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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange
--- Act of 1934 (Fee Required)
For the fiscal year ended June 29, 1996
--- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the Transition period from to
Commission file number
AAF-MCQUAY INC.
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(Exact name of the Registrant as specified in its charter
Delaware 41-0404230
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Legg Mason Tower, Suite 2800
111 South Calvert Street
Baltimore, MD 21202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 528-2755
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Securities registered pursuant to section 12(b) of the Act
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
None
Securities registered pursuant to Section 12(g) of the Act
None
Indicated by check whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. x Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant at June 29, 1996 was $ -0-.
The number of shares outstanding of the registrant's only class of
common stock as of June 29, 1996 (latest practicable date) was 2,497.
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INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
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PART I
Item 1 Business 3
Item 2 Properties 11
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Securities Holders N/A
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters N/A
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 8 Financial Statements and Supplemental Data 32
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure N/A
PART III
Item 10 Directors and Officers of the Registrant 61
Item 11 Executive Compensation 64
Item 12 Security Ownership of Certain Beneficial Owners and Management 68
Item 13 Certain Relationships and Related Transactions 69
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 71
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PART I
ITEM 1. BUSINESS
GENERAL
In 1994, O.Y.L. Industries Berhad ("OYL"), a member of the Hong Leong
Group Malaysia ("Hong Leong"), one of Malaysia's leading manufacturers and
exporters of commercial and industrial air conditioners, refrigerators,
freezers and electrical components, purchased all the outstanding stock of
the Company (then named SnyderGeneral Corporation) for approximately $420
million, including the assumption of debt (the "OYL Acquisition"). As part
of the funding, OYL made a cash investment of $170 million, applied both to
purchase the prior owner's interest and to restructure the Company's debt.
The Company was then renamed AAF-McQuay Inc. OYL is a subsidiary of Hume
Industries Malaysia Berhad ("Hume"). Hume, like OYL, is a publicly traded
Malaysian company controlled by Hong Leong. Mr. Quek Leng Chan is Hong
Leong's controlling shareholder.
The Company is a leading worldwide manufacturer and marketer of
commercial air conditioning and air filtration products and systems
primarily for commercial, institutional and industrial customers. The
Company believes that it is the leading global manufacturer of air
filtration products for nonvehicular applications and is a major participant
in the global commercial HVAC market. In addition, in December 1995, the
Company entered the industrial refrigeration business through the
acquisition of J&E Hall, the United Kingdom's leading integrated provider of
industrial refrigeration and freezing equipment. The Company maintains
production facilities in nine countries and its products are sold in over 80
countries. The Company believes that its geographic and product
diversification makes it less susceptible to an economic downturn in any
particular market or region.
The Company believes its affiliation with Hong Leong, which has a
significant Asian presence, substantially improves the Company's financial
and operating flexibility and access to Asian markets. The Company also
intends to accelerate expansion into other new markets outside Asia, such as
Latin America, where demand for the Company's products is increasing and the
markets remain fragmented. In addition, the Company is committed to
expanding its product lines through research and development and pursuing
strategic technology joint ventures and acquisitions. Consistent with this,
the Company acquired industrial refrigeration business of J&E Hall. The
acquisition of J&E Hall expands the Company's product offerings and also
accelerates its development of the single screw compressors that both the
Company and J&E Hall have been developing for several years. The Company
believes that single screw chillers, rather than the twin screw chillers
produced by a number of its competitors in the commercial HVAC and industrial
refrigeration markets, provide certain competitive advantages, including
improvements in efficiency and cost, lower service requirements and noise
reduction. As customers are made aware of the advantages of the single screw
chiller technology, and as a result of the Company's expanded product line,
the Company expects to gain market share.
The Company's Commercial Air Conditioning Group engages in the
manufacture, sale, service and distribution of HVAC equipment. Products
include chillers, applied air handling systems, terminal air conditioning
systems, fans, service and parts. The Company's commercial air conditioning
equipment is sold primarily under the McQuay -Registered Trademark- and
BarryBlower -Registered Trademark- brand names and has been installed in many
prominent facilities around the world, including the Queen Elizabeth II, the
Chrysler Technical Center in Detroit, the Jakarta Stock Exchange in Indonesia,
the Nestle^ Headquarters in Switzerland and the Georgia Dome in Atlanta.
The Company's Filtration Products Group engages in the manufacture,
sale and distribution of air filtration products and systems, including air
filtration equipment, air pollution control products and systems, machinery
filtration and acoustic systems and replacement filters. The Company's
products, including replacement filters, are sold globally under the
AmericanAirFilter -TM- and AAF-Registered Trademark- brand names
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and under private label. The Company's filtration products are sold
worldwide to commercial, institutional and industrial customers as well as
to retailers for residential use. The Filtration Products Group's largest
customers include Shinwa Corporation, Wal-Mart Stores, Inc., Ace Hardware
Corp., Asea Brown Boveri ("ABB"), European Gas Turbines, Westinghouse
Electric Corp. and Solar Gas Turbines.
In December 1995, the Company established its Industrial Refrigeration
Group following the J&E Hall acquisition. J&E Hall is the leading
integrated supplier of industrial refrigeration and freezing products and
systems in the United Kingdom as well as being among the three largest
suppliers of industrial contact plate ("fast") freezers in the world.
Industrial refrigeration products and systems are sold under the "J&E Hall"
brand name and freezers are sold under the "Jackstone" brand name. In
connection with its refrigeration business, J&E Hall also manufactures a
line of single screw compressors which are sold under the "HallScrew" brand
name. In addition to establishing an important presence in the global
industrial refrigeration industry, the acquisition of J&E Hall provides the
Company with access to J&E Hall's single screw compressor technology which
will expand the single screw chiller product line offered by the Company's
Commercial Air Conditioning Group.
COMMERCIAL AIR CONDITIONING GROUP
The Company, through the Commercial Air Conditioning Group, is a
worldwide leader in the design, manufacture, sale and service of HVAC
equipment principally for the commercial, industrial and institutional
markets. In the United States, the Company believes that its share of the
commercial air conditioning market which it serves is approximately 10%. The
Company's products are sold primarily under the widely recognized
McQuay -Registered Trademark- and BarryBlower -Registered Trademark- brand
names and services are marketed under the McQuayService -TM- name. The
Company's broad range of standard and custom products and services fulfill
the HVAC requirements of most building types and sizes and offer multiple
solutions to a variety of HVAC needs. The Company markets its commercial
HVAC equipment principally to building contractors, architects, consulting
engineers, building developers and building owners.
The Company's Commercial Air Conditioning Group's products are divided
into five groups: (i) chiller products, (ii) applied air handling systems,
(iii) terminal air conditioning systems, (iv) fans and (v) service and
parts.
CHILLER PRODUCTS. The Company's chiller products include centrifugal,
screw, absorption and reciprocating chillers, condensing units and air
cooled condensers, all of which frequently contain sophisticated control
systems. These products are normally engineered and assembled to meet
specific design criteria for a wide range of commercial, institutional and
industrial applications. Typical applications are large square footage
buildings which require integrated HVAC systems ranging in capacity from 10
to over 2,300 tons (the cooling capacity of air conditioning units is
measured in tons; one ton being equivalent to 12,000 BTUs and generally
adequate to air condition approximately 500 square feet of space). The
Company is also the only HVAC manufacturer to offer a broad line of dual
compressor centrifugal chillers which offer improved energy efficiency
because of their unique part-load capability. The dual compressor
centrifugal chiller provides the Company with additional competitive
advantages by virtue of its small footprint, built-in redundancy, and its
utilization of HFC-134a (non CFC) refrigerant. In 1995, the Company began
manufacturing gas absorption chillers which offer an alternative to building
owners faced with CFC phaseout since these chillers operate with water vapor
as the refrigerant.
APPLIED AIR HANDLING SYSTEMS. Applied air handling systems include
indoor and roof mounted air handling units, packaged rooftop systems,
self-contained systems and coils with capacities up to 135 tons that are
generally mounted on the roof of a building, in ceilings and/or duct work,
or installed on each floor of a multi-story building. These units generally
combine heating and cooling capabilities in a single or self-contained
configuration. The Company has recently developed a new line of advanced
technology air handlers which combine European and North American designs to
meet the market's growing demand for quiet, reliable, high quality air
handlers in response to demand for improved indoor air quality.
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TERMINAL AIR CONDITIONING SYSTEMS. Terminal air conditioning systems
consist of HVAC units that provide heating and cooling for a defined space
on a "localized" basis. They include fan-coil units, water source heat
pumps, packaged terminal air conditioners and heat pumps, unit ventilators
and mini-split systems. Capacities of individual units are less than 20 tons
and typically include electronic controls. Typical applications include
facilities where air conditioning is required on a "room-by-room" basis such
as hotels/motels, condominiums, schools and office buildings. Within the
United States, the Company believes that it is a leading manufacturer of
water source heat pumps and unit ventilators. The large installed base is
expected to provide significant replacement and service opportunities. The
Company recently introduced a new line of console water source heat pumps
which are more efficient and feature sophisticated electronic controls.
FANS. The Company manufactures and sells a wide range of commercial and
industrial fans which are used in HVAC and industrial applications. The fans
are sold under the BarryBlower-Registered Trademark- brand name.
SERVICE AND PARTS. Under the trade name McQuayService-TM-, the Company
services both its own and its competitors' products and systems and provides
start-up assistance, warranty support, full aftermarket service, replacement
parts and chiller retrofit services. The Company's service operations are
conducted primarily in North America through 20 field offices and employ
approximately 310 personnel. In addition to providing a non-cyclical source
of revenues, the Company's service and parts business provides access to the
growing replacement and retrofit markets.
COMMERCIAL AIR CONDITIONING GROUP STRATEGIC PARTNERSHIPS
The Company, through its Commercial Air Conditioning Group, has entered
into selective strategic partnerships throughout the world to maximize its
market penetration through enhancement of its manufacturing and distribution
capabilities and further diversification of its product lines. The Company
has formed partnerships with local companies in India, Japan, Mexico, Puerto
Rico and Spain and has entered into a partnership to sell its products
throughout Latin America. In addition, the Company markets its products
throughout Asia, including China, through manufacturing and sales joint
ventures established by OYL.
FILTRATION PRODUCTS GROUP
Within its Filtration Products Group, the Company has two principal
businesses: replacement filters and environmental products. Replacement
filters are sold to commercial and industrial building owners, contractors,
retailers for residential applications, hospitals and computer chip
manufacturers for clean room applications, locomotive and air conditioning
original equipment manufacturers and railroad companies. The Company has,
since the 1920's, marketed its replacement filters under the
AmericanAirFilter TM brand name. The environmental products business has two
major product areas: Air Pollution Control Products and Systems ("APC") and
Machinery Filtration and Acoustical Systems ("MFAS") products. Environmental
products are sold throughout the world for a wide variety of commercial,
institutional and industrial applications. Two of the Company's facilities
used to produce its air filtration products have earned ISO 9001
certification, and one facility has earned ISO 9002 certification.
REPLACEMENT FILTER PRODUCTS
The Company believes that it is the world's largest manufacturer of
commercial, industrial and residential air filters, which are used to remove
airborne contaminants from intake and conditioned air, for a wide variety of
products. The Company estimates its global and North American served market
share in nonvehicular applications to be approximately 15% and 25%,
respectively. The Company's filters, including replacement filters, are sold
globally under the AmericanAirFilter-TM- and AAF-Registered Trademark- brand
names
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and under private label. The filters are designed to be used in all
types of air filtration systems regardless of the original manufacturer.
The Filtration Products Group's replacement filter products consist of
a broad product line including: (i) standard filters and equipment for use
in a wide range of commercial, institutional, industrial and residential
settings; (ii) custom-designed 99.9999%+ high-efficiency filters and
equipment for "clean rooms" required by certain industries such as
semiconductor manufacturers and health care and (iii) specialty intake air
filtration systems for locomotives and other niche applications.
ENVIRONMENTAL PRODUCTS
AIR POLLUTION CONTROL PRODUCTS AND SYSTEMS. The Company's APC equipment
is designed to improve atmospheric quality by removing airborne pollutants
such as dust, mist and fumes from air exhaust streams. APC systems are sold
primarily in Europe, Latin America and Asia and include design and
construction services. The Company markets APC equipment to a broad range of
industrial customers including the food, pharmaceutical, chemical, steel,
cement, power generation, waste incineration, chemical and pulp and paper
industries, as well as special market niches such as woodworking companies,
welding shops and restaurants. The Company's APC equipment includes wet and
dry scrubbers, cartridge and fabric filter collectors, electrostatic
precipitators and dust and mist collection products. These products collect
contaminants, recover materials from the manufacturing process and solve
in-plant air quality problems. APC systems offered by the Company are
integrated systems engineered to combine air pollution control equipment
with peripheral equipment, ductwork and instrumentation to produce an
integrated emission control process.
MACHINERY FILTRATION AND ACOUSTICAL SYSTEMS ("MFAS"). Filtration
products and systems are designed to remove particulate contamination from
air supplies to machines to reduce the performance inhibiting effects of
corrosion, erosion and fouling. Acoustical systems are designed to protect
the environment in which the machines are installed from excessive noise
pollution generated by the machines and their ancillary processes.
Machinery filtration systems can include weather protection, mechanical
separators, high efficiency barrier filters enhanced by lower efficiency
pre-filtration and self-cleaning reverse pulse filters, and they can also
incorporate air tempering equipment including anti-ice systems and
evaporative coolers. Acoustical equipment includes air intake ducts and
silencers, high temperature exhaust ducts and silencers, ventilation fan
silencers and machinery enclosures, all designed individually or as
integrated systems with ancillary access, supports, controls and
instrumentation systems. The Company designs and supplies MFAS products and
systems to major machinery manufacturers for the oil, gas, electrical and
chemical/petro-chemical industries in the global market. Continued research
and development of products and systems allows the Company to provide a
complete range of products and a single source, total package capability for
its customers.
FILTRATION PRODUCTS GROUP STRATEGIC ALLIANCES
The Company, through its Filtration Products Group, has entered into
selective strategic partnerships and alliances throughout the world to
maximize its market penetration through enhancement of its manufacturing and
distribution capabilities and further diversification of its product lines.
The Company has formed partnerships with local companies in Japan, Korea,
Saudi Arabia and Sweden to manufacture and distribute its products. In
addition, the Company has entered into technology sharing agreements for the
development of synthetic pinch frame filters, antimicrobial filters and high
efficiency synthetic media.
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INDUSTRIAL REFRIGERATION GROUP
In December 1995, the Company acquired the assets of J&E Hall for
approximately $35 million. Following this acquisition, the Company
established the Industrial Refrigeration Group. The Industrial Refrigeration
Group manufactures, sells and services industrial refrigeration and freezing
equipment under several well known J&E Hall brand names, the principal ones
being J&E Hall, Thermotank, Jackstone and Parafreeze. The principal customers
for industrial refrigeration products are concentrated in the food and meat
processing, dairy, brewing and beverage (soft and alcoholic), chemical,
petrochemical, pharmaceutical, naval and merchant marine industries. The
principal customers for industrial freezers are in the food industry
generally and particularly the seafood industry.
The Company will continue to manufacture industrial refrigeration and
freezer products through J&E Hall's five existing U.K. production facilities.
See "--Properties."
SALES AND DISTRIBUTION
GENERAL. The Company has a diverse base of customers. No customer of the
Commercial Air Conditioning Group, the Filtration Products Group or J&E Hall
accounted for more than 10% of the Company's net sales of these products over
the past three fiscal years.
COMMERCIAL AIR CONDITIONING GROUP. The Company distributes its
commercial HVAC equipment and systems in the United States and Canada through
a network of approximately 180 independent manufacturers' representatives who
sell on a commission basis. Replacement parts for HVAC equipment are sold
through a network of 80 independent parts distributors and two Company-owned
stores. Service products and contracts are sold through the Company's own
sales force working from offices located throughout the United States and
Canada. The Company distributes its commercial HVAC products and parts
internationally through a combination of direct sales personnel, independent
distributors and joint venture partners selling in over 80 countries
throughout the world. Backlog for the Commercial Air Conditioning Group at
June 30, 1996 and July 1, 1995 was $121 million and $115 million,
respectively.
FILTRATION PRODUCTS GROUP. The Company deploys separate sales forces and
distribution channels to market its replacement filter and environmental
products. The Company employs the industry's largest replacement filter
direct sales force, with over 200 factory sales people worldwide to market
replacement filters. The majority of the Company's residential replacement
filters are sold in the United States through national retail stores, such as
Wal-Mart, Inc., Ace Hardware and True Value/Cotter Hardware. Environmental
products are sold through factory direct sales people, independent
distributors, agents and joint venture partners. Backlog for the Filtration
Products Group at June 30, 1996 and July 1, 1995 was $68 million and $62
million, respectively.
INDUSTRIAL REFRIGERATION GROUP. The Company distributes its industrial
refrigeration and freezer products through a number of sales offices located
throughout the United Kingdom. In addition, the Company has an extensive
field service organization with 13 branch offices and employs approximately
110 field service technicians in the United Kingdom. Backlog for the
Industrial Refrigeration Group at June 30, 1996 was $12 million.
MANUFACTURING
COMMERCIAL AIR CONDITIONING GROUP. The Company's commercial HVAC
products are manufactured in 12 factories in the United States, France,
Italy, the United Kingdom, China, Malaysia, and Indonesia.
FILTRATION PRODUCTS GROUP. In the Company's filter manufacturing
business, fiberglass filtermedia is manufactured at three facilities located
in the United States, Singapore and The Netherlands and then shipped to
filter assembly facilities throughout Europe and North America from which
finished products are then shipped to customers. Air filtration equipment
and systems are manufactured at facilities located
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in geographically dispersed locations throughout the world. See
"--Properties." Replacement filters are produced in 16 geographically
dispersed manufacturing facilities and environmental products are
manufactured in seven geographically dispersed manufacturing facilities.
INDUSTRIAL REFRIGERATION GROUP. The Company has five manufacturing
facilities in the United Kingdom. Its major facility is located in Dartford
(Southeast England) where it manufactures compressors, refrigeration
packages and contact plate freezers.
PURCHASING
The principal component parts and materials purchased by the Company
for use in its equipment and systems are reciprocating compressors, electric
motors, filter media, copper tubes, glass pellets and castings, all of which
are readily available through multiple sources. No single supplier has
accounted for more than 10% of the annual purchases by the Company of raw
materials or component parts in any of the past three fiscal years. The
Company believes it has contracts and commitments or readily available
sources of supply sufficient to meet its anticipated raw material or key
component requirements. The Company maintains alternate sources for key
components where dependence upon a single supplier could have an adverse
impact upon production.
The Company negotiates corporate-wide agreements with many of its major
suppliers of purchased material. These agreements, which are typically from
one to three years in length, are intended to increase the responsiveness of
suppliers to the Company's needs and to provide the Company with assured
sources of supplies at competitive prices and terms.
COMPETITION
GENERAL. The commercial HVAC and air filtration business segments are
highly competitive. In the commercial HVAC industry, the principal methods of
competition are lead time, product performance, feature availability, energy
efficiency, price and service. In the air filtration business, participants
generally compete on the basis of service, price, quality, reliability,
efficiency and conditions of sale. Certain portions of these markets are also
very fragmented, both geographically and by product line. The Company
believes its competitive position is strengthened in those international
markets in which it has both a manufacturing and a marketing presence and
that it has a competitive advantage through its affiliation with Hong Leong
and OYL in gaining access to certain markets where barriers exist for
non-local companies.
COMMERCIAL AIR CONDITIONING GROUP. International markets for commercial
HVAC products are competitive and fragmented along geographic and product
lines. On a global basis, the Company's primary competitors across the full
range of its HVAC product offerings are Carrier Corporation (a subsidiary of
United Technologies Corporation), The Trane Company (a division of American
Standard, Inc.) and York International Corporation. Outside North America,
the Company also competes with numerous European and Japanese companies.
FILTRATION PRODUCTS GROUP. Competition in the air filtration products
and systems, air pollution control equipment and systems and MFAS businesses
is very fragmented. Globally, the Company competes with many companies along
each product line. The Company believes that price, quality and breadth of
product offerings are among the leading competitive factors in selling air
filtration products and systems.
INDUSTRIAL REFRIGERATION GROUP. Competition in the global industrial
refrigeration and freezer business is fragmented. The Company believes that
price, quality and a wide range of products are significant competitive
factors in selling industrial refrigeration and freezer products.
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RESEARCH AND DEVELOPMENT
The Company's research and development programs are involved in
creating new products, enhancing and redesigning existing equipment and
systems to reduce manufacturing costs and increasing product efficiency. The
Company spent approximately $8.2 million, $4.3 million, and $5.5 million
during the 12 months ended June 30, 1996 the six months ended July 1, 1995
and the period May 2, 1994 to December 31, 1994, respectively for research
and development.
A significant focus of the Company's research and development efforts
since 1988 has been to develop its single screw compressors chiller
equipment. The Company introduced its first single screw chiller product in
1994 and it continues to develop additional single screw chiller products
that are planned to be introduced in 1997. The Company expects to accelerate
the development of other single screw chiller products through its
acquisition of J&E Hall which has been marketing single screw products since
1978. Additional recent product initiatives include: (i) self-cleaning
filters for gas turbines, (ii) self-cleaning filters for dust control, (iii)
permanent electro-static residential furnace filters and (iv) antimicrobial
treated replacement filters that inhibit microbial indoor air contamination.
The Company has developed and is now producing the next generation of
air handlers which will be highly energy and sound efficient products
available in either a galvanized steel or a space age polymer structural
form. The Company expects these air handlers to meet the growing market for
quiet, high quality air handlers.
PATENTS AND TRADEMARKS
The Company holds numerous patents related to the design and use of its
equipment and systems that are considered important to the overall conduct
of its business. The Company's policy is to maintain patent protection for
as many of its new products as possible. The Company believes that certain
of its patents are important to distinguish the Company's equipment and
systems from those of its competitors; however, the Company does not
consider any particular patent, or any groups of related patents, essential
to its operations. The Company believes that its rights in its patents are
adequately protected.
The Company owns several registered trademarks and operates under
certain trade names that are important in the marketing of its products,
including AmericanAirFilter-TM-, AAF-Registered Trademark-,
McQuay-Registered Trademark-, BarryBlower-Registered Trademark-,
HermanNelson-Registered Trademark-, Thermotank, Jackstone and Parafreeze.
The Company believes that its rights to use tradenames and trademarks are
adequately protected.
EMPLOYEES
As of June 30, 1996 the Company employed approximately 6,200 full time
employees worldwide, with approximately 3,900 persons employed in the United
States and 2,300 employed internationally. The Company has a total of 19
labor union bargaining agreements, covering approximately 2,900 employees in
the United States and Canada, of which eight agreements, covering 1,500
employees, will expire in fiscal year 1997. The Company currently believes
that it will be able to obtain new labor agreements without interruption of
work when these agreements expire. The Company considers its relations with
its employees to be good.
ENVIRONMENTAL REGULATIONS
Environmental laws that affect or could affect the Company's domestic
operations include, among others, the Clean Air Act, the Clean Water Act,
the Resource Conservation and Recovery Act, the Occupational Safety and
Health Act, the National Environmental Policy Act, the Toxic Substances
Control Act, any regulations promulgated under these acts and various other
federal, state and local laws and
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regulations governing environmental matters. The Company's foreign
operations are also subject to various environmental statutes and
regulations.
Some of the refrigerants used in HVAC equipment manufactured by the
Company are regulated under international agreements and domestic and
foreign laws and regulations governing stratospheric ozone depleting
chemicals.
In 1987, the United States became a signatory to the Montreal Protocol.
The Montreal Protocol has been amended several times since 1987, including
in 1990 (the "London Amendments"), in 1992 (the "Copenhagen Amendments"),
and in 1995. Over 100 countries are signatories to the Montreal Protocol and
the London Amendments. More than 40 countries (including the United States)
have also agreed to abide by the Montreal Protocol as amended by the
Copenhagen Amendments.
Under the Montreal Protocol, as amended, consumption (defined as
production plus imports minus exports) of CFCs by participating
industrialized companies is banned, with limited exceptions, as of January
1, 1996. Additionally, the Montreal Protocol places a cap on the
consumption of HCFCs beginning on January 1, 1996 and mandates a gradual
phaseout culminating in 2020, for participating industrialized countries,
with a ten-year service tail exemption allowing industrialized countries to
supply old equipment with HCFCs during this period. In addition, certain
countries, not including the United States, declared during December 1995
that they would take all appropriate measures to limit the use of HCFCs as
soon as possible.
The federal Clean Air Act Amendments of 1990 establish minimum
statutory timetables for the phaseout of consumption of ozone-depleting
chemicals in the United States, and authorize the EPA to establish
regulatory timetables which meet and exceed those set forth in the Montreal
Protocol, as amended. Pursuant to that authority, the EPA has adopted
regulations mandating, among other things and with limited exceptions, (a) a
total ban on the consumption of CFCs by January 1, 1996 (b) a prohibition on
the consumption of HCFC-142b and HCFC-22 (a refrigerant used in some
equipment manufactured by the Company) for new equipment beginning on
January 1, 2010, (c) a ban on consumption of HCFC-142b and HCFC-22 for use
in old equipment beginning on January 1, 2020, and (d) a phaseout of other
HCFCs commencing in 2015.
The manner in which the other signatories to the Montreal Protocol
implement its requirements and regulate ozone-depleting refrigerants could
differ from the approach and timetables adopted in the United States.
With respect to the ban on consumption of CFCs (which began January 1,
1996), the Company has redesigned its large cooling capacity central station
system HVAC equipment to utilize hydrofluorocarbon-134a ("HFC-134a"), a
non-chlorinated refrigerant that is believed to be harmless to the ozone
layer and is not scheduled for elimination pursuant to the Montreal
Protocol.
Substantially all major manufacturers of HVAC products, including the
Company, produce HVAC equipment for smaller cooling capacity applications
that utilize HCFC-22. The Company (and its competitors) must develop
substitute refrigerants for use in HVAC products that currently use HCFC-22
prior to the phaseout of HCFC-22. Presently, the EPA has identified several
refrigerants that it considers acceptable HCFC-22 substitutes for certain
uses applicable to some of the Company's products. The Company is utilizing
one such substitute in some of its equipment sold in Europe and is
evaluating redesigned equipment capable of utilizing other acceptable
substitutes.
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ITEM 2. PROPERTIES
A description of the Company's principal facilities with their
approximate square feet of building space is summarized below. Unless
otherwise specified below, the facilities are devoted to manufacturing:
<TABLE>
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LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
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COMMERCIAL AIR CONDITIONING GROUP
Plymouth, Minnesota 166,000 Owned Headquarters for the Commercial Air Conditioning Group;
research and development facility
Staunton, Virginia 665,000 Owned Chiller products
Faribault, Minnesota 244,000 Owned Applied air handling system products
Auburn, New York 417,000 Owned Terminal air conditioning system products
Scottsboro, Alabama 270,000 Owned Applied air handling system products
Fridley, Minnesota 116,000 Owned Fan products
Cecchina, Italy 246,000 Owned Chiller products
Pons, France 150,000 Owned Applied air handling systems and terminal air
conditioning system products
Dayton, Ohio 100,000 Leased Parts distribution
FILTRATION PRODUCTS GROUP
Louisville, Kentucky 157,000 Owned Headquarters for global filtration products sales;
research and development facility
Louisville, Kentucky 167,000 Owned Environmental products
Atlanta, Georgia 113,000 Leased Replacement filters
Columbia, Missouri 60,000 Owned Air filtration products
Hutchins, Texas 369,000 Owned Replacement filters
Elizabethtown,
Pennsylvania 110,000 Leased Replacement filters
Fayetteville, Arkansas 175,000 Owned Replacement filters
Los Angeles, California 70,000 Leased Replacement filters
Lebanon, Indiana 153,000 Leased Replacement filters
Boucherville, Quebec 62,000 Owned Replacement filters
Brampton, Ontario 55,000 Leased Distribution warehouse
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
- -------- ----------- ------------ ------------------
<S> <C> <C> <C>
Cramlington, England 160,000 Owned Applied air handling systems and environmental products
Linton, England 20,000 Owned Replacement filters
Amsterdam,
The Netherlands 16,000 Leased Administrative Office
Emmen, The Netherlands 150,000 Leased Replacement filters
Gasny, France 109,000 Owned Environmental products
Ecoparc, France 48,000 Leased Replacement filters
Vitoria, Spain 40,000 Owned Environmental products
Singapore 41,300 Owned Replacement filters
INDUSTRIAL REFRIGERATION GROUP
Dartford, England 103,000 Owned Headquarters for manufacturing of compressors, industrial
refrigeration packages and contact plate freezers
Thetford, England 30,000 Leased Production of air-blast, automatic plate and cryogenic freezers
Derby, England 71,000 Leased Spares distribution and compressor remanufacturing facility
Birkenhead, England 3,800 Owned Compressor remanufacturing facility
Orpington, England 11,000 Leased Insulated cabinets and doors
</TABLE>
The Company's corporate headquarters is located in Baltimore, Maryland
and occupies approximately 4,200 square feet of leased space. The Company
also leases numerous facilities worldwide for use as sales and service
offices, regional warehouses and distribution centers.
Substantially all of the Company's property is subject to encumbrances.
See Footnote 5 to the Consolidated Financial Statements and the Notes thereto.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS.
CERCLA and other federal, state, local and foreign acts may subject the
Company to liability for the release of pollutants into the environment.
CERCLA imposes liability for the cleanup of releases of hazardous substances
from a facility on four classes of persons: the current owner and operator
of the facility, the owner and operator at the time the hazardous substances
were disposed of at the facility, waste generators that sent their wastes to
the facility, and transporters of waste who selected the facility as a
disposal site. Liability under various environmental statutes, including
CERCLA, may be imposed jointly and severally and regardless of fault.
CERCLA imposes potential liability on the Company for remediating
contamination arising from the Company's past and present operations and
from former operations by other entities at sites later acquired and now
owned by the Company. Many of the Company's facilities have operated for
many years, and substances which are or might be considered hazardous were
generated, used, and disposed of at some locations, which will require
remediation. The Company has been, and in the future could be, held
responsible for environmental liabilities resulting from former operations
of other entities at facilities now owned by the Company. In addition, the
Company has agreed to indemnify parties to whom it has sold facilities for
certain environmental liabilities arising from acts occurring before the
dates those facilities were transferred.
It is possible that environmental liabilities in addition to those
described below may arise in the future. The precise costs associated with
such liabilities are difficult to predict at this time.
In 1988, the California Department of Health Services issued a Remedial
Action Order naming the Company and others as respondents in connection with
soil and groundwater contamination in the vicinity of a manufacturing
facility located in Visalia, California that had been owned and operated by
the Company's predecessor, McQuay, Inc., from 1961 to 1973. The Company
entered into a settlement agreement with the other respondents under which
the Company, among other things, agreed to be solely responsible for the
remaining cleanup of the site. As of June 30, 1996 the Company had incurred
over $10 million in expenses including cleanup costs and attorney's fees.
The Company currently estimates cleanup costs through fiscal year 2006 to be
approximately $7.5 million, of which $1.2 million is expected to be incurred
in fiscal year 1997 and $765,000 is expected to be incurred in fiscal year
1998. In addition, the Company settled a suit brought by the State of
California seeking to recover the state's existing and future oversight
costs for the cleanup at the Visalia site. The Company agreed to pay
approximaely $375,000 of the state's existing oversight costs and to pay
future costs estimated by the state to total $286,334 through 2005. The
Company also has litigation pending against several of its insurers seeking
coverage under various insurance policies with respect to the Visalia site.
The Company has recovered approximately $11 million from a number of these
insurance carriers. See Note 12 to the Consolidated Financial Statements.
On April 20, 1989, the Company and the North Carolina Department of
Environment, Health and Natural Resources ("DEHNR") entered into an
Administrative Order of Consent (the "Order"), which related to the
Company's former facility located in Wilmington, North Carolina. The Order
was concerned with the remediation of two separate accidental spills of 1,
1, 1 trichloroethane which occurred at this facility on November 18, 1983,
and on July 24, 1987. The Order provided that the area of residual
contamination at the site is a hazardous waste management unit subject to
closure requirements under the Resource Conservation & Recovery Act. This
Order has been vacated and the Company is trying to negotiate a new
agreement for cleanup with DEHNR. Pursuant to the terms of the sales
agreement between the Company and the current owner of the site, the Company
is obligated to undertake remediation of the site at its sole expense. The
Company currently estimates that there will be additional costs of $6.6
million through fiscal year 2006, of which $1.1 million is expected to be
incurred in fiscal year 1997 and $2.1 million is expected to be incurred in
fiscal year 1998. The primary insurance carrier has paid the limits of its
policy ($200,000). The Company is now in litigation with its excess insurer.
The
13
<PAGE>
Court recently granted the carrier summary judgment on the issue of
coverage, and the Company filed a notice of appeal. See Note 12 to the
Consolidated Financial Statements.
In March 1994, contamination was found in wetlands, soil and groundwater
at the Company's Scottsboro, Alabama manufacturing facility. The Company
purchased the facility from Halstead Industries in 1984. The Alabama
Department of Environmental Management has required investigation and
cleanup. The Company made a claim for indemnification from Halstead
Industries, which denied responsibility. The Company has filed suit against
Halstead Industries. The Company currently estimates that there will be
additional costs of $15.6 million through 2006, of which $4.5 million is
expected to be incurred in fiscal year 1997 and $2.8 million is expected to
be incurred in fiscal year 1998.
The Company has discovered contaminants in the soil and/or groundwater at
certain of its other manufacturing facilities. Based upon preliminary
estimates prepared by the Company's environmental consultants, the Company
currently estimates that there will be additional costs at these sites of
$7.2 million through 2006.
Based on preliminary estimates prepared by the Company's environmental
consultants, the Company currently estimates that expenditures for
remediation of all sites described above will be in the aggregate
approximately $8.9 million, $6.6 million and $8.4 million in fiscal years
1997, 1998 and 1999, respectively.
Along with multiple other parties, the Company has been identified as a
potentially responsible party under CERCLA and analogous state laws at
numerous other sites, usually as a generator of wastes which were disposed
of at the site. While CERCLA imposes joint and several liability on
responsible parties, liability at each site is likely to be apportioned
among such parties. However, the Company does not believe that its
potential liability at these sites will have a material adverse effect on
the Company's financial condition or results of operations.
IRS AUDIT.
The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's Federal income tax returns for its fiscal years
ended 1987, 1988, 1989, and 1990 and has raised various issues with respect
to certain positions taken by the Company on those returns. The IRS has
issued a revenue agent's report asserting a proposed tax deficiency and the
amount of the proposed deficiency may exceed the amount the Company provided
for the resolution of the tax examination in its financial statements.
However, the Company intends to contest vigorously any proposed deficiency.
Moreover, the Company believes, after having discussed with its tax counsel
and advisors the issues raised by the IRS, that the Company has made
adequate provision in respect of any additional tax liability that the
Company may ultimately incur. See Note 12 to Consolidated Financial
Statements.
In March 1995, the Internal Revenue Service opened an examination of
the Predecessor Company's tax returns for the years ending in 1991, 1992,
1993 and 1994. Other than issues originating in earlier years which would
also affect these years, there have been no material adjustments proposed
during this examination
INDEMNIFICATION.
Under the terms of the stock purchase agreement with OYL, prior owners
of the Company provided certain indemnifications to the Company, including
an indemnification for certain tax and environmental matters. The
indemnification is available for aggregate claims (net of recoveries) over
$5.8 million and subject to a ceiling of $18.0 million over the initial $5.8
million deductible. Claims for indemnified losses can be made for up to five
years after the acquisition date of May 2, 1994.
14
<PAGE>
MISCELLANEOUS.
The Company is involved in various other lawsuits arising out of the
conduct of its business. The Company believes that the outcome of any such
pending claims or proceedings will not have a material adverse effect upon
its business or financial condition. The Company maintains various insurance
policies regarding many of such matters, including general liability and
property damage insurance, as well as product liability, workers'
compensation and other policies, which it believes provide adequate coverage
for its operations. Insurance coverage for environmental liabilities is not
generally available at the present time, and the Company does not currently
intend to obtain such coverage now or in the future.
15
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical and pro
forma financial data of the Company (i) prior to the OYL Acquisition (the
"Predecessor Company"), for the fiscal years ended December 31, 1991, 1992
and 1993 and for the period from January 2 to May 1, 1994; (ii) after the
OYL Acquisition (the "Successor Company") for the period from May 2 to
December 31, 1994, the six months ended July 1, 1995, and the fiscal year
ended June 30, 1996 and (iii) on a combined pro forma basis for the year
ended December 31, 1994 to reflect the OYL Acquisition as if it had
occurred on January 1, 1994. The pro forma data may not be indicative of
the results that actually would have occurred if the OYL Acquisition had
been effected on January 1, 1994. In 1995 the Company changed its fiscal
year end from the Saturday closest to December 31 to the Saturday closest to
June 30 to coincide with OYL's fiscal year. For clarity of presentation in
the consolidated financial statements, all full fiscal years are shown to
begin on January 1 and end on December 31, or to begin on July 1 and end on
June 30. For the periods presented on a basis other than a full fiscal year,
actual period end dates are used.
The table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the related Notes included herein.
16
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Combined
Predecessor Pro Forma(f) Successor
------------------------------------------------------ ------------ ------------------------------------
Period from Period from Six months
Year Ended Year Ended Year Ended January 2 to Year Ended May 2 to Ended (g) Year Ended
December 31, December 31, December 31, May 1, December 31, December 31, July 1, June 30,
1991 1992 1993 1994 1994 1994 1995 1996
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............ $ 835,174 $ 749,448 $ 705,496 $ 232,484 $ 717,165 $ 484,681 $ 428,510 $ 901,395
Cost of sales........ 580,014 535,144 498,640 169,357 512,831 344,120 303,699 645,149
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Gross profit......... 255,160 214,304 206,856 63,127 204,334 140,561 124,811 256,246
Operating expenses... 209,148 184,471 203,344 72,777 183,003 116,320 101,535 199,550
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Operating income
(loss).............. 46,012 29,833 3,512 (9,650) 21,331 24,241 23,276 56,696
Interest expense, net 47,477 42,314 41,785 13,723 27,819 16,192 11,671 24,957
Other (income)
expense, net........ (18,200)(b) (6,020)(c) 3,112 1,458 1,196 (30) (1,442) (3,219)
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before
income taxes,
extraordinary item
and cumulative
effect of accounting
changes............. 16,735 (6,461) (41,385) (24,831) (7,684) 8,079 13,047 34,958
Income taxes(a)...... 12,421 6,485 4,444 324 4,196 6,834 6,755 18,423
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before,
extraordinary item
and cumulative effect
of accounting changes. 4,314 (12,946) (45,829) (25,155) (11,880) 1,245 6,292 16,535
Extraordinary item..... -- -- -- -- -- -- -- (1,635)(h)
Cumulative effect of
accounting changes.. -- (4,866)(d) (971)(e) -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Net income (loss).... $ 4,314 $ (17,812) $ (46,800) $ (25,155) $ (11,880) $ 1,245 $ 6,292 $ 14,900
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
BALANCE SHEET DATA (end of period):
Working capital...... $ 83,084 $ 65,110 $ 58,384 $ 58,008 N/A $ 30,496 $ 43,558 $ 92,613
Total assets......... 516,854 466,295 427,124 435,513 N/A 679,897 731,328 806,954
Total debt........... 304,486 302,195 290,843 299,986 N/A 260,553 270,728 302,907
Stockholder's
equity (deficit).... 13,111 (9,133) (60,749) (73,209) N/A 172,413 188,828 199,283
OTHER DATA:
EBITDA(i)............ $ 87,460 $ 57,179 $ 21,982 $ (4,910) $ 43,314 $ 39,012 $ 38,269 $ 85,724
Adjusted EBITDA(1)... 65,660 57,179 57,160 (4,910) 43,314 39,012 38,269 85,724
Adjusted EBITDA
margin.............. 7.9% 7.6% 8.1% --(j) 6.0% 8.0% 8.9% 9.5%
Depreciation and
amortization........ $ 23,248 $ 21,326 $ 21,582 $ 6,198 $ 23,179 $ 14,741 $ 13,551 $ 25,809
Capital expenditures. 11,380 17,730 8,745 1,821 10,275 8,454 5,697 14,765
Net cash provided by (used in):
Operating
activities....... 6,191 (5,982) 15,252 (17,056) N/A (5,542) (8,488) 27,962
Investing
activities....... 64,614 (17,730) (8,745) (1,821) N/A (8,454) (5,697) (49,668)
Financing
activities....... (50,923) (5,067) (10,381) 20,065 N/A 8,081 20,492 27,075
</TABLE>
17
<PAGE>
FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA
(a) The Predecessor Company was taxed as an "S" corporation under the
Internal Revenue Code. Thus the Predecessor Company's income (loss) was
included in the taxable income (loss) reported by its stockholders and
the Company incurred no U.S. Federal income tax expense (benefit) and did
not recognize certain state income tax expense (benefit). The Predecessor
Company's subsidiaries (with the exception of AAF-McQuay Holdings, Inc.)
were not "S" corporations and thus incurred income tax expense (benefit)
with respect to their taxable income (loss). The Predecessor Company
historically paid dividends or otherwise distributed amounts to its
stockholders to pay taxes owed as a result of the Predecessor Company's
"S" corporation status. Substantially all of the cash dividends were for
the payment of such taxes. Effective with the OYL Acquisition, the
Company terminated its "S" corporation status and thereafter computed its
income tax expense (benefit) with respect to the Company's consolidated
income (loss).
(b) In June 1991, the Company sold substantially all of the net operating
assets of its residential heating and air conditioning business which
encompassed the Dealer Products Group ("DPG") and recorded $18.4 million
gain on this sale. The gain is included in other income. DPG generated
$74.4 million in revenue and $3.4 million in income from operations from
January 1, 1991 to the sale date.
(c) Other income for the year ended December 31, 1992 primarily reflects the
receipt of a cash settlement, net of directly related legal expenses,
resulting from an agreement settling a lawsuit.
(d) In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." This statement
requires postretirement benefits other than pensions, principally health
care benefits, to be recognized ratably over employee service periods.
The Predecessor Company's practice was to recognize postretirement
benefits other than pensions on a cash basis. Effective at the beginning
of the fiscal year ended December 31, 1992 the Predecessor Company
adopted this new accounting standard for both domestic and foreign plans
and recognized the transitional obligation of approximately $4.9 million
(net of tax benefits of $340,000). Postretirement benefit costs were not
restated for prior periods.
(e) In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes." This statement was adopted by the Predecessor Company for the
year ended December 31, 1993 thereby changing its method of accounting
for income taxes from the deferred method to the liability method, which
resulted in a cumulative effect charge of $1.0 million primarily related
to deferred taxes in foreign countries.
18
<PAGE>
(f) Pro forma to reflect the OYL Acquisition as if it had occurred on
January 1, 1994.
The following is a reconciliation of the combined historical net loss of
the Predecessor Company from January 2, 1994 to May 1, 1994 and the
Company from May 2, 1994 to December 31, 1994 to the pro forma net loss
for the period ended December 31, 1994: (dollars in thousands)
Historical combined net loss.................................... $(23,910)
Decrease in interest expense, reflecting the adjustment of
the annual interest rate of the 14.25% Senior Subordinated
Debentures acquired to a fair market interest rate of 11.0%.... 2,417
Increase in interest expense, reflecting interest on the $11.5
million 6% promissory note issued to the owner of the
Predecessor Company............................................ (225)
Increase in amortization expense due to an increase in the cost
in excess of net assets acquired and other identifiable
intangibles.................................................... (2,607)
Decrease in selling, general and administrative expenses
relating to Predecessor Company equity participation
compensation arrangements (described below).................... 8,848
Decrease in depreciation expense due to change in valuation and
useful life of property, plant and equipment................... 635
Decrease in income taxes to reflect the effect of computing
the tax provision on the pro forma combined pretax loss......... 2,962
---------
Pro forma net loss............................................. $(11,880)
---------
---------
As more fully described in Note 10 to the Consolidated Financial
Statements, the Predecessor Company recorded compensation charges in
the period ending May 1, 1994 totaling $8.8 million ($2.2 million for
employment agreements, $0.7 million for stock options and $5.9 million
for warrants). These charges were triggered based upon a change in
control or sale of the Predecessor Company; and therefore, are directly
attributable to the OYL Acquisition. The related agreements terminated
with the OYL Acquisition.
(g) During 1995, the Company changed the reporting of its fiscal year end
from the Saturday closest to December 31 to the Saturday closest to
June 30. Through December 31, 1994 certain foreign subsidiaries reported
on fiscal periods which ended one month prior to the Company's or
Predecessor Company's period-end. During the six month period ended
July 1, 1995, the closing date for the foreign subsidiaries was changed
to reflect the Company's current closing period. As a result, the
July 1, 1995 financial statements include the financial results of these
foreign subsidiaries from December 1, 1994 through July 1, 1995. The
estimated impact on sales and operating income for the six month period
ended July 1, 1995, was an increase in sales and operating income of
$19.1 million and $0.7 million, respectively.
(h) During the year ended June 30, 1996 the Company completed the
Refinancing. As part of the Refinancing the Company used some of the
proceeds from the offering to repay long-term debt. As a result, the
Company recorded an extraordinary item of $1.6 million ($2.7 million net
of $1.1 million tax benefit) relating to unamortized debt issuance cost.
(i) EBITDA represents income (loss) before extraordinary item, cumulative
effect of accounting change, interest expense, income tax expense, and
depreciation and amortization. Adjusted EBITDA excludes: (i) $3.4
million in income from operations and $18.4 million from the gain on the
disposal of DPG for the year ended December 31, 1991 and (ii) $35.2
million related to potential environmental liabilities for the period
ended December 31, 1993. The Company has included information
concerning EBITDA and Adjusted EBITDA as it is relevant for debt covenant
analysis and because it is used by certain investors as a measure of the
Company's ability to service its debt. Neither EBITDA nor Adjusted
EBITDA should be used as an alternative to, or be construed as more
meaningful than, operating income or cash flow from operations as an
indicator of the operating
19
<PAGE>
performance of the Company. A reconciliation of net income (loss) for
each period presented is as follows:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Period from
Year Ended Year Ended Year Ended January 2 to
December 31, December 31, December 31, May 1,
1991 1992 1993 1994
------------ ------------ ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss).............. $ 4,314 $(17,812) $(46,800) $(25,155)
Interest....................... 47,477 42,314 41,785 13,723
Income taxes................... 12,421 6,485 4,444 324
Depreciation and amortization.. 23,248 21,326 21,582 6,198
Cumulative effect of
accounting change............ -- 4,866 971 --
Operating (income) loss
related to DPG............... (3,400) -- -- --
Gain on disposal of DPG........ (18,400) -- -- --
Environmental charge........... -- -- 35,198 --
------------ ------------ ------------ -------------
Adjusted EBITDA.............. $65,660 $57,179 $57,180 $ (4,910)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
Successor Company
-----------------
Combined
Pro Forma Period from Six Months
Year Ended May 2 to Ended Year Ended
December 31, December 31, July 1, June 30,
1994 1994 1995 1996
------------ ------------ ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss)...... $(11,880) $ 1,245 $ 6,292 $ 14,900
Interest............... 27,819 16,192 11,671 24,957
Income taxes........... 4,196 6,834 6,755 18,423
Depreciation and
amortization......... 23,179 14,741 13,551 25,809
Extraordinary item,
net of tax........... -- -- -- 1,635
------------ ------------ ----------- -----------
EBITDA............. $43,314 $39,012 $38,269 $ 85,724
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
(j) For the period ended May 1, 1994 Adjusted EBITDA margin is not calculable
due to a net deficiency of earnings before taxes, depreciation and
amortization.
(k) During 1995, the Company changed the reporting of its fiscal year end
from the Saturday closest to December 31 to the Saturday closest to June
30. The consolidated statement of earnings and the consolidated
statement of cash flows for the period from January 1, 1995 to July 1,
1995 are presented in the Consolidated Financial Statements. The
combined pro forma results for the six months ended June 30, 1994 are:
net sales of $343,850, cost of sales of $247,572, operating income of
$2,688, interest expense of $16,736, other expense of $905, an income
tax benefit of $1,954 and a pro forma net loss of $12,999. A
description of the pro forma adjustments to reconcile the historical
combined net loss to the pro forma net loss and the related amounts are
presented in Note (f) above.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
In 1994, O.Y.L. Industries Berhad ("OYL"), a publicly traded company and a
member of the Hong Leong Group Malaysia ("Hong Leong"), one of Malaysia's
leading manufacturers and exporters of commercial and industrial air
conditioners, refrigerators, freezers and electrical components, purchased
all the outstanding stock of the Company (then named SnyderGeneral
Corporation) for approximately $420 million, including the assumption of debt
(the "OYL Acquisition"). As part of the funding, OYL made a cash investment
of $170 million, applied both to purchase the prior owner's interest and to
restructure the Company's debt. The Company was then renamed AAF-McQuay Inc.
OYL is a subsidiary of Hume Industries Malaysia Berhad ("Hume"). Hume, like
OYL, is a publicly traded Malaysian company controlled by Hong Leong. Mr.
Quek Leng Chan is Hong Leong's controlling shareholder.
The Company is a leading worldwide manufacturer and marketer of commercial
air conditioning and air filtration products and systems primarily for
commercial, institutional and industrial customers. The Company believes that
it is the leading global manufacturer of air filtration products for
nonvehicular applications and is a major participant in the global commercial
HVAC market. In addition, in December 1995, the Company entered the
industrial refrigeration business through the acquisition of J&E Hall, the
United Kingdom's leading integrated provider of industrial refrigeration and
freezing equipment. The Company maintains production facilities in nine
countries and its products are sold in over 80 countries. The Company
believes that its geographic and product diversification makes it less
susceptible to an economic downturn in any particular market or region.
The Company believes its affiliation with Hong Leong, which has a
significant Asian presence, substantially improves the Company's financial
and operating flexibility, access to Asian markets and ability to expand its
product lines through strategic acquisitions and increased focus on research
and development. The Company also intends to accelerate expansion into other
new markets outside Asia, such as Latin America, where demand for the
Company's products is increasing and the markets remain fragmented. In
addition, the Company is committed to expanding its product lines through
research and development and pursuing strategic technology joint ventures and
acquisitions. Consistent with this, the Company acquired an industrial
refrigeration business which operates as J&E Hall. The acquisition of J&E
Hall expands the Company's product offerings and also accelerates its
development of the single screw compressors that both the Company and J&E
Hall have been developing for several years. The Company believes that
single screw chillers, rather than the twin screw chillers produced by a
number of its competitors in the commercial HVAC and industrial refrigeration
markets, provide certain competitive advantages, including improvements in
efficiency and cost, lower service requirements and noise reduction. As
customers are made aware of the advantages of the single screw chiller
technology, and as a result of the Company's expanded product line, the
Company expects to gain market share.
RESULTS OF OPERATIONS
The periods prior to May 2, 1994 and periods after May 2, 1994 are not
comparable because of the change in control resulting from the OYL Acquisition
and related differences in the basis of accounting. The results of operations
have been combined for the following periods to allow for the discussion and
analysis of comparable periods: (i) January 2, 1994 to May 1, 1994 has been
combined with the period from May 2, 1994 to December 31, 1994 ("Combined Pro
Forma"); (ii) Six months ended July 1, 1995 has been combined with the
unaudited six months ended December 31, 1995 ("Year ended December 31, 1995");
and (iii) the unaudited six months ended December 31, 1994 has been combined
with the six months ended July 1, 1995 ("Comparable Period ended July 1,
1995"). In addition, the combined results of operations for the fiscal year
ended December 31, 1994 have been prepared on a pro forma basis to reflect
the OYL Acquisition, as if it had occurred on January 1, 1994. Refer to the
notes to the "Selected Financial Data" for a discussion of these pro forma
adjustments. The pro forma financial information set
21
<PAGE>
forth herein does not purport to represent what the Company's financial
position or results of operations would actually have been had the OYL
Acquisition occurred on January 1, 1994 or to project the Company's financial
position or results of operations for any future date of period.
The Company has not provided a discussion of its transition period
(January 1, 1995 to July 1, 1995) as compared to the comparable period in the
prior year. The Company believes that discussion of this period is not
material since the six month period is included in what the Company believes
is a more meaningful discussion comparing the operating results of the 12
month periods ended December 31, 1995 and July 1, 1995. The Company believes
that the discussion and the analysis of the trends for the 12 month period
comparisons would not be substantially different than a separate discussion of
the six month periods and there were no significant events that have occurred
during either 12 month period that would have significantly affected the
results of either of the six month periods versus the corresponding 12 month
period. The following should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements and the Notes
thereto. In 1995, the Company changed its fiscal year end from the Saturday
closest to December 31 to the Saturday closest to June 30 to coincide with
OYL's fiscal year. For clairty of presentation in the consolidated financial
statements, all full fiscal years are shown to begin on January 1 and end on
December 31, or to begin on July 1 and end on June 30. For the periods
presented on a basis other than a full fiscal year, actual period end dates
are used.
The following table sets forth the major components of the Predecessor
Company's consolidated results of operations for the year ended December 31,
1993 the Combined Pro Forma consolidated results of operations of the
Predecessor Company combined with the Successor Company's results of
operations for the year ended December 31, 1994; the Successor Company's
consolidated results of operations for the years ended December 31, 1995,
July 1, 1995 and June 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMBINED SUCCESSOR
COMPANY PRO FORMA COMPANY SUCCESSOR COMPANY
------------------------------------------ ----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30,
------------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $705,496 $717,165 $862,633 $801,825 $901,395
Cost of sales..................................... 498,640 512,831 616,582 568,957 645,149
---------- -------- -------- --------- ----------
Gross profit...................................... 206,856 204,334 246,051 232,868 256,246
Gross margin.................................... 29.3% 28.5% 28.5% 29.0% 28.4%
SG&A expenses..................................... $195,045 $169,895 $184,192 $177,125 $186,072
Amortization expense.............................. 8,299 13,108 14,151 13,823 13,478
---------- -------- -------- --------- ----------
Operating income.................................. 3,512 21,331 47,708 41,920 56,696
Operating margin................................ 0.5% 3.0% 5.5% 5.2% 6.3%
Interest expense, net............................. $41,785 $27,819 $23,520 $22,753 $24,957
Other (income) expense, net....................... 3,112 1,196 (3,369) (1,152) (3,219)
---------- -------- -------- --------- ----------
Income (loss) before taxes, extraordinary item
and cumulative effect of accounting change....... (41,385) (7,684) 27,557 20,319 34,958
Income taxes...................................... 4,444 4,196 14,844 12,906 18,423
---------- -------- -------- --------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change........... (45,829) (11,880) 12,713 7,413 16,535
Extraordinary item, net of tax.................... -- -- -- -- (1,635)
Cumulative effect of accounting change............ (971) -- -- -- --
---------- -------- -------- --------- ----------
Net income (loss)................................. $(46,800) $(11,880) $12,713 $7,413 $14,900
---------- -------- -------- --------- ----------
</TABLE>
BUSINESS SEGMENTS
The following table summarizes the Company's consolidated results of
operations by business segment and geographic region. The United States
portion of sales and operating income (loss) is derived from sales in the
United States and export sales from the United States. The international
portion of sales
22
<PAGE>
and operating income (loss) is generated by sales in the
rest of the world, primarily in Europe. (dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Combined Successor
Company Pro Forma Company Successor Company
------------------------------------------ ----------------------
Year Ended December 31, Year Ended June 30,
------------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
SEGMENT DATA
NET SALES
Commercial Air Conditioning...................... $403,077 $417,667 $511,907 $465,232 $526,164
Filtration Products.............................. 303,897 301,024 347,328 338,207 341,707
Eliminations/Industrial Refrigeration............ (1,478) (1,526) 3,398 (1,614) 33,524
-------- -------- -------- --------- ----------
Total.......................................... $705,496 $717,165 $862,633 $801,825 $901,395
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
OPERATING INCOME (LOSS)
Commercial Air Conditioning...................... $(13,008) $ 3,204 $ 22,286 $ 14,857 $ 29,929
Filtration Products.............................. 17,955 18,127 25,425 27,110 28,664
Corporate/Industrial Refrigeration............... (1,435) -- (3) (47) (1,897)
-------- -------- -------- --------- ----------
Total.......................................... $ 3,512 $ 21,331 $ 47,708 $ 41,920 $ 56,696
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
OPERATING INCOME (LOSS) EXCLUDING AMORTIZATION,
AND THE 1993 ENVIRONMENTAL CHARGE
Commercial Air Conditioning...................... $ 22,595 $ 10,767 $ 29,798 $ 22,272 $ 36,501
Filtration Products.............................. 25,849 23,672 32,045 33,494 34,875
Corporate/Industrial Refrigeration............... (1,435) -- 16 (23) (1,202)
-------- -------- -------- --------- ----------
Total.......................................... $ 47,009 $ 34,439 $ 61,859 $ 55,743 $ 70,174
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
GEOGRAPHIC DATA
NET SALES
U.S.............................................. $428,906 $466,534 $533,640 $517,535 $559,505
International.................................... 276,590 250,631 328,993 284,290 341,890
-------- -------- -------- --------- ----------
Total.......................................... $705,496 $717,165 $862,633 $801,825 $901,395
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
OPERATING INCOME (LOSS)
U.S............................................. $ (3,000) $ 28,217 $ 38,180 $ 38,730 $ 45,142
International................................... 16,246 6,222 23,679 17,560 27,414
Corporate and amortization...................... (9,734) (13,108) (14,151) (14,370) (15,860)
-------- -------- -------- --------- ----------
Total......................................... $ 3,512 $ 21,331 $ 47,708 $ 41,920 $ 56,696
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------
</TABLE>
1996 COMPARED TO COMPARABLE PERIOD 1995
CONSOLIDATED
NET SALES. Consolidated net sales, including the acquisition of J&E Hall,
were $901.4 million for the fiscal year ended June 30, 1996 an increase of
$99.6 million, or 12.4%, from $801.8 million in the Comparable Period ended
July 1, 1995. International sales increased $57.6 million and domestic sales
increased by $42.0 million.
OPERATING INCOME. Consolidated operating income was $56.7 million or 6.3%
of net sales for the fiscal year ended June 30, 1996 an increase of $14.8
million from $41.9 million or 5.2% of net sales for the Comparable Period
ended July 1, 1995.
During the Comparable Period ended July 1, 1995, the closing date for
certain foreign subsidiaries was changed to reflect the Company's current
period. Prior to this, certain foreign subsidiaries reported on fiscal
periods which ended one month prior (the "Lag Month") to the Company's period
end. As a result, the financial statements, for the Comparable Period ended
July 1, 1995, include the Lag Month, or a 13th month, of these foreign
subsidiaries. Management will discuss the financial results excluding the Lag
Month in order to improve comparability. The following table summarizes the
Company's net sales, and operating income, excluding amortization, adjusted
for the Lag Month, by business segment.
23
<PAGE>
Year Ended Year Ended
July 1, June 30,
1995 1996
---------- -----------
(dollars in thousands)
NET SALES
Commercial Air Conditioning..... $457,958 $526,164
Filtration Products............. 326,380 341,707
Industrial Refrigeration........ -- 40,763
Lag Month....................... 19,101 --
Eliminations.................... (1,614) (7,239)
---------- -----------
Total........................... $801,825 $901,395
---------- -----------
---------- -----------
OPERATING INCOME EXCLUDING AMORTIZATION
Commercial Air Conditioning..... $22,518 $36,501
Filtration Products............. 32,608 34,875
Industrial Refrigeration........ -- 687
Lag Month....................... 640 --
Other........................... (23) (1,889)
---------- -----------
Total........................... $55,743 $70,174
---------- -----------
---------- -----------
COMMERCIAL AIR CONDITIONING GROUP
NET SALES. Net sales were $526.2 million in fiscal year 1996, an increase
of $68.2 million, or 14.9%, from $458.0 million for the Comparable Period
ended July 1, 1995. North American sales, for the 1996 fiscal year,
increased 9.6% over Comparable Period ended July 1, 1995. This increase
was primarily the result of increased Chiller Product sales due to the
acceptance of new products utilizing the single screw technology plus
increased exports to Asia and Latin America. The growth in exports is the
result of strategic alliances and marketing strategies aimed at gaining
market share in these areas. International sales, for the fiscal year ended
June 30, 1996 increased 35.5% over the Comparable Period ended July 1, 1995;
substantially due to increases in Italy, the United Kingdom, and France.
These increases were the result of several factors including the completion
of a large one-time contract in the United Kingdom, the introduction of a new
product in Italy and an increase in exports sales from operations in France.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $36.5 million in fiscal year 1996, an increase of $14.0
million from $22.5 million for the Comparable Period ended July 1, 1995.
Operating income excluding amortization as a percent of sales increased from
4.9% to 6.9%. Gross margins decreased to 25.7% from 26.2% as a percentage of
sales for the fiscal year and Comparable Period ended June 30, 1996 and
July 1, 1995, respectively. The decline in margin is primarily due to U.S.
operations which declined as a result of competitive price pressures
and production start-up cost for a new product. The decline in domestic
gross margin was slightly offset by increased margin rates for international
operations. Selling, General & Administrative expense ("SG&A") excluding
amortization as a percentage of sales decreased 2.5 percentage points in
fiscal year 1996 from the Comparable Period ended July 1, 1995. This
decrease was due to cost containment actions, the realization of cost saving
strategies implemented by the Company during the prior year and increased
volume levels.
FILTRATION PRODUCTS GROUP
NET SALES. Net sales were $341.7 million in fiscal 1996, an increase of
$15.3 million, or 4.7%, from $326.4 million for the Comparable Period ended
July 1, 1995. Sales from U.S. operations, for the fiscal year ended June 30,
1996 increased 7.0% over the Comparable Period ended July 1, 1995. This
increase was primarily the result of increased market share for Machinery
Filtration & Acoustic Systems ("MFAS") and overall market growth in Air
Filtration Product markets for commercial and retail use. International
sales, for the 1996 fiscal year, increased 2.1% from the 1995 Comparable
Period. International sales gains from market share increases for MFAS were
partially offset by declines in Air Filtration and
24
<PAGE>
Environmental products sales in Europe and Mexico. The effect of foreign
currency exchange rates, deteriorated net sales by approximately $1.2 million,
almost exclusively from the devaluation of the Mexican Peso.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $34.9 million in fiscal year 1996, an increase of $2.3
million from $32.6 million for the Comparable Period ended July 1, 1995.
Operating income excluding amortization as a percent of sales increased from
10.0% to 10.2%. Gross margins increased to 33.3% from 33.1% as a percentage
of sales for the fiscal year and Comparable Period ended June 30, 1996 and
July 1, 1995, respectively. Margin rates for domestic operations decreased
1.0 percentage point due to increased competition across most product lines
which was partially offset by production efficiencies. International margin
rates increased approximately 1.5 percentage point primarily the result of
increased MFAS sales across Europe. SG&A excluding amortization remained
relatively flat as a percentage of sales for the fiscal year 1996 as
compared to the Comparable Period ended July 1, 1995.
FINANCIAL REVIEW
Interest expense was $25.0 million for the fiscal year ended June 30,
1996 versus $22.8 million for the Comparable Period ended July 1, 1995. The
increase was primarily attributable to an increase in borrowing to fund the
acquisition of J&E Hall. Amortization expense was $13.5 million for the
fiscal year ended June 30,1996 versus $13.8 million for the Comparable
Period ended July 1, 1995. Effective April 1, 1996 the Company changed its
estimated useful life of goodwill from 25 to 40 years. The effect of this
change in estimate on amortization expense recognized for the 1996 fiscal
year was a decrease of approximately $.8 million. Other income of $3.2
million for the year ended June 30, 1996 and $1.2 million for the Comparable
Period ended July 1, 1995 consists primarily of foreign currency transaction
gains, gains from an insurance settlement and sale of a product line, and
income from equity affiliates.
Income tax expense was $18.4 million and the effective tax rate was
52.7% for the fiscal year ended June 30, 1996 compared to income tax expense
of $12.9 million and an effective tax rate of 63.5% for the Comparable
Period ended July 1, 1995. The effective income tax rate was substantially
higher than the U.S. federal statutory rate primarily due to nondeductible
goodwill amortization and foreign tax credits not utilized. The reduction
in the effective rate was primarily attributable to diminished impact of
nondeductible goodwill amortization.
1995 COMPARED TO PRO FORMA 1994
Combined Successor
Pro Forma Company
Year Ended Year Ended
December 31, December 31,
1994 1995
------------ ------------
(dollars in thousands)
NET SALES
Commercial Air Conditioning................ $417,667 $511,907
Filtration Products........................ 301,024 347,328
Eliminations/Industrial Refrigeration...... (1,526) 3,398
------------ ------------
Total.................................... $717,165 $862,633
------------ ------------
------------ ------------
OPERATING INCOME EXCLUDING AMORTIZATION
Commercial Air Conditioning................ $10,767 $29,798
Filtration Products........................ 23,672 32,045
Other/Industrial Refrigeration............. -- 16
------------ ------------
Total.................................... $34,439 $61,859
------------ ------------
------------ ------------
25
<PAGE>
CONSOLIDATED
Through December 31, 1994 certain foreign subsidiaries reported on
fiscal periods which ended one month prior to the Company's or the
Predecessor Company's period-end. During the year ended December 31, 1995,
the closing date for the foreign subsidiaries was changed to reflect the
Company's current closing period. As a result, the year ended December 31,
1995 includes the financial results of these foreign subsidiaries from
December 1, 1994 through December 31, 1995. The estimated impact on net sales
and operating income was increases in the 1995 period of $11.8 million and
$0.9 million, respectively, for Filtration Products and $7.3 million and
$(0.2) million for Commercial Air Conditioning, respectively.
NET SALES. Consolidated net sales were $862.6 million for the year ended
December 31, 1995, an increase of $145.5 million, or 20.3%, from $717.2
million in the comparable pro forma 1994 period. Commercial Air Conditioning
net sales increased 22.6% to $511.9 million and Filtration Products sales
increased 15.4% to $347.3 million.
OPERATING INCOME. Consolidated operating income was $47.7 million or 5.5%
of net sales in the year ended December 31, 1995, an increase of $26.4 million
from $21.3 million or 3.0% of net sales in the comparable pro forma 1994
period.
COMMERCIAL AIR CONDITIONING GROUP
NET SALES. Net sales were $511.9 million in 1995, an increase of $94.2
million, or 22.6%, from $417.7 million in 1994. In North America, sales
increased 9.1% due to market growth of approximately 5% in new U.S.
nonresidential construction and an increase in demand of 23.4% for chillers
resulting from increased replacement and retrofit activity. International
revenues increased 73.2%, primarily due to the continued recovery of the
European economy and an approximate 8.0% appreciation of the French Franc
during the 1995 period. In addition, a portion of the increase in net sales
was attributable to the extra month of operations of certain foreign
subsidiaries included in the 1995 period as discussed above. Revenue
increased in Italy by 103.8%, in the United Kingdom by 95.1%, and in France by
41.9%.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $29.8 million in 1995, an increase of $19.0 million from
$10.8 million in 1994. Operating income excluding amortization as a percent
of sales increased from 2.6% to 5.8%. Gross margins held constant at 25.7%.
During 1994 and 1995, the Company implemented cost saving programs which
resulted in estimated savings of $6.0 million in 1995. These estimated cost
savings are primarily reflected in the gross margin, with a small component
impacting SG&A expenses. The favorable impact on margins due to cost
savings was offset by lower price levels and approximately $2.0 million in
increased copper material prices. SG&A as a percent of sales decreased from
23.1% in 1994 to 19.9% in 1995 primarily due to higher sales levels and
a reduction of $0.7 million in bad debt expense.
FILTRATION PRODUCTS GROUP
NET SALES. Net sales were $347.3 million for the year ended December 31,
1995, an increase of $46.3 million, or 15.4%, from $301.0 million in the
comparable pro forma 1994 period. The Company's international operations
contributed the majority of the improvement with a sales increase of $26.8
million, or 18.0%, to $175.6 million. A portion of this increase was
attributable to the extra month of operations of certain foreign subsidiaries
included in the 1995 period as discussed above. In addition, some of
this increase is attributable to the recovery of certain European economies
and the weakening of the U.S. dollar largely due to the appreciation of the
French Franc and the Dutch Gilder during the 1995 period. This impact of
fluctuations of exchange rates versus the U.S. dollar increased international
net sales by approximately $4.5 million in 1995 on a comparable basis with the
pro forma 1994 period. The Company's Latin America net sales decreased by
$3.1 million due almost entirely to the devaluation of the Mexican peso during
the 1995 period.
26
<PAGE>
U.S. operations also contributed to the increase in sales with period
over period growth of $19.5 million, or 12.8%, from $152.2 million in
the pro forma 1994 period to $171.7 million in the 1995 period. U.S. sales
grew largely due to overall market growth for filtration products consumed by
commercial and industrial markets, products for retail sale, equipment used
by turbine manufacturers and a $2.9 million increase in export sales to Asian
industrial customers.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income, excluding
amortization, was $32.0 million for the year ended December 31, 1995, an
increase of $8.4 million, or 35.4%, from $23.7 million in the comparable pro
forma 1994 period. Operating income excluding amortization as a percent of
sales increased from 7.9% to 9.2%, partially the result of gross margin
improvements resulting from cost reduction programs implemented worldwide.
Gross margins increased from 32.2% to 32.8% year over year, largely the result
of headcount reductions in France and the United Kingdom as well as cost
reductions for a number of air filter products manufactured in the United
States. Restructuring actions in Europe taken in the last half of 1994
included workforce reductions in staff and manufacturing positions. Management
believes that the 1994 restructuring actions and product cost reductions
realized gross savings in 1995 product and SG&A costs of approximately
$7.0 million. The Company initiated other cost reduction programs in 1995
including a program to eliminate 46 sales offices as the Company moved towards
a centralized customer service function at its headquarters and a "home
office" concept for its sales force, commencement of relocation of the Zion,
Illinois production facility and certain product reengineering that is
expected to aid in reducing costs in future years. Total 1995 sales growth in
Asian markets of $5.4 million, where higher gross profit margins are
generally achievalbe, also improved Filtration Products Group gross margins.
Further contributing to the improvement in operating income excluding
amortization was a decline in SG&A expenses as a percentage of sales
from 24.4% to 23.6%. The improvement in 1995 SG&A as a percentage of
sales was attributable to the heightened focus on cost reduction since the
OYL Acquisition and approximately $4.0 to $5.0 million of gross savings from
the 1994 French and United Kingdom restructuring actions.
FINANCIAL REVIEW
Interest expense was $23.5 million for the year ended December 31, 1995
versus $27.8 million for the pro forma 1994 period. The decrease was primarily
attributable to higher debt levels in the first half of 1994 and the
incremental effect of refinancing fixed rate debt with variable rate debt
with a lower effective interest rate in July 1994. Amortization expense was
$14.2 million for the year ended December 31, 1995 versus $13.1 million
for the pro forma 1994 year. Other income of $3.4 million for the year ended
December 31, 1995 and other expense of $1.2 million for the pro forma 1994
period consists primarily of foreign currency transaction gains of
$2.3 million in 1995 versus foreign currency losses of $0.7 million in
the pro forma 1994 period. The foreign currency gains in 1995 primarily
relate to currency transaction gains in Mexico. In addition, the Company
recorded a gain of approximately $0.7 million in 1995 from the sale of
certain product rights discontinued in a foreign location.
Income tax expense was $14.8 million and the effective tax rate was
53.9% for the year ended December 31, 1995 compared to income tax expense of
$4.2 million, despite a pretax loss, for the pro forma 1994 period. The
effective income tax rate was substantially higher than the U.S. federal
statutory rate primarily due to nondeductible goodwill amortization, foreign
tax rate differentials and foreign losses not benefited and U.S. taxes on
foreign unrepatriated earnings.
27
<PAGE>
PRO FORMA 1994 COMPARED TO 1993
Predecessor Combined
Company Pro Forma
----------------- -----------------
Year Ended Year Ended
December 31, 1993 December 31, 1994
----------------- -----------------
(dollars in thousands)
NET SALES
Commercial Air Conditioning.......... $403,077 $417,667
Filtration Products.................. 303,897 301,024
Eliminations......................... (1,478) (1,526)
------------- -----------
Total.............................. $705,496 $717,165
------------- -----------
------------- -----------
OPERATING INCOME EXCLUDING AMORTIZATION
AND THE 1993 ENVIRONMENTAL CHARGE
Commercial Air Conditioning.......... $22,595 $10,767
Filtration Products.................. 25,849 23,672
Corporate............................ (1,435) --
------------- -----------
Total.............................. $47,009 $34,439
------------- -----------
------------- -----------
CONSOLIDATED
NET SALES. Consolidated net sales were $717.2 million in pro forma 1994,
an increase of $11.7 million, or 1.7%, from $705.5 million in fiscal 1993.
Commercial Air Conditioning sales increased 3.6% to $417.7 million and
Filtration Products sales decreased 0.9% to $301.0 million.
OPERATING INCOME. Consolidated operating income was $21.3 million in pro
forma 1994, an increase of $17.8 million from $3.5 million in fiscal 1993.
Operating income as a percent of sales was 3.0% of net sales in pro forma 1994
as compared to 0.5% of net sales in fiscal 1993. In 1993, the Predecessor
Company recorded a special environmental charge of $35.2 million related to
a change in its estimate of potential insurance claim recoveries and the
estimated cost to remediate certain of its Commercial Air Conditioning sites.
See Note 12 to the Consolidated Financial Statements. Excluding amortization
and the 1993 environmental charge, operating income was $34.4 million or 4.8%
of net sales for the pro forma year ended December 31, 1994 as compared to
$47.0 million or 6.7% of net sales in 1993.
COMMERCIAL AIR CONDITIONING GROUP
NET SALES. Net sales were $417.7 million in pro forma 1994, an increase
of $14.6 million, or 3.6%, from $403.1 million in fiscal 1993. U.S. net sales
increased 5.4% primarily as a result of continued improvement in the U.S. new
construction market of approximately 10% and increases in chiller products of
37.6% driven mainly by increased demand to replace or retrofit existing
equipment as part of the phaseout of CFC-based refrigerants. International
sales were down 5.5% in total; sales were down 24.0% in France due to
continued economic weakness, partially offset by gains of 25.7% in the
United Kingdom and 13.5% in Italy.
OPERATING INCOME EXCLUDING AMORTIZATION AND THE 1993 ENVIRONMENTAL
CHARGE. Operating income excluding amortization and the 1993 environmental
charge was $10.8 million in pro forma 1994, a decrease of $11.8 million, or
52.3%, from $22.6 million in fiscal 1993. Operating income excluding
amortization as a percent of sales decreased from 5.6% to 2.6%. Gross margin
decreased from 26.7% in 1993 to 25.6% in pro forma 1994 as total product costs
increased at a faster rate than the Company's ability to push through price
increases to the market. SG&A expenses as a percent of sales increased from
21.1% in 1993 to 23.1% in pro forma 1994, due to increased European bad debt
expense of $0.8 million, increased warranty expense of $1.4 million partially
due to new product introductions, an increase in marketing support of $1.8
million and increased information systems costs of $0.7 million. In addition,
28
<PAGE>
research and development expenditures increased $1.8 million as a result of
management's continued focus on expanding the Company's technology base.
FILTRATION PRODUCTS GROUP
NET SALES. Net sales were $301.0 million in pro forma 1994, a decrease of
$2.9 million, or 0.9%, from $303.9 million in fiscal 1993. Filtration
Products sales in the United States increased 23.3%, driven by a significant
increase in replacement filter products sales. This increase was offset by a
30.2% decline in sales of Environmental Products due to decreased sales of
machinery filtration and acoustical systems as demand from turbine
manufacturers declined during 1994.
The 6.5% decline in international sales was due to lower sales of
large-scale air pollution control projects in Europe, attributable to a
continuation of the decline in the European market for these long lead
time products in 1993. This decrease was partially offset by an increase
in sales of air filtration products in Europe and Latin America.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $23.7 million in pro forma 1994, a decrease of $2.2 million,
or 8.4%, from $25.8 million in fiscal 1993. Operating income excluding
amortization as a percent of sales decreased from 8.5% to 7.9%. Gross
margins decreased from 32.6% in 1993 to 32.3% in the pro forma 1994
period. SG&A expenses as a percentage of net sales increased from 24.1%
in 1993 to 24.4% in the pro forma 1994 period due to reduced sales and
stable SG&A spending during the first half of the year. Following the OYL
Acquisition, management implemented a restructuring plan, to reduce product
and SG&A expenses. The restructuring resulted in headcount reductions in
the last half of 1994, largely in the Company's French and United Kingdom
operations. Management estimates that the restructuring actions taken in
Europe resulted in estimated cost savings of $7.0 million primarily in
1995.
FINANCIAL REVIEW
Interest expense was $27.8 million for the pro forma year ended
December 31, 1994 versus $41.8 million for fiscal year 1993. The decrease
was primarily attributable to the Company refinancing the Predecessor
Company's 14.25% Senior Subordinated Debentures at a substantially lower
interest rate. Amortization expense increased to $13.1 million for the pro
forma year ended December 31, 1994 from $8.3 million for fiscal year 1993
due to higher intangible balances and differing amortization lives. Other
expense of $1.2 million for the pro forma year ended December 31, 1994 and
$3.1 million for the year ended December 31, 1993 consists primarily of
foreign currency transaction losses in certain European currencies of
$0.7 million and $2.6 million, respectively.
Income tax expense was $4.2 million for the pro forma year ended
December 31, 1994 despite a loss before taxes. This unusual relationship
occurred primarily as a result of nondeductible goodwill amortization,
foreign tax rate differentials and foreign losses not benefited and U.S.
taxes on foreign unrepatriated earnings. For the year ended
December 31, 1993 income tax expense was $4.4 million despite a loss before
taxes; such income tax expense relates solely to foreign earnings because
the Predecessor Company had selected "S" corporation status, and Federal,
and certain state taxable income (loss) did not accrue to the Predecessor
Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $28.0 million for the year
ended June 30,1996. Net cash used by investing activities consisted of
capital expenditures of $14.8 million and cash used to acquire J&E Hall of
$34.9 million. Net cash provided by financing activities was $27.1 million
primarily comprised of $136.0 million in proceeds from the issuance of new
long-term debt, $5.1 million in payments of debt issuance cost and the
repayment of $0.9 million and $102.9 million in short and long
29
<PAGE>
term debt respectively. The financing activity during fiscal year 1996 was
primarily the result of the Refinancing (See Note 7 to the Consolidated
Financial Statements).
The Refinancing consisted of $125 million of 8 7/8% Senior Notes - Due
2003, an $80 million trade receivables securitization facility and an Amended
Credit Facility of $110.0 million. The Refinancing increased the Company's
availability of short-term credit facilities, deferred debt amortization
requirements and extended the average life of indebtedness. Management does
not expect a material change in interest expense as result of the Refinancing.
The Company has secured certain letter of credit facilities totaling $25
million that are supported by letters of credit from OYL, which were fully
utilized at June 30, 1996 and July 1, 1995. The commitments made under these
facilities expire in March 1997, but may be extended annually for successive
one year periods with the consent of OYL and the banks providing the
facilities.
As payment for the acquisition of J&E Hall, now a wholly-owned
subsidiary of the Company, J&E Hall borrowed $19.8 million of revolving
debt supported by a letter of credit from OYL and the balance of the purchase
price was funded by the Company drawing down $15.1 million under its Existing
Credit Facility.
Planned capital expenditures are approximately $20 million per year for
the years ending June 30, 1997 and 1998.
The ongoing costs of compliance with existing environmental laws and
regulations and the estimated costs to clean up and monitor existing
contaminated sites is not expected to have a material adverse effect on the
Company's capital expenditures or financial position. See "Legal Proceedings"
and Note 12 to the Consolidated Financial Statements.
The Predecessor Company's U.S. federal income tax returns for the taxable
years ending in 1987, 1988, 1989 and 1990 have been examined by the Internal
Revenue Service. Adjustments to the taxable income for each of these years
have been proposed. Portions of the resulting tax liabilities would be imposed
directly on the Company or its subsidiaries, and the Company is obligated
under the stock purchase agreement between OYL and the former owners of
the Predecessor Company to make payments to the former owners of the
Predecessor Company to compensate them for the remainder of the tax
liabilities which would be imposed on them under Subchapter S of the Internal
Revenue Code. That agreement also entitles the Company to payments from the
former shareholders of the Predecessor Company of certain tax refunds or
benefits which the former owners may realize. The Internal Revenue Service
has also opened an examination of the Predecessor Company's tax returns for
the years ending in 1991, 1992, 1993 and 1994. Other than issues originating
in earlier years which would also affect these years, there have been no
issues raised in this examination.
As more fully described in the Notes to the Consolidated Financial
Statements, the stock purchase agreement between OYL and the former owners of
the Predecessor Company contains certain indemnifications related to specified
contingencies related to environmental, income tax and litigation matters,
including those described above. See "Certain Relationships and Related
Transactions." Indemnified losses (net of recoveries) exceeding $5.8 million
up to a maximum of $18.0 million are the obligation of the former owners.
Amounts expended in excess of $5.8 million will first offset the $11.5 million
promissory note owed to the former owners while additional amounts expended
will be reimbursed by the former owners up to $6.5 million.
The Company has manufacturing facilities and sells products in various
countries around the world. As a result, the Company is exposed to movements
in exchange rates of various currencies against the U.S. dollar. Management's
response to currency movements vary (e.g. changes in pricing actions, changes
in cost structures and changes in hedging strategy). Currently, the Company
enters into short-term forward exchange contracts to hedge its exposure to
currency fluctuations affecting certain foreign currency
30
<PAGE>
denominated trade payables and certain intercompany debt of its foreign
subsidiaries. The Company will continue to report, from time to time,
fluctuations in both earnings and equity due to foreign exchange movements
since it is not cost-effective to establish a hedging strategy that
eliminates all risks.
In August 1996, the Company canceled the Securitization Program (see note
7) and increased the Revolving Credit portion of the Bank Agreement from $35
million to $100 million. (the "August 1996 Amendment") Trade accounts
receivable previously encumbered under the Securitization Program were
consequently re-pledged under the Bank Agreement via the August 1996
Amendment. In addition, the interest rate premiums under the Bank Agreement
were reduced to LIBOR + 1.375% or prime + 0.375%. The overall net impact on
the Company's average interest rate did not change significantly. Additional
borrowing capacity increased from a combined $50 million under the Revolver
and Securitization at June 30, 1996 to approximately $63 million of borrowing
availability under the Revolver after the August 1996 Amendment.
Management believes, based upon current levels of operations and
forecasted earnings, that cash flow from operations, together with borrowings
under the Amended Credit Facility and the Receivables Facility, will be
adequate to make payments of principal and interest on debt, to permit
anticipated capital expenditures and to fund working capital requirements
and other cash needs. Nevertheless, the Company will remain leveraged to a
significant extent and its debt service obligations will continue to be
substantial. If the Company's sources of funds were to fail to satisfy the
Company's requirements, the Company may need to refinance its existing debt
or obtain additional financing. There is no assurance that any such new
financing alternatives would be available, and, in any case, such new
financing (if available) would be expected to be more costly and burdensome
than the debt agreements currently in place.
SEASONALITY
The demand for certain replacement filter products, particularly residential
filters, is seasonal in nature. Normally, sales of residential filters are
relatively low in the winter and early spring with an increase in sales during
the late spring, summer and fall months. Replacement air filter sales in the
commercial and industrial markets are also higher during the spring and summer
months, although these sales are driven primarily by maintenance cycles.
Sales of some air filtration equipment are seasonal to the extent that
construction activity increases during the warmer months.
Sales of commercial air conditioning equipment are generally not
seasonal. However, the Company's air conditioning service business
is seasonal in nature due to off-season maintenance cycles and service needs
during the summer months. Demand for unitary air conditioning equipment in
the small unit commercial new construction markets varies according to the
season, with increased demand generally from March to October. Demand in
the small unit commercial replacement markets is impacted by seasonal
temperature fluctuations. Sales of unit ventilators for educational
facilities tend to increase in the second and third calendar quarters of any
given year in part due to the start of a new school year as well as the
availability of bond or other funds budgeted for capital expenditures.
NEW ACCOUNTING STANDARDS
In 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and FASB No.
123 "Accounting for Stock-Based Compensation." The Company does not expect
the adoption of these standards to have a material effect on the Consolidated
Financial Statements.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page in this
Report
Report of the Independent Auditors....................... 33
Consolidated Balance Sheets-
at June 30, 1996 and July 1, 1995........................ 34
Consolidated Statements of Operations-
Year ended June 30, 1996, the period from
January 1, 1995 to July 1, 1995, the period
from May 2, 1994 to December 31, 1994,
the period January 2, 1994 to May 1, 1994 and
the year ended December 31, 1993........................ 35
Consolidated Statements of Cash Flows-
Year ended June 30, 1996, the period from
January 1, 1995 to July 1, 1995, the period
from May 2, 1994 to December 31, 1994, the
period January 2, 1994 to May 1, 1994 and
the year ended December 31, 1993....................... 36
Consolidated Statements of Stockholder's Equity
(Deficit)-Year ended June 30, 1996, the period from
January 1, 1995 to July 1, 1995, the period
from May 2, 1994 to December 31, 1994, the
period January 2, 1994 to May 1, 1994 and the
year ended December 31, 1993........................... 37
Schedule II - Report of the Independent Auditors;
Valuation and Qualifying Accounts and
Reserves-Year ended June 30, 1996 the period from
January 1, 1995 to July 1, 1995, the
period from May 2, 1994 to December 31, 1994,
the period January 2, 1994 to May 1, 1994
and the year ended December 31, 1993................... 59
32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
AAF-McQuay Inc.
We have audited the accompanying consolidated balance sheets of AAF-McQuay
Inc. and subsidiaries as of June 30, 1996 and July 1, 1995 and the related
consolidated statements of operations, cash flows and stockholder's equity
for the year ended June 30, 1996 the period from January 1, 1995 to July 1,
1995 and the period from May 2, 1994 to December 31, 1994 and the
accompanying consolidated statements of operations, cash flows and
stockholder's equity of SnyderGeneral Corporation and subsidiaries (the
"Predecessor Company") for the period from January 2, 1994 to May 1, 1994
and for the year ended December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
As discussed in Note 1 to the consolidated financial statements, effective
May 2, 1994 all of the outstanding stock of the Predecessor Company was
acquired in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods
after the acquisition is presented on a different cost basis than that for
the period before the acquisition and, therefore, is not comparable.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AAF-McQuay
Inc. and subsidiaries at June 30, 1996 and July 1, 1995 and the consolidated
results of their operations and their cash flows for the year ended June 30,
1996 the period from January 1, 1995 to July 1, 1995 and the period from May
2, 1994 to December 31, 1994 and the consolidated results of operations and
cash flows of SnyderGeneral Corporation and subsidiaries for the period from
January 2, 1994 to May 1, 1994 and for the year ended December 31, 1993 in
conformity with generally accepted accounting principles.
As discussed in Notes 9 and 12 to the consolidated financial statements, the
Predecessor Company changed its method of accounting for income taxes and
environmental liabilities in 1993.
Ernst & Young LLP
- ------------------------------
Baltimore, Maryland
August 9, 1996
33
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, July 1,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $ 20,824 $ 16,242
Accounts receivable . . . . . . . . . . . . 225,337 179,982
Inventories . . . . . . . . . . . . . . . . 115,273 110,000
Other current assets. . . . . . . . . . . . 5,055 7,638
-------- --------
Total current assets. . . . . . . . . . . 366,489 313,862
Property, plant and equipment, net. . . . . . 149,235 145,504
Cost in excess of net assets acquired and
other identifiable intangibles, net. . . . . 271,840 262,634
Other assets and deferred charges . . . . . . 19,390 9,328
-------- --------
Total assets. . . . . . . . . . . . . . . $806,954 $731,328
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings . . . . . . . . . . . $ 65,538 $ 66,453
Current maturities of long-term debt. . . . 9,879 26,062
Accounts payable, trade . . . . . . . . . . 108,792 93,036
Accrued warranty. . . . . . . . . . . . . . 14,256 12,473
Accrued employee compensation . . . . . . . 33,807 34,888
Other accrued liabilities . . . . . . . . . 41,604 37,392
-------- --------
Total current liabilities . . . . . . . . 273,876 270,304
Long-term debt. . . . . . . . . . . . . . . . 227,490 178,213
Deferred income taxes . . . . . . . . . . . . 51,589 43,900
Other liabilities . . . . . . . . . . . . . . 54,716 50,083
-------- --------
Total liabilities . . . . . . . . . . . . 607,671 542,500
Stockholder's equity:
Preferred stock ($1 par value; 1,000 shares
authorized, none issued) . . . . . . . . . -- --
Common stock ($100 par value; 8,000 shares
authorized, 2,497 shares issued and
outstanding) . . . . . . . . . . . . . . . 250 250
Additional paid-in capital. . . . . . . . . 179,915 179,915
Retained earnings . . . . . . . . . . . . . 22,437 7,537
Foreign currency translation adjustment . . (3,319) 1,126
-------- --------
Total Stockholder's Equity. . . . . . . . 199,283 188,828
-------- --------
Total Liabilities and Stockholder's Equity. . $806,954 $731,328
-------- --------
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------- -----------------------------
January 1, May 2, January 2,
Year Ended 1995 to 1994 to 1994 to Year Ended
June 30, July 1, December 31, May 1, December 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . $901,395 $428,510 $484,681 $232,484 $705,496
Cost of sales . . . . . . . . . . . . . . 645,149 303,699 344,120 169,357 498,640
-------- -------- -------- -------- --------
Gross profit. . . . . . . . . . . . . . . 256,246 124,811 140,561 63,127 206,856
Operating expenses:
Selling, general and administrative . . 186,072 94,238 107,717 62,234 195,045
Amortization of intangible assets . . . 13,478 7,297 8,603 1,695 8,299
Equity participation compensation . . . -- -- -- 8,848 --
-------- -------- -------- -------- --------
199,550 101,535 116,320 72,777 203,344
-------- -------- -------- -------- --------
Income (loss) from operations . . . . . . 56,696 23,276 24,241 (9,650) 3,512
Interest expense, net . . . . . . . . . . 24,957 11,671 16,192 13,723 41,785
Other (income) expense, net . . . . . . . (3,219) (1,442) (30) 1,458 3,112
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of accounting change . . . . . . . . . . 34,958 13,047 8,079 (24,831) (41,385)
Income taxes. . . . . . . . . . . . . . . 18,423 6,755 6,834 324 4,444
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
accounting change. . . . . . . . . . . . 16,535 6,292 1,245 (25,155) (45,829)
Extraordinary item, net of tax. . . . . . (1,635) -- -- -- --
Cumulative effect of accounting change. . -- -- -- -- (971)
-------- -------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . $14,900 $ 6,292 $ 1,245 $(25,155) $(46,800)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------- -----------------------------
January 1, May 2, January 2,
Year Ended 1995 to 1994 to 1994 to Year Ended
June 30, July 1, December 31, May 1, December 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . $ 14,900 $ 6,292 $ 1,245 $(25,155) $(46,800)
Adjustments to reconcile to cash
from operating activities:
Extraordinary item . . . . . . . . . . . 2,681 -- -- -- --
Cumulative effect of accounting change . -- -- -- -- 971
Depreciation and amortization. . . . . . 25,809 13,551 14,741 6,198 21,582
Foreign currency transaction (gains)
losses. . . . . . . . . . . . . . . . . (1,444) (948) 617 (561) 1,422
Deferred income taxes. . . . . . . . . . 7,642 1,916 4,118 94 750
Changes in operating assets and
liabilities:
Accounts receivable. . . . . . . . . . (25,670) (30,268) (6,722) (3,125) 6,457
Inventories. . . . . . . . . . . . . . 249 (15,735) (2,349) (6,911) 3,535
Other assets/liabilities, net. . . . . 5,834 (1,693) (4,531) 9,700 21,427
Accounts payable and other accrued
liabilities . . . . . . . . . . . . . (2,039) 18,397 (12,661) 2,704 5,908
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . 27,962 (8,488) (5,542) (17,056) 15,252
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures, net. . . . . . . . (14,765) (5,697) (8,454) (1,821) (8,745)
Purchase of J&E Hall . . . . . . . . . . (34,903) -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities. . . (49,668) (5,697) (8,454) (1,821) (8,745)
Cash flows from financing activities:
Net borrowing (repayment) under short-term
arrangements . . . . . . . . . . . . . (915) 14,929 8,947 10,703 89
Payments on long-term debt . . . . . . . (102,894) (7,947) (262,627) (1,666) (11,240)
Proceeds from issuance of long-term debt 135,988 3,345 190,000 -- 649
Payment of debt issuance cost. . . . . . (5,104) -- (6,784) -- --
Proceeds from contribution of capital. . -- 10,165 78,545 11,028 121
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities. . . . . . . . . . . 27,075 20,492 8,081 20,065 (10,381)
Effect of exchange rate changes on cash. . (787) (1,318) 3,272 (124) (262)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 4,582 4,989 (2,643) 1,064 (4,136)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . 16,242 11,253 13,896 12,832 16,968
--------- --------- --------- --------- ---------
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . . $ 20,824 $ 16,242 $ 11,253 $ 13,896 $ 12,832
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
SUCCESSOR
Balance on May 2, 1994 after
acquisition. . . . . . . . . . . . . . $250 $ 91,205 $ -- $ -- $ 91,455
Contribution of capital from
Parent Company . . . . . . . . . . . . -- 78,545 -- -- 78,545
Net income. . . . . . . . . . . . . . . -- -- 1,245 -- 1,245
Currency translation adjustment . . . . -- -- -- 1,168 1,168
----- -------- --------- ------- --------
Balance December 31, 1994 . . . . . . . 250 169,750 1,245 1,168 172,413
Contribution of capital from Parent
Company. . . . . . . . . . . . . . . . -- 10,165 -- -- 10,165
Net income. . . . . . . . . . . . . . . -- -- 6,292 -- 6,292
Currency translation adjustment . . . . -- -- -- (42) (42)
----- -------- --------- ------- --------
Balance July 1, 1995. . . . . . . . . . 250 179,915 7,537 1,126 188,828
Net income. . . . . . . . . . . . . . . -- -- 14,900 -- 14,900
Currency translation adjustment . . . . -- -- -- (4,445) (4,445)
----- -------- --------- ------- --------
Balance June 30, 1996 . . . . . . . . . $250 $179,915 $22,437 $(3,319) $199,283
----- -------- --------- ------- --------
----- -------- --------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
MINIMUM FOREIGN
ADDITIONAL RETAINED PENSION CURRENCY
COMMON PAID-IN EARNINGS LIABILITY TRANSLATION
STOCK CAPITAL (DEFICIT) ADJUSTMENT ADJUSTMENT TOTAL
----- ------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance December 31, 1992 . . . . . . $300 $ 4,423 $(11,743) $(1,204) $ (909) $ (9,133)
Net loss. . . . . . . . . . . . . . . -- -- (46,800) -- -- (46,800)
Dividends and reserve for
distributions. . . . . . . . . . . . -- -- (1,500) -- -- (1,500)
Contribution of capital . . . . . . . -- 121 -- -- -- 121
Adjustment to recognize additional
minimum pension liability. . . . . . -- -- -- (307) -- (307)
Currency translation adjustment . . . -- -- -- -- (3,130) (3,130)
----- -------- -------- ------- ------- --------
Balance December 31, 1993 . . . . . . 300 4,544 (60,043) (1,511) (4,039) (60,749)
Net loss. . . . . . . . . . . . . . . -- -- (25,155) -- -- (25,155)
Contribution of capital . . . . . . . -- 11,028 -- -- -- 11,028
Currency translation adjustment . . . -- -- -- -- 1,667 1,667
----- -------- -------- ------- ------- --------
Balance May 1, 1994 . . . . . . . . . $300 $15,572 $(85,198) $(1,511) $(2,372) $(73,209)
----- -------- -------- ------- ------- --------
----- -------- -------- ------- ------- --------
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The accompanying financial statements include the accounts of AAF-McQuay
Inc. (the Company or "Successor"), a wholly owned subsidiary of AAF-McQuay
Group, Inc., and its wholly-owned subsidiaries. AAF-McQuay Group, Inc. is a
wholly-owned subsidiary of O.Y.L. Industries Berhad ("OYL"). In December
1995, AAF-McQuay Group, Inc. contributed all of its ownership interest in
AAF-McQuay Holdings, Inc. to the Company. AAF-McQuay Holdings, Inc. holds
minority investments in certain companies. Since this transaction represents
a combination of entities under common control, it has been treated in a
manner similar to a pooling of interests. Accordingly, the accompanying
financial statements reflect the consolidated financial results of these
entities from the beginning of the periods presented.
On May 2, 1994 OYL and affiliates purchased all of the outstanding stock
of SnyderGeneral Corporation and SnyderGeneral Holding Company, collectively
the "Predecessor Company". Subsequent to this acquisition, the names of
these entities were changed to AAF-McQuay Inc. and AAF-McQuay Holdings,
Inc., respectively. The aggregate purchase price was approximately $108
million and consisted of $88.5 million in cash to the former owners of the
Predecessor Company, payment of seller transaction costs of $5 million,
other related transaction costs of approximately $3.0 million, and an $11.5
million promissory note (see Note 7) issued to the former owners of the
Predecessor Company.
As a result of the acquisition, the consolidated financial information
for the periods after the acquisition is presented on a different cost basis
than that for the period before the acquisition and therefore, is not
comparable.
The acquisition by OYL was accounted for under the purchase method of
accounting and the accompanying financial statements reflect OYL's cost
basis in the Predecessor Company. Under this method, OYL's purchase price
was allocated to assets acquired and liabilities assumed based on their fair
value at the date of acquisition. A summary of the fair value of assets
acquired and liabilities assumed as of May 2, 1994 are as follows (dollars
in thousands).
<TABLE>
<S> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 13,896
Accounts receivable . . . . . . . . . . . . . . . . . . . . 141,190
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 90,366
Property, plant & equipment . . . . . . . . . . . . . . . . 143,819
Intangible assets . . . . . . . . . . . . . . . . . . . . . 278,534
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 8,055
--------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . $675,860
--------
--------
Short-term borrowings . . . . . . . . . . . . . . . . . . . $42,728
Accounts payable, trade . . . . . . . . . . . . . . . . . . 67,312
Senior subordinated debentures. . . . . . . . . . . . . . . 237,015
Other long-term debt. . . . . . . . . . . . . . . . . . . . 44,483
Other liabilities . . . . . . . . . . . . . . . . . . . . . 192,867
--------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 584,405
Stockholders' Equity. . . . . . . . . . . . . . . . . . . . 91,455
--------
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . $675,860
--------
--------
</TABLE>
The Predecessor Company had operated with four business groups with
several functions administered on a centralized basis. In order to more
clearly focus on the need to increase the Company's global presence and to
leverage the extensive U.S. manufacturing and technology base, and in
conjunction with the acquisition, new management of the Company took actions
to reorganize the Company to a global
38
<PAGE>
product segment format. Further, to elevate accountability within the
operating business segments, administrative functions formerly centralized
were restructured and relocated to certain division locations. Also steps
were taken by new management of the Company to reduce excess capacity that
existed at the acquisition date. As a result of these restructuring actions,
the Company recognized an $17.2 million liability at the acquisition date
consisting primarily of employee termination costs of $12.8 million and
employee relocation costs of $2.7 million. As of June 30, 1996 all amounts
have been paid and charged against the related liability.
The Company is a worldwide manufacturer and marketer of commercial air
conditioning and air filtration products and systems primarily for
commercial, institutional and industrial customers. In addition, in
December 1995, the Company entered the industrial refrigeration business
through the acquisition of J&E Hall, a United Kingdom's integrated provider
of industrial refrigeration and freezing equipment. The Company maintains
production facilities in nine countries and its products are sold in over 80
countries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated. The accompanying financial statements
reflect the financial results of the Company for the fiscal year ended June
30, 1996 and the periods from January 1, 1995 to July 1, 1995 and from May
2, 1994 to December 31, 1994 and of the Predecessor Company from January 2,
1994 to May 1, 1994 and for the fiscal year ended December 31, 1993. In
1995, the Company changed its fiscal year ended from the Saturday closest to
December 31 to the Saturday closest to June 30 to coincide with OYL's fiscal
year. For clarity of presentation in the consolidated financial statements,
all full fiscal years are shown to begin on January 1 and end on December
31, or to begin on July 1 and end on June 30. For the periods presented on
a basis other than a full fiscal year, actual period end dates are used.
Through December 31, 1994 certain foreign subsidiaries reported on fiscal
periods which ended one month prior to the Company's or Predecessor
Company's period-end. During the six month period ending July 1, 1995 the
closing date for the foreign subsidiaries was changed to reflect the
Company's current closing period. As a result, the July 1, 1995 financial
statements include the financial results of these foreign subsidiaries from
December 1, 1994 through July 1, 1995. The impact on sales and income from
operations for the period ended July 1, 1995 was increases in sales and
income from operations of approximately $19.1 million and $0.7 million,
respectively.
The preparation of financial statements in accordance with Generally
Accepted Accounting Principles require management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company invests cash in excess of operating requirements in
short-term time deposits, money market instruments, or commercial paper.
These investments have original maturities of less than three months and are
considered cash equivalents for financial reporting purposes.
INVENTORIES
Inventories are valued at the lower of cost or market at June 30, 1996
and July 1, 1995. Cost is determined by the last-in, first-out (LIFO) method
for U.S. inventories, (63% and 69%, respectively), and the first-in,
first-out (FIFO) method for the Company's foreign subsidiaries (37% and 31%,
respectively).
39
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated using the straight-line
method over their estimated useful lives as follows:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------
<S> <C> <C>
Buildings . . . . . . . . . . . . . . . . 20 to 40 years 20 to 45 years
Machinery and Equipment . . . . . . . . . 3 to 12 years 2 to 14 years
</TABLE>
Maintenance and repairs are charged to operations when incurred, while
expenditures which have the effect of extending the useful life of an asset
are capitalized.
INTANGIBLE ASSETS
The excess of cost over fair values of net assets acquired are being
amortized on a straight-line basis over forty years. Other identifiable
intangibles acquired include trademarks and tradenames; technical drawings
and technology; and assembled work force, which are being amortized on a
straight-line basis over forty, fifteen and ten years, respectively.
Effective April 1, 1996 the Company changed its estimate for the useful life
of goodwill, tradenames and trademarks, relating to the OYL Acquisition,
from 25 to 40 years to better reflect the estimated periods over which
economic benefits will be realized.
The excess of cost over fair values of net assets acquired of the
Predecessor Company were amortized on a straight-line basis, principally
over forty years. Other identifiable intangibles of the Predecessor Company,
which include the cost of technical drawings, patents, developed software,
trademarks and assembled work force, were amortized over lives ranging from
two to ten years, except for trademarks, which were amortized over forty
years.
On a periodic basis, the Company evaluates the carrying value of its
intangible assets to determine if the facts and circumstances suggest that
intangible assets may be impaired. If this review indicates that intangible
assets may not be recoverable, as determined based on the undiscounted cash
flow of the entity acquired over the remaining amortization period, the
Company's carrying value of intangible assets is reduced by the estimated
shortfall of cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in
the management of its interest rate and foreign currency exposures. The
Company does not enter into speculative derivative transactions.
The differential between interest rate cap premiums due and amounts
receivable under interest rate cap agreements are recognized as yield
adjustments to interest expense over the term of the related debt.
Gains and losses on foreign exchange forward contracts are recognized in
income and offset the foreign exchange gains and losses on the underlying
foreign currency transactions.
FOREIGN CURRENCIES
Assets and liabilities of the Company's subsidiaries outside the U.S. are
translated into U.S. dollars at the exchange rates in effect at the end of
the period. Revenue and expense accounts are translated at a weighted
average of exchange rates in effect during the period. Translation
adjustments that arise from translating a foreign subsidiary's financial
statements from local currency (the functional currency) to U.S. dollars are
reflected as a separate component of stockholder's equity.
40
<PAGE>
Transaction gains and losses that arise from exchange rate changes on
transactions denominated in a currency other than the local currency are
included currently in the results of operations. The Company recognized net
foreign currency transaction (gains) losses of ($1,444,000), ($948,000),
$617,000, $115,000 and $2,610,000 for the fiscal years and periods ended
June 30, 1996, July 1, 1995, December 31, 1994 May 1, 1994 and December 31,
1993, respectively.
REVENUE RECOGNITION
Revenues and costs are generally recognized as products are shipped or
services are rendered. Revenues and costs associated with long-term
contracts are recognized on the percentage-of-completion method. Provisions
are recorded for losses on contracts whenever it is estimated that costs
will exceed contract value. Unbilled revenue recognized on long-term
contracts is included in accounts receivable in the accompanying
Consolidated Balance Sheets.
PRODUCT WARRANTIES
Product warranties are provided as charges to current expense for
estimated normal warranty costs and, if applicable, for specific performance
issues known to exist on products sold. The expenses estimated to be
incurred are provided at the time of sale, based primarily upon estimates
derived from experience. Warranty costs on some purchased parts and
components are partially reimbursed to the Company by supplying vendors.
Estimated obligations beyond one year are classified as other long-term
liabilities. Revenue from the sale of extended warranty and related service
contracts is deferred and amortized over the respective contract life on a
straight-line basis.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were approximately $8.2 million, $4.3
million, $5.5 million, $3.5 million and $7.0 million for the fiscal years
and periods ended June 30, 1996, July 1, 1995, December 31, 1994, May 1,
1994 and December 31, 1993, respectively, and are included in selling,
general and administrative expenses in the accompanying Consolidated
Statements of Operations.
INCOME TAXES
The Company uses the liability method for financial accounting and
reporting of income taxes. Under the liability method, deferred tax assets
and liabilities are determined based on the difference between financial
statement carrying amounts and the tax bases of assets and liabilities.
These differences are measured at the enacted tax rates that will be in
effect when these differences reverse.
The Predecessor Company, with the consent of its shareholders, elected
"S" corporation status under the U.S. Internal Revenue Code effective March
29, 1987. U.S. federal and certain state income taxes (benefits) relating to
earnings and losses of the Predecessor Company after that date accrued to
the Predecessor Company's shareholders and, therefore, are not included in
the accompanying statements of operations. The Predecessor Company declared
cash dividends and accrued distributions to provide for related
shareholders' income tax payments.
At the beginning of the fiscal year ended December 31, 1993 the
Predecessor Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Adoption of SFAS No. 109,
applied without restating prior years financial statements, resulted in a
cumulative effect charge of approximately $1.0 million. See Note 9 for
further discussion.
NEW ACCOUNTING STANDARDS
In 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" and SFAS No.
123 "Accounting for Stock-Based
41
<PAGE>
Compensation". The Company does not expect the adoption of these standards
to have a material effect on the Consolidated Financial Statements.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, JULY 1,
1996 1995
-------- --------
<S> <C> <C>
Accounts receivable, trade . . . . . . . . . . . . . $224,921 $180,355
Accounts receivable, other . . . . . . . . . . . . . 6,728 4,222
-------- --------
231,649 184,577
Less allowance for doubtful receivables. . . . . . . 6,312 4,595
-------- --------
$225,337 $179,982
-------- --------
-------- --------
</TABLE>
The Company manufactures and sells heating, ventilating, air conditioning
and air filtration products to companies in various industries with the most
significant sales concentration being in the construction industry. The
Company performs periodic evaluations of its customers' financial condition
and generally does not require collateral. For domestic equipment sales, it
is the Company's practice to attach liens in the event of non-payment, when
such recourse is available. Trade receivables generally are due within
30-90 days.
4. INVENTORIES
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
FIFO cost:
Raw materials . . . . . . . . . . . . . . . $ 46,870 $ 44,858
Work-in-process . . . . . . . . . . . . . . 23,365 22,175
Finished goods. . . . . . . . . . . . . . . 42,067 40,729
-------- --------
112,302 107,762
LIFO adjustment . . . . . . . . . . . . . . 2,971 2,238
-------- --------
$115,273 $110,000
-------- --------
-------- --------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
Land. . . . . . . . . . . . . . . . . . . . . . . $11,495 $10,362
Buildings . . . . . . . . . . . . . . . . . . . . 62,455 62,281
Machinery and equipment . . . . . . . . . . . . . 98,710 85,253
-------- --------
172,660 157,896
Less accumulated depreciation and amortization. . 23,425 12,392
-------- --------
$149,235 $145,504
-------- --------
-------- --------
</TABLE>
At June 30, 1996 substantially all property, plant and equipment are
encumbered by various debt obligations of the Company.
42
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
Cost in excess of net assets acquired. . . . . $154,964 $144,956
Other intangibles:
Technology . . . . . . . . . . . . . . . . . 12,676 --
Trademarks . . . . . . . . . . . . . . . . . 61,161 61,161
Drawings . . . . . . . . . . . . . . . . . . 54,000 54,000
Workforce. . . . . . . . . . . . . . . . . . 18,417 18,417
-------- --------
Total other intangibles. . . . . . . . . . . 146,254 133,578
Less accumulated amortization. . . . . . . . 29,378 15,900
-------- --------
$271,840 $262,634
-------- --------
-------- --------
</TABLE>
7. DEBT
On May 2, 1994 the Company assumed the Predecessor Company's outstanding
borrowings totaling $312.7 million. The borrowings assumed included $42.7
million of short-term borrowings and $270.0 million of term debt including
$237.0 million of 14.25% senior subordinated debentures, $14.1 million of
senior term loans, and $18.9 million of mortgage notes, obligations under
industrial revenue bond issues and other borrowings. Additionally, on May
2, 1994 the Company's acquired bank debt was retired in full with a portion
of the proceeds from a capital infusion from OYL.
In July 1994, the Company entered into a $270 million Revolving Credit,
Letter of Credit, and Term Loan Agreement (Bank Agreement). Proceeds from
the Bank Agreement were used to refinance the 14.25% senior subordinated
debentures that had been assumed in connection with the May 2, 1994
acquisition. In February 1996, an amendment to the Bank Agreement was
executed in which the lenders consented to the issuance of the $125 million
Senior Unsecured Notes and the $80 million Receivables Securitization Program
("the Refinancing"). The February 1996 amendment significantly restated
commitment amounts, repayment terms, interest rates, and security provisions.
The amended Revolving Credit portion of the Bank Agreement ("Revolver") has
a five year term (expiring in February, 2001) and provides for maximum
aggregate short-term borrowings of $35 million and up to $35 million for
letters of credit. However, the combined amount of short-term borrowings
plus letters of credit cannot exceed $35 million. Use of the Revolver is
subject ot he Company's availability (as defined in the Bank Agreement) and
is based on the Company's level of domestic inventories. At June 30, 1996 no
borrowings were outstanding under this facility, $0.1 million in letters of
credit were issued and outstanding and the Company had approximately $30.0
million in additional borrowing availability. The Company is required to pay
a commitment fee of 3/8% on the unused portion of the Revolver.
Interest on Revolver advances is generally payable quarterly based, at
the Company's option, on (1) the higher of the bank prime rate or a rate
based upon the Federal Funds Rate plus a specified premium, or (2) the
average rate at which Eurodollar deposits are offered to prime banks in the
London interbank market (LIBOR) plus a specified premium. The interest rate
premiums are determined by an interest rate matrix which is based on certain
quarterly financial ratios as described in the Bank Agreement. As of June
30, 1996 the Company's interest rate premiums were LIBOR + 1.50% or prime +
0.50% based on the applicable financial ratios. The interest rate premiums
are subject to a 0.375% increase or may decrease by as much as 0.50%,
depending on the applicable quarterly financial ratios. At June 30, 1996
the Company's borrowing rate under the Bank Agreement, was approximately
7.00%. The average effective interest rate under the Bank Agreement for the
fiscal year ended June 30, 1996 was approximately 7.78%.
In February 1996, the Company entered into a five-year agreement to sell,
on a revolving basis, an undivided percentage ownership interest in a
designated pool of trade accounts receivable ("Securitization
43
<PAGE>
Program"). The Securitization Program provides for up to $80 million in short
term borrowings. Availability is based on the amount of U.S. dollar trade
receivables determined to be eligible for the program. At June 30, 1996 the
Company had $36.0 million of outstanding borrowings under the Securitization
Program arrangement and approximately $20 million in additional borrowing
availability. Both the accounts receivable and related short term debt
continue to be included in the Company's consolidated balance sheet.
Financing costs, which currently accrue at an average rate of approximately
6.0%, are included in interest expense.
At June 30, 1996 certain of the Company's foreign subsidiaries had
available lines of credit with foreign banks of approximately $50 million
which may be drawn as needed at an average interest rate of approximately
8%. Outstanding borrowings against international lines of credit amounted
to approximately $29.5 million and $12.0 million at June 30, 1996 and July
1, 1995, respectively. In addition, certain of the Company's foreign
subsidiaries have non-borrowing bank facilities (letters of credit,
guarantees, performance bonds, etc.) totaling $25 million as of June 30,
1996 and July 1, 1995 of which approximately $18 million was used at June
30, 1996 and $17 million used at July 1, 1995.
The Company's foreign subsidiaries have agreements in place whereby they
can sell trade receivables on a revolving basis, with limited recourse. The
subsidiaries pay fees equal to approximately an annual interest rate of 9%
on such receivables outstanding. The fees are included in interest expense.
Provisions for losses on receivables sold which become uncollectible are
included in the Company's allowance for doubtful receivables. Receivables
sold which remained uncollected were $0.1 million and $6.6 million at June
30, 1996 and July 1, 1995, respectively.
The Company also has available letter of credit facilities totaling $25
million which are supported by a letter of credit from OYL and were fully
utilized at June 30, 1996 and July 1, 1995. The commitments made under
these facilities expire in March of 1997, but may be extended annually for
successive one year periods with the consent of the banks providing the
facilities.
The weighted average effective interest rate on short-term borrowings was
6.1% at June 30, 1996 and 7.7% at July 1, 1995.
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JULY 1,
1996 1995
---- ----
<S> <C> <C>
Senior Term Loans $ 73,000 $174,600
Promissory Note due May 2, 1999,
bearing interest at 6%, and secured
by a letter of credit 11,500 11,500
Senior Unsecured Notes due February 15,
2003, bearing interest at 8.875% 125,000 --
Other issues 27,869 18,175
-------- --------
237,369 204,275
Less: Current maturities (9,879) (26,062)
-------- --------
$227,490 $178,213
-------- --------
-------- --------
</TABLE>
In February 1996, the Company issued the 8.875% Senior Unsecured Notes
("Senior Notes") with the proceeds being used to reduce indebtedness under
the Bank Agreement. The Senior Notes were issued under an indenture
agreement which, among other things, contains restrictive covenants relating
to
44
<PAGE>
dividend distributions, additional debt, sale of assets, transactions
with affiliates, guarantees and investments by the Company and its
subsidiaries. The Senior Notes are not redeemable prior to maturity
(February 15, 2003) and are not subject to any sinking fund requirement.
The term loan portion of the Bank Agreement consists of Senior Term Loans
that are a direct obligation of the Company. These term loans are secured
by substantially all the domestic assets (except U.S. trade receivables) of
the Company and its domestic subsidiaries and a portion of the capital stock
of certain foreign subsidiaries. The Senior Term Loans are payable in
quarterly installments of varying amounts through March 2001. Interest is
generally payable quarterly based on the same interest rate structure as the
Revolver.
The Bank Agreement contains covenants that, among other things, impose
limitations on incurrence of indebtedness, capital expenditures,
transactions with affiliates, mergers and the disposition of assets,
investments by the Company, and transactions involving the capital of the
Company, including payment of any dividends. In addition, the Bank
Agreement contains financial covenants (as amended in February of 1996)
relating to net worth, leverage ratio, interest coverage, and fixed charge
coverage. At June 30, 1996 and July 1, 1995 the Company was in compliance
with the financial covenants.
The Bank Agreement also contains provisions requiring accelerated
payments. The generation of cash resulting from, among other things, the
sale of any material asset, collection of any special receipt (as defined)
or any excess cash flow (as defined) require certain accelerated payments.
No accelerated payments were required during the fiscal year and period
ended June 30, 1996 or July 1, 1995.
The $11.5 million, 6% Promissory Note was issued in connection with the
May 2, 1994 acquisition and is payable to a bank, as paying agent for the
benefit of certain former stockholders of the Predecessor Company. The
Promissory Note is subject to offsets and increases (but not in excess of
the original current amount) associated with indemnifications and any
proceeds of recovery (as defined).
Included in other issues of long term debt are various term loans
incurred by certain foreign subsidiaries, as well as obligations under
Industrial Revenue Bonds and mortgage notes. The foreign term loans are
secured by certain assets of the issuing foreign subsidiary and contain
various repayment terms ranging from 5 to 15 years. The outstanding balance
of these foreign term loans was $13.3 million and $4.4 million at June 30,
1996 and July 1, 1995, respectively.
On January 26, 1995 the Company secured a loan of $10 million from OYL.
Effective March 31, 1995 OYL transferred all of OYL's interest in the loan
to AAF-McQuay Group, Inc. Effective March 31, 1995 the note was converted
into equity in the form of additional paid-in capital.
The Company paid cash interest of $21.7 million $10.9 million, $29.4
million, $1.6 million, and $39.1 million for the fiscal years and periods
ended June 30, 1996, July 1, 1995, December 31, 1994, May 1, 1994 and
December 31,1993, respectively.
Maturities of long-term debt during each of the next five fiscal years
subsequent to June 30, 1996 are as follows (dollars in millions): 1997,
$9.9; 1998, $11.3; 1999, $30.0; 2000, $24.5; 2001, $23.2.
8. FINANCIAL INSTRUMENTS
The Company operates internationally and borrows at floating interest
rates, giving rise to exposure to market risks from changes in foreign
exchange rates and interest rates. The Company utilizes derivatives to
reduce those risks. The notional amounts of derivatives noted below do not
represent amounts exchanged by the parties and, thus, are not a measure of
the exposure of the Company through its use of derivatives. The Company
does not hold or issue derivative financial instruments for trading
purposes.
45
<PAGE>
INTEREST RATE RISK MANAGEMENT: The Company may, at times, seek to limit
the impacts of rising interest rates on its variable rate debt through the
use of interest rate derivative instruments. The Company entered into a
series of three-year, interest rate cap agreements ("Caps") in 1994 to hedge
100% of its variable interest rate Senior Term Loans against floating
interest rates. The notional amount ($174.6 million at July 1, 1995) of the
Caps was scheduled to reduce at the same rate and time as quarterly
amortization payments are made on the Senior Term Loans. Under the terms of
the Caps, the Company received a cash payment if the 90-day LIBOR interest
rate was above a certain stated cap level at various quarterly measurement
dates. For the periods ended July 1, 1995 and December 31, 1994 the Company
recorded a net benefit of $1.2 million and $121,000, respectively, under the
Caps as a reduction to interest expense. In December 1995, the interest rate
cap agreements were terminated. The deferred loss on the early termination
of these agreements was not material. The Company entered into a new
amortizing interest rate swap agreement with an initial notional amount of
$100 million. Under this agreement the Company pays an interest rate equal to
LIBOR when LIBOR is greater than 4.75% or less than 6.6%; otherwisw, the
Company pays an interest rate of 6.6%. This swap agreement was terminated in
June 1996. The gain on early termination of the swap agreement was not
material.
FOREIGN CURRENCY MANAGEMENT: The Company enters into short-term foreign
exchange contracts to hedge its exposure to currency fluctuations affecting
certain foreign currency denominated trade payables and certain intercompany
debt of its foreign subsidiaries. The notional amount of foreign exchange
forward contracts outstanding at June 30, 1996 and July 1, 1995 was
approximately $34.7 million and $36.2 million, respectively. The U.S.
dollar equivalent notional amount of these foreign exchange forward
contracts by applicable foreign currency at June 30, 1996 and July 1, 1995
was as follows: Canadian dollars, $10.7 million and $15.7 million; British
pounds $0.1 million and $5.8 million; Singapore dollars $5.9 million and
$5.2 million; Japanese yen $0.1 million and $2.2 million; Dutch guilders
$0.1 million and $2.9 million; Italian lira $2.6 million and $1.6 million;
and French francs $15.2 million and $2.8 million.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company monitors the credit worthiness of the counterparties and presently
does not anticipate nonperformance by the counterparties. The credit
exposure of derivative financial instruments is represented by the fair
value of contracts with a positive fair value.
FASB Statement No. 107, Disclosures about Fair Values of Financial
Instruments, defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. The carrying values reported in the balance sheets for
cash and cash equivalents, accounts receivables and short-term borrowings
approximate their respective values. The fair value of the Company's Senior
Unsecured Notes is estimated using a quoted market price at June 30, 1996.
The carrying amount of all other long-term debt approximates fair value.
The aggregate fair value of the Company's long-term debt at June 30, 1996 is
$233.6 million compared to the carrying value of $237.4 million. The
carrying amount of the Company's long-term debt at July 1, 1995 of $204.3
million approximates fair value. The fair value of the Company's foreign
exchange forward contracts are based on current settlement values and fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the courterparties' credit standing. At
June 30, 1996 and July 1, 1995 the net carrying amount of these contracts
approximates their fair value.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
at June 30, 1996 and July 1, 1995 are as follows (dollars in thousands):
46
<PAGE>
<TABLE>
<CAPTION>
SUCCESSOR
---------
JUNE 30, JULY 1,
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . $ 11,987 $ 21,162
Tax over book fixed assets basis . . . . . . . 811 829
Accrual for pension and retirement benefits. . 5,343 5,821
Accrual for other expenses . . . . . . . . . . 21,199 24,865
Tax credit carryforwards . . . . . . . . . . . 4,760 687
Other. . . . . . . . . . . . . . . . . . . . . 2,823 3,397
--------- ---------
Total deferred tax assets. . . . . . . . . . . 46,923 56,761
Valuation allowance. . . . . . . . . . . . . . (21,089) (22,742)
--------- ---------
Net deferred tax assets. . . . . . . . . . . . 25,834 34,019
Deferred tax liabilities:
Unrepatriated earnings of foreign
subsidiaries. . . . . . . . . . . . . . . . . 2,519 2,337
Book over tax fixed assets basis . . . . . . . 24,574 26,911
Book over tax intangible asset basis . . . . . 37,046 38,806
Book over tax inventory basis. . . . . . . . . 7,583 5,811
Other. . . . . . . . . . . . . . . . . . . . . 5,701 4,054
--------- ---------
Total deferred tax liabilities . . . . . . . . 77,423 77,919
--------- ---------
Net deferred tax liabilities . . . . . . . . . $51,589 $43,900
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets for net operating loss carryforwards and other items
at June 30, 1996 and July 1, 1995 includes approximately $16 million and
$21 million, respectively, related to periods prior to the acquisition by OYL
which have been offset by a valuation allowance. If realized, the benefit of
these deferred tax assets will be applied to reduce goodwill related to the
acquisition.
Significant components of the provision for income taxes for the fiscal
years and periods ended June 30, 1996, July 1, 1995, December 31, 1994, May
1, 1994, and December 31, 1993 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------------------------------- ------------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal taxes-Current . . . . . . . $ 3,650 $1,061 $ -- $ -- $ --
Federal taxes-Deferred. . . . . . . 6,199 1,553 3,256 -- --
State taxes . . . . . . . . . . . . 1,024 240 609 -- --
Foreign taxes-Current . . . . . . . 6,107 3,538 2,107 230 3,694
Foreign taxes-Deferred. . . . . . . 1,443 363 862 94 750
------- ------ ------ ------ ------
Total . . . . . . . . . . . . . . . $18,423 $6,755 $6,834 $324 $4,444
------- ------ ------ ------ ------
------- ------ ------ ------ ------
</TABLE>
During the fiscal years and periods ended June 30, 1996, July 1, 1995,
December 31, 1994, May 1, 1994 and December 31, 1993 the Company paid income
taxes of approximately $ 8.7 million, $3.2 million, $4.1 million,
$1.9 million, and $5.0 million, respectively. A reconciliation between the
Company's reported tax provision and the tax provision computed based on the
U.S. statutory rate is as follows (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------------------------------- ------------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statutory U.S. Federal income tax
provision (benefit) . . . . . . . . . . . . $12,237 $4,567 $2,828 $(8,691) $(9,615)
Nondeductible goodwill amortization. . . . . 1,871 1,153 1,312 -- --
Foreign tax credits not utilized . . . . . . 2,375 1,155 940 94 750
State taxes, net of federal benefit. . . . . 1,024 156 396 -- --
Effect of "S" Corporation status . . . . . . -- -- -- 8,691 10,451
47
<PAGE>
Other. . . . . . . . . . . . . . . . . . . . 916 (276) 1,358 230 2,858
------- ------ ------ ------- -------
Reported tax provision . . . . . . . . . . . $18,423 $6,755 $6,834 $ 324 $ 4,444
------- ------ ------ ------- -------
------- ------ ------ ------- -------
</TABLE>
At June 30, 1996 the Company has net operating loss and tax credit
carryforwards of approximately $37 million and $4.4 million, respectively, in
the United States and various foreign countries. Approximately $13.0 million
of the net operating loss carryforwards and $4.4 of the tax credit
carryforwards expire in fiscal years 1997 through 2011. The remaining net
operating loss carryforwards can be carried forward indefinitely.
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." SFAS No. 109 was adopted by the Predecessor Company at the
beginning of the fiscal year ended December 31, 1993 thereby changing its
method of accounting for income taxes from the deferred method to the
liability method as required by SFAS No. 109. Adoption of SFAS No. 109,
applied without restating prior years' financial statements resulted in a
cumulative effect charge of $1.0 million primarily related to deferred taxes
in foreign countries. For the fiscal year ended December 31, 1993 the
application of SFAS No. 109 did not affect pre-tax income from continuing
operations.
10. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans in effect for substantially
all of its domestic hourly employees and certain of its foreign employees.
Benefits are computed using formulas which are generally based on age and
years of service. Plan assets consist primarily of common stock, insurance
contracts and government obligations. The Company's method of funding
pension costs is to contribute amounts to the plans sufficient to meet
minimum funding requirements, plus such amounts as the Company may determine
to be appropriate from time to time.
Pension expense for the Company's domestic defined benefit pension plans
for the fiscal years and periods ended June 30, 1996, July 1, 1995,
December 31, 1994, May 1, 1994 and December 31, 1993 includes the following
components (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------ ----------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . $ 301 $ 127 $ 199 $ 90 $ 269
Interest cost on the projected benefit
obligation. . . . . . . . . . . . . . . . 1,916 987 1,244 629 1,886
Return on plan assets. . . . . . . . . . . (4,144) (2,418) (153) (205) (2,367)
Net amortization and deferral. . . . . . . 2,431 1,624 (1,023) (330) 696
------- ------- ------- ----- -------
Total pension expense. . . . . . . . . . . $ 504 $ 320 $ 267 $ 184 $ 484
------- ------- ------- ----- -------
------- ------- ------- ----- -------
</TABLE>
Pension expense for the Company's foreign pension plans for the fiscal
years and periods ended June 30, 1996, July 1, 1995, December 31, 1994,
May 1, 1994 and December 31, 1993 includes the following components (dollars
in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------ ------------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service cost. . . . . . . . . . . . . . . . $ 950 $ 538 $ 386 $ 253 $ 759
Interest cost on the projected benefit
obligation . . . . . . . . . . . . . . . . 1,656 949 897 553 1,660
Return on plan assets . . . . . . . . . . . (1,820) (1,051) (959) (621) (1,733)
Amortization of (gain) loss . . . . . . . . (18) -- -- -- 20
------- ------- ----- ----- -------
Total pension expense . . . . . . . . . . . $ 768 $436 $ 324 $ 185 $ 706
------- ------- ----- ----- -------
------- ------- ----- ----- -------
</TABLE>
48
<PAGE>
The funded status of the domestic defined benefit plans as of
June 30, 1996 and July 1, 1995 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JULY 1, 1995
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Vested benefits. . . . . . . . . . . . $ 9,855 $15,124 $8,634 $16,908
Nonvested benefits . . . . . . . . . . 110 721 11 110
------- ------- ------ -------
Accumulated benefit obligation and
projected benefit obligation. . . . . 9,965 15,845 8,645 17,018
Fair value of plan assets. . . . . . . 11,428 10,972 8,849 11,107
------- ------- ------ -------
Plan assets (in excess) less than
projected benefit obligation. . . . . (1,463) 4,873 (204) 5,911
Unrecognized net gain. . . . . . . . . 1,934 1,676 621 943
------- ------- ------ -------
Pension liability included in balance
sheet . . . . . . . . . . . . . . . . $471 $6,549 $417 $6,854
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
The funded status of the Company's foreign defined benefit plans,
including termination indemnities, as of June 30, 1996 and July 1, 1995 is
presented below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JULY 1, 1995
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Vested benefits. . . . . . . . . . . . $33,667 $ 985 $15,488 $ 886
Nonvested benefits . . . . . . . . . . 333 -- 398 --
------- ------ ------- ------
Accumulated benefit obligation . . . . 34,000 985 15,886 886
Additional benefits related to future
compensation levels . . . . . . . . . 9,750 356 4,465 319
------- ------ ------- ------
Projected benefit obligation . . . . . 43,750 1,341 20,351 1,205
Fair value of plan assets. . . . . . . 48,928 -- 22,617 --
------- ------ ------- ------
Plan assets (in excess) less than
projected benefit obligation. . . . . (5,178) 1,341 (2,266) 1,205
Unrecognized net gain. . . . . . . . . 1,762 110 2,195 174
------- ------ ------- ------
Pension (asset) liability included
in balance sheet. . . . . . . . . . . $(3,416) $1,451 $(71) $1,379
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
The weighted average discount rate used to measure the projected
obligation for the domestic plans was 7.75% as of both June 30, 1996 and
July 1, 1995. The computations above for domestic plans assumes an expected
long-term rate of return on assets of 9% for each period presented.
The foreign plans included in the preceding tables used weighted average
discount rates ranging from 7.0% to 8.5% at June 30, 1996 and July 1, 1995.
The assumed rate of increase in future compensation levels ranged from 4.0%
to 5.0% at June 30, 1996 and July 1, 1995. The expected long-term rate of
return on assets was 7.0% to 8.5% for the fiscal year and period ended
June 30, 1996, July 1, 1995 and December 31, 1994 and 6.5% to 9.0% for the
periods ended May 1, 1994 and December 31, 1993.
The Company has a defined contribution plan that primarily covers
domestic salaried employees. Company contributions to the plan are based on
employee compensation. The Company expensed $1,411,000, $646,000,
$1,190,000, $306,000, and $1,437,000 under this plan during the fiscal years
and
49
<PAGE>
periods ended June 30, 1996, July 1, 1995, December 31, 1994, May 1, 1994 and
December 31, 1993, respectively.
The Company also sponsors a 401(k) defined contribution plan that
primarily covers domestic salaried employees. Participants may contribute a
percentage of their compensation to the plan. Contributions are matched by
the Company with certain limitations. During the fiscal years and periods
ended June 30, 1996, July 1, 1995, December 31, 1994, May 1, 1994 and
December 31, 1993 the Company expensed $1,094,000, $616,000, $988,000,
$420,000, and $1,104,000, respectively, related to this plan.
The Company sponsors domestic defined benefit health care plans for
certain salaried and nonsalaried employees whereby certain health care and
life insurance benefits are provided on retirement. The benefits are
provided only for a frozen group of active employees and retirees. For these
plans, medical trend rates assume escalation of 10.5 percent decreasing
gradually for five years to the ultimate medical trend rate of 5.5 percent.
The aggregate increase in the accumulated postretirement benefit obligation
and the service cost plus interest for the domestic plan as of and for the
fiscal year ended June 30, 1996 assuming a one percentage point increase in
the medical trend rate in each year is $415,000 and $65,000, respectively.
The weighted average discount rate used in determining the June 30, 1996 and
July 1, 1995 accumulated postretirement benefit obligation was 7.75%. The
domestic plans are unfunded.
The Company also sponsors a foreign defined benefit health care plan for
certain salaried and nonsalaried employees whereby certain health care and
life insurance benefits are provided on retirement. For this plan, medical
trend rates assume escalation of 7 percent decreasing ratably to the
ultimate medical trend rate of 4.5 percent in the year 2010. The
accumulated postretirement benefit obligation and service cost plus interest
would not increase significantly assuming a one percent increase in the
medical trend rate as of and for the fiscal year ended June 30, 1996. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at June 30, 1996 and July 1,
1995. The foreign plan is also unfunded.
Postretirement benefit expense for the Company's domestic defined benefit
health care plans for the fiscal years and periods June 30, 1996, July 1,
1995, December 31, 1994, May 1, 1994 and December 31, 1993 includes the
following components (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------- ----------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service cost . . . . . . . . . . . . $218 $86 $133 $ 55 $166
Interest cost on the accumulated
postretirement benefit obligation . 410 195 277 123 369
Net amortization and deferral. . . . (11) (24) -- -- --
---- --- ---- ---- ----
Postretirement benefit expense . . . $617 $257 $410 $178 $535
---- --- ---- ---- ----
---- --- ---- ---- ----
</TABLE>
Postretirement benefit expense for the Company's foreign defined benefit
healthcare plans for the fiscal years and periods ended June 30, 1996, July 1,
1995, December 31, 1994, May 1, 1994, and December 31, 1993 includes the
following components (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------- ------------------------
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service cost for the current
period. . . . . . . . . . . . . . . $ -- $-- $ 37 $10 $30
Interest cost on the accumulated
postretirement benefit obligation . 57 35 74 27 81
Net amortization and deferral. . . . (20) (14) -- -- --
---- --- ---- --- ---
Postretirement benefit expense . . . $37 $21 $111 $37 $111
---- --- ---- --- ---
---- --- ---- --- ---
</TABLE>
50
<PAGE>
The funded status of both domestic and foreign defined benefit health
care plans at June 30, 1996 and July 1, 1995 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 JULY 1, 1995
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
PLANS PLAN PLANS PLAN
----- ---- ----- ----
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees . . . . . . . . . . . . . . $3,104 $ 828 $2,661 $ 803
Fully eligible active plan
participants. . . . . . . . . . . . 751 -- 580 --
Active plan participants . . . . . . 2,021 -- 2,205 --
Unrecognized gain. . . . . . . . . . 308 462 565 487
------ ------ ------ ------
Accrued postretirement benefit
obligation. . . . . . . . . . . . . $6,184 $1,290 $6,011 $1,290
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The Company has an employment agreement with an executive officer which
provides the executive the option to purchase a specified percentage of the
Company's common stock. Exercise of this option is contingent upon certain
performance measures being achieved and other conditions specified in the
agreement.
The Predecessor Company had employment agreements with certain of its
executives that became effective in 1991. These agreements provided the
executives with specified benefits in the event of specified circumstances
including a change in control (as defined). The benefits provided by these
agreements were generally based on the fair value of the Predecessor Company's
stock. Approximately $600,000 was expensed during the period ended
December 31, 1993 relating to these agreements. The May 2, 1994 purchase of
the Predecessor Company by OYL was a change in control as defined by the
agreements. The Predecessor Company expensed $2.2 million relating to these
agreements during the period ended May 1, 1994.
The Predecessor Company had an employee stock option plan for key
management employees. The options were exercisable only under specified
limited conditions including the change in control of the company. The May
2, 1994 purchase of the Predecessor Company was a change in control as
defined by the stock option plan and accordingly the Predecessor Company
expensed $717,000 relating to the stock option plan.
As of December 31, 1993 an officer of the Predecessor Company held
warrants to purchase shares of the Predecessor Company's common stock. The
warrants were exercisable only under specified limited conditions (including
completion of a public offering or sale of the company). The May 2, 1994
purchase of the Predecessor Company caused these warrants to become
exercisable and accordingly the Predecessor Company expensed $5.9 million
relating to the warrants during the period ended May 1, 1994.
11. LEASES AND COMMITMENTS
The following is a schedule of future minimum lease payments required
under third party operating leases that have initial or remaining
noncancelable lease terms in excess of one year (dollars in thousands):
Year
----
1997 . . . . . . . . . . . . . . . . . . . $8,452
1998 . . . . . . . . . . . . . . . . . . . 4,986
1999 . . . . . . . . . . . . . . . . . . . 2,799
2000 . . . . . . . . . . . . . . . . . . . 1,343
2001 . . . . . . . . . . . . . . . . . . . 824
Thereafter . . . . . . . . . . . . . . . . 9
Rental expense associated with third party operating leases was
approximately $11.6 million, $5.6 million, $7.8 million, $2.8 million, and
$11.0 million for the fiscal years and periods ended June 30, 1996,
51
<PAGE>
July 1, 1995, December 31, 1994, May 1, 1994 and December 31, 1993,
respectively. It is expected that, in the normal course of business, leases
that expire will be renewed or replaced by leases on other property and
equipment.
The Company has a contract whereby certain of its data processing
operations are managed by a third party. Monthly charges during the fiscal
years and periods ended June 30, 1996, July 1, 1995, December 31, 1994, May 1,
1994 and December 31, 1993 averaged approximately $832,000, $684,000,
$758,000, $685,000, and $520,000, respectively under this contract. This
contract extends through December 31, 2000 but includes certain early
termination options.
12. CONTINGENCIES
INDEMNIFICATION AGREEMENT
The purchase agreement between OYL and the former owners of the
Predecessor Company contains certain indemnifications relating to specified
contingencies that existed as of the acquisition date. Specifically, the
former owners of the Predecessor Company have an indemnification obligation
for losses relating to certain environmental, tax, and litigation matters.
Under terms of the purchase agreement, the Company is responsible for the
first $5.8 million of indemnified losses. Indemnified losses (net of
recoveries) exceeding $5.8 million must be indemnified by the former owners
of the Predecessor Company up to a maximum of $18 million. If the ultimate
amount expended by the Company for contingencies subject to indemnification
exceeds $23.8 million, the excess will be borne by the Company. If the
aggregate amount expended is less than $23.8 million, the Company will first
offset amounts exceeding $5.8 million against the $11.5 million promissory
note discussed in Note 7. Indemnified losses in excess of $17.3 million
would then be indemnified by the former owners of the Predecessor Company up
to $6.5 million. Claims for indemnified losses can be made for up to five
years after the acquisition date of May 2, 1994. The Company believes that
the ultimate liability for indemnified losses will exceed $23.8 million and
has recognized this noncurrent liability in the accompanying Consolidated
Balance Sheets.
ENVIRONMENTAL MATTERS
The Company is subject to potential liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
(CERCLA), and other federal, state and local statutes and regulations
governing the discharge of pollutants into the environment and the handling
and disposal of hazardous substances and waste. These statutes and
regulations, amongst other things, impose potential liability on the Company
for remediating contamination arising from the Company's past and present
operations and from former operations of other entities at sites later
acquired and now owned by the Company. Many of the Company's facilities
have operated for many years, and substances which are or might be
considered hazardous were generated, used, and disposed of at some
locations, both on- and off-site. Therefore, it is possible that
environmental liabilities in addition to those described below may arise in
the future. The Company records liabilities if, in management's judgment,
environmental assesments or remedial efforts are probable and the costs can
be reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adusted if ne essary based on the completion of a formal study
or the Company's commitment to a formal plan of action. The Company believes
that all environmental liabilities discussed below are subject to the
indemnification agreement with the former owners of the Predecessor Company
described above.
In 1988, a lawsuit was filed in federal court against the Predecessor
Company concerning the alleged release of trichloroethylene at a former
Visalia, California manufacturing facility (Visalia). In November 1990, the
Predecessor Company entered into a settlement agreement with all known
potentially responsible parties at Visalia whereby the Predecessor Company
agreed to be solely responsible for the costs of the remaining cleanup. As
of June 30, 1996 the Company and Predecessor Company had incurred over $10
52
<PAGE>
million for cleanup costs and legal fees related to the Visalia site, and,
although the exact amount of the costs of this remediation is not
ascertainable, the Company estimates future probable costs to be
approximately $7.5 million on a nondiscounted basis through the year 2006
based upon cost projections provided by the Company's environmental
consultants.
The Company had filed suit against several insurers seeking coverage with
respect to the Visalia site. The Company and Predecessor Company have
already settled with other insurers from which $11 million has been
recovered. No amounts have been recorded in the accompanying Consolidated
Balance Sheet relating to these potential recoveries.
The Predecessor Company was named as a potentially responsible party
arising from accidental trichloroethane spills at a facility in Wilmington,
North Carolina. The Company estimates the probable expenses for future
cleanup to be approximately $6.6 million on a nondiscounted basis through
the year 2006 based upon cost projections provided by the Company's
environmental consultants. The Predecessor Company has already recovered
from its primary insurance carrier the limit of its policy related to this
matter. The Company's excess insurance carrier failed to respond to the
Company's claim for coverage. As a result, the Company filed suit against
this carrier for recovery of the cleanup and remediation costs at the
Wilmington site. The carrier was later granted permission by the Court to
file a Motion for Summary Judgment. In November 1995, the Court granted the
carrier's Motion as to liability but denied the Motion concerning the
Company's bad faith and insurance code claims. Although these claims were
set for trail, the Company asked the Court to make its coverage decision
final and to abate the remaining claims so that the Company could appeal the
Court's ruling on coverage. The court granted this request and the Company is
in the process of appealing the Court's ruling. No amounts have been recorded
in the accompanying consolidated Balance Sheets relating to these potential
recoveries.
In July 1993, the Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue No. 93-5, "Accounting for Environmental Liabilities.'' EITF
93-5 requires that an environmental liability be evaluated independently
from any potential claim for recovery (a two-event approach) and that the
loss arising from the recognition of an environmental liability should be
reduced only when a claim for recovery is probable of realization. This was
in contrast to the Predecessor Company's past practice of recording a claim
for recovery when realization was reasonably possible. During the fiscal
year ended December 31, 1993 the Predecessor Company adopted EITF 93-5 and
recognized a $13.9 million expense related to potential insurance claim
recoveries relating to the Visalia and Wilmington sites. The Company
recognized the expense as a change in accounting principle inseparable from
a change in accounting estimate. The $13.9 million expense is included in
selling, general and administrative expense in the accompanying Consolidated
Statement of Operations.
The Predecessor Company discovered contaminants in the soil and/or
groundwater at its manufacturing facilities in Faribault, Minnesota,
Scottsboro, Alabama and Staunton, Virginia. The level of contamination
exceeds mandated levels and will require remediation. During the fiscal year
ended December 31, 1993 the Predecessor Company recorded a provision of
approximately $21.3 million relating to these sites. Based upon estimates
prepared by environmental consultants, at June 30, 1996 the Company
estimates that related probable remediation costs will be approximately $21
million. The Company is currently assessing its insurance coverage and
potential recovery of such costs from third parties. No amounts have been
recorded in the accompanying Consolidated Balance Sheets relating to these
potential recoveries.
INCOME TAX
The Predecessor Company's U.S. federal income tax returns for the taxable
years ending in 1987, 1988, 1989 and 1990 have been examined by the Internal
Revenue Service. Adjustments to the taxable income for each of these years
have been proposed. Portions of the resulting tax liabilities would be
imposed directly on the Company or its subsidiaries, and the Company is
obligated under the purchase agreement to make payments to the former owners
of the Predecessor Company to compensate for the remainder of the tax
liabilities which would be imposed on them under Subchapter S of the
Internal Revenue Code. That
53
<PAGE>
agreement also entitles the Company to payments from the former shareholders
of certain tax refunds or benefits which the former owners may realize.
Payments by the Company under this agreement are indemnified losses under the
purchase agreement (as discussed above), and receipts by the Company from the
former owners, as well as certain other future tax benefits which the Company
may realize on its own tax returns must be subtracted from losses which are
subject to indemnification.
In March 1995, the Internal Revenue Service opened an examination of the
Predecessor Company's tax returns for the years ending in 1991, 1992, 1993
and 1994. Other than issues originating in earlier years which would also
affect these years, there have been no material adjustments proposed during
this examination.
LITIGATION
The Company is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out
of the use of the Company's products. The Company is also involved in
litigation and administrative proceedings involving employment matters and
commercial disputes. Some of these lawsuits include claims for punitive as
well as compensatory damages. The Company is insured for product liability
claims for amounts in excess of established deductibles and accrues for the
estimated liability on a case-by-case basis up to the limits of the
deductibles. All other claims and lawsuits are also handled on a
case-by-case basis.
The Company does not believe that the potential liability from the
ultimate outcome of environmental, income tax and litigation matters will
have a material adverse effect on it.
13. EXTRAORDINARY ITEM
During fiscal year June 30, 1996 the Company completed the Refinancing.
See Note 7. As part of the Refinancing the Company used some of the
proceeds from the offering to repay long-term debt. As a result, the
Company recorded an extraordinary item of $1.6 million ($2.7 million net of
$1.1 million tax benefit) relating to an accelerated charge-off of
unamortized debt issuance cost.
14. SEGMENT INFORMATION
The Company serves the air quality control industry with three industry
segments: Commercial Air Conditioning ("Commercial") the manufacture, sale
and distribution of heating, ventilating and air conditioning products,
Filtration Products ("Filtration"), the manufacture and sale of air
filtration products and systems and Industrial Refrigeration
("Refrigeration") the manufacture sale and service of industrial
refrigeration and freezing equipment. The Refrigeration segment was
entered into in December 1995 with the acquisition of J&E Hall. See note 15
for further discussion. Information relating to operations in each industry
segment and information by geographic area is as follows as of and for the
fiscal years and periods ended June 30, 1996, July 1, 1995, December 31,
1994, May 1, 1994 and December 31, 1993:
54
<PAGE>
<TABLE>
<CAPTION>
CLASSIFIED BY INDUSTRY: SUCCESSOR PREDECESSOR
- ----------------------- ---------------------------------------- ----------------------------
JANUARY 1, MAY 2, JANUARY 2,
YEAR ENDED 1995 TO 1994 TO 1994 TO YEAR ENDED
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---------- ---------- ------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales:
Commercial.......................... $526,164 $253,874 $283,966 $133,782 $403,077
Filtration.......................... 341,707 175,520 201,705 99,290 303,897
Refrigeration....................... 40,763 -- -- -- --
Eliminations........................ (7,239) (884) (990) (588) (1,478)
-------- -------- -------- -------- --------
Total............................. $901,395 $428,510 $484,681 $232,484 $705,496
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Operating Income (Loss):
Commercial.......................... $ 29,929 $ 11,308 $ 8,192 $ (1,860) $(13,008)
Filtration.......................... 28,664 11,968 16,049 1,058 17,955
Refrigeration....................... 485 -- -- -- --
Corporate........................... (2,382) -- -- (8,848) (1,435)
-------- -------- -------- -------- --------
Total............................. $ 56,696 $ 23,276 $ 24,241 $ (9,650) $ 3,512
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Assets:
Commercial.......................... $410,355 $393,954 $344,138 $172,990 $184,803
Filtration.......................... 320,125 324,120 324,892 227,410 225,723
Refrigeration....................... 46,633 -- -- -- --
Corporate........................... 29,841 13,254 10,867 22,999 16,598
-------- -------- -------- -------- --------
Total............................. $806,954 $731,328 $679,897 $423,399 $427,124
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Depreciation/Amortization:
Commercial.......................... $ 13,337 $ 7,326 $ 8,243 $ 2,144 $ 6,700
Filtration.......................... 11,355 6,193 6,453 3,904 14,812
Refrigeration....................... 551 -- -- -- --
Corporate........................... 566 32 45 159 --
-------- -------- -------- -------- --------
Total............................. $ 25,809 $ 13,551 $ 14,741 $ 6,198 $ 21,582
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Capital Expenditures:
Commercial.......................... $ 8,192 $ 3,229 $ 5,147 $ 877 $ 5,033
Filtration.......................... 5,782 2,468 3,115 944 3,651
Refrigeration....................... 791 -- -- -- --
Corporate........................... -- -- 192 -- 61
-------- -------- -------- -------- --------
Total............................. $ 14,765 $ 5,697 $ 8,454 $ 1,821 $ 8,745
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
CLASSIFIED GEOGRAPHICALLY: SUCCESSOR PREDECESSOR
- -------------------------- ---------------------------------------- ----------------------------
JANUARY 1, MAY 2, JANUARY 2,
YEAR ENDED 1995 TO 1994 TO 1994 TO YEAR ENDED
JUNE 30, JULY 1, DECEMBER 31, MAY 1, DECEMBER 31,
1996 1995 1994 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales:
U.S................................. $559,505 $261,159 $329,866 $136,668 $428,906
Europe.............................. 297,976 134,712 113,412 69,904 196,112
Other............................... 43,914 32,639 41,403 25,912 80,478
-------- -------- -------- -------- --------
Total........................... $901,395 $428,510 $484,681 $232,484 $705,496
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Operating Income (loss):
U.S................................. $ 45,142 $ 18,785 $ 24,169 $ 3,346 $ (3,000)
Europe ............................. 22,627 7,616 6,798 (4,572) 8,341
Other............................... 4,787 4,172 1,877 2,119 7,905
Corporate........................... (15,860) (7,297) (8,603) (10,543) (9,734)
-------- -------- -------- -------- --------
Total........................... $ 56,696 $ 23,276 $ 24,241 $ (9,650) $ 3,512
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Total Assets:
U.S................................. $537,501 $542,198 $545,524 $258,122 $249,653
Europe.............................. 210,471 160,712 117,469 121,071 116,844
Other............................... 29,141 15,164 6,037 21,208 44,029
Corporate-U.S....................... 29,841 13,254 10,867 22,998 16,598
-------- -------- -------- -------- --------
Total........................... $806,954 $731,328 $679,897 $423,399 $427,124
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Depreciation/Amortization:
U.S................................. $ 21,214 $ 11,546 $ 12,899 $ 4,762 $ 17,774
Europe.............................. 3,652 1,817 1,547 1,186 3,089
Other............................... 377 156 250 250 719
Corporate-U.S....................... 566 32 45 -- --
-------- -------- -------- -------- --------
Total........................... $ 25,809 $ 13,551 $ 14,741 $ 6,198 $ 21,582
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Capital Expenditures:
U.S................................. $ 11,109 $ 4,427 $ 6,939 $ 1,088 $ 6,082
Europe.............................. 2,912 1,020 912 710 2,334
Other............................... 744 250 411 23 268
Corporate-U.S....................... -- -- 192 -- 61
-------- -------- -------- -------- --------
Total........................... $ 14,765 $ 5,697 $ 8,454 $ 1,821 $ 8,745
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
For the fiscal year ended December 31, 1993 the commercial segment
includes a charge of approximately $35.2 million relating to environmental
contaminants at several manufacturing facilities.
Transfers between geographic areas are not significant. Identifiable
assets are those assets identified with the operation of each business
segment or geographic area.
15. ACQUISITION OF J&E HALL LTD.
On December 4, 1995 the Company, through one of its wholly-owned
subsidiaries, acquired the UK and Ireland refrigeration and freezing
operations of APV plc for consideration of approximately $35 million. The
acquired business operates as J&E Hall Ltd. and is an integrated supplier of
industrial refrigeration and freezing products, systems and services.
16. RELATED PARTY TRANSACTIONS
The Company has entered into trademark license and royalty agreements
with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"),
Shenzhen O.Y.L. Electrical Co. Ltd.
56
<PAGE>
("Shenzhen") (the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing
("PT OYL"). Pursuant to such Agreements, the Company has granted OMC,
Shenzhen and PT OYL, respectively, nonexclusive, nontransferable rights and
licenses to use the trademark "McQuay" in connection with the sale and
marketing of certain products exclusively through Shenzhen's, OMC's and PT
OYL's respective international distribution networks. In exchange for such
grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned
royalty payments ranging from 2% to 5% of the accumulated net sales of such
products. Since July 1995, the Company has been paid or is owed $228,000
pursuant to the OMC Agreement, $39,000 pursuant to the Shenzhen Agreement and
$3,000 pursuant to the PT OYL agreement. Each of OMC, Shenzhen and PT OYL are
subsidiaries of OMC, Shenzhen and PT OYL are subsidiaries of OYL.
In August 1995, the Company entered into an agreement with McQuay-Wuhan
Air Conditioning & Refrigeration Company Ltd. ("McQuay-Wuhan"), a joint
venture of Wuhan-New World Refrigeration Industrial Company Limited and
McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain
technology and trademarks for use in the Peoples Republic of China in
exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement,
royalties from the first two years of the contract will be accumulated and
paid after the third year of the contract. Such accumulated royalty
payments will be made quarterly and the amount of such payments will be
dependent upon McQuay-Wuhan's financial condition.
Hong Leong and its subsidiary companies, including OYL and the Company,
have a policy of buying from related companies whenever feasible. During
fiscal year ended June 30, 1996 pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $14 million
of the Company's products to various OYL entities in the ordinary course of
business. These sales were made at what the Company considers to be normal
distributor pricing levels. The Company does not expect a change in this
policy and plans to continue to buy from and sell to OYL and Hong Leong
related entities in the future in the ordinary course of business on terms
that are, in the aggregate, no less favorable to the Company than those that
could be obtained in a transaction on an arm's length basis.
The Predecessor Company leased certain office space and equipment from
the Predecessor Company's principal shareholder. Rental expense associated
with such leases was approximately $73,000 and $144,000 for the period and
year ended May 1, 1994 and December 31, 1993, respectively.
The Predecessor Company funded certain "split-dollar" life insurance
premiums for the principal shareholder of the Predecessor Company and his
spouse. The policies were owned by certain irrevocable insurance trusts and
annual premiums were approximately $280,000. Pursuant to a certain
Split-Dollar Agreement, the Predecessor Company would be reimbursed for the
premiums previously funded in the event of the death of the principal
shareholder or his spouse or in the event of termination of the related life
insurance policies. The principal shareholder and his spouse agreed to
reimburse the Predecessor Company in the event the cash surrender values of
the policies were not adequate upon cancellation of the policies. As of
December 31, 1993 the Company had paid premiums of approximately $1.2
million related to these insurance policies.
The shareholders of the Predecessor Company owned 100% of SnyderTech
Corporation (STC) which, in turn, owns 72.5% of EnergyLine Systems, Inc.
(EnergyLine). EnergyLine manufactures and markets digital, communicating
controls and affiliated software products to original equipment
manufacturers. Sales of controller products by EnergyLine to the Predecessor
Company were approximately $1.0 million and $2.9 million for the period
ended May 1, 1994 and December 31, 1993, respectively. EnergyLine sales to
the Predecessor Company comprised 50% or more of EnergyLine's net sales in
the period and year ended May 1, 1994 and December 31, 1993. The
Predecessor Company's management believes that products were sold by
EnergyLine to the Predecessor Company at competitive market prices.
The Predecessor Company periodically made loans to STC, bearing market
rates of interest and evidenced by unsecured promissory notes, to support
EnergyLine's operations. Advances outstanding to STC from the Predecessor
Company (including accrued interest) were approximately $2.8 million at
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<PAGE>
December 31, 1993. The advances bore interest at prime plus 1 1/2%. Interest
income recognized on the advances to STC by the Company were $72,000 and
$147,000 for the period and year ended May 1, 1994 and December 31, 1993,
respectively. The principal shareholder of the Predecessor Company and his
spouse personally guaranteed amounts owed the Predecessor Company from STC.
The Predecessor Company made a loan of $750,000, bearing a fixed interest
rate of 10% per annum and evidenced by an unsecured promissory note, to a
director and officer of the Predecessor Company. The Predecessor Company
director and officer and his spouse have personally guaranteed the amounts
owed the Company.
A law firm in which a Predecessor Company director and officer is a
partner provided legal services for fees of approximately $0.5 million and
$2.8 million during the period and year ended May 1, 1994 and December 31,
1993, respectively.
Pursuant to the terms of the Stock Purchase Agreement (Agreement) between
OYL and the shareholders of the Predecessor Company, OYL did not acquire or
assume certain assets and liabilities (the "Excluded Assets") of the
Predecessor Company. These assets included the "split-dollar" life
insurance policies, unsecured promissory notes to STC, and the $750,000 loan
to a director and officer of the Predecessor Company previously discussed,
as well as certain other assets, primarily three idle manufacturing
facilities. The Predecessor Company distributed the excluded assets with a
carrying value of $11.6 million to the shareholder in conjunction with the
sale. The Company no longer has a lease agreement for certain office space
with the principal owner of the Predecessor Company. On May 2, 1994 the
Company entered into a five year supply agreement with EnergyLine.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Boards of Directors and Stockholder
AAF-McQuay Inc.
We have audited the consolidated balance sheets of AAF-McQuay Inc. and
subsidiaries as of June 30, 1996 and July 1, 1995 and the related
consolidated statements of operations, cash flows and stockholder's equity for
the year ended June 30, 1996 and the period from January 1, 1995 to July 1
1995, and the period from May 2, 1994 to December 31, 1994 and the
consolidated statements of operations, cash flows and stockholder's equity of
SnyderGeneral Corporation and subsidiaries (the "Predecessor" Company) for
the period from January 2, 1994 to May 1, 1994 and for the year ended
December 31, 1993 and have issued our report theron dated August 9, 1996
included elsewhere in this Annual Report on Form 10-K. Our audit also
included the financial statement schedule listed in Item 14(a) of this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule refered to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
- ------------------------------
Baltimore, Maryland
August 9, 1996
59
<PAGE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
AAF-MCQUAY INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
YEAR ENDED JUNE 30, 1996
Allowance for doubtful receivables..... $ 4,595 $ 1,285 $ 733(c) $ 301(a) $ 6,312
Accrued warranty expense............... 19,739 11,205 1,072(c) 9,838(b) 22,178
PERIOD ENDED JULY 1, 1995
Allowance for doubtful receivables..... 5,630 1,223 -- 2,258(a) 4,595
Accrued warranty expense............... 19,043 4,717 -- 4,021(b) 19,739
PERIOD ENDED DECEMBER 31, 1994
Allowance for doubtful receivables..... 5,677 1,134 -- 1,181(a) 5,630
Accrued warranty expense............... 17,744 5,916 -- 4,617(b) 19,043
PREDECESSOR COMPANY
PERIOD ENDED MAY 1, 1994
Allowance for doubtful receivables...... 6,288 2,377 -- 2,988(a) 5,677
Accrued warranty expense................ 17,497 3,075 -- 2,828(b) 17,744
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful receivables...... 5,909 2,563 -- 2,184(a) 6,288
Accrued warranty expense................ 16,874 7,900 -- 7,277(b) 17,497
</TABLE>
- ----------------------
(a) Uncollectible accounts written off net of recoveries.
(b) Warranty claims honored during the year.
(c) Amounts added during the year due to acquisition of J&E Hall.
60
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
INTRODUCTION
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph B. Hunter................ 59 President and Chief Executive Officer and Director
Gerald L. Boehrs................ 55 Executive Vice President and Chief Operating Officer of
Commercial Air Conditioning Group and Director
Thomas K. Barber................ 54 Managing Director of Industrial Refrigeration Group
Michael J. Christopher.......... 52 Chief Financial Officer and Executive Vice President and Chief
Operating Officer of Filtration Products Group and Director
Joseph R. Weaver, Jr............ 49 Secretary and General Counsel
Barton L. Bailey................ 52 Vice President, Human Resources
Andrew R. Morrison.............. 44 Treasurer
John M. Sichter................. 52 Controller
Dennis R. Marcott............... 44 President of Environmental Products Division, Filtration
Products Group
Robert E. Brymer................ 38 President of Air Filtration Division, Filtration Products Group
Ho Nyuk Choy.................... 41 Director
Tan Sri Quek Leng Chan.......... 53 Director
Liu Wan Min..................... 51 Director
Roger Tan Kim Hock.............. 48 Director
</TABLE>
61
<PAGE>
JOSEPH B. HUNTER has served as Chief Executive Officer of the Company
since May 1994. Prior to joining the Company, Mr. Hunter served for 21 years
in various executive capacities for York International Corporation and for
his last 13 years with York as President of its International Business Group
until March 1994.
GERALD L. BOEHRS has served as Executive Vice President of the Company
since May 1994, Chief Operating Officer of the Commercial Air Conditioning
Group since May 1996 and Chief Operating Officer of the Filtration Products
Group from May 1994 to May 1996. From 1992 to 1994, Mr. Boehrs served as
Executive Vice President and General Manager of the Filtration Products
Group. From 1989 to 1992, he served as Vice President, Technical Support.
From 1987 until 1989, Mr. Boehrs headed the Company's residential HVAC
business.
THOMAS K. BARBER has served as Managing Director of the Industrial
Refrigeration Group since December 1995. From 1993 to 1995, Mr. Barber
served as Managing Director of the J&E Hall division of APV plc. From 1986 to
1993, Mr. Barber served as Managing Director of a sub-division of APV plc.
MICHAEL J. CHRISTOPHER has served as Chief Financial Officer of the
Company since March 1995 and Executive Vice President of the Company and
Chief Operating Officer of the Filtration Products Group since June 1996.
Mr. Christopher served as Vice President, Planning of the Company from June
1994 to June 1996. From 1984 to 1994, Mr. Christopher served in various
financial and operating positions at York International Corporation, most
recently in the International Group and prior to that as Vice President,
Finance of its Applied Systems Group.
JOSEPH R. WEAVER, JR., has served as Secretary and General Counsel of the
Company since May 1994. From 1990 to 1994, Mr. Weaver served as Assistant
General Counsel of the Company. From 1983 to 1990, Mr. Weaver was engaged in
the private practice of law with the law firm of Caolo & Bell.
BARTON L. BAILEY has served as Vice President, Human Resources of the
Company since 1994. From 1987 to 1994, Mr. Bailey served as Vice President,
Administration of the Company. Mr. Bailey has served in various executive
capacities with the Company since 1983.
ANDREW R. MORRISON has served as Treasurer of the Company since December
1995. From 1992 until 1995, Mr. Morrison served as Assistant Treasurer of PHH
Corporation, a provider of vehicle management, relocation, real estate and
mortgage banking services. From 1989 to 1992, Mr. Morrison served as Director
of Corporate Finance of British Petroleum plc.
JOHN M. SICHTER has served as Controller of the Company since April 1995.
From 1990 to 1995, Mr. Sichter served as Assistant Controller of the Company.
Mr. Sichter has served in various executive capacities with the Company since
1986.
DENNIS R. MARCOTT has served as President of Environmental Products
Division of the Filtration Products Group since June 1996. From November
1994 May 1996, Mr. Marcott served as Vice President of the Filtration
Products Group and General Manager of the Air Pollution Control division.
From 1990 to 1994, Mr. Marcott served in various executive capacities at
York International and Donlee Tech. Prior to 1990 Mr. Marcott was employed
with Westinghouse for 15 years.
ROBERT E. BRYMER has served as President of Air Filtration Division of the
Filtration Products Group since June 1996. Mr. Brymer served as Vice
President of the Filtration Products Group, General Manager of the Air
Filtration division and various other executive capacities with the Company
since May 1993. Prior to 1993, Mr. Brymer served as the Vice President of
Marketing and Sales for Wedge Innovations for three years and Director of
Marketing and various other positions for Skill Tools for seven years.
LIU WAN MIN has served as Deputy Chairman of OYL since 1993. From 1974 to
1993, Mr. Liu served as Group Managing Director of OYL.
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<PAGE>
HO NYUK CHOY has served as Group Managing Director of OYL since 1993. From
1989 to 1993, Mr. Ho served in various management positions with OYL. Mr. Ho
is a director of McQuay Asia (Hong Kong) Limited and Hume.
TAN SRI QUEK LENG CHAN has served as Executive Chairman of Hume since
1990. He has served as Group Chief Executive Officer of Hong Leong since
1968. Mr. Quek currently serves as Executive Chairman of Hong Leong Credit
Berhad, Hong Leong Bank Berhad, Hong Leong Industries Berhad, Malaysian
Pacific Industries Bhd, and Hong Leong Properties Berhad, and as Chairman of
Nanyang Press (Malaya) Berhad. Mr. Quek is a Director of OYL, Southern Steel
Berhad and Tasek Cement BHD.
ROGER TAN KIM HOCK has served as President and Chief Executive Officer of
Hume since 1993. From 1988 to 1993, he served as Chief Executive Officer of
HLG Securities Sdn Bhd. Mr. Tan serves as a Director of Hume.
Each of the Directors of the Company has been a Director since May 2,
1994, except for Michael J. Christopher who was elected June 20, 1995. All
Directors hold office until the next annual meeting of shareholders of the
Company and until their successors have been elected and qualified. The
Company does not currently pay the Directors any fees for serving on the
Board of Directors, although the Company may consider a change in this policy
in the future. Executive officers of the Company are elected by and serve at
the discretion of the Board of Directors. There are no family relationships
among the Directors or executive officers of the Company.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid
by the Company to the Chief Executive Officer and each of the next five most
highly compensated executive officers of the Company, for services rendered
in all capacities to the Company and its subsidiaries during the year ended
June 30, 1996, the six month period ended July 1, 1995 and the year ended
December 31, 1994.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
LONG TERM
INCENTIVE
OTHER ANNUAL PLAN ALL OTHER
NAME YEAR SALARY $ BONUS $ COMPENSATION $(a) PAYOUTS $ COMPENSATION $
- ---- ---- -------- ------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph B. Hunter(b)................ 1996 365,095 400,625 -- -- 12,219(c)
President and Chief Executive 1995 180,000 130,027 -- -- 531(c)
Officer 1994 255,000 176,693 -- -- --
Charles J. Tambornino(d)........... 1996 250,462 74,262 17,250(e) 375,607(f) 294,829(g)
Former Executive Vice President 1995 125,000 113,506 -- 384,473(f) 3,750(c)
1994 233,862 172,969 -- 347,139(f) 7,500(c)
Gerald L. Boehrs................... 1996 177,323 87,975 -- 136,557(f) 7,026(c)
Executive Vice President 1995 86,769 59,813 -- 139,808(f) 3,188(c)
1994 156,215 108,277 -- 126,232(f) 6,375(c)
Michael J. Christopher(b).......... 1996 175,077 102,272 -- -- 10,267(c)
Executive Vice President and 1995 81,077 59,375 -- -- --
Chief Financial Officer 1994 77,964 60,896 -- -- --
Barton L. Bailey................... 1996 158,543 91,085 25,834(i) 170,729(f) 6,594(c)
Vice President, Human 1995 77,106 44,513 64,951(j) 174,760(f) 3,188(c)
Resources 1994 136,017 80,963(h) 61,043(k) 157,790(f) 6,375(c)
Dennis R. Marcott (b) ............. 1996 129,308 60,000 -- -- 1,530(c)
President of Environmental 1995 62,500 35,714 -- -- 3,188(c)
Products Division 1994 13,462 14,286 112,077(l) -- 6,375(c)
</TABLE>
(a) Unless otherwise indicated, the aggregate dollar cost to the Company of
perquisites and other personal benefits received by the executives did not
exceed the lesser of $50,000 or 10% of the total amounts reported in the
Salary and Bonus columns.
(b) Messrs. Hunter, Christopher and Marcott were hired by the Company in
May 1994, June 1994 and November 1994, respectively.
(c) Represents contributions by the Company to the Company's 401(k) plan.
(d) Mr. Tambornino left the Company in May 1996.
(e) Represents compensation for consulting services provided to the
Company, subsequent to Mr. Tambornino's separation from the Company.
(f) Represents payouts from the Company's Equity Participation Plan.
(g) Represents $256,000 in compensation for severance pay, $15,000 in
reimbursement for outplacement
64
<PAGE>
services and $14,000 representing the fair market value of a company
automobile transfered to Mr. Tambornino. Amount also includes a cash
payment to Mr. Tambornino representing the amount that the Company
would have contributed to the Company's 401(k) plan on Mr. Tambornino's
behalf if Mr. Tambornino had been employed by the Company until the end
of the fiscal year.
(h) Includes relocation bonus of $18,225.
(i) Represents compensation for additional taxes payable on his 1996 Equity
Participation Plan payout resulting from Mr. Bailey's relocation to
Maryland from Texas.
(j) Includes perquisites, other personal benefits, reimbursement for taxes and
reimbursement for moving expenses. Mr. Bailey was reimbursed $8,222
for income taxes payable on amounts disbursed by the Company on Mr.
Bailey's behalf in connection with his relocation and $25,475 for
additional taxes payable on his 1995 Equity Participation Plan payout
resulting from his relocation to Maryland from Texas. The
reimbursement for moving expenses totaled $28,462.
(k) Includes perquisites, other personal benefits, reimbursement for taxes
and reimbursement for moving expenses. Mr. Bailey was reimbursed
$24,131 for taxes payable on amounts disbursed by the Company on Mr.
Bailey's behalf in connection with his relocation. The reimbursement
for moving expenses totaled $30,667.
(l) Includes reimbursement for taxes and reimbursement for moving expenses.
Mr. Marcott was reimbursed $29,910 for income taxes payable on amounts
disbursed by the Company on Mr. Marcott's behalf in connection with his
relocation. The reimbursement for moving expenses totaled $82,167.
EMPLOYMENT AGREEMENT
As of the OYL Acquisition date, AAF-McQuay Group Inc., the Company's
parent, entered into an employment agreement with Mr. Hunter. Pursuant to
this agreement, Mr. Hunter serves as President and Chief Executive Officer of
the Company at a current base salary of $399,120 per year and a bonus of not
less than $140,000 per year. Mr. Hunter's employment agreement expires May 2,
1999.
In addition, AAF-McQuay Group Inc. entered into an option agreement with
Mr. Hunter as of the OYL Acquisition date pursuant to which Mr. Hunter was
granted options to purchase such number of shares of Common Stock of the
AAF-McQuay Group Inc. which represent 5% of the total outstanding shares of
the Common Stock after such exercise. The employment agreement and the
option agreement are expected to be replaced upon the effectiveness of the
Company's Stock Option Plan discussed below.
EMPLOYEE BENEFIT PLANS
EQUITY PARTICIPATION PLAN. Effective January 1, 1991 the Company
established an Executive Employment and Compensation Plan (the "Equity
Participation Plan") and entered into Executive Employment and Compensation
Agreements with certain executive officers of the Company including Messrs.
Tambornino, Boehrs and Bailey (each of such executive officers is referred to
herein as a "NEPI Holder"). Under the Equity Participation Plan the Company
agreed to provide each such officer a contingent net equity participation
interest (a "NEPI Interest") in the Company under certain circumstances as
follows: Mr. Tambornino - 1.1%, Mr. Boehrs - 0.4% and Mr. Bailey - 0.5%.
Pursuant to the Equity Participation Plan, as modified effective May 2,
1994 and in connection with the OYL Acquisition, 10% of each NEPI Holder's
NEPI Interest is designated a Reserve Amount and 90% of each NEPI Holder's
NEPI Interest has been paid or is payable by the Company to the NEPI Holder
pursuant to the following formula: one-third on May 2, 1994; one-third on
May 2, 1995; and one-third on
65
<PAGE>
May 2, 1996. On April 29, 1994 the Company established and funded an
irrevocable trust for the purpose of making such NEPI Interest payments to
NEPI Holders in due course. On May 2, 1996 the final distributions were made
from the trust.
Under the terms of the Equity Participation Plan, as modified, each NEPI
Holder's Reserve Amount is subject, pro rata and severally not jointly, to
claims for certain indemnifications in connection with the OYL Acquisition.
See "Certain Transactions".
RETIREMENT PLAN. Effective April 3, 1982, the Company adopted the
Predecessor Company Retirement Plan (the "Retirement Plan"), which was
amended as of January 1, 1991 and further amended as of May 1, 1991 and
December 31, 1991. The Retirement Plan has been maintained for the benefit
of certain salaried and hourly employees of the Company. Effective January 1,
1989, benefits for most salaried participants in the Retirement Plan were
frozen as of December 31, 1988.
Normal retirement age under the Retirement Plan is age 65. A
participant's annual rate of pension commencing after retirement is
determined based on a number of factors, including that participant's
earnings, years of service and contributions.
The annual benefit amount, commencing at normal retirement age and
payable as a single life annuity, under the Retirement Plan for Messrs.
Boehrs, Bailey and is approximately $1,777, and $2,514, respectively.
SENIOR EXECUTIVE SEVERANCE PLAN. Effective April 26, 1994 the Company
established a Senior Executive Severance Plan (the "Severance Plan") and,
pursuant thereto, entered into senior executive severance agreements with
certain executive officers of the Company including Messrs. Tambornino,
Boehrs, and Bailey. Pursuant to the Severance Plan and the applicable
agreements, upon involuntary termination without good cause of such executive
officer, the executive officer will be entitled to receive his base salary as
then in effect for a maximum period of 12 months and cash in respect of
certain retirement benefits. Pursuant to such agreements, involuntary
termination "without good cause" is defined to include (i) any termination
that does not result from material dishonesty, significant fraud, willful
negligence or gross and material malfeasance detrimental to the Company or
(ii) any requirement that the executive be based or perform services at a new
location, a material change in the position, duties, authority or
responsibilities of the executive or any decrease in the executive's
compensation.
SEVERANCE AGREEMENT. Effective June 21, 1996, the Company entered into a
Separation of Employment Agreement, General Release, Consulting Agreement and
Non-Competition Agreement (the "Severance Agreement") with Charles J.
Tambornino, a former Director and Executive Vice President of the Company.
Pursuant to the Severance Agreement: (1) the Company is obligated to (i) pay
Mr. Tambornino $256,000 as severance pay, in 12 monthly installments and
maintain certain of his employee benefits until May 15, 1997, (ii) pay Mr.
Tambornino $15,000 as reimbursement for the use of outplacement services,
(iii) transfer to Mr. Tambornino the title to his company automobile, and
(iv) pay Mr. Tambornino a pro rata portion of any bonus to which he would be
entitled if he had remained employed by the Company through June 30, 1996;
and (2) Mr. Tambornino is obligated not to compete with the Company and to
maintain the confidentiality of certain confidential information of the
Company until December 31, 1999. Further, Mr. Tambornino and the Company
have entered into a consulting arrangement pursuant to which Mr. Tambornino
has agreed to perform 20 hours per week of consulting services for the
Company until December 31, 1999 for which the Company will pay Mr. Tambornino
$138,000 per year plus $150 per hour for each hour Mr. Tambornino works in
excess of 20 hours per week. The consulting arrangement is terminable by the
Company or Mr. Tambornino on 30 days notice. If the Company terminates the
consulting arrangement without cause prior to December 31, 1999, the Company
is obligated to pay Mr. Tambornino $100,000 per year until December 31, 1999.
If Mr. Tambornino terminates the consulting arrangement prior to
December 31, 1999 or dies or becomes disabled prior to January 1, 2000 and prior
to any termination of the consulting arrangement by the Company, the Company is
obligated to pay Mr. Tambornino $50,000 per year until December 31, 1999.
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<PAGE>
SALARY CONTINUATION PLAN. Effective January 1, 1990, the Company
established an Executive Salary Continuation Plan (the "Salary Continuation
Plan") for certain executive officers and key employees of the Company which
provides for compensation in the event of retirement or death.
In the event a participant retires after he attains the age of 65 the
Company is required to pay to the participant a specified amount ($50,000 per
year in the case of each of Messrs. Tambornino, Boehrs and Bailey) until the
earlier of (i) the date of death of the participant or (ii) the first day of
the month following the ninth anniversary of the date of retirement of the
participant. The Salary Continuation Plan further provides for adjustments in
the event of early retirement. In the event the participant becomes totally
disabled or is terminated involuntarily without good cause, the participant
will remain eligible for the benefits. In the event of the death of a
participant while actively employed by the Company, the Company will make
such payments to the designated beneficiary of the participant.
STOCK OPTION PLAN
The Company expects to adopt a Stock Option Plan which will provide for
the grant of non-qualified stock options to purchase the Company's parent
AAF-McQuay Group Inc. Common Stock to certain members of management and key
employees. The Stock Option Plan must be approved by the Kuala Lumpur Stock
Exchange and OYL's public shareholders and will become effective upon such
approvals.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Hunter is the only officer or employee of the Company who
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation during the last fiscal year.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 30, 1996 with
respect to the beneficial ownership of shares of the Company's Common Stock
by each person known to the Company to own 5% or more of its Common Stock
(determined in accordance with the applicable rules of the Commission), and
by the Company's directors and current executive officers and such directors
and executive officers as a group.
COMMON STOCK, PAR VALUE $100.00 PER SHARE
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- ---- ---------------- -------------------
<S> <C> <C>
AAF-McQuay Group Inc.(a)..................................... 2,947 100
Legg Mason Tower, Suite 2800
111 South Calvert Street
Baltimore, Maryland 21202
All current directors and executive officers as a group
(13 persons)(a)............................................. 0 0
</TABLE>
(a) AAF-McQuay Group Inc. is a wholly-owned subsidiary of OYL (Jalan
Pengapit 15/19, 40000 Shah Alam, Selangor Darul Ehsan, Malaysia). OYL
is publicly traded on the Kuala Lumpur Stock Exchange. Approximately
62.5% of the outstanding stock of OYL is owned by Hume, a company also
publicly traded on the Kuala Lumpur Stock Exchange. Approximately 43.2%
of the outstanding stock of Hume is owned by Hong Leong (Hong Leong
Group, Level 10, Wisma Hong Leong, 18 Janlan Perak, 50450 Kuala Lumpur,
Malaysia). Tan Sri Quek Leng Chan is a director of the Company, a
director and the Chairman of AAF-McQuay Group Inc., the Executive
Chairman of Hume and a controlling shareholder of Hong Leong.
SECURITY OWNERSHIP OF MANAGEMENT IN PARENTS OF THE COMPANY
The following tables set forth information as of June 30, 1996 OYL and
Hume pertaining to the beneficial ownership of shares of the respective
company's equity securities by the Company's directors and current executive
officers and such directors and executive officers as a group.
OYL ORDINARY SHARES, PAR VALUE RM 1.00 PER SHARE
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- ---- ---------------- -------------------
<S> <C> <C>
Tan Sri Quek Leng Chan................................................... 76,863,181(a) 62.5
Liu Wan Min.............................................................. 7,502,000 6.1
Ho Nyuk Choy............................................................. 40,000 *
Joseph B. Hunter......................................................... 25,000 *
Michael J. Christopher................................................... 1,000 *
All current directors and executive officers as a group
(13 persons)......................................................... .. 84,430,181 68.6
</TABLE>
HUME ORDINARY STOCK UNITS, PAR VALUE RM 1.00 PER UNIT
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- ---- ---------------- -------------------
<S> <C> <C>
Tan Sri Quek Leng Chan................................................... 107,134,455(b) 43.2
All current directors and executive officers as a group
(13 persons)......................................................... 107,134,455 43.2
</TABLE>
* Less than one percent (1%).
(a) Includes 76,862,681 shares held by Hume, a company publicly traded on
the Kuala Lumpur Stock Exchange. Approximately 43.2% of the outstanding
stock of Hume is owned by Hong Leong (Hong Leong Group, Level 8, Wisma
Hong Leong, 18 Janlan Perak, 50450 Kuala Lumpur, Malaysia). Tan Sri
Quek Leng Chan is the Executive Chairman of Hume and a controlling
shareholder of Hong Leong.
(b) Includes 107,084,455 shares held by Hong Leong.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
In January 1995, OYL loaned $10 million to the Company in exchange for
which the Company issued a promissory note in the principal amount of $10
million in favor of OYL. In March 1995, the promissory note was transferred
to the Company as an additional capital contribution.
In connection with the acquisition of J & E Hall, which is now a
wholly-owned subsidiary of the Company, OYL issued a standby letter of credit
dated November 24, 1995 in the amount of L22.5 million. Such standby letter
of credit supports the J & E Hall L22.0 million revolving credit facility.
No fees were paid to OYL in connection with such letter of credit.
In March 1995, the Company obtained letter of credit facilities totaling
$25 million that are supported by letters of credit from OYL (including the
$11.5 million letter of credit described below), which were fully utilized at
July 1, 1995. The commitments made under these new facilities expire in
March 1996, but may be extended annually for successive one year periods with
the consent of OYL and the banks providing the facilities. No fees were paid
to OYL in connection with the letter of credit facilities.
In March 1995, the Company transferred its Singapore HVAC business to
McQuay Air Conditioning (Singapore) Pte. Ltd., a subsidiary of OYL. Assets
including motor vehicles, office equipment, furniture and fixtures,
inventory, deposits and prepayments were transferred with the business. The
business was transferred for a consideration of approximately $323,000 which
was equal to its net book value.
In connection with the OYL Acquisition, the Company issued an $11.5
million promissory note to Mr. Snyder, Mr. Caolo and the following holders of
contingent net equity participation interests in the Company: Mr. Bailey, Mr.
Boehrs, James F. Brum, Dick W. Driggs, Norbert O. Grohmann, Bruce E. Hebert
and Mr. Tambornino (each a "NEPI Holder") all of whom were officers of the
Company prior to the OYL Acquisition. Payment of the promissory note is
secured by an $11.5 million irrevocable standby letter of credit. The
promissory note bears interest semi-annually at a rate of up to six percent
and matures on May 2, 1999. The principal amount of the promissory note is
subject to offset for claims for indemnification on certain matters. Any
such offset would be allocated 88.6% to Mr. Snyder, 7.6% to Mr. Caolo and the
balance among the NEPI Holders. The principal amount of the promissory note
becomes subject to offset claims only to the extent that indemnification
claims, less recoveries from third parties ("Net Indemnification Claims"),
exceed $5.8 million (the "Deductible Amount") in the aggregate. To the
extent that Net Indemnification Claims exceed the Deductible Amount and the
principal amount of the promissory note, such claims are required to be paid
by Mr. Snyder up to an additional $6.5 million in the aggregate.
The Company has entered into trademark license and royalty agreements with
O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen
O.Y.L. Electrical Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T.
O.Y.L. Sentra Manufacturing ("PT OYL"). Pursuant to such Agreements, the
Company has granted OMC, Shenzhen and PT OYL, respectively, nonexclusive,
nontransferable rights and licenses to use the trademark "McQuay" in
connection with the sale and marketing of certain products exclusively
through Shenzhen's, OMC's and PT OYL's respective international distribution
networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each
agreed to pay the Company earned royalty payments ranging from 2% to 5% of
the accumulated net sales of such products. Since July 1995, the Company has
been paid or is owed $228,000 pursuant to the OMC Agreement, $39,000 pursuant
to the Shenzhen Agreement and $3,000 pursuant to the PT OYL agreement. Each
of OMC, Shenzhen and PT OYL are subsidiaries of OYL.
In August 1995, the Company entered into an agreement with McQuay-Wuhan
Air Conditioning & Refrigeration Company Ltd. ("McQuay-Wuhan"), a joint
venture of Wuhan-New World Refrigeration Industrial Company Limited and
McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain
technology and trademarks for use in the Peoples Republic of China in
exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement,
royalties from the first two years of the contract will be accumulated and
paid after the third year of the contract. Such accumulated royalty payments
will be made quarterly and the amount of such payments will be dependent upon
McQuay-Wuhan's financial condition.
69
<PAGE>
Hong Leong and its subsidiary companies, including OYL and the Company,
have a policy of buying from related companies whenever feasible. During
fiscal year ended June 30, 1996 pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $14 million of
the Company's products to various OYL entities in the ordinary course of
business. These sales were made at what the Company considers to be normal
distributor pricing levels. The Company does not expect a change in this
policy and plans to continue to buy from and sell to OYL and Hong Leong
related entities in the future in the ordinary course of business on terms
that are, in the aggregate, no less favorable to the Company than those that
could be obtained in a transaction on an arm's length basis.
70
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
1. Financial Statements
Report of the Independent Auditors
Consolidated Balance Sheets-
at June 30, 1996 and July 1, 1995
Consolidated Statements of Operations-
Year ended June 30, 1996 the period from January 1,
1995 to July 1, 1995, the period from May 2, 1994 to
December 31, 1994, the period from January 2, 1994 to
May 1, 1994 and the year ended December 31, 1993
Consolidated Statements of Cash Flows-
Year ended June 30, 1996 the period from January 1,
1995 to July 1, 1995, the period from May 2, 1994 to
December 31, 1994, the period from January 2, 1994 to
May 1, 1994 and the year ended December 31, 1993
Consolidated Statements of Stockholder's Equity
(Deficit)-
Year ended June 30, 1996 the period from January 1,
1995 to July 1, 1995, the period from May 2, 1994 to
December 31, 1994, the period from January 2, 1994 to
May 1, 1994 and the year ended December 31, 1993
2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(b) EXHIBITS
3.1 Articles of Incorporation(1)
3.2 By-Laws(1)
4.1 Indenture dated as of February 14, 1996 with IBJ Schroder
Bank and Trust Company(2)
4.2 Form of Note (included in Exhibit 4.1)
10.1 Employment Agreement dated May 2, 1994 with Joseph B.
Hunter(1)
10.2 Stock Opinion Agreement dated May 2, 1994 with Joseph B.
Hunter(1)
10.3 Executive Employment and Compensation Agreement dated
January 1, 1991 with Barton L. Bailey(1)
10.4 NEPI Modification Agreement dated May 2, 1994 with Barton
L. Bailey(1)
10.5 NEPI Relinquishment and Release Agreement dated May 2,
1994 with Barton L. Bailey(1)
10.6 NEPI Indemnification Modification Agreement dated May 2,
1994 with Barton L. Bailey(1)
10.7 Senior Executive Severance Agreement dated April 26, 1994
with Barton L. Bailey(1)
10.8 Executive Salary Continuation Agreement Dated July
25,1990 with Barton L. Bailey(1)
10.9 Executive Employment and Compensation Agreement dated
January 1, 1991 with Gerald L. Boehrs(1)
71
<PAGE>
10.10 NEPI Modification Agreement dated May 2,1994 with
Gerald I. Boehrs(1)
10.11 NEPI Relinquishment and Release Agreement dated May 2,
1994 with Gerald L. Boehrs(1)
10.12 NEPI Indemnification Modification Agreement dated May 2,
1994 with Gerald L. Boehrs(1)
10.13 Senior Executive Severance Agreement dated April 26, 1994
with Gerald L. Boehrs(1)
10.14 Executive Salary Continuation Agreement dated July 25,
1990 with Gerald L. Boehrs(1)
10.15 Executive Employment and Compensation Agreement dated
January 1, 1991 with Charles J. Tambornino(1)
10.16 NEPI Modification Agreement dated May 2, 1994 with
Charles J. Tambornino(1)
10.17 NEPI Relinquishment and Release Agreement dated May 2,
1994 with Charles J. Tambornino(1)
10.18 NEPI Indemnification Modification Agreement dated May 2,
1994 with Charles J. Tambornino(1)
10.19 Executive Salary Continuation Agreement dated
July 25,1990 with Charles J. Tambornino(1)
10.20 NEPI Irrevocable Trust Agreement(1)
10.21 Paying Agent Agreement dated May 2, 1994 with OYL,
Richard W. Snyder and certain other parties specified
therein(1)
10.22 $11,500,000 Note dated May 2, 1994 to Bank One, Texas,
N.A.(1)
10.23 $13,500,000 Reimbursement Agreement dated March 22, 1995
with the Bank of Nova Scotia(1)
10.24 L22,000,000 Line of Credit Agreement dated November 30,
1995 with Bank of America(1)
10.25 $11,500,000 Amended Line of Credit Agreement dated
April 5, 1995 with Citibank N.A.(1)
10.26 SnyderGeneral Stock Purchase Agreement dated March 31,
1994 with OYL, Richard W. Snyder and certain other
parties listed therein(1)
10.27 SnyderGeneral Tax Indemnification Agreement dated
May 2,1994 with Richard W. Snyder and certain other
parties listed therein(1)
10.28 Final Form of J&E Hall Stock Purchase Agreement dated
, 1995 with APV plc(1)
10.29 Trademark License and Royalty Agreement dated
December 27, 1995 with P.T. O.Y.L. Sentra
Manufacturing(1)
10.30 Trademark License and Royalty Agreement dated
December 27, 1995 with Shenzhan O.Y.L. Electrical Company
Ltd.(1)
10.31 Trademark License and Royalty Agreement dated
December 27, 1995 with O.Y.L. Manufacturing Company SDN
BHD(1)
10.32 Technology Licensing Agreement dated August 8, 1995 with
McQuay-Wuhan Air Conditioning & Refrigeration Company
Ltd.(1)
10.33 Asset Transfer Agreement dated May 29, 1995 by and among
AAF Asia Pte., Ltd. and McQuay Air Conditioning
(Singapore) Pte. Ltd.(1)
10.34 Supply and Procurement Agreement dated May 2, 1994 with
EnergyLine Systems, Inc.(1)
10.35 Credit Agreement dated July 21, 1995 with the Bank of
Nova Scotia, Bank Bumiputra Malaysia Berhad, New York
Branch and certain financial institutions listed
therein(1)
10.36 First Amendment to Credit Agreement dated April 14, 1995
with the Bank of Nova Scotia, Bank Bumiputra Malaysia
Berhad, New York Branch and certain financial
institutions listed therein(1)
10.37 Second Amendment to Credit Agreement dated November 28,
1995 with the Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial
institutions listed therein(1)
10.38 Third Amendment to Credit Agreement dated February 7,
1996 with The Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain
72
<PAGE>
financial institutions listed therein(2)
10.39 Receivables Purchase Agreement dated February 14, 1996
with AAF-McQuay Funding Corporation(2)
10.40 $80,000,000 Trade Receivables Purchase and Sale Agreement
dated as of February 14, 1996 with AAF-McQuay Funding
Corporation, Citibank, N.A., Citicorp North America, Inc.
and certain other parties listed therein(2)
10.41 $80,000,000 Trade Receivables Purchase and Sale Agreement
dated as of February 14, 1996 with AAF-McQuay Funding
Corporation, Citibank, N.A., Citicorp North America, Inc.
and Corporate Receivables Corporation(2)
10.42 Separation of Employment Agreement, General Release,
Consulting Agreement and Non-Competition Agreement dated
as of June 21, 1996 with Charles J. Tambornino(3)
21 Subsidiaries(1)
24 Power of Attorney(3)
27 Financial Data Schedule(3)
- --------------------------------
(1) Incorporated by reference to Pre-Effective Amendment Number 1 to the
Company's Registration Statement (File No. 33-80701) on Form S-1 as filed with
the Securities and Exchange Commission (the "Commission") on January 26, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Commission on April 26, 1996.
(3) Filed herewith.
(c) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on April
24, 1996 in order to file executed copies of Exhibits
10.38, 10.39, 10.40 and 10.41 as listed above.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Baltimore, State of
Maryland, on September 16, 1996.
AAF-MCQUAY INC.
By: /s/ Joseph B. Hunter .
-----------------------------------
Joseph B. Hunter
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Joseph B. Hunter . September 16, 1996
- -----------------------------------
Joseph B. Hunter
Principal Executive Officer
/s/ Michael J. Christopher . September 16, 1996
- -----------------------------------
Michael J. Christopher
Principal Financial and
Accounting Officer
The Board of Directors:
Joseph B. Hunter Michael J. Christopher
Liu Wan Min Quek Leng Chan
Ho Nyuk Choy Roger Tan Kim Hock
Gerald L. Boehrs
By: /s/ Joseph B. Hunter . September 16, 1996
-------------------------------
Joseph B. Hunter
Attorney-in-Fact
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security-holders
during the period covered by this report.
74
<PAGE>
Exhibit Index
Number Description
- ------ -----------
10.42 Separation of Employment Agreement, General
Release, Consulting Agreement and Non-Competition
Agreement dated as of June 21, 1996 with Charles
Tambornino..............................................
24 Power of Attorney.......................................
27 Financial Data Schedule.................................
<PAGE>
SEPARATION OF EMPLOYMENT AGREEMENT,
GENERAL RELEASE, CONSULTING AGREEMENT
AND NON-COMPETITION AGREEMENT
This Separation of Employment Agreement, General Release, Consulting
Agreement and Non-Competition Agreement (herein "Agreement") is hereby
entered into as of this 21th day of June 1996 between AAF-McQuay Inc., its
parents, subsidiaries, affiliates, divisions, predecessors, purchasers,
assigns, representatives and successors (hereinafter collectively referred
to as "the Company") and Charles J. Tambornino (hereinafter "Mr.
Tambornino"), who are collectively referred to herein as the "Parties."
WHEREAS, the Parties now desire and agree to forever sever their
employment relationship and to fully and finally resolve any and all
existing or potential issues, claims, causes of action, grievances and
disputes that do, or could relate thereto or arise out of that relationship
or severance thereof, without any admission of liability or finding or
admission that any of Mr. Tambornino's rights, under any statute, claim or
otherwise, were in any way violated. In consideration of the mutual
promises contained herein, and other good and valuable consideration as
hereinafter recited, the receipt and adequacy of which is hereby
acknowledged, the Parties, intending to be legally bound, agree as follows:
1. SEPARATION AND SEVERANCE.
a. The Company and Mr. Tambornino agree that Mr. Tambornino's employment
with the Company will terminate effective May 15, 1996. The Company agrees
that it will pay Mr. Tambornino $256,000.00 as severance pay, in twelve
monthly payments of $21,333.33, less all lawful deductions for FICA,
Medicare, and Federal, State and local taxes, the adequacy of which is
hereby acknowledged, commencing on June 15, 1996 and on the 15th day of
each consecutive month thereafter until May 15, 1997. This Agreement
terminates and supersedes the terms of the "Senior Executive Severance
Agreement" executed by Mr. Tambornino and the Company on April 26, 1994
including, but not limited to, the provision in Paragraph 1(a)(i) of that
Agreement requiring Mr. Tambornino to seek comparable employment
opportunities over the twelve month period after his termination of
employment from the Company. The Company agrees that in the event of the
death of Mr. Tambornino all remaining payments under this paragraph will be
paid to his beneficiaries. The Company's obligation to pay these amounts is
absolute and unconditional and shall not be affected by any circumstances,
including, any set-off, counterclaim, recoupment, defense or other right
that the Company may have against him or anyone else.
<PAGE>
b. The Company agrees to provide Mr. Tambornino his current level of
health care benefits, group life insurance and long term disability until
May 31, 1997 under the terms and conditions that applied to Mr. Tambornino
immediately prior to his separation of employment from the Company.
Mr. Tambornino recognizes and agrees that for purposes of the continuation
coverage requirements of group health plans under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"), as amended, and the group
health provisions of any state law, a "qualifying event" and "applicable
change in status" occurs on May 15, 1997. The Company further agrees to
provide Mr. Tambornino with continuation coverage under its group health
plan at Mr. Tambornino's expense until May 1, 1998, at which time he will
commence participation in the Company's Retiree Medical Group Benefits
Plan. The benefits under the Company's Retiree Medical Group Benefits Plan
will be offered to Mr. Tambornino on the same basis as is offered to other
retirees.
c. On the 30th day after he signs this Agreement, the Company will pay
Mr. Tambornino a lump sum in the amount of $15,000 to compensate him for
the cost of outplacement, career counseling and other services incurred in
connection with the transition necessitated by his separation from the
Company.
d. The Company agrees to transfer to Mr. Tambornino title (free and clear
of any encumbrances) to the 1993 Ford Explorer currently in his possession.
Said title will be transferred to him no later than the 10th day after he
signs this Agreement.
e. Mr. Tambornino will be paid a pro rata portion of any bonus under
AAF-McQuay Inc. FY 1996 Executive Incentive Compensation Plan, which
otherwise would have been paid to him had he remained employed by the
Company until June 30, 1996. Said bonus payment will be paid to him by
September 30, 1996.
f. The Company further agrees to retain Mr. Tambornino as a consultant as
specified in Paragraph 2 herein.
g. It is expressly understood that all benefits due Mr. Tambornino under
the terms of the Executive Salary Continuation Agreement are fully vested
and nonforfeitable; that for the purposes of that Agreement, he will be
treated as though he had remained in the employ of the Company through an
Early Retirement date of January 1, 2000; and that he or his beneficiaries
will be paid the sum of $50,000 per year commencing on January 1, 2000 and
continuing for such periods as are provided under the terms of that
Agreement.
h. Mr. Tambornino agrees that portions of the above-described
consideration and payments from the Company are over and above that to
which he is otherwise entitled and constitutes good and valid consideration.
2. CONSULTING RELATIONSHIP.
2
<PAGE>
a. Effective May 15, 1996, the Company shall retain and Mr. Tambornino
shall provide the Company with consulting services (herein "Consulting
Services" or "Consulting Relationship"), the nature of which may be
modified in writing from time to time by the Parties, in connection with
the Company's business which shall include, but not be limited to,
distribution, manufacturing, engineering and service, and joint venture
assignments, as requested and directed by the Company's Chief Executive
officer.
b. Mr. Tambornino agrees to devote twenty hours a week performing
Consulting Services for the Company.
c. This Agreement as it pertains to the provision of Consulting Services
will remain in effect from May 15, 1996 until December 31, 1999 unless
earlier terminated as set forth herein.
d. In consideration of the performance of the Consulting Services, the
Company shall pay Mr. Tambornino the sum of One Hundred Thirty Eight
Thousand Dollars ($138,000.00) per year, payable in equal monthly
installments in the amount of Eleven Thousand Five Hundred Dollars
($11,500.00), payable on the 15th day of each month commencing June 15,
1996, and continuing each month thereafter until December 15, 1999, plus a
pro rata payment for the period between December 15, 1999 and December 31,
1999 payable on December 31, 1999. In the event that Mr. Tambornino is
requested by the Company to devote more than twenty hours a week performing
Consulting Services for the Company, and if he agrees to perform such
additional services, he shall be paid at a rate of $150 per hour for each
additional hour worked.
e. The Company or Mr. Tambornino may terminate the Consulting
Relationship with or without cause on 30 days written notice to the other.
In the event of a termination of Consulting Relationship, whether by the
Company or Mr. Tambornino, the obligations of the Company pursuant to
Paragraph 1 and the obligations of Mr. Tambornino and the Company pursuant
to Paragraphs 3 through 19 shall continue.
Upon any termination of the Consulting Relationship, the payments
described in Paragraph 2(d) shall cease, effective as of the effective date
of termination. However, in recognition of Mr. Tambornino's past
contributions to the Company and his agreement to provide Consulting
Services:
(i) If the Company terminates the Consulting Relationship for cause
prior to December 31, 1999, it shall have no further obligations to make
any payments to Mr. Tambornino under paragraph 2 of this Agreement. Under
this Agreement, termination for cause shall be limited to: (a) recurring
gross misconduct or recurring, gross willful disregard for duty in the
performance of the Consulting Relationship which is materially harmful to
the Company's business, financial condition, prospects or reputation; (b)
acts of moral turpitude, dishonesty or fraud by Mr. Tambornino which
3
<PAGE>
is materially harmful to the Company's business, financial condition,
prospects or reputation; or (c) the commission of an act or omission which
would constitute a felony or high misdemeanor which could materially and
adversely affect the Company's business, financial condition, prospects or
reputation.
(ii) If the Company terminates the Consulting Relationship without
cause, cause being limited to the circumstances described in Paragraph
2(e)(i), prior to December 31, 1999, the Company shall pay Mr. Tambornino
the sum of One Hundred Thousand Dollars ($100,000.00) per year, in monthly
installments of $8,333.33, payable on the 15th day of each month commencing
as of the effective date of the termination of the Consulting Relationship
and continuing on the 15th day of each month thereafter until
December 15, 1999, plus a pro rata payment for the period between December
15, 1999 and December 31, 1999, payable on December 31, 1999. If Mr.
Tambornino dies or becomes disabled after any such termination by the
Company but before January 1, 2000, the payments under this Paragraph
2(e)(i) shall continue and be paid to Mr. Tambornino or his beneficiaries.
For the purposes of this Agreement "disabled" shall mean a period in excess
of three consecutive months during which Mr. Tambornino is unable to
perform substantially all of his duties under this Agreement.
(iii) If Mr. Tambornino terminates the Consulting Relationship prior to
December 31, 1999 or dies or becomes disabled prior to January 1, 2000 and
prior to any termination of the Consulting Relationship by the Company, the
Company shall pay Mr. Tambornino or his beneficiaries, the sum of Fifty
Thousand Dollars per year, in monthly installments of $4,166.66, payable on
the 15th day of each month commencing as of the effective date of the
termination of the Consulting Relationship or the date of such death or
disability and continuing on the 15th day of each month thereafter until
December 15, 1999, plus a pro rata payment for the period between December
15, 1999 and December 31, 1999, payable on December 31, 1999.
f. Mr. Tambornino has the right to control and direct the means, manner
and method by which the Consulting Services are performed. Mr. Tambornino
shall furnish all equipment and materials used to perform the Consulting
Services. Mr. Tambornino shall pay all ordinary and necessary expenses
arising from his performance of the Consulting Services. The Company will,
however, reimburse Mr. Tambornino for ordinary and customary business
expenses, including travel and communication costs (e.g. phone, fax,
computer, printer and typing) and other materials and equipment costs
incurred by him in connection with the provision of Consulting Services.
Mr. Tambornino will provide the Company with detailed documentation
regarding such expenses, including receipts, itineraries, reasons for the
expenses and such other documentation as the Company may reasonably
require. Except as provided in Paragraph 1b, the Company shall not provide
insurance coverage of any kind for Mr. Tambornino.
g. The Parties agree and acknowledge that Mr. Tambornino is an
independent contractor. Mr. Tambornino does not have any authority to
enter into agreements or
4
<PAGE>
contracts on behalf of the Company, and shall not represent that he possesses
any such authority.
h. Mr. Tambornino is not, nor shall be deemed to be for any purpose, an
employee of the Company. The Company shall not be responsible to Mr.
Tambornino, or to any governmental authority, for any payroll-related taxes
related to the performance of the Consulting Services. It is understood
that the Company shall not withhold from Mr. Tambornino's compensation any
amount that would normally be withheld from an employee's pay and Mr.
Tambornino agrees to pay all federal, state and local taxes incurred and
chargeable to him in the rendering of the Consulting Services.
Mr. Tambornino further agrees to file all required forms and make all tax
payments appropriate and necessary to Mr. Tambornino's tax status as an
independent contractor and shall not claim any other status.
i. The Company shall have the right to evaluate the performance of
Mr. Tambornino's Consulting Services. The Company shall have the right to
request status meetings, reports, teleconferences, or conferences with Mr.
Tambornino as a part of his Consulting Services in order to review the
status of Mr. Tambornino's performance of the Consulting Services.
j. During the course of his provision of Consulting Services,
Mr. Tambornino may work on and become part of the development of technical
or other systems for the Company. Mr. Tambornino agrees that such systems
and information developed by him in connection with such systems shall be,
and will remain, the sole and absolute property of the Company.
k. Nothing in this Agreement will preclude Mr. Tambornino from engaging
in other business activities so long as such other activities do not
violate the terms of this Agreement.
3. CONFIDENTIALITY AND NON-COMPETITION.
a. As used herein "Customer" means all persons, firms or entities that
have either sought or purchased the Company's goods or services, have
contacted the Company for the purpose of seeking or purchasing the Company's
goods or services, or have been contacted by the Company for the purpose of
selling its goods and services during Employee's employment, and all persons,
firms, or entities subject to the control of those persons, firms, or
entities. The Customers covered by this Agreement shall include any Customer
of the Company at any time during Mr. Tambornino's employment.
b. As used herein "Confidential Information" means all information which
became known to Mr. Tambornino as a consequence of his employment by the
Company and includes, but is not limited to, information about the Company's
Customers, methods of operation, prospective and executed contracts, trade
secrets, business contracts,
5
<PAGE>
customer lists, and all technological, business, financial, accounting,
statistical and personnel information regarding the Company. The Parties
further agree and stipulate that this Confidential Information was developed
by the Company at considerable expense, that this information is vital to the
Company's success and is the sole property of the Company. Notwithstanding
the foregoing, Confidential Information does not include information which is
in the public domain or becomes a part of the public domain without any
breach by Mr. Tambornino of any of his duties to the Company.
c. Mr. Tambornino recognizes and acknowledges that during his employment
by the Company and provision of Consulting Services to the Company,
Mr. Tambornino had access to, worked with and became familiar with the
Company's Confidential Information, that he established close relationships
with the Company's Customers, and co-workers, and that the success of the
Company's business depended in large part on Mr. Tambornino's personal
conduct in contacting and establishing relationships with Customers and
co-workers.
d. Mr. Tambornino recognizes and acknowledges the value to him of the
extensive training that the Company provided to him, the enhancement of his
professional experience and credentials resulting from such training, and the
instructive professional associations and supervision that he received by
virtue of his employment with the Company.
e. Mr. Tambornino recognizes and acknowledges that the Company is engaged
in a highly competitive enterprise, so that any unauthorized disclosure or
unauthorized use by Mr. Tambornino of the Confidential Information protected
under this Agreement, whether during his Consulting Relationship with the
Company or after its termination, would cause immediate, substantial and
irreparable injury to the business and goodwill of the Company.
f. Mr. Tambornino agrees that upon the termination of the Consulting
Relationship with the Company, whether voluntary or involuntary or with or
without cause, he will surrender to the Company every item and every document
in his possession that is the Company's property or that contains
Confidential Information, in whatever form. All of these materials are the
sole and absolute property of the Company.
g. Mr. Tambornino agrees that until December 31, 1999, he will not, on his
own behalf or as a partner, officer, director, employee, agent, or consultant
of any other person or entity, directly or indirectly, disclose the Company's
Confidential Information to any person or entity other than agents of the
Company, and he will not use or aid others in obtaining or using any such
Confidential Information without the express written permission of the
President or Chief Executive Officer of the Company.
h. Mr. Tambornino agrees that until December 31, 1999, except as provided
below, and except as required to provide Consulting Services for the Company,
he will not, on his own behalf or as a partner, officer, director, employee,
agent, or consultant of any
6
<PAGE>
other person or entity, directly or indirectly, engage or attempt to engage
in the business of providing goods or services the same as or similar to the
goods or services of the McQuay International Division of the Company,
anywhere in the world. The Parties agree that the McQuay International
Division of the Company engages in the worldwide manufacture, sale, service,
marketing and distribution of commercial and industrial air conditioning,
heating and ventilation equipment, products, systems and processes. The
Parties agree that the entities which engage in the business of providing
goods or services the same as or similar to the goods or services of the
Company include, but are not limited to, York International, American
Standard (Trane), United Technologies (Carrier), and Nortek, Inc. Nothing in
this Agreement, however, will preclude Mr. Tambornino from engaging in an
independent business within a defined territory which markets and/or
distributes the Company's goods or services or goods or services similar to
those of the Company so long as such business does not distribute the goods
or services of York International, Trane, Carrier or Nortek. Further, nothing
in this Agreement will prohibit Mr. Tambornino from owning not more than 5%
of securities of a corporation that are listed on a national securities
exchange or quoted on the National Association of Securities Dealers
Automated Quotation System.
i. Mr. Tambornino agrees that until December 31, 1999, he will not, on his
own behalf or as a partner, officer, director, employee, agent, or consultant
of any other person or entity, directly or indirectly, solicit or induce (or
attempt to solicit or induce) any of the Company's Customers not to conduct
business with the Company, or to stop conducting business with the Company,
or to conduct business with or contract with any other person or entity.
Nothing in this paragraph, however, will preclude Mr. Tambornino from
soliciting the Company's Customers to conduct business with any independent
business with which he becomes affiliated which markets and/or distributes
the Company's goods or services or other goods or services so long as such
business does not distribute the goods or services of York International,
Trane, Carrier or Nortek.
j. Mr. Tambornino agrees that until December 31, 1999, he will not, on his
own behalf or as a partner, officer, director, employee, agent, or consultant
of any other person or entity, directly or indirectly, solicit or induce (or
attempt to solicit or induce) any employee of the Company to leave their
employment with the Company or consider employment with any other person or
entity.
k. The Parties agree that any breach by Mr. Tambornino of any of the
non-disclosure or non-compete provisions contained in Paragraph 3 of this
Agreement will cause the Company immediate, material and irreparable injury
and damage, and there is no adequate remedy at law for such breach.
Accordingly, in the event of a breach of any of the provisions of Paragraph 3
of this Agreement by Mr. Tambornino, in addition to any other remedies it may
have at law or in equity, the Company shall be entitled immediately to seek
enforcement of this Agreement in a court of competent jurisdiction by means
of a decree of specific performance, an injunction and any other form of
equitable relief. If any such action is brought, the prevailing party shall
be entitled to recover from the other the costs and attorneys' fees it
incurs. This provision is not a
7
<PAGE>
waiver of any other rights which the Company may have under this Agreement,
including the right to receive money damages.
l. Mr. Tambornino recognizes and acknowledges that his experience, skills,
education and training are transferable and can be employed in other fields
of endeavor, and that consequently, and in light of the consideration being
provided to him under this Agreement, the terms of this Agreement will not
unreasonably impair Mr. Tambornino's ability to engage in business or
employment activities after the termination of his employment or consulting
relationship with the Company.
4. RELEASE.
a. Mr. Tambornino and the Company agree that, except as provided below, in
consideration of the payments and consideration described herein, they will,
and hereby do, forever and irrevocably release and discharge the other (and,
in the case of the Company, its officers, directors, employees, agents,
affiliates, parents, subsidiaries, divisions, predecessors, purchasers,
assigns, representatives, successors, successors in interest, and customers)
from any and all grievances, claims, demands, debts, defenses, actions or
causes of action, obligations, contracts, promises, damages, judgments,
expenses, and liabilities, known or unknown, whatsoever which he now has, has
had, or may have, whether the same be at law, in equity, or mixed, in any way
arising from or relating to any act, occurrence, or transaction before the
date of this Agreement, including without limitation his separation of
employment. This is a General Release. Mr. Tambornino expressly
acknowledges that this General Release includes, but is not limited to, Mr.
Tambornino's intent to release the Company from any claim relating to this
employment at the Company, including, but not limited to, tort and contract
claims, arbitration claims, statutory claims, claims under any state or
federal wage and hour law or wage collection law, and claims of age, race,
color, sex, religion, handicap, disability, national origin, ancestry,
citizenship, marital status, retaliation, or any other claim of employment
discrimination under the Age Discrimination In Employment Act (29 U.S.C.
Sections 626 ET SEQ.), Title VII of the Civil Rights Acts of 1964 and 1991 as
amended (42 U.S.C. Sections 2000e ET SEQ.), the Employee Retirement Income
Security Act (29 U.S.C. Sections 1001 ET SEQ.), the Consolidated Omnibus
Budget Reconciliation Act of 1985 (29 U.S.C. Sections 1161 ET SEQ.), the
Americans With Disabilities Act (42 U.S.C. Sections 12101 ET SEQ.), the
Rehabilitation Act of 1973 (29 U.S.C. Sections 701 ET SEQ.), the Family and
Medical Leave Act (29 U.S.C. Sections 2601 ET SEQ.), the Fair Labor Standards
Act (29 U.S.C. Sections 201 ET SEQ.), the Annotated Code of Maryland, and any
other law of any State or local government prohibiting employment
discrimination. Nothing contained in this paragraph, however, shall limit
Mr. Tambornino's right to enforce his rights under the AAF-McQuay, Inc.
Retirement Savings Plan ("401k Plan"), the Executive Salary Continuation
Agreement, the Company's Retiree Medical Group Benefits Plan, NEPI
Relinquishment and Release Agreement, NEPI Modification Agreement and NEPI
Indemnification Modification Agreement or to assert any rights he may have
against the Company in the event a claim is made against him by another
person or entity resulting
8
<PAGE>
from acts within the scope of his employment, officership or directorship
with the Company, including any right to contribution or indemnification.
b. Mr. Tambornino and the Company agree not to sue each other or to join
in any lawsuit against the Company, or any other person or entity specified
in Paragraph 4a, concerning any matter released in Paragraph 4a. Mr.
Tambornino and the Company further agree and covenant not to make, file,
assist or encourage others in making or filing any lawsuits, complaints, or
other proceedings, including but not limited to any suits in the local or
state courts, the United States Federal District Courts or any other court,
against each other or any other person or entity specified in Paragraph 4a,
concerning any matter released in Paragraph 4a. As to any such lawsuits,
complaints, or other proceedings which have already been made or filed by or
on behalf of Mr. Tambornino or the Company, Mr. Tambornino and the Company
agree to withdraw or dismiss with prejudice immediately all such lawsuits or
proceedings.
5. NO PREVAILING PARTY. Mr. Tambornino and the Company agree that neither
this Agreement nor the negotiations in pursuance thereof shall be construed
or interpreted to render Mr. Tambornino or the Company a prevailing party for
any reason, including but not limited to an award of attorney's fees or costs
under any statute or otherwise.
6. CONFIDENTIALITY. Mr. Tambornino agrees not to disclose the monetary
terms of this Agreement and the negotiations in pursuance thereof, except to
his lawyers, tax, financial and business advisors, spouse, and as required by
regulatory authorities, by law or valid legal process or as needed to enforce
the terms of this Agreement. Nothing herein shall prevent Mr. Tambornino
from disclosing the non-monetary terms of the Agreement, including his
Consulting Relationship and the terms of his non-competitive agreement with
the Company. Mr. Tambornino further agrees that a violation of the terms of
this paragraph entitles the Company to obtain injunctive, monetary or other
relief permitted by law.
7. NON-ASSIGNMENT. Mr. Tambornino represents that he has not heretofore
assigned or transferred, or purported to assign or transfer, to any person or
entity, any claim against the Company or portion thereof or interest therein.
8. BINDING. The Parties further agree that this Agreement shall be
binding upon and inure to the benefit of the assigns, personal
representatives, heirs, executors, and administrators of Mr. Tambornino and
the assigns, personal representatives, heirs, executors, administrators,
affiliates, successors, predecessors, subsidiaries, divisions, officers,
purchasers, agents, representatives, directors and employees of the Company.
9. GOVERNING LAW. This Agreement and the rights and obligations hereunder
shall be governed by, and construed in accordance with, the laws of the State
of Maryland regardless of any principles of conflicts of laws or choice of
laws of any jurisdiction. The state courts of the State of Maryland and, if
the jurisdictional prerequisites exist at the time, the United States
District Court for the District of Maryland, shall have sole
9
<PAGE>
and exclusive jurisdiction to hear and determine any dispute or controversy
arising under or concerning this Agreement.
10. NON-WAIVER. The failure of a party to enforce any term of this
Agreement shall not constitute a waiver of any rights or deprive that party
of the right to insist thereafter upon strict adherence to that or any other
term of this Agreement, nor shall a waiver of any breach of this Agreement
constitute a waiver of any preceding or succeeding breach. No waiver of a
right under any provision of this Agreement shall be binding on a party
unless made in writing and, in the case of the Company, signed by the
President or Chief Executive Officer of the Company.
11. ENFORCEABILITY, SEVERABILITY. It is the intention of the Parties
that this Agreement shall be enforceable to the fullest extent allowed by
law. In the event that a court holds any provision of this Agreement to be
unenforceable, the Parties agree that, if allowed by law, that provision
shall be deemed amended to the degree necessary to render it enforceable
without affecting the rest of this Agreement. The Parties agree that the
invalidity or unenforceability of any provision of this Agreement shall not
affect or limit the validity and enforceability of the other provisions
hereof. The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning.
12. ALL PAYMENTS IMMEDIATELY DUE IN CERTAIN CASES. If all or
substantially all of the assets of the Company or of the McQuay International
Division of the Company are sold or if there is a change in control of the
Company, all payments due to Mr. Tambornino under this Agreement shall be
immediately due and payable. For the purposes of this Agreement, a "change
in control" means a change in the beneficial ownership of more than 50% of
the stock of the Company in any consecutive 12 month period. The Company
shall give written notice to Mr. Tambornino at least 10 days prior to the
closing on any such sale or upon any change in control.
These provisions are not a waiver of any other rights which Mr. Tambornino
may have under this Agreement.
In the event of any acceleration of payments under this Agreement, the
full amount due and payable set out in this Agreement shall be discounted to
present value by a factor of seven percent (7%) per year.
13. WHOLE AGREEMENT. Except as provided below, this Agreement
supersedes all prior Agreements between the Parties concerning the subject
matter hereof and constitutes the entire agreement between the Parties with
respect to the subject matter hereof and all previous discussions, promises,
representations, and understandings relating to the topics herein discussed
are hereby merged into this Agreement. This Agreement may be modified only
by a written instrument signed by Mr. Tambornino and the President or Chief
Executive Officer of the Company. No person has any authority to make any
representation or promise on behalf of any of the Parties not set
10
<PAGE>
forth herein, and this Agreement has not been executed in reliance upon any
representation or promise except those executed herein. The following
Agreements are exempted from this paragraph: The Executive Salary
Continuation Agreement, NEPI Relinquishment and Release Agreement, NEPI
Modification Agreement, NEPI Indemnification Modification Agreement,
AAF-McQuay, Inc. Retirement Savings Plan ("401K Plan") and the Company's
Retiree Medical Group Benefits Plan.
14. NO ADMISSION. Mr. Tambornino and the Company agree that nothing in
this Agreement is to be construed as an admission of any wrongdoing or
liability on the part of either party under any statute or otherwise, but
that on the contrary, any such wrongdoing or liability is expressly denied by
the parties.
15. VOLUNTARY AGREEMENT. Mr. Tambornino represents that he has read
this Agreement, that he understands all of its terms, that he had the
opportunity to discuss the terms of this Agreement with an attorney of his
choice, that in executing this Agreement he does not rely and has not relied
upon any representation or statements made by any of the Company's agents,
representatives, or attorneys with regard to the subject matter, basis, or
effect of the Agreement, and that he enters into this Agreement voluntarily,
of his own free will and with knowledge of its meaning and effect.
16. CONSIDERATION. Mr. Tambornino understands that he has twenty-two
days from the date of his receipt of this Agreement, which was May 15, 1996,
to consider his decision to sign it. By signing this Agreement, Mr.
Tambornino expressly acknowledges that his decision to sign this Agreement
was of his own free will.
17. REVOCATION. Mr. Tambornino acknowledges that he may revoke this
Agreement for up to and including eight (8) days after the execution of this
Agreement, and that the Agreement shall not become effective until the
expiration of eight (8) days from the date of the execution of the Agreement.
18. NOTICES.
Any notice, request, instruction or other document to be given hereunder
to any party shall be in writing delivered personally or sent by registered
or certified mail, as follows:
If to Mr. Tambornino:
Mr. Charles Tambornino
500 Waycliffe Dr. N.
Wayzata, MN 55391
If to Company:
Chief Executive Officer
11
<PAGE>
AAF-McQuay, Inc.
Legg Mason Tower, Suite 2800
111 South Calvert Street
Baltimore, Maryland 21202
19. ATTORNEY. THE COMPANY HEREBY ADVISES MR. TAMBORNINO TO CONSULT WITH AN
ATTORNEY PRIOR TO EXECUTING THIS AGREEMENT.
IN WITNESS WHEREOF, the Parties have hereunto executed this Agreement, as of
this 21th day of June 1996.
/s/ CHARLES J. TAMBORNINO /S/ JOSEPH B. HUNTER
- ------------------------- --------------------
Charles J. Tambornino Joseph B. Hunter
President and Chief Executive
Officer, AAF-McQuay, Inc.
12
<PAGE>
EXHIBIT 24
AAF-MCQUAY INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned Directors of
AAF-McQuay Inc. hereby constitutes and appoints Joseph B. Hunter and Michael
J. Christopher and either of them, the true and lawful agents and
attorneys-in-fact of the undersigned with full power and authority in any of
said agents and attorneys-in-fact, to sign for the undersigned in their
respective names as Directors of AAF-McQuay Inc., the Annual Report on Form
10-K, and any and all further amendments to said Report, hereby ratifying and
confirming all acts taken by any such agent and attorney-in-fact, as herein
authorized.
Dated:
/s/ Joseph B. Hunter /s/ Gerald L. Boehrs
- ----------------------------- -----------------------------
Joseph B. Hunter Gerald L. Boehrs
/s/ Michael J. Christopher /s/ Liu Wan Min
- ----------------------------- -----------------------------
Michael J. Christopher Liu Wan Min
/s/ Quek Leng Chan /s/ Ho Nyuk Choy
- ----------------------------- -----------------------------
Quek Leng Chan Ho Nyuk Choy
/s/ Roger Tan Kim Hock
- -----------------------------
Roger Tan Kim Hock
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE YEAR ENDED JUNE 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> JUN-29-1996
<CASH> 20824
<SECURITIES> 0
<RECEIVABLES> 231649
<ALLOWANCES> 6312
<INVENTORY> 115273
<CURRENT-ASSETS> 366489
<PP&E> 172660
<DEPRECIATION> 23425
<TOTAL-ASSETS> 806954
<CURRENT-LIABILITIES> 273876
<BONDS> 227490
0
0
<COMMON> 250
<OTHER-SE> 199033
<TOTAL-LIABILITY-AND-EQUITY> 806954
<SALES> 901395
<TOTAL-REVENUES> 901395
<CGS> 645149
<TOTAL-COSTS> 645149
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24957
<INCOME-PRETAX> 34958
<INCOME-TAX> 18423
<INCOME-CONTINUING> 16535
<DISCONTINUED> 0
<EXTRAORDINARY> 1635
<CHANGES> 0
<NET-INCOME> 14900
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
