UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 33-80701
AAF-MCQUAY INC.
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(Exact name of registrant as specified in its charter)
Delaware 41-0404230
- --------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
111 South Calvert Street, Baltimore, Maryland 21202
- --------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(410) 528-2755
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,497 shares of Common Stock,
par value $100.00 per share, were outstanding as of May 9, 1997.
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
Page
----
Part I - Financial Information..................................... 3
- ------
Item 1. Financial Statements (unaudited).......................... 3
Consolidated Balance Sheets as of -
March 30, 1997 and June 30, 1996.......................... 3
Consolidated Statements of Operations -
Three months and nine months ended March 30, 1997 and
March 30, 1996 ........................................... 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 30, 1997 and March 30, 1996....... 5
Notes to the Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Part II - Other Information......................................... 11
- -------
Item 6. Exhibits and Reports on Form 8-K.......................... 11
Signatures................................................ 12
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 30, June 30,
1997 1996
---------- ---------
(unaudited)
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................................... $ 8,185 $ 20,824
Accounts receivable ................................................ 205,597 225,337
Inventories ........................................................ 126,548 115,273
Other current assets ............................................... 6,313 5,055
--------- ---------
Total current assets ............................................. 346,643 366,489
Property, plant and equipment, net ................................... 146,591 149,235
Cost in excess of net assets acquired and other intangibles, net ..... 266,873 271,840
Other assets and deferred charges .................................... 19,829 19,390
--------- ---------
Total assets ..................................................... $ 779,936 $ 806,954
========= =========
LIABILITIES AND STOCKHOLDERS EQUITY:
Current liabilities:
Short-term borrowings .............................................. $ 49,715 $ 65,538
Current maturities of long-term debt ............................... 9,882 9,879
Accounts payable, trade ............................................ 112,102 108,792
Accrued warranty ................................................... 13,138 14,256
Other accrued liabilities .......................................... 68,332 75,411
--------- ---------
Total current liabilities ........................................ 253,169 273,876
Long-term debt ....................................................... 221,825 227,490
Other liabilities .................................................... 103,837 106,305
--------- ---------
Total liabilities ................................................ 578,831 607,671
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 .................................................. 25,755 22,437
Foreign currency translation adjustment ............................ (4,815) (3,319)
--------- ---------
Total stockholder's equity ....................................... 201,105 199,283
Total liabilities and stockholders equity ............................ $ 779,936 $ 806,954
========= =========
</TABLE>
See Notes To Consolidated Financial Statements
3
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------- ---------------------
March 30, March 30, March 30, March 30,
1997 1996 1997 1996
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net Sales .............................. $227,441 $ 218,849 $686,352 $ 652,972
Cost of Sales .......................... 164,750 158,999 500,809 471,882
-------- --------- -------- ---------
Gross Profit ........................... 62,691 59,850 185,543 181,090
Operating Expenses:
Selling, general and administrative... 50,378 47,383 149,841 137,337
Amortization of intangible assets .... 2,880 3,715 8,633 10,569
-------- --------- -------- ---------
53,258 51,098 158,474 147,906
-------- --------- -------- ---------
Income from operations ................. 9,433 8,752 27,069 33,184
Interest expense, net .................. 6,229 6,542 19,581 18,391
Other (income) expense, net ............ 522 (1,338) 863 (3,265)
-------- --------- -------- ---------
Income before income taxes and
extraordinary item ..................... 2,682 3,548 6,625 18,058
Income taxes ........................... 1,413 1,509 3,307 9,598
-------- --------- -------- ---------
Income before extraordinary item ....... 1,269 2,039 3,318 8,460
Extraordinary item, net of income tax .. -- 1,635 -- 1,635
-------- --------- -------- ---------
Net income ............................. $ 1,269 $ 404 $ 3,318 $ 6,825
======== ========= ======== =========
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine months ended
-----------------------
March 30, March 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 3,318 $ 6,825
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization .................... 19,127 19,669
Extraordinary item ............................... -- 2,681
Foreign currency transaction (gains) losses ...... 491 (1,348)
Changes in operating assets and liabilities ...... (6,011) 2,251
-------- ---------
Net cash from operating activities ................. 16,925 30,078
Cash flows from investing activities:
Capital expenditures, net ........................ (8,914) (8,897)
Purchase of J&E Hall ............................. -- (29,799)
-------- ---------
Net cash from investing activities ................. (8,914) (38,696)
Cash flows from financing activities:
Net repayments under short-term borrowing
arrangements ................................... (15,128) (14,467)
Payments on long-term debt ....................... (7,603) (100,512)
Proceeds from issuance of long-term debt ......... 1,940 134,812
Payment of debt issuance cost .................... -- (4,736)
-------- ---------
Net cash from financing activities ................. (20,791) 15,097
Effect of exchange rate changes on cash ............ 141 (701)
-------- ---------
Net increase (decrease) in cash and cash equivalents (12,639) 5,778
Cash and cash equivalents at beginning of period ... 20,824 16,242
-------- ---------
Cash and cash equivalents at end of period ......... $ 8,185 $ 22,020
======== =========
See Notes To Consolidated Financial Statements
5
<PAGE>
Notes to the Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All inter-company transactions have been
eliminated. The accompanying unaudited consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim reporting and with the instructions to Form
10-Q and Article 10 of Regulation S-K. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K (the
"Annual Report") for the year ended June 30, 1996. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The accompanying consolidated
financial statements reflect the statements of operations for the third quarter
and nine months ended March 30, 1997 and March 30, 1996; the balance sheets at
March 30, 1997 and June 30, 1996, and the statements of cash flows for the nine
months ended March 30, 1997 and March 30, 1996.
The operating results for the nine months ended March 30, 1997 are not
necessarily indicative of the operating results that may be expected for the
full year ending June 30, 1997. For clarity in presentation all periods
presented herein are shown to end on the 30th of the month.
Note 2. Inventories:
Inventories consist of the following:
(dollars in thousands)
March 30, June 30,
1997 1996
-------- --------
FIFO Cost:
Raw Materials ........................ $ 45,129 $ 46,870
Work-in-process ...................... 28,701 23,365
Finished goods ...................... 49,741 42,067
-------- --------
123,571 112,302
LIFO adjustment ...................... 2,977 2,971
-------- --------
$126,548 $115,273
======== ========
Note 3. Income Taxes:
The difference between the Company's reported tax provision for the first
nine months of fiscal years 1997 and 1996 and the tax provision computed based
on U.S. statutory rates is primarily attributed to nondeductible goodwill
amortization and foreign tax credits not utilized.
Note 4. Contingencies:
Indemnification Agreement:
On May 2, 1994, O.Y.L. Industries Berhad ("OYL") 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 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.
6
<PAGE>
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 a $11.5 million promissory note (see note 7 in
the Annual Report). 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.
The Company believes that the ultimate liability for indemnified losses will
exceed $23.8 million and has recognized this non-current 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, among 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 in note 11 of the
Annual Report may arise in the future. The Company records liabilities if, in
management's judgment, environmental assessments or remedial efforts are
probable and the costs can be reasonably estimated. These accrued liabilities
are not discounted. Such estimates are adjusted if necessary based upon the
completion of a formal study or the Company's commitment to a formal plan of
action. The Company believes that all significant environmental matters are
subject to the indemnification agreement with the former owners of the
Predecessor Company described above.
The Company is currently a plaintiff in several legal suits, assessing
insurance coverage, or pursuing other actions in an attempt to recover the cost
associated with the above liabilities. No amounts have been recorded in the
accompanying Consolidated Balance Sheets relating to any such possible
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 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.
On March 23, 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. These tax matters are also covered by the indemnification agreement
with the former owners of the Predecessor Company.
7
<PAGE>
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 the Company.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations:
Consolidated net sales were $227.4 million and $686.4 million for the
quarter and nine months ended March 30, 1997, respectively. This represents an
increase in net sales, as compared to the comparable prior year periods, of 3.9%
for the quarter and 5.1% for the nine months. Income from operations was $9.4
million or 4.1% of sales versus $8.7 million or 4.0% of sales for the third
quarter of fiscal years 1997 and 1996, respectively. Income from operations for
nine months ended March 30, 1997 and 1996 was $27.1 million or 3.9% of sales and
$33.2 million or 5.1%, respectively. The Company's ongoing implementation of
certain cost improvement and strategic initiatives, in both the Commercial Air
Conditioning and Filtration Products groups, has unfavorably impacted operating
income during the quarter and nine months ended March 30, 1997. The
implementation of these initiatives has resulted in extended delivery times for
some products and higher than anticipated manufacturing costs and operating
expenses. These strategic initiatives involve the integration and relocation of
certain product manufacturing lines, opening operations in Asia, start-up of new
products, implementation of new software systems and the consolidation of
certain field sales' offices. In spite of the higher than anticipated transition
costs, the Company remains committed to these strategic initiatives in order to
realize the expected benefits.
Net Sales
Consolidated net sales were $227.4 million and $686.4 million for the
quarter and nine months ended March 30, 1997, respectively. This represents an
increase in net sales, as compared to the comparable prior year periods, of 3.9%
for the quarter and 5.1% for the nine months. The Industrial Refrigeration
segment was acquired in December, 1995 and thus the nine months of 1996 does not
reflect a full period. The following table presents the Company's net sales by
business segment.
(dollars in thousands) Quarter ended Nine months ended
--------------------- ---------------------
March 30, March 30, March 30, March 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales:
Commercial Air Conditioning . $ 128,754 $ 124,725 $ 384,535 $ 382,758
Filtration Products ......... 84,740 84,023 256,472 255,832
Industrial Refrigeration .... 15,208 11,846 49,310 19,823
Eliminations/ other ......... (1,261) (1,745) (3,965) (5,441)
--------- --------- --------- ---------
Total ................... $ 227,441 $ 218,849 $ 686,352 $ 652,972
========= ========= ========= =========
8
<PAGE>
Commercial Air Conditioning net sales increased $4.0 million or 3.2% and
$1.8 million or .5% for the quarter and nine month period ended March 30, 1997,
respectively, as compared to the comparable 1996 periods. Domestic sales
increased 4.7%, while international sales decreased 1.4% in the third quarter of
fiscal year 1997 versus the third quarter of fiscal year 1996. For the nine
months ended March 30, 1997, domestic sales increased 6.5% and international
sales decreased 17.4%, as compared to the nine months ended March 30, 1996.
Domestic sales increases for the third quarter and nine months ended March 30,
1997 were primarily due to market growth and increased market share for terminal
air conditioning systems, continued acceptance of new products utilizing the
single screw technology and increased exports to Asia and Latin America. Due to
new international distribution systems, exports from domestic operations grew
approximately 16% and 23% for the quarter and nine months ended March 30, 1997,
respectively, as compared to the prior year. These increases were partially
offset by a decline in absorption chiller product sales which continue to be
negatively affected by the reduction in the number of natural gas incentive and
rebate programs. In addition, the CFC replacement/retrofit market has seen
demand flatten as the replacement of existing chillers has slowed. For the third
quarter, the decrease in international sales was due primarily to the impact of
foreign currency translation. For the nine month period, the decrease in
international sales was due to several large projects completed in fiscal year
1996 which were not repeated in fiscal year 1997, the impact of foreign currency
translation, and a continued soft European market. Backlog for the Commercial
Air Conditioning group at the end of the third quarter for fiscal year 1997 was
$121.1 million as compared to $116.5 million for the prior year.
Filtration Products net sales were slightly higher for the third quarter
and nine months ended March 30, 1997, as compared to the prior year. In the
third quarter of fiscal year 1997 domestic sales decreased 4.8% while
international sales increased 7.3% versus the third quarter of 1996. For the
nine months ended March 30, 1997, domestic sales decreased 5.9% and
international sales increased 8.0%, as compared to the nine months ended March
30, 1996. The decrease in domestic sales during the third quarter and nine
months of fiscal 1997 was primarily attributed to complexities in implementing
new software systems, sales office consolidations and manufacturing integration;
all of which affected delivery schedules. Management believes that the software
systems' and manufacturing problems have been largely overcome and the
difficulties with field sales office consolidation should be mostly resolved by
the end of the fiscal year. In addition, the domestics sales decrease for the
nine months was partially due to a promotional program sponsored by a large
retail customer during fiscal 1996 that was not repeated in the current year.
The increases in international sales, for the third quarter and nine months
ended March 30, 1996, were due to continued growth in emerging markets in Asia
and Latin America. These increases were offset by the impact of unfavorable
currency translation and soft market conditions in Europe.
Gross Profit
Consolidated gross margin was $62.7 million versus $59.8 million for the
third quarter of fiscal years 1997 and 1996, respectively. For the nine months
ended March 30, 1997 and 1996, the consolidated gross margin was $185.5 million
and $181.1 million, respectively. The increase for the nine month period is
largely attributable to the acquisition of J&E Hall late in the second quarter
of fiscal year 1996. The consolidated gross margin rate was 27.6% versus 27.3%
for the third quarter of fiscal years 1997 and 1996, respectively. For the nine
months ended March 30, 1997 and 1996, the consolidated gross margin rate was
27.0% and 27.7%, respectively. The increase in the gross margin rate for the
quarter was primarily the result of improved margins in the Commercial Air
Conditioning group versus the prior year. For the nine month period, the
decrease in gross margin rate was largely attributable to the inclusion of the
newly acquired lower margin Industrial Refrigeration group in the consolidated
Company results. Furthermore, both the Commercial Air Conditioning and
Filtration Products groups' gross profit margin rates declined due to high
production costs resulting from difficulties in the execution of certain
strategic initiatives. Additionally, certain product lines in both Filtration
Products and Commercial Air Conditioning segments experienced margin rate
deterioration due to competitive price pressures and pricing strategies aimed at
increasing market share.
9
<PAGE>
Operating Expenses
Operating expenses were $53.3 million or 23.5% of sales versus $51.1
million or 23.3% of sales for the third quarter of fiscal year 1997 and 1996,
respectively. Operating expenses for the nine months ended March 30, 1997 and
1996 were $158.5 million or 23.1% of sales and $147.9 million or 22.7% of sales,
respectively. The acquisition of J&E Hall late in the second quarter of fiscal
year 1996 accounted for approximately 50% of the increase in selling, general
and administrative ("SG&A") expenses for the nine months period of fiscal year
1997 as compared to fiscal year 1996. Excluding J&E Hall, SG&A expenses
increased approximately 4.7% for the nine months ended March 30, 1997, as
compared to the prior year. These spending increases for the quarter and current
nine months pertain primarily to the Company's initiative to build a
decentralized and global organization. This initiative included increases in
general and administrative expenses such as staffing a new Asian office,
software consulting and increases in research and development engineering to
help meet the growing demand for new products. These expense increases were
partially offset by a decrease in amortization expense due to the change in
estimated lives for certain intangible assets made in the fourth quarter of the
prior fiscal year.
Income from Operations
Income from operations was $9.4 million or 4.1% of sales versus $8.7
million or 4.0% of sales for the third quarter of fiscal year 1997 and 1996,
respectively. The Commercial Air Conditioning group and the Industrial
Refrigeration group both had an increase in income from operations while the
Filtration Products group had a decrease during the third quarter of fiscal year
1997, as compared to the same period in 1996. Income from operations for the
nine months ended March 30, 1997 and 1996 was $27.1 million or 3.9% of sales and
$33.2 million or 5.1%, respectively. During the nine months ended March 30,
1997, the Commercial Air Conditioning and Filtration Products groups both had
decreases in income from operations while the Industrial Refrigeration group had
a slight increase, as compared to the prior year.
Net Interest Expenses and Other (Income) Expense
Net interest expense was $6.2 million and $19.6 million during the third
quarter and nine months ended March 30, 1997, a decrease of $0.3 million and an
increase $1.2 million, respectively, as compared to the comparable periods in
the prior year. The decrease in interest expense for the quarter is primarily
due to lower levels of debt. For the nine months ended March 30, 1997, the
increase in interest expense is the result of slightly higher interest rates, as
a result of the Refinancing (see footnote 7 on page 43 in the Annual Report) and
the increased borrowing as a result of the acquisition of J&E Hall. Net other
expense was $0.5 and $0.9 million for the third quarter and nine months ended
March 30, 1997, respectively. Net other expense increased $1.8 million and $4.1
million, respectively, as compared to the prior year. This change in other
expense is primarily due to currency gains not repeated and reduced earnings
from equity affiliates during the current year.
Liquidity and Capital Resources
The Company's liquidity needs are provided by cash generated from
operating activities and supplemented when necessary by short-term credit
facilities. During the nine months of fiscal year 1997, funds provided by
operating activities were $16.9 million as compared to a generation of $30.1
million in net cash provided by operating activities in the prior year for the
same period. The decrease in operating cash provided in the first nine months of
fiscal year 1997 reflects lower net income and increased working capital. During
the nine months of fiscal year 1997, cash used in investing activities was $8.9
million and cash used in financing activities was $21.0 million. Cash balances
decreased due to the application of excess cash at foreign subsidiaries against
short-term debt.
During the quarter, a stock option plan ( the "Plan") was approved for the
Company's executives which will be accounted for as a compensatory plan. The
Company anticipates the granting of options under the Plan during fiscal year
1998. The related impact to the Statement of Operations will be based on an
independent valuation of the Company at or near the grant date.
10
<PAGE>
Management believes, based upon current levels of operations and
forecasted earnings, that cash flow from operations, together with borrowings
under the Amended Credit 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. In addition, the current Bank
Agreement (see note 7 in the Annual Report) requirements become more restrictive
in the future. During the next quarter, the Company intends to amend its
existing bank credit agreement to ease current covenant requirements. If the
Company's sources of funds were to fail to satisfy the Company's requirements,
the Company may need to amend or 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.
Forward-Looking Statements
When used in this report by management of the Company, from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements that involve certain risks and
uncertainties. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward-looking statements,
some of which include risk factors previously discussed in this and other SEC
reports filed by the Company. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date thereof.
The Company undertakes no obligation to publicly release the results of any
events or circumstances after the date hereof to reflect the occurrence of
unanticipated events.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 Stock Option Plan (filed herewith)
Exhibit 27 Financial Data Schedule
(filed herewith)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
period.
11
<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.
AAF-MCQUAY INC.
DATE May 9, 1997 By: /S/ M.J. Christopher
--------------------
M.J. Christopher
Executive Vice President
DATE May 9, 1997 /S/ B.J. Bates
-------------------------
B.J. Bates
Chief Financial Officer
DATE May 9, 1997 /S/ J.M. Sichter
-------------------------
J.M. Sichter
Controller
(Principal Accounting Officer)
12
<PAGE>
Exhibit Index
Number Description
- ------ -----------
10.1 Stock Option Plan
27 Financial Data Schedule
AAF-MCQUAY GROUP, INC.
STOCK OPTION PLAN
1. Establishment and Purpose
The AAF-McQuay Group, Inc. hereby establishes the AAF-MCQUAY GROUP, INC.
STOCK OPTION PLAN (the "Plan"). The Plan permits the grant of nonqualified stock
options for the purpose of promoting the long-term growth and profitability of
the AAF-McQuay Group, Inc. (the "Company") and its Subsidiaries (collectively,
the "AMG Group"), by (i) providing directors, officers and other employees of
the AMG Group with incentives to improve stockholder value and to contribute to
the success of the AMG Group and (ii) enabling the AMG Group to attract, retain
and reward the best available persons for positions of substantial
responsibility.
The Plan is a compensatory benefit plan within the meaning of Rule 701
under the Securities Act of 1933, Chapter 2A of Title 15 of the United States
Code (the "Securities Act"). Except to the extent any other exemption from such
Act is expressly relied upon in connection with any agreement entered into
pursuant to the Plan or the securities issuable upon exercise of options granted
pursuant hereto are registered under the Securities Act, the issuance of Common
Stock pursuant to the Plan is intended to qualify for the exemption from
registration under the Securities Act provided by Rule 701. To the extent that
an exemption from registration under the Securities Act provided by Rule 701 is
unavailable, all unregistered offers and sales of shares of Common Stock
issuable upon exercise of an option are intended to be exempt from registration
under the Securities Act in reliance upon the private offering exemption
contained in Section 4(2) of the Securities Act, or other available exemption,
and the Plan shall be so administered.
2. Definitions
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Affiliate" of an entity means a person or entity that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, such entity.
(b) "AMG Group" means the Company and its Subsidiaries, collectively.
(c) "Change of Control" with respect to a member of the AMG Group means
(i) any combination, consolidation or merger with a non-Affiliate of Hume where
the member of the AMG Group is not the survivor; (ii) any sale, exchange or
other disposition of all or substantially all of the assets of a member of the
AMG Group to a non-Affiliate of Hume; or (iii) any sale, other than in the
context of a public offering, of more than 50% of the issued shares of a member
of the AMG Group to a non-Affiliate of Hume.
<PAGE>
(d) "Code" means the Internal Revenue Code of 1986, Title 26 of the United
States Code, as amended, and any successor statute.
(e) "Common Stock" means shares of authorized but unissued common stock of
a member of the AMG Group.
(f) "Company" means AAF-McQuay Group, Inc., a wholly-owned subsidiary of
O.Y.L. Industries Bhd, and incorporated in Delaware, United States of America.
(g) "Exchange Act" means the Securities Exchange Act of 1934, Chapter 2B
of Title 15 of the United States Code.
(h) "Fair Market Value" of a share of the Common Stock of a member of the
AMG Group for any purpose on a particular date shall be determined in a manner
such as the Committee shall in good faith determine to be appropriate, but in no
event shall such value be less than the higher of (i) the value of the member of
the AMG Group based upon the last independent appraisal divided by the number of
outstanding shares of Common Stock of such member of the AMG Group, or (ii) such
value as may be established in good faith as a result of the occurrence of any
public offering of equity securities of the member of the AMG Group or a Change
of Control transaction with respect to such member of the AMG Group that occurs
after such last independent appraisal. In the case of Joseph B. Hunter, "Fair
Market Value" under (i) above shall be determined without discounts for lack of
marketability or minority ownership. With respect to the other participants,
"Fair Market Value" under (i) above shall be determined by factoring in a
discount for lack of marketability but without regard to any minority interest
discount. With respect to all participants, no lack of marketability or other
discounts shall be applied in determining "Fair Market Value" under (ii) above.
(i) "Hume" means Hume Industries (Malaysia) Berhad.
(j) "Parent" means O.Y.L. Industries Bhd.
(k) "Participant" means an employee, officer or director of the AMG Group
who is selected for participation by the Committee, subject to the restriction
in Section 5 of the Plan.
(l) "Plan" means the AAF-McQuay Group, Inc. Stock Option Plan, as set
forth herein and as amended from time to time.
(m) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the Exchange Act
on the effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan (and
further transactions in such securities) from Section 16(b) of the Exchange Act.
-2-
<PAGE>
(n) "Securities Act" means the Securities Act of 1933, Chapter 2A of Title
15 of the United States Code.
(o) "Subsidiary" and "subsidiaries" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if each
of the corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
3. Administration
The Plan shall be administered by a committee (the "Committee"), a
majority of whose members shall be appointed by the Board of Directors of Parent
and the balance of whose members shall be appointed by the Company's Board of
Directors (the "Board").
Notwithstanding the foregoing, in the event that the Common Stock or any
other capital stock of a member of the AMG Group becomes registered under
Section 12 of the Exchange Act, the members of the Committee shall be both
"Non-employee Directors" within the meaning of Rule 16b-3 and "outside
directors" within the meaning of Section 162(m) of the Code.
All members of the Committee shall serve at the Board's pleasure and the
Board may, from time to time, remove members from or add members to the
Committee and vacancies on the Committee, however caused, shall be filled by
appointment by the Board; provided, however, that the Board of Directors of
Parent shall have appointed or ratified the appointment of a majority of the
members of the Committee as it may be comprised from time to time.
The Committee shall have the authority, in its sole discretion and from
time to time, consistent with the provisions of the Plan, to (i) select persons
or classes of persons to participate in the Plan, (ii) grant awards provided
under the Plan in such form and amount as the Committee shall determine and
impose such terms, limitations, restrictions and conditions upon any such award
as the Committee shall deem appropriate, (iii) modify, extend or renew
outstanding grants, accept the surrender of outstanding grants and substitute
new grants, (iv) interpret the Plan and (v) adopt, amend, or rescind such rules
and regulations for carrying out the Plan, and take all other action necessary
or advisable for the implementation and administration of the Plan, as the
Committee may deem appropriate. Decisions and determinations of the Committee on
all matters relating to the Plan shall be in the Committee's sole discretion and
shall be conclusive and binding on all parties, including members of the AMG
Group, their stockholders and the participants in the Plan and their respective
successors in interest. No member of the Committee shall be liable for any
action taken or decision made in good faith relating to the Plan or any award
thereunder.
-3-
<PAGE>
The Committee shall select one of its members to act as Chairman and shall
make such rules and regulations for its operation as it deems appropriate or
desirable, provided that such rules and regulations include the following:
(1) No member of the Committee shall participate in any manner in
the Committee's determination to award to such member a stock
option under the Plan, nor in the determination of the terms
and conditions of any such stock option;
(2) At least 4 or 3/4 of the members of the Committee (whichever
is higher) must be present (including via telephone
conference) at all meetings to constitute a quorum, a majority
of any such quorum must be comprised of Committee members
appointed by the Board of Directors of Parent, and decisions
of the Committee must be made by unanimous consent of all
members present at any such meeting; and
(3) Any decision reduced to writing and signed by all of the
members of the Committee shall be fully effective as if it had
been unanimously made at a duly held meeting of the Committee.
The Board of Directors of the Company shall have the right, at any time
and from time to time, in its discretion or at the direction of the Board of
Directors of Parent, to establish a separate committee to administer the
application of the Plan to a member of the AMG Group and its participants,
provided that a majority of the members of such committee are not employees of
that member of the AMG Group and no member of such committee shall be empowered
to cause a grant of options under this Plan to himself or herself. In such
event, the term "Committee" as used herein shall mean, with respect to the
application of the Plan to such member of the AMG Group and its participants,
the committee established for such member.
4. Shares Available for the Plan
Shares of stock which may be issued under the Plan pursuant to the
exercise of options shall be authorized and unissued shares of Common Stock of
members of the AMG Group. Subject to adjustments as provided in Section 12, the
total number of shares of Common Stock of a member of the AMG Group with respect
to which options may be granted under the Plan shall not exceed 10% of the
shares of Common Stock of such member outstanding on a fully diluted basis at
any one point in time during the term of the Plan. If any grant under the Plan
expires or terminates unexercised, becomes unexercisable or is forfeited or
otherwise terminated or canceled as to any shares, the shares subject to such
grant shall thereafter be available for further grants under the Plan.
-4-
<PAGE>
5. Participation
Participation in the Plan shall be open to employees, officers, and
directors of members of the AMG Group as may be selected by the Committee from
time to time. To the extent necessary to comply with Rule 16b-3 or to constitute
an "outside director" within the meaning of Section 162(m) of the Code, and only
insofar as Rule 16b-3 and Section 162(m) of the Code are then applicable to
grants made pursuant to this Plan, Committee members shall not be eligible to
participate in the Plan while members of the Committee.
Options may be granted to such persons and for such number of shares as
the Committee shall determine, subject to the limitations in Section 4. The
Committee shall determine the number of shares with respect to which an option
is to be granted to a participant based on individual performance and/or base
salary range; provided that, subject to adjustments as provided in Section 12,
in no event shall a participant be granted options under the Plan which in the
aggregate entitle the participant to subscribe for an amount that is more than
5% of the shares of Common Stock of a member of the AMG Group that are
outstanding on a fully diluted basis at any one point in time during the term of
the Plan.
6. Stock Options
Subject to the other applicable provisions of the Plan, the Committee may
from time to time grant to eligible participants non-qualified stock options.
The options granted shall be subject to the following terms and conditions.
(a) Grant of Option. The date an option is granted shall mean the
effective date selected by the Committee as of which the Committee allots a
specific number of shares to a participant pursuant to the Plan. The grant of a
stock option shall be evidenced by a written Stock Option Agreement, executed by
a member of the AMG Group and the grantee, stating the number of shares of
Common Stock of a member of the AMG Group subject to the stock option evidenced
thereby and the terms and conditions of such option, in such form as the
Committee may from time to time determine.
(b) Price.
(i) With respect to any and all options to be granted to Joseph B.
Hunter pursuant to the Plan, the price per share payable upon the exercise of
each such option ("option price") shall be determined by the Committee using a
formula based upon Parent's equity in the Company from time to time, increased
by London Interbank Offer Rates ("LIBOR") less 1.5% to the effective date of
grant of the option and divided by the number of shares of Common Stock of the
Company outstanding on a fully diluted basis (as determined in accordance with
Generally Accepted Accounting Principles) at the
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<PAGE>
effective date of grant of the option. For this purpose, the Parent's equity
shall mean its initial investment of U.S. $170,000,000 on May 2, 1994, together
with its subsequent investment of U.S. $10,000,000 on January 1, 1995 plus such
additional sums as may be paid into the Company from time to time and LIBOR
shall mean the weighted-average libor rates paid by the Company over the period
measured from May 1994 through the effective date of grant of the option, all as
determined by the Committee.
(ii) With respect to grants of options to any participants other
than Joseph B. Hunter, the option price for grants made with respect to the
Company's fiscal years ended June 30, 1995 and June 30, 1996 shall be determined
as set forth in (i) above, with the exception that Parent's equity from time to
time shall be increased by the full amount of LIBOR. With respect to the grants
of options made with respect to the fiscal years ending after June 30, 1996, the
option price shall be the Fair Market Value of the Common Stock underlying the
option, determined by the Committee, as of the effective date of grant of the
option.
(c) Payment. Options may be exercised in whole or in part by payment of
the option price of the shares subscribed. Payment may be made in cash or cash
equivalents acceptable to the Committee, or by such other means as the Committee
may prescribe. In addition, within the twelve-month period immediately preceding
the expiration of the term of the option or other termination of the option and
provided that Common Stock is not then registered under Section 12(b) or 12(g)
of the Exchange Act, payment of the option price may be made, in whole or in
part, by the tendering of shares of Common Stock (including the withholding of
shares that otherwise would be delivered to grantee or the Permitted Transferee
upon exercise) that have a Fair Market Value, determined as of the date of
exercise, equal to the amount of option price to be paid thereby.
If the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the option price, in whole or in part, by delivery of a
properly executed exercise notice, together with irrevocable instructions, to
(i) a brokerage firm designated by the member of the AMG Group to deliver
promptly to the member of the AMG Group the aggregate amount of sale or loan
proceeds to pay the option price and any withholding tax obligations that may
arise in connection with the exercise and (ii) the member of the AMG Group to
deliver the certificates for such subscribed shares directly to such brokerage
firm.
No shares shall be issued until full payment therefor has been made.
(d) Term of Option. The term during which each option may be exercised
shall be determined by the Committee. In no event shall an option be exercisable
more than ten years from the date the written Stock Option Agreement evidencing
such option is executed or, in the event of an initial public offering of Common
Stock of the Company, after the later of the expiration of: (i) two years
following the date of such initial public offering or, (ii) with respect to the
portion, if any, of the option that vests
-6-
<PAGE>
after the initial public offering, two years following the date that the grantee
becomes vested in the option or portion thereof, as the case may be. Prior to
the exercise of the option and delivery of the stock represented thereby, the
grantee shall not have any rights to receive any dividends or be entitled to any
voting rights on any stock represented by outstanding options.
(e) Put Right. Upon the later of grantee's termination of employment or
attainment of age 65, the grantee or his Permitted Transferee, as the case may
be, in his discretion, shall have the right to require a member of the AMG Group
to purchase all or any portion of the vested options outstanding with respect to
shares of Common Stock of that member of the AMG Group and all or any number of
the shares of Common Stock of that member of the AMG Group then owned by the
grantee or the Permitted Transferee which were acquired through exercise of
options granted pursuant to the Plan. Upon surrender of any such outstanding
shares, such member of the AMG Group shall be required to pay in cash to each
grantee or Permitted Transferee, as the case may be, subject to the provisions
of Section 7, the greater of U.S. $1 or the Fair Market Value of the surrendered
shares of Common Stock of the member of the AMG Group. Upon surrender of any
portion of such outstanding vested options, such member of the AMG Group shall
be required to pay in cash to each grantee or Permitted Transferee, as the case
may be, subject to the provisions of Section 7, the greater of U.S. $1 or the
amount equal to the Fair Market Value of the shares of Common Stock with respect
to which the surrendered portion of the option was outstanding and vested at the
time of surrender minus the aggregate option price of such portion of the
outstanding vested option as of the time of surrender. Notwithstanding the
foregoing, in all events any payments due pursuant to this paragraph shall be
reduced by appropriate reserves to cover the Company's or other member of the
AMG Group's indemnification obligations or other contingent liabilities incurred
as a result of any Change of Control. Any other provision of this Plan
notwithstanding, a grantee's put right shall terminate upon a public offering of
the Company's equity securities.
(f) Other Terms and Conditions. Options may contain such other provisions,
not inconsistent with the provisions of the Plan, as the Committee shall
determine appropriate from time to time.
7. Withholding of Taxes
A member of the AMG Group may require, as a condition to any option
exercise or to the delivery of certificates for shares issued or payments of
cash made hereunder or pursuant to a Stock Option Agreement, that the grantee
pay to the member of the AMG Group, in cash any federal, state or local taxes of
any kind required by law to be withheld with respect to any option exercise, any
withholding or delivery of shares, or the exercise of any call rights of the
member of the AMG Group hereunder. Within the twelve-month period immediately
preceding the expiration of the term of the option or other termination of the
option and provided that Common Stock is not then registered under Section 12(b)
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<PAGE>
or 12(g) of the Exchange Act, the grantee shall have the right to satisfy such
withholding tax obligation by tendering shares of Common Stock to the Company,
including shares acquired upon exercise of the option, valued at Fair Market
Value on the date as of which the withholding tax liability is determined. The
member of the AMG Group, to the extent permitted or required by law, shall have
the right to deduct from any payment of any kind (including salary or bonus)
otherwise due to a grantee any federal, state or local taxes of any kind
required by law to be withheld with respect to any option exercise or to the
withholding or delivery of shares under the Plan, or to retain or sell without
notice a sufficient number of the shares to be issued to such grantee to cover
any such taxes.
8. Written Agreement
Each person to whom a grant is made under the Plan shall enter into a
written agreement with a member of the AMG Group, within 60 days of the
Committee formally acting to make such grant, that shall incorporate the terms
of this Plan and shall contain such provisions, consistent with the provisions
of the Plan, as may be established by the Committee.
9. Transferability
No option granted under the Plan shall be transferable or assignable by a
participant otherwise than by will or the laws of descent and distribution or by
gift to the grantee's immediate family or to a trust established for the
exclusive benefit of one or more members of the grantee's immediate family
(collectively "Permitted Transferee"). For purposes of the immediately preceding
sentence, immediate family means the grantee's children, stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings (including
half brothers and sisters), in-laws, and persons related by reason of legal
adoption. A Permitted Transferee of the grantee may not transfer or assign any
option granted under the Plan. During the lifetime of the grantee or the
grantee's Permitted Transferee, an option may be exercised only by the grantee
or the grantee's Permitted Transferee or, during the period the grantee or the
grantee's Permitted Transferee is under a legal disability, by the grantee's or
the grantee's Permitted Transferee's guardian or legal representative. Except as
otherwise provided in this Section 9, a grantee or Permitted Transferee may not,
in whole or in part, sell, assign, transfer, convey, encumber, pledge, mortgage
or alienate in any manner whatsoever any option granted under the Plan and any
attempt to do so shall be void and of no effect; provided, however, that the
foregoing shall not restrict the ability of the grantee or Permitted Transferee
to exercise an option through a broker-assisted cashless exercise transaction,
as contemplated under Section 6(c) of the Plan, after the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act. The grantee's or
Permitted Transferee's rights under any such option shall not be subject to the
claims of creditors or subject to attachment, execution, bankruptcy proceedings
or any other legal process.
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<PAGE>
The Committee shall have the right, in its sole discretion, at any time
and from time to time, to require any or all Permitted Transferees to surrender
to a member of the AMG Group any or all options outstanding with respect to
shares of Common Stock of that member of the AMG Group and all shares of Common
Stock of that member of the AMG Group then owned by the Permitted Transferee
which were acquired through exercise of options granted pursuant to the Plan.
Upon surrender of any such outstanding shares, such member of the AMG Group
shall be required to pay in cash to the Permitted Transferee, subject to the
provisions of Section 7, the greater of U.S. $1 or the Fair Market Value of the
surrendered shares of Common Stock of the member of the AMG Group. Upon
surrender of any such outstanding options, such member of the AMG Group shall be
required to pay in cash to the Permitted Transferee, subject to the provisions
of Section 7, regardless of whether the grantee was then vested in the
outstanding option, the greater of U.S. $1 or the amount equal to the Fair
Market Value of the shares of Common Stock with respect to which the surrendered
option was outstanding at the time of surrender minus the aggregate option price
of the outstanding option as of the time of surrender. Notwithstanding the
foregoing, in all events any payments due pursuant to this paragraph shall be
reduced by appropriate reserves to cover the Company's or other member of the
AMG Group's indemnification obligations or other contingent liabilities that may
be outstanding or otherwise incurred as a result of any Change of Control with
respect to such member of the AMG Group.
10. Listing and Registration
If a member of the AMG Group determines that the listing, registration or
qualification upon any securities exchange or under any law, of shares subject
to any option is necessary or desirable as a condition of, or in connection
with, the granting of same or the issue or subscription of shares thereunder, no
such option may be exercised in whole or in part unless such listing,
registration or qualification is effected free of any conditions not acceptable
to the member of the AMG Group.
11. Termination of Employment
Transfer of an employee from an Affiliate of Hume to the Company, from the
Company to an Affiliate of Hume, or from one Affiliate of Hume to another shall
not be considered a termination of employment. Nor shall it be considered a
termination of employment if an employee is placed on military or sick leave or
such other leave of absence which is considered as continuing intact the
employment relationship; in such a case, the employment relationship shall be
continued until the date when an employee's right to reemployment shall no
longer be guaranteed either by law or contract. A termination of employment
shall be deemed to have occurred in the event that, immediately following any
Change of Control of a member of the AMG Group or any sale, exchange or other
disposition of all or substantially all of the assets of a line of the business
of a member of the AMG Group to a party that is not an Affiliate of Hume, the
grantee's employment is not with an Affiliate of Hume.
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<PAGE>
12. Adjustments; Business Combinations; Reorganizations
In the event of a reorganization, recapitalization, rights issues, stock
split, stock dividend, combination of shares, merger, share exchange,
consolidation, distribution of assets, or any other change in the corporate
structure or shares of a member of the AMG Group, the Committee shall make such
adjustments as it deems appropriate and equitable in the number and kind of
shares reserved for issuance under the Plan, in the number and kind of shares
covered by outstanding options (including, without limitation, converting
options to acquire shares of Company Common Stock to options to acquire the
Common Stock of one or more Affiliates of Company), and in the option price of
outstanding options. To the extent required by the Rules of the Kuala Lumpur
Stock Exchange or other applicable laws, the Committee shall obtain a written
opinion from the AMG Group's auditors that any such adjustments are fair and
reasonable. Notwithstanding anything herein to the contrary, the issue of
securities as consideration for an acquisition by any member of the AMG Group
shall not be regarded as a circumstance requiring adjustments, but the Committee
may, in its sole discretion, make such adjustments as it deems appropriate under
such circumstance.
In the event of any proposed merger, share exchange, consolidation or
other reorganization in which a member of the AMG Group is not the surviving or
continuing corporation, or in which the stockholders of the member of the AMG
Group become entitled to receive cash, securities of the member of the AMG Group
other than voting Common Stock or securities of another issuer, the Committee
may take such action as it deems appropriate and equitable to effectuate the
purposes of this Plan and to protect the grantees and their Permitted
Transferees of options, which action may include, but without limitation, any
one or more of the following: (i) acceleration or change of the exercise dates
of any option; (ii) arrangements with grantees and their Permitted Transferees
for the payment of appropriate consideration to them for the cancellation and
surrender of any option; and (iii) in any case where equity securities other
than Common Stock of the member of the AMG Group are proposed to be delivered in
exchange for or with respect to Common Stock of the member of the AMG Group,
arrangements providing that any option shall become one or more options with
respect to such other equity securities.
Notwithstanding anything herein to the contrary, in the event of a Change
of Control of a member of the AMG Group, the Committee, in its discretion, shall
have the right to require all grantees and their Permitted Transferees under the
Plan to surrender to such member of the AMG Group all options outstanding with
respect to shares of Common Stock of that member of the AMG Group and all shares
of Common Stock of that member of the AMG Group then owned by the grantees which
were acquired through exercise of options granted pursuant to the Plan. Upon
surrender of any such outstanding shares, such member of the AMG Group shall be
required to pay in cash to each grantee or Permitted Transferee, as the case may
be, subject to the provisions of
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<PAGE>
Section 7, the greater of U.S. $1 or the Fair Market Value of the surrendered
shares of Common Stock of the member of the AMG Group. Upon surrender of any
such outstanding options, such member of the AMG Group shall be required to pay
in cash to each grantee or Permitted Transferee, as the case may be, subject to
the provisions of Section 7, regardless of whether the grantee was then vested
in the outstanding option, the greater of U.S. $1 or the amount equal to the
Fair Market Value of the shares of Common Stock with respect to which the
surrendered option was outstanding at the time of surrender minus the aggregate
option price of the outstanding option as of the time of surrender.
Notwithstanding the foregoing, in all events any payments due pursuant to this
paragraph shall be reduced by appropriate reserves to cover the Company's or
other member of the AMG Group's indemnification obligations or other contingent
liabilities incurred as a result of such Change of Control.
In the event a member of the AMG Group dissolves and liquidates (other
than pursuant to a plan of merger or reorganization), then notwithstanding any
restrictions on exercise set forth in this Plan or any Stock Option Agreement:
(i) each grantee or Permitted Transferee shall have the right to exercise his
option with respect to shares of Common Stock of such member of the AMG Group at
any time up to ten days prior to the effective date of such liquidation and
dissolution; and (ii) the Committee may make arrangements with the grantees and
Permitted Transferees for the payment of appropriate consideration to them for
the cancellation and surrender of any option that is so canceled or surrendered
at any time up to ten days prior to the effective date of such liquidation and
dissolution. The Committee shall give each such grantee at least 30 days prior
written notice of such dissolution or liquidation. The Committee may establish a
different period for such exercise, cancellation, or surrender to avoid
subjecting the grantee to liability under Section 16(b) of the Exchange Act. Any
option not so exercised, canceled, or surrendered shall terminate on the last
day for exercise prior to such effective date.
13. Termination and Modification of the Plan
The Board of Directors, without further approval of the stockholders, may
modify or terminate the Plan, except that no modification shall become effective
without prior approval of the stockholders of the Company if stockholder
approval would be required for continued compliance with Rule 16b-3, to the
extent applicable, or if prior approval would be required under the Rules of the
Kuala Lumpur Stock Exchange or other applicable laws.
The Committee may amend or modify the grant of any outstanding option in
any manner to the extent that the Committee would have had the authority to make
such grant as so modified or amended, including without limitation to change the
date or dates as of which an option becomes exercisable. Except as provided
under Section 12, no modification may be made that would materially adversely
affect any grant previously made under the Plan without the approval of the
grantee. The Committee shall be
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<PAGE>
authorized to make minor or administrative modifications to the Plan as well as
modifications to the Plan that may be dictated by requirements of federal, state
or other laws applicable to the AMG Group or that may be authorized or made
desirable by such laws.
14. Independent Appraisals
The Committee shall undertake to obtain an independent appraisal, no less
frequently than annually, of the Company and of any other member of the AMG
Group with respect to whose shares options or shares issued upon exercise of
options are outstanding.
15. Governing Law
The validity, construction and effect of the Plan and Stock Option
Agreements entered into pursuant to the Plan, and any rules and regulations
relating to the Plan shall be determined in accordance with all applicable laws,
rules, and regulations, including without limitation, the laws, rules, and
regulations of the United States, the State of Maryland, Malaysia, and the Kuala
Lumpur Stock Exchange.
16. Non-Uniform Determinations
The Committee's determinations under the Plan (including without
limitation determinations of the persons to receive awards, the form, amount and
timing of such awards, the terms and provisions of such awards and the
agreements evidencing same) need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, awards under
the Plan, whether or not such persons are similarly situated.
17. Non-Guarantee of Employment
Nothing in the Plan or in any grant thereunder shall confer any right on
an employee to continue in the employ of the AMG Group or shall interfere in any
way with the right of the AMG Group to terminate an employee at any time.
18. Limitation on Benefits
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under such Act. To the extent any
provision of the Plan or action by the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Committee.
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<PAGE>
19. Effective Date; Termination Date
The Plan is effective as of January 1, 1996, subject to approval of the
Company's stockholders and, to the extent required by the Kuala Lumpur Stock
Exchange, the stockholders of the Company's Parent. Unless previously
terminated, the Plan shall terminate on the close of business on December 31,
2005, ten years from the Effective Date. Subject to other applicable provisions
of the Plan, all awards made under the Plan prior to termination of the Plan
shall remain in effect until such awards have been satisfied or terminated in
accordance with the Plan and the terms of such awards.
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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