill and 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 based on the expected
undiscounted net cash flows of the related businesses. Goodwill and other assets
are net of accumulated amortization of $8,640 and $10,472 at August 31, 1996 and
1997, respectively. At August 31, 1996, goodwill included $53,192 resulting from
the merger with NYCOR, Inc. ("NYCOR") on August 13, 1996 (note 13).
Accrued expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Warranty......................................................... $ 4,019 $ 4,047
Marketing programs............................................... 16,345 11,686
Salaries and benefits............................................ 7,964 7,876
Other............................................................ 9,727 7,473
------- -------
$38,055 $31,082
======= =======
</TABLE>
Income taxes
Deferred income taxes are provided to reflect the tax effects of "temporary
differences" between assets and liabilities for financial reporting purposes and
income tax purposes. Provisions are also made for U.S. income taxes on
undistributed earnings of foreign subsidiaries not considered to be indefinitely
reinvested (note 7).
F-7
<PAGE> 85
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and development costs
All research and development costs are charged to expense as incurred and
amounted to $2,742, $3,891, and $6,268 in 1995, 1996 and 1997, respectively.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Risks and uncertainties
Approximately 15% of Fedders Corporation's employees are covered by a
three-year collective bargaining agreement, which expired in August 1997. The
Company and the union representing employees of Rotorex Company, Inc.
("Rotorex") were unable to reach agreement prior to the expiration, and the
employees covered by the collective bargaining agreement struck. Rotorex
continues to operate using temporary replacement workers. The Company believes
that this will not have a material adverse effect on its financial condition or
results of operations.
Another 34% of the employees are covered by collective bargaining
agreements which expire in October 1998.
Effect of new accounting pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
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," which establishes accounting standards for, among other things, the
impairment of long-lived assets and certain identifiable intangibles. The
adoption of this pronouncement on September 1, 1996 did not have a material
effect on Fedders Corporation's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." On September 1, 1996, Fedders Corporation adopted SFAS No. 123
and chose to continue the application of APB Opinion 25 and related
interpretations in accounting for its stock options. As a result, the adoption
of SFAS No. 123 did not have a material effect on Fedders Corporation's
consolidated financial statements.
In February 1997, the FASB issued SFAS 128 "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. SFAS 128
replaces the presentation of primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Basic earnings per share are
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share are computed similarly to fully diluted earnings per share. The standard
is effective for financial statements for periods ending after December 15,
1997, with earlier application not permitted.
Under the provisions of SFAS No. 128 pro forma basic earnings per share
would have been $0.74, $0.77 and $0.42 in 1995, 1996 and 1997, respectively, and
pro forma diluted earnings per share would have been $0.72, 0.74 and $0.39 in
1995, 1996 and 1997 respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information," were
issued. SFAS No. 130 addresses standards for reporting and display of
comprehensive income and its components, and SFAS No. 131 requires disclosure of
reportable operating segments. Both statements are effective for Fedders
Corporation's 1999 fiscal year. Fedders Corporation will review these
pronouncements to determine their applicability if any.
F-8
<PAGE> 86
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts per share
Primary earnings per share are computed by dividing net income attributable
to common stockholders 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, 41,997,000 and 40,888,000 in 1995, 1996 and 1997,
respectively. Fully diluted earnings per share were not materially dilutive for
all years and, accordingly, are not presented.
2. TRANSACTIONS WITH NYCOR
On August 13, 1996, upon receiving over two-thirds majority approval of all
Common and Class B stockholders, Fedders Corporation merged with NYCOR. One
share of Fedders Convertible Preferred Stock was issued for each share of NYCOR
Common, Class A and Class B stock (note 13).
Prior to the merger, Fedders Corporation had an agreement with 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
and $53,878 in 1995 and 1996, respectively. Certain officers and directors of
Fedders Corporation were also officers and/or directors of NYCOR and had
significant stockholdings in both companies.
3. LITIGATION
Fedders Corporation 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, 1996 and 1997, Fedders Corporation had no short-term
borrowing outstanding under the revolving credit facility with a commercial
finance company. Availability under the facility of $40,000 and $50,000 at
August 31, 1996 and 1997, respectively, is based on accounts receivable and
inventory, and the facility requires maintenance of certain financial covenants.
The maximum amount outstanding under the credit facility was $37,877 and $50,000
during fiscal 1996 and 1997, respectively. The average amount outstanding and
average rate of interest charged on outstanding borrowings under the credit
facility were $5,596 and 9.8% in fiscal 1996 and $14,974 and 8.6% in fiscal
1997. The credit facility is collateralized by substantially all of Fedders
Corporation's assets and is in effect until February 2000. The rate of interest
on the facility is the prime rate.
F-9
<PAGE> 87
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1996 1997
---------- ---------
<S> <C> <C>
9 3/8% senior subordinated notes due in 2007:
$100,000 principal amount less unamortized discount
of $477............................................ -- $ 99,523
8 1/2% convertible subordinated debentures due
2012............................................... $ 22,806 --
Fedders Xinle 15.175% promissory note................ 6,299 6,131
Promissory note payable to the State of Illinois,
interest at 1%..................................... 4,196 3,859
Capital lease obligations and other.................. 7,105 5,867
------- --------
40,406 115,380
Less current maturities.............................. 1,889 1,891
------- --------
$ 38,517 $ 113,489
======= ========
</TABLE>
Aggregate amounts of long-term debt, excluding capital leases and other of
$5,867, maturing in each of the years ended August 31 are: 1998 - $339,
1999 - $342, 2000 - $346, 2001 - $349, 2002 - $352 and thereafter $107,785.
In August 1997, a subsidiary of the Company issued $100,000 principal
amount of 9 3/8% senior subordinated notes due in 2007. The notes are guaranteed
by the Company on a senior subordinated basis. The notes may be redeemed after
August 2002 at a redemption price of 104.688% of the principal amount. The
provisions of the notes limit, among other things, the payment of dividends by
the subsidiary.
In August 1997, the Company satisfied its obligation on the 8 1/2%
convertible subordinated debentures due 2012 which were convertible into the
Company's Preferred Stock.
The $6,131 long-term promissory note of Fedders Xinle is payable to a
People's Republic of China bank and matures in 2008. The loan is secured by
certain joint venture assets and is not guaranteed by Fedders Corporation or its
other subsidiaries.
The loan from the State of Illinois has an interest rate of 1%, is to be
paid over the next 11 years, and is collateralized by a mortgage on the Illinois
facility.
6. LEASES
Capital Leases
Aggregate future minimum rental payments under capital leases primarily
assumed in connection with the NYCOR merger (note 13) for the years ended August
31 are as follows: 1998 - $2,103, 1999 - $2,086, 2000 - $2,232, 2001 - $214,
2002 - $214 and thereafter $189. The present value of net minimum lease payments
is $5,867 excluding the interest portion of $1,171.
Operating Leases
Fedders Corporation leases certain property and equipment under operating
leases, which expire over the next five years. Most of these operating leases
contain one of the following options: (a) Fedders Corporation may, at the end of
the initial lease term, purchase the property at the then fair market value or
(b) Fedders
F-10
<PAGE> 88
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Corporation 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: $3,473, $3,065, $1,978, $1,742
and $895 in 1998, 1999, 2000, 2001 and 2002, respectively, and total $11,153.
Total rent expense for all operating leases amounted to $2,083, $2,025 and
$3,749 in 1995, 1996 and 1997, respectively.
7. INCOME TAXES
The provision for income tax (benefit) consists of the following
components:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 6,258 $18,047 8,005
State............................................... 2,378 2,253 714
Foreign............................................. 57 88 401
---- ------- -------
8,693 20,388 9,120
---- ------- -------
Charge in lieu of income taxes........................ 2,900 437 479
---- ------- -------
Deferred:
Federal............................................. (4,392) (1,530) 380
State............................................... (1,014) (187) 124
---- ------- -------
(5,406) (1,717) 504
---- ------- -------
$ 6,187 $19,108 $10,103
==== ======= =======
</TABLE>
The exercise of stock options to acquire shares of Fedders Corporation's
Class A Stock create 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 are reflected as a charge in lieu of income
taxes and a credit to additional paid-in capital.
Deferred income taxes result from "temporary differences" between assets
and liabilities for financial reporting purposes and income tax purposes. The
principal temporary differences and carryforwards giving rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Warranty......................................................... $ 3,065 $ 2,498
Depreciation..................................................... 392 (1,263)
Employee benefit programs........................................ 3,525 4,560
Inventory........................................................ 1,710 2,249
Net operating loss carryforwards................................. 7,598 8,221
Other............................................................ 1,683 915
------ -------
17,973 17,180
Valuation allowance.............................................. (7,025) (6,736)
------ -------
$10,948 $10,444
====== =======
</TABLE>
In connection with the NYCOR merger in August 1996, net deferred tax assets
were increased by $5,000, net of a valuation allowance of $6,584, attributable
to temporary differences, and to tax loss, and tax credit carryforwards of NYCOR
and its subsidiaries which Fedders Corporation expects to utilize over the
carryforward periods.
F-11
<PAGE> 89
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The decrease in the deferred tax asset valuation allowance resulted from
the utilization of net operating loss carryforwards and, a change in Fedders
Corporation'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>
YEARS ENDED AUGUST 31,
---------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Expected tax at statutory rate...................... $12,492 $17,593 $10,103
Valuation allowance reflected in current income..... (7,851) (325) (289)
State taxes, less federal income tax benefit........ 887 1,343 545
Prior year provisions no longer required............ -- -- (675)
Other............................................... 659 497 419
------- ------- -------
$ 6,187 $19,108 $10,103
======= ======= =======
</TABLE>
At August 31, 1997, Fedders Corporation had Canadian net operating loss
carryforwards of approximately $556 that expire in the years 2002 through 2003,
and U.S. net operating loss and tax credit carryforwards related to NYCOR of
approximately $17,000 and $1,000, respectively, which are restricted as to use
and expire in the years 2001 through 2010. All prior U.S. net operating loss and
credit carryforwards were utilized at August 31, 1995.
8. SEGMENT INFORMATION
Fedders Corporation 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, 30% of net sales in 1996 and 27% of net sales in 1997. A second customer
accounted for 19% of net sales in 1997, and a third customer accounted for 10%
in 1995.
International sales were approximately $12,892 in 1995, $24,458 in 1996 and
$45,012 in 1997 and were made principally to Canada, Mexico, Europe and Asia.
9. CAPITAL STOCK
Preferred Stock: In fiscal 1996, 7,643,036 shares of Convertible Preferred
Stock ("Preferred Stock") were issued to NYCOR's stockholders on a
share-for-share basis in exchange for their Common, Class A and Class B Stock to
consummate the merger with NYCOR (notes 2 and 13). In August 1997, the Company
called for redemption its Preferred Stock. In September 1997, each share of
Preferred Stock was redeemed for 1.022 shares of Class A Stock based on the
average closing price of $6.113 of the Class A Stock. Fractional shares and all
accounts holding 100 shares or less were paid in cash at the rate of $6.25 per
share. During fiscal 1997, 705,233 shares of Preferred Stock were repurchased
under the Company's stock repurchase program and were retired
Common Stock: Shares of Common Stock are reserved for the conversion of
Class A and Class B Stock as indicated herein.
Class A Stock: In 1995, Fedders Corporation issued 7,984,000 shares of
Class A Stock through a stock dividend. During fiscal 1997, 4,334,800 shares
were repurchased under the Company's stock repurchase program and are held in
treasury. At August 31, 1997, 6,959,000 shares are reserved for conversion of
Fedders Corporation's Convertible Preferred Stock. At August 31, 1997,
10,138,000 shares of Class A Stock are reserved under Fedders Corporation's
stock option plans. Class A Stock has rights, including dividend rights,
substantially identical to the Common Stock, except that the Class A Stock is
not entitled to vote except to the extent provided under Delaware law. Class A
Stock is immediately convertible into Common Stock on
F-12
<PAGE> 90
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a share-for-share basis upon conversion of all of the Class B Stock and
accordingly, at August 31, 1997, 37,171,281 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, 1997, 2,266,606 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, if declared, equal to 90% of the dividend on
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.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's stock option
plans been determined consistent with FASB No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net income attributable to common stockholders:
As reported.................................................... $31,007 $16,344
Pro forma...................................................... 30,642 14,801
Primary earnings per share:
As reported.................................................... $ 0.74 $ 0.40
Pro forma...................................................... 0.73 0.36
</TABLE>
The stock option plan summary and changes during each year is presented
below:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year.......................... 3,903 4,715 4,852
Granted........................................................... 403 752 1,761
Canceled.......................................................... (300) (30) (92)
Exercised......................................................... (218) (585) (529)
------- ------- -------
Options outstanding prior to stock dividend-related adjustments... 3,788 4,852 5,992
Stock dividend-related adjustments(a)............................. 927 -- --
------- ------- -------
Options outstanding at end of year................................ 4,715 4,852 5,992
======= ======= =======
Options exercisable at end of year................................ 3,336 3,682 3,385
======= ======= =======
Exercise price per share.......................................... $ 2.33 $ 1.69 $ 1.87
to 4.70 to 4.87 to 5.50
</TABLE>
- ------------------------------
(a) In connection with stock dividends distributed in 1995, all options were
adjusted to reflect a 25% increase.
Options exercisable at August 31, 1997 have an average exercise price of
$3.64. The fair value of the stock options granted during 1997 and 1996 was
$2,478 and $821, respectively, on the date of grant using the Black Scholes
option-pricing model. The weighted-average assumptions used were:
1997 -- expected dividend yield of $.08 per share, risk-free interest rate of
6.1%, an expected life of 4 years and an expected volatility of
F-13
<PAGE> 91
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
32%; 1996 -- expected dividend yield of $.08 per share, risk-free interest rate
of 6.3%, an expected life of 4.7 years and an expected volatility of 32%.
The following table summarizes information on stock options outstanding at
August 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
AUGUST 31, CONTRACTUAL EXERCISE AUGUST 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- -------------------------------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.87-2.93............................ 1,178 4.6 $ 2.68 241 $ 2.34
$3.00-3.53............................ 688 2.9 3.29 688 3.29
$3.60-3.93............................ 1,820 2.6 3.63 1,820 3.63
$4.00-4.50............................ 471 4.0 4.41 471 4.41
$4.75-4.87............................ 1,685 5.5 4.75 65 4.87
$5.13-5.50............................ 150 5.7 5.25 100 5.13
--- ---- ----- ----
5,992 4.1 $ 3.80 3,385 $ 3.64
</TABLE>
11. PENSION PLANS AND OTHER RETIREMENT BENEFITS
Fedders Corporation maintains a 401(k) defined contribution plan covering
all U.S. employees. Fedders Corporation matching contributions under the plan
are based on the level of individual participant contributions and amounted to
$756 in 1995 $1,171 in 1996 and $1,340 in 1997. In 1996, Fedders Corporation
terminated its defined pension benefit plan that was curtailed in 1993 with no
material gain or loss recognized.
Fedders Corporation has an agreement with an officer that has a term of ten
years from any point in time and provides for salary during the 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 Fedders
Corporation 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 Fedders Corporation. The agreement was adjusted in 1996 to include terms of
the NYCOR merger (note 13) to maintain employees and directors of NYCOR in the
same economic position as immediately prior to the merger.
Fedders Corporation provides a portion of health care and life insurance
benefits for retired employees who elect to participate in Fedders Corporation's
plan. SFAS No. 106, which requires accrual accounting for all postretirement
benefits other than pension. At August 31, 1996 and 1997 postretirement benefits
were fully accrued.
12. JOINT VENTURE
On November 7, 1995, Fedders Corporation entered into a joint venture with
the Ningbo General Air Conditioner Factory ("Ningbo"), Ningbo City, Zhejiang
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 with Fedders Corporation's contribution of approximately $8,400 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 for a 40% interest. The
equivalent of approximately $10,300 in long-term financing was provided by a
P.R.C. bank for the joint venture which is not guaranteed by Fedders
Corporation. At August 31, 1997, $6,131 was outstanding under this long-term
financing. The financial statements of the joint venture are consolidated
herein.
F-14
<PAGE> 92
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. MERGER
On August 13, 1996, Fedders Corporation merged with NYCOR, a manufacturer
of rotary compressors and thermoelectric heating and cooling modules.
Consideration consisted of 7,643,000 shares of Preferred Stock with a value of
approximately $47,769. The merger was accounted for using the purchase method,
with the consideration allocated to the assets acquired based on their estimated
fair values as of the merger date. The purchase price plus the fair value of net
liabilities assumed was allocated to goodwill which is being amortized on a
straight line basis over 40 years.
Fedders Corporation's consolidated financial statements include the
operating results of NYCOR since August 13, 1996. The following table presents
the unaudited pro forma results of operations as if these transactions occurred
on September 1, 1994. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have actually
occurred had the merger been consummated at the beginning of fiscal 1995 or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST
31,
---------------------
1995 1996
--------(PRO --------
FORMA -- UNAUDITED)
<S> <C> <C>
Net sales.................................................... $329,516 $390,349
Operating income............................................. 35,747 42,168
Net income................................................... 26,742 23,574
Income per share:
Primary.................................................... 0.57 0.51
Fully diluted.............................................. 0.54 0.47
</TABLE>
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Fedders North America, Inc. (the "Company") is a wholly owned subsidiary of
Fedders Corporation. The Company and Fedders Corporation are the Issuer and the
Guarantor, respectively, of the senior subordinated notes due 2007 which were
issued in August, 1997 (the "Offering" note 5). Fedders Corporation's guarantee
is full, unconditional, and joint and several. The following condensed
consolidating financial statements present separate information for the Company
and for Fedders Corporation and its subsidiaries other than the Company
("Fedders") and should be read in connection with the consolidated financial
statements of Fedders Corporation. The non-guarantor subsidiaries of Fedders
Corporation are inconsequential individually and in the aggregate, to the
consolidated financial statements and management has determined that separate
financials of the Guarantor would not be meaningful.
The amounts shown for the Company (presented under the caption "Fedders
North America") in the following historical condensed consolidating financial
statements include the accounts of Rotorex Company, Inc. ("Rotorex") since
August 13, 1996. The amounts shown for Fedders (presented under the caption
"Other Fedders") include the accounts of NYCOR and its subsidiaries other than
Rotorex since August 13, 1996. August 13, 1996 was the date of the merger
between Fedders Corporation and NYCOR (note 13). The amounts shown for Fedders
and the Company reflect the elimination of the $20,000, 10% note payable by
Rotorex to NYCOR as a contribution to the capital of Rotorex retroactive to
August 13, 1996, since this amount was contributed to Rotorex's capital in
connection with the offering. The amounts also present the intercompany
receivable by the Company from Fedders for all periods prior to August 31, 1997
as a reduction of stockholders' equity since the balance in this account was
forgiven at the time of completing the Offering.
F-15
<PAGE> 93
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1995
-------------------------------------------
FEDDERS OTHER FEDDERS
NORTH AMERICA FEDDERS CORPORATION
------------- ------- -----------
<S> <C> <C> <C>
Net sales......................................................... $ 311,363 $ 5,131 $ 316,494
Cost of sales..................................................... 245,593 3,776 249,369
Selling, general and administrative expenses(a)................... 26,515 2,957 29,472
-------- ------- --------
Operating income (loss)........................................... 39,255 (1,602) 37,653
Minority interest in joint venture................................ -- -- --
Net interest income (expense)(b).................................. (2,608) 646 (1,962)
-------- ------- --------
Income (loss) before income taxes................................. 36,647 (956) 35,691
Income taxes (benefit)............................................ 6,340 (153) 6,187
-------- ------- --------
Income (loss)..................................................... 30,307 (803) 29,504
Preferred stock dividend requirements............................. -- -- --
-------- ------- --------
Net income (loss) attributable to common stockholders............. $ 30,307 $ (803) $ 29,504
======== ======= ========
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1997
-------------------------------------------
FEDDERS OTHER FEDDERS
NORTH AMERICA FEDDERS CORPORATION
------------- ------- -----------
<S> <C> <C> <C>
Net sales......................................................... $356,392 $15,380 $ 371,772
Cost of sales..................................................... 276,917 11,827 288,744
Selling, general and administrative expenses(a)................... 25,267 6,773 32,040
--------- ------- -------
Operating income (loss)........................................... 54,208 (3,220) 50,988
Minority interest in joint venture................................ -- 230 230
Net interest income (expense)(b).................................. (3,941) 2,989 (952)
---------- ------- -------
Income (loss) before income taxes................................. 50,267 (1) 50,266
Income taxes (benefit)............................................ 19,108 -- 19,108
---------- ------- -------
Income (loss)..................................................... 31,159 (1) 31,158
Preferred stock dividend requirements............................. -- 151 151
--------- ------- -------
Net income (loss) attributable to common stockholders............. $ 31,159 $ (152) $ 31,007
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------
FEDDERS OTHER ELIMINATION FEDDERS
NORTH AMERICA FEDDERS ENTRIES CORPORATION
------------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales....................................................... $ 271,874 $42,226 $ -- $ 314,100
Cost of sales................................................... 206,870 37,154 -- 244,024
Selling, general and administrative expenses(a)................. 26,130 12,217 -- 38,347
-------- ------- -------- --------
Operating income (loss)......................................... 38,874 (7,145) -- 31,729
Minority interest in joint venture.............................. -- 568 -- 568
Net interest income (expense)(b)................................ (4,341) 911 -- (3,430)
-------- ------- -------- --------
Income (loss) before income taxes............................... 34,533 (5,666) -- 28,867
Income taxes (benefit).......................................... 12,087 (1,984) -- 10,103
-------- ------- -------- --------
Net income (loss)............................................... 22,446 (3,682) -- 18,764
Intercompany dividend income(f)................................. -- 72,300 (72,300) --
Preferred stock dividend requirement............................ -- 2,420 -- 2,420
-------- ------- -------- --------
Net income (loss) attributable to common stockholders........... $ 22,446 $66,198 $ (72,300) $ 16,344
======== ======= ======== ========
</TABLE>
- ---------------
(a)(b)(f) See page F-19.
F-16
<PAGE> 94
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1996 AUGUST 31, 1997
----------------------------------------------- -----------------------------------------------
FEDDERS FEDDERS
NORTH OTHER ELIMINATION FEDDERS NORTH OTHER ELIMINATION FEDDERS
AMERICA FEDDERS ENTRIES CORPORATION AMERICA FEDDERS ENTRIES CORPORATION
-------- -------- ----------- ----------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash......................... $ -- $ 90,295 $ -- $ 90,295 $ -- $110,393 $ $ 110,393
Net accounts receivable...... 3,464 4,511 -- 7,975 5,461 3,599 9,060
Inventories.................. 38,998 14,448 -- 53,446 50,303 12,584 62,887
Other current assets......... 1,020 5,930 -- 6,950 584 12,403 12,987
------- -------- -------- --------- -------- -------- --------
Total current assets........... 43,482 115,184 -- 158,666 56,348 138,979 195,327
Investments in subsidiaries.... -- 104,306 (104,306) -- -- 104,306 (104,306) --
Net property, plant and
equipment.................... 52,041 10,831 -- 62,872 51,466 12,528 63,994
Goodwill....................... 51,704 6,852 -- 58,556 50,284 6,574 56,858
Other long-term assets......... 4,597 5,529 -- 10,126 7,794 5,041 12,835
------- -------- -------- --------- -------- -------- --------
$151,824.. $242,702 $ (104,306) $ 290,220 $165,892 $267,428 $ (104,306) $ 329,014
======= ======== ======== ========= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ 1,670 $ 219 $ -- $ 1,889 $ 1,870 $ 21 $ -- $ 1,891
Accounts and income taxes
payable................... 15,924 15,981 -- 31,905 20,747 (129) -- 20,618
Accrued expenses............. 29,431 8,624 -- 38,055 22,752 8,330 -- 31,082
------- -------- -------- --------- -------- -------- --------
Total current liabilities...... 47,025 24,824 -- 71,849 45,369 8,222 53,591
Net due to (from) affiliate.... -- 133,286 (133,286) -- (10,758) 10,758 --
Long-term debt................. 9,322 29,195 -- 38,517 107,346 6,143 -- 113,489
Other long-term liabilities.... 4,309 15,794 -- 20,103 2,780 13,467 -- 16,247
Stockholders' equity:
Preferred Stock.............. -- 7,643 -- 7,643 -- 6,809 -- 6,809
Common, Class A and Class B
Stock..................... 5 40,668 -- 40,673 5 41,326 -- 41,331
Paid-in capital(f)........... 109,637 87,563 (109,472) 87,728 21,292 237,634 (173,224) 85,702
Retained earnings
(deficit)(f).............. 114,935 (96,236) 5,166 23,865 -- (31,894) 68,918 37,024
Treasury stock............... -- -- -- -- -- (25,041) -- (25,041)
Net due from affiliate....... (133,286) -- 133,286 -- -- -- -- --
Cumulative translation
adjustments............... (123) (35) -- (158) (142) 4 (138)
------- -------- -------- --------- -------- -------- --------
Total stockholders' equity..... 91,168 39,603 28,980 159,751 21,155 228,838 (104,306) 145,687
------- -------- -------- --------- -------- -------- --------
$151,824 $242,702 $ (104,306) $ 290,220 $165,892 $267,428 $ (104,306) $ 329,014
======= ======== ======== ========= ======== ======== ========
</TABLE>
- ---------------
(f) See page F-19
F-17
<PAGE> 95
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, FISCAL YEAR ENDED AUGUST 31,
1995 1996
-------------------------------- --------------------------------
FEDDERS FEDDERS
NORTH OTHER FEDDERS NORTH OTHER FEDDERS
AMERICA FEDDERS CORPORATION AMERICA FEDDERS CORPORATION
-------- ------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by operations.............................. $ 41,805 $ 2,782 $ 44,587 $ 36,073 $ 5,798 $41,871
-------- -------- -------- -------- -------- --------
Net additions to property, plant and equipment, being cash
used in investing activities............................... (4,807) (3,713) (8,520) (4,448) (2,060) (6,508)
-------- -------- -------- -------- -------- --------
Net (repayments) proceeds from short and long-term
borrowings................................................. (522) (13,344) (13,866) (398) (394) (792)
Cash dividends............................................... -- (797) (797) -- (3,252) (3,252)
Proceeds from stock options exercised........................ -- 692 692 -- 1,868 1,868
Other........................................................ -- 742 742 -- (599) (599)
Change in net due to (from) affiliate........................ (36,476) 36,476 -- (31,227) 31,227 --
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by financing activities.......... (36,998) 23,769 (13,229) (31,625) 28,850 (2,775)
-------- -------- -------- -------- -------- --------
Net increase in cash and cash equivalents.................... -- 22,838 22,838 -- 32,588 32,588
Cash and cash equivalents at beginning of year............... -- 34,869 34,869 -- 57,707 57,707
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of year..................... $ -- $57,707 $ 57,707 $ -- $90,295 $90,295
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1997
-------------------------------------
FEDDERS
NORTH OTHER FEDDERS
AMERICA FEDDERS CORPORATION
-------- -------- -----------
<S> <C> <C> <C>
Net cash provided by operations......................................................... $ 12,694 $(21,520) $ (8,826)
-------- -------- --------
Net additions to property, plant and equipment, being cash used in investing
activities............................................................................ (6,750) (2,058) (8,808)
-------- -------- --------
Net (repayments) proceeds from short and long-term borrowings........................... (1,716) (276) (1,992)
Cash dividends.......................................................................... -- (5,605) (5,605)
Proceeds from stock options exercised................................................... -- 1,727 1,727
Net proceeds from bond offering......................................................... 96,025 -- 96,025
Repayment and redemption of 8 1/2% convertible subordinated debentures.................. -- (22,806) (22,806)
Purchase of Class A Stock............................................................... -- (25,041) (25,041)
Purchase of Preferred Stock............................................................. -- (4,408) (4,408)
Other................................................................................... -- (168) (168)
Intercompany dividend................................................................... (72,300) 72,300 --
Change in net due to (from) affiliate................................................... (27,953) 27,953 --
-------- -------- --------
Net cash (used in) provided by financing activities..................................... (5,944) 43,676 37,732
-------- -------- --------
Net increase in cash and cash equivalents............................................... -- 20,098 20,098
Cash and cash equivalents at beginning of year.......................................... -- 90,295 90,295
-------- -------- --------
Cash and cash equivalents at end of year................................................ $ -- $110,393 $ 110,393
======== ======== ========
</TABLE>
F-18
<PAGE> 96
FEDDERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED)
INTERCOMPANY TRANSACTIONS
The historical condensed consolidating financial statements presented above
include the following transactions between the Company and Fedders;
a) Fedders charges corporate overhead to the Company essentially on a cost basis
allocated in proportion to sales. Such charges to the Company amounted to
$9,294, $10,247 and $9,747 for the years ended August 31, 1995, 1996 and
1997, respectively.
b) Fedders allocates interest expense to the Company based upon the level of the
Company's working capital at the prime rate of interest. Such interest
charges amounted to $1,627, $2,751 and $3,953 for the years ended August 31,
1995, 1996 and 1997, respectively.
c) The Company's depreciation and amortization for the years ended August 31,
1995, 1996 and 1997 amounted to $6,061, $6,071 and $7,847, respectively.
Capital expenditures of the Company for the same periods amounted to $4,286,
$4,983, $7,131, respectively.
d) Fedders guarantees the Company's obligations under the Company's revolving
credit facility.
e) Fedders stock option plans include the Company employees.
f) In connection with the completion of the Offering on August 13, 1997, the
Company declared a dividend of $72,300 to Fedders. In addition, the
intercompany receivable from Fedders Corporation on August 13, 1997 of
$152,097 was forgiven and has been reflected as an adjustment to
stockholders' equity of both companies in the accompanying condensed
consolidated balance sheet on page F-17.
F-19
<PAGE> 97
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FEDDERS CORPORATION
We have audited the accompanying consolidated balance sheets of Fedders
Corporation as of August 31, 1996 and 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended August 31, 1997. These financial statements are
the responsibility of Fedders Corporation'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 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1997 in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Woodbridge, New Jersey
September 29, 1997
F-20
<PAGE> 98
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL YEAR
----------------- ----------------- ------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $33,087 $27,809 $60,593 $88,327 $143,776 $173,868 $76,644 $81,768 $314,100 $371,772
Gross profit............ 7,179 6,777 14,277 18,005 30,842 37,859 17,778 20,387 70,076 83,028
Income (loss) before
income taxes.......... (1,668) 554 3,584 10,274 19,153 28,200 7,798 11,238 28,867 50,266
Net income (loss)....... $(1,246) $ 343 $ 2,511 $ 6,370 $ 12,640 $ 17,430 $ 4,859 $ 7,015 $ 18,764 $ 31,158
Net income (loss) per
share(a).............. $ (0.05) $ 0.01 $ 0.04 $ 0.15 $ 0.30 $ 0.42 $ 0.12 $ 0.16 $ 0.40 $ 0.74
Market price per share:
Class A Stock (FJA)
High.................. 5 7/8 5 6 1/8 5 5/8 6 1/4 6 1/4 6 3/8 6 3/8 6 3/8 6 3/8
Low................... 4 5/8 3 3/4 4 5/8 3 7/8 5 1/4 5 3/8 5 1/2 4 7/8 4 5/8 3 3/4
Common Stock (FJC)
High.................. 6 1/2 6 3/4 6 1/2 6 3/4 6 1/2 7 6 5/8 7 1/4 6 5/8 7 1/4
Low................... 5 5/8 5 1/4 5 5/8 5 5 5/8 6 5 5/8 5 1/2 5 5/8 5
Preferred Stock (FJAPr)
High.................. 6 1/2 -- 6 1/2 -- 6 3/4 -- 7 5 7/8 7 5 7/8
Low................... 5 5/8 -- 5 5/8 -- 5 5/8 -- 6 5 1/8 5 5/8 5 1/8
</TABLE>
- ------------------------------
(a) Quarterly earnings per share may not add to earnings per share for the year
due to rounding and changes in the number of weighted average shares
outstanding.
F-21
<PAGE> 99
=========================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR FEDDERS CORPORATION. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of Prospectus.................... 1
Risk Factors............................. 11
Summary Organization Chart............... 18
Use of Proceeds.......................... 19
Capitalization........................... 19
Selected Historical Consolidated
Financial Information.................. 20
Management's Discussion and Analysis of
Results of Operations and Financial
Condition of Fedders Corporation....... 22
Business................................. 25
Management............................... 32
Security Ownership of Directors and
Executive Officers of Fedders
Corporation............................ 34
Executive Compensation................... 36
Description of Certain Indebtedness...... 37
The Exchange Offer....................... 38
Description of Notes..................... 47
Plan of Distribution..................... 72
Federal Income Tax Consequences.......... 72
Legal Matters............................ 73
Experts.................................. 73
Available Information.................... 73
Incorporation of Certain Documents by
Reference.............................. 73
Index to Financial Statements............ F-1
</TABLE>
=========================================================
=========================================================
$100,000,000
[FEDDERS NORTH AMERICA LOGO]
9 3/8% SENIOR SUBORDINATED NOTES
DUE 2007
AS FULLY AND UNCONDITIONALLY GUARANTEED
ON A SENIOR SUBORDINATED BASIS BY
FEDDERS CORPORATION
--------------------
PROSPECTUS
--------------------
DECEMBER , 1997
=========================================================
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
A list of exhibits included as part of this registration statement is set
forth in the Exhibit Index that immediately precedes such exhibits and is
incorporated herein by reference.
(b) Financial Statement Schedule.
Consolidated Schedule for the years ended August 31, 1997, 1996 and 1995
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................. S-1
II. Valuation and Qualifying Accounts............................... S-2
</TABLE>
II-1
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the town of Liberty Corner,
State of New Jersey, on December 9, 1997.
FEDDERS NORTH AMERICA, INC.
By /s/ ROBERT L. LAURENT, JR.
--------------------------------------
Robert L. Laurent, Jr.
Executive Vice President --
Finance and Administration
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities shown on December 9, 1997.
<TABLE>
<C> <S> <C>
SALVATORE GIORDANO Chairman of the Board
- -------------------------------------
Salvatore Giordano
SAL GIORDANO, JR. President and Chief Executive
- ------------------------------------- Officer and a Director
Sal Giordano, Jr. (Principal Executive Officer)
JOSEPH GIORDANO Director
- -------------------------------------
Joseph Giordano
C. A. KEEN Director
- -------------------------------------
C. A. Keen
HOWARD S. MODLIN Director
- -------------------------------------
Howard S. Modlin
CLARENCE RUSSEL MOLL Director
- -------------------------------------
Clarence Russel Moll
WILLIAM J. BRENNAN Director
- -------------------------------------
William J. Brennan
S. A. MUSCARNERA Director
- -------------------------------------
S. A. Muscarnera
ANTHONY PULEO Director
- -------------------------------------
Anthony Puleo
ROBERT L. LAURENT, JR. Executive Vice President --
- ------------------------------------- Finance and Administration
Robert L. Laurent, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
By/s/ ROBERT N. EDWARDS
--------------------------
Robert N. Edwards
Attorney-in-fact
II-2
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to its registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the town of Liberty Corner,
State of New Jersey, on December 9, 1997.
FEDDERS CORPORATION
By /s/ ROBERT L. LAURENT, JR.
--------------------------------------
Robert L. Laurent, Jr.
Executive Vice President --
Finance and Administration
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities shown on December 9, 1997.
<TABLE>
<C> <S> <C>
SALVATORE GIORDANO Chairman of the Board
- -------------------------------------
Salvatore Giordano
SAL GIORDANO, JR. Vice Chairman, President and
- ------------------------------------- Chief Executive Officer and a
Sal Giordano, Jr. Director (Principal Executive
Officer)
JOSEPH GIORDANO Director
- -------------------------------------
Joseph Giordano
C. A. KEEN Director
- -------------------------------------
C. A. Keen
HOWARD S. MODLIN Director
- -------------------------------------
Howard S. Modlin
CLARENCE RUSSEL MOLL Director
- -------------------------------------
Clarence Russel Moll
WILLIAM J. BRENNAN Director
- -------------------------------------
William J. Brennan
S. A. MUSCARNERA Director
- -------------------------------------
S. A. Muscarnera
ANTHONY PULEO Director
- -------------------------------------
Anthony Puleo
ROBERT L. LAURENT, JR. Executive Vice President --
- ------------------------------------- Finance and Administration
Robert L. Laurent, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
By/s/ ROBERT N. EDWARDS
--------------------------
Robert N. Edwards
Attorney-in-fact
II-3
<PAGE> 103
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Fedders Corporation
The audits referred to in our report dated September 29, 1997, relating to
the consolidated financial statements of Fedders Corporation, which is contained
in the Prospectus constituting part of this Registration Statement, included the
audits of the financial statement schedule listed in Item 21(b). 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 audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Woodbridge, New Jersey
September 29, 1997
S-1
<PAGE> 104
FEDDERS CORPORATION
VALUATION & QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
FOR THE YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BALANCEAT BEGINNING ADDITIONS
ENDOF PERIOD CHARGED TO
PERIOD ----------------------- AT EXPENSES
------------------------
DEDUCTIONS
OTHEROF
--
--------------- --------------
<C> <S> <C> <C>
Allowance for Doubtful Accounts:
Year ended: August 31, 1997.................. $1,952 $ (116) $ 2 $ -- $ 1,834
====== ===== ====== ===== ======
August 31, 1996.................. $ 872 $ 580 $ -- $ 500(1) $ 1,952
====== ===== ====== ===== ======
August 31, 1995.................. $ 744 $ 286 $ 158 $ -- $ 872
====== ===== ====== ===== ======
</TABLE>
- ---------------
(1) Includes $500 related to joint venture (see note 12 of the Notes to the
Consolidated Financial Statements).
S-2
<PAGE> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -------------------------------------------------------------------------------
<S> <C>
1* Purchase Agreement dated August 11, 1997 by and between the Company, the
Guarantor, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co.
3.1(a)* Restated Certificate of Incorporation of the Company, dated November 18, 1997
(incorporated by reference to Exhibit 3.1 to the Guarantor's Annual Report on
Form 10-K for 1997 (File No. 1-8831)).
3.2(a)* By-Laws of the Company.
3.2(b) By-Laws of the Guarantor, amended through January 16, 1998 (incorporated by
reference to Exhibit (3)(vii) to the Guarantor's Annual Report on Form 10-K for
1987 (File No. 1-8831)).
4.1* Indenture, dated as of August 18, 1997, by and among the Company, the Guarantor
and the Trustee.
4.2* Registration Rights Agreement dated as of August 18, 1997, by and among the
Company, the Guarantor, Donaldson, Lufkin & Jenrette Securities Corporation and
Goldman, Sachs & Co.
5* Opinion of Cummings & Lockwood.
10(i) Stock Option Plan II (incorporated by reference to Exhibit 10.4 to the
Guarantor's Annual Report on Form 10-K for 1984 (File No. 1-8831)).
10(ii) Stock Option Plan III (incorporated by reference to Exhibit 10(iv) to the
Guarantor's Annual Report on Form 10-K for 1985 (File No. 1-8831)).
10(iii) Stock Option Plan IV (incorporated by reference to Exhibit 10(iv) to the
Guarantor's Annual Report on Form 10-K for 1987 (File No. 1-8831)).
10(iv) Stock Option Plan V (incorporated by reference to Exhibit 10(v) to the
Guarantor's Annual Report on Form 10-K for 1988 (File No. 1-8831)).
10(v) Stock Option Plan VI (incorporated by reference to Exhibit 10(vi) to the
Guarantor's Annual Report on Form 10-K for 1989 (File No. 1-8831)).
10(vi) Stock Option Plan VII (incorporated by reference to Exhibit 10(vi) to the
Guarantor's Annual Report on Form 10-K for 1990 (File No. 1-8831)).
10(vii) Stock Option Plan VIII (incorporated by reference to Annex F to the Guarantor's
Proxy Statement -- Prospectus dated May 10, 1996 (File No. 1-8831)).
10(viii) Employment Contract between the Guarantor and Salvatore Giordano dated March
23, 1993 (incorporated by reference to Exhibit 10(viii) to the Guarantor's
Annual Report on Form 10-K for 1993 (File No. 1-8831)).
10(ix) 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 (incorporated by reference to Exhibit 10(viii) to the
Guarantor's Annual Report on Form 10-K for 1996 (File No. 1-8831)).
11 Statement re: Computation of Per Share Earnings. (Incorporated by reference to
Exhibit 11 to the Guarantor's Annual Report on Form 10-K for 1997 (File No.
1-8831)).
12 Computation of Ratio of Earnings to Fixed Charges.
21(a)* Subsidiaries of the Company.
21(b)* Subsidiaries of the Guarantor.
23(a) Consent of BDO Seidman, LLP.
23(b)* Consent of Cummings & Lockwood (included as part of Exhibit 5).
24* Power of Attorney.
25* Statement of Eligibility on Form T-1 of the Trustee.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Exchange Agency Agreement between the Company and the Trustee.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 12
FEDDERS CORPORATION
Computation of Ratio of Earnings To Fixed Charges
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years Ended August 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing operations
before taxes, extraordinary items and
cumulative effect of accounting changes $(2,340) $19,803 $35,691 $50,266 $28,867
Add:
Portion of rent representative of the
interest factor 1,261 1,186 694 675 1,250
Interest expense 4,247 4,325 2,713 2,362 4,350
-------------------------------------------------------------
Income (loss) as adjusted 3,168 25,314 39,098 53,303 34,467
=============================================================
Fixed charges:
Interest expense 4,247 4,325 2,713 2,362 4,350
Portion of rent representative of the
interest factor 1,261 1,186 694 675 1,250
-------------------------------------------------------------
Fixed charges $5,508 $5,511 $3,407 $3,037 $5,600
=============================================================
Ratio of earnings to fixed charges -- 4.59 11.48 17.55 6.15
=============================================================
Deficiency of earnings versus
fixed charges $2,340 -- -- -- --
=============================================================
</TABLE>
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Fedders Corporation
Liberty Corner, New Jersey
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated September 29, 1997, relating to the
consolidated financial statements of Fedders Corporation, which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Woodbridge, New Jersey
December 8, 1997
