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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
For the fiscal year ended June 30, 1997
/ / 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: Not Applicable
AAF-MCQUAY INC.
(Exact name of the Registrant as specified in its charter)
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DELAWARE 41-0404230
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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LEGG MASON TOWER, SUITE 2800
111 SOUTH CALVERT STREET
BALTIMORE, MD 21202
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (410) 528-2755
Securities registered pursuant to section 12(b) of the Act:
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TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
None
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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 30, 1997 was $-0-.
The number of shares outstanding of the registrant's only class of common
stock as of September 15, 1997 (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............................................................................... 12
Item 4 Submission of Matters to a Vote of Securities Holders........................................... 14
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters............................ N/A
Item 6 Selected Financial Data......................................................................... 15
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 18
Item 8 Financial Statements and Supplemental Data...................................................... 27
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........................................................ 53
Item 11 Executive Compensation.......................................................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and Management.................................. 58
Item 13 Certain Relationships and Related Transactions.................................................. 59
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 61
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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 has also expanded
into other new markets outside Asia, such as Latin America, where demand has
increased and the markets remain fragmented. In addition, the Company seeks to
expand its product lines through research and development and seeks to pursue
strategic technology joint ventures and acquisitions. Consistent with this
strategy, the Company acquired the industrial refrigeration business of J&E
Hall. The acquisition of J&E Hall expanded the Company's product offerings and
also accelerated its development of the single screw compressors that both the
Company and J&E Hall had been developing for several years. The Company believes
that single screw chillers, rather than 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.
The Company's Commercial Air Conditioning and Refrigeration Group engages in
the manufacture, sale, service and distribution of HVAC equipment, industrial
refrigeration and freezing products and systems. Products include chillers,
applied air handling systems, terminal air conditioning systems, fans,
industrial refrigerators and freezers, 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 Commercial Air Conditioning and Refrigeration
Group is also the leading integrated supplier of industrial refrigeration and
freezing products and systems in the United Kingdom and is 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, the Commercial Air Conditioning and
Refrigeration Group 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 provided the Company with access to J&E Hall's single
screw compressor technology which has expanded the single screw chiller product
line.
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,
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including replacement filters, are sold globally under the AmericanAirFilter TM
and AAF -Registered Trademark- brand names 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.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
The Company, through the Commercial Air Conditioning and Refrigeration
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. In addition, the Company manufactures, sells and services industrial
refrigeration and freezing equipment under the J&E Hall brand names including
J&E Hall, Thermotank, and Jackstone. Principle customers are in the food and
beverage, chemical and naval and maritime industries.
The Company's Commercial Air Conditioning and Refrigeration products are
divided among the following business units: (i) chiller products, (ii) applied
air handling systems, (iii) terminal air conditioning systems, (iv) fans and (v)
industrial refrigeration.
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.
Under the trade name McQuayServiceTM, 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.
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.
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/
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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.
INDUSTRIAL REFRIGERATION. The Company manufactures, sells and services
industrial refrigeration and freezing equipment under several well known J&E
Hall brand names, including J&E Hall, Thermotank, and Jackstone. 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 manufactures industrial
refrigeration and freezer products through J&E Hall's U.K. production
facilities. In fiscal year 1997, the Company acquired Coulstock & Place
Engineering Co. Ltd., a motor rewind specialist providing support for the
Compressor business.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP STRATEGIC PARTNERSHIPS
The Company, through its Commercial Air Conditioning and Refrigeration
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 and
AAF-Registered Trademark- brand names. 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
six facilities have 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 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.
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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, India, Saudi Arabia
and Malaysia 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.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 14 "Segment Information" in the Notes to the Consolidated Financial
Statements. Information for fiscal periods prior to fiscal year end June 30,
1997 have been restated due to the inclusion of the former Industrial
Refrigeration Group in the Commercial Air Conditioning and Refrigeration Group.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See Note 14 "Segment Information" in the Notes to the Consolidated Financial
Statements. Information for fiscal periods prior to fiscal year end June 30,
1997 have been restated due to the inclusion of the former Industrial
Refrigeration Group in the Commercial Air Conditioning and Refrigeration Group.
SALES AND DISTRIBUTION
GENERAL. The Company has a diverse base of customers. No customer of the
Commercial Air Conditioning and Refrigeration Group or the Filtration Products
Group accounted for more than 10% of the Company's net sales of these products
over the past three fiscal years.
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COMMERCIAL AIR CONDITIONING AND REFRIGERATION 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.
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. During the year an office was established in Asia to better service the
industrial refrigeration market.
Backlog for the Commercial Air Conditioning and Refrigeration Group at June
30, 1997 and June 30, 1996 was $156 million and $133 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 commercial replacement
filter direct sales force, with over 200 factory sales people worldwide to
market commercial replacement filters. Residential replacement filters are sold
primarily in the United States through national retail stores, such as Wal-Mart,
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, 1997 and
June 30, 1996 was $77 million and $68 million, respectively.
MANUFACTURING
COMMERCIAL AIR CONDITIONING AND REFRIGERATION 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. The Company's
industrial refrigeration products are manufactured in 5 manufacturing facilities
in the United Kingdom. See "--Properties."
FILTRATION PRODUCTS GROUP. In the Company's filter manufacturing business,
fiberglass filtermedia is manufactured at 3 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 in geographically dispersed locations throughout the
world. Replacement filters are produced in 12 geographically dispersed
manufacturing facilities and environmental products are manufactured in 4
geographically dispersed manufacturing facilities. See "--Properties."
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.
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COMPETITION
GENERAL. The commercial HVAC and refrigeration 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 refrigeration industry, competitive
factors include price, quality and a vertically integrated approach of supplying
products. In the air filtration business, participants generally compete on the
basis of service, price, quality, reliability, efficiency, conditions of sale
and range of product offering. 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 AND REFRIGERATION 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. Competition
in the global industrial refrigeration and freezer business is fragmented,
consisting of a limited number of large companies and a significant number of
local companies. The Company believes that price and quality in addition to a
vertically integrated approach to supplying products and systems are significant
competitive factors in selling industrial refrigeration and freezer products.
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.
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 $10.6 million, $8.2 million, and $4.3 million during the 12 months
ended June 30, 1997, June 30, 1996 and the six months ended July 1, 1995,
respectively, for research and development.
A significant focus of the Company's research and development efforts since
1988 has been to develop and extend its range of water-cooled and air-cooled
water chillers using advanced single screw compressor technology. The Company
introduced its first single screw air conditioning product in 1994 and has
continued to expand its offerings during 1997. It expects further screw air
conditioning product introductions during fiscal year 1998. Single screw
compressor technology will continue to be important elements of research and
development programs in the Commercial Air Conditioning and Refrigeration Group.
J&E Hall has been marketing industrial refrigeration product using single screw
compressor technology since 1978.
The Company has developed and is now producing the next generation of air
handlers which is highly energy and sound efficient. The product is available in
a variety of configurations and material options. The Company expects this
family of product to meet the growing market for quiet, high quality air
handlers.
Additionally, the Company has introduced a new range of air cleaners; a new
extended surface pleated filter that exceeds the standards proposed in ASHRAE
62-1989R; a variety of replacement filters treated with antimicrobial agents
that inhibit the growth of various microbial contaminants on the filter media;
and a range of self cleaning filters for gas turbines.
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
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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 Beth. The Company believes that its rights to use
tradenames and trademarks are adequately protected.
EMPLOYEES
As of June 30, 1997 the Company employed approximately 7,000 employees
worldwide, with approximately 4,400 persons employed in the United States and
2,600 employed in non U.S. locations. The Company has a total of 19 labor union
bargaining agreements, covering approximately 2,300 employees in the United
States and Canada, of which 4 agreements, covering 1,100 employees, will expire
in fiscal year 1998. 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 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.
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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.
10
<PAGE>
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>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
- ---------------------------- ----------- ------------- -------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
Plymouth, Minnesota 166,000 Owned Global Commercial Air Conditioning Group Headquarters
and 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
Dartford, England 105,000 Owned Headquarters for manufacturing of compressors,
industrial refrigeration packages and contact plate
freezers
Thetford, England 33,000 Leased Production of air-blast, automatic plate and cryogenic
freezers
Derby, England 73,000 Leased Spares distribution and compressor remanufacturing
facility
Birkenhead, England 3,800 Owned Compressor remanufacturing facility
Doncaster, England 5,300 Owned Motor rewinding facility
7,900 Leased Cabling facility
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
- ---------------------------- ----------- ------------- -------------------------------------------------------
<S> <C> <C> <C>
FILTRATION PRODUCTS GROUP
Louisville, Kentucky 180,000 Owned Global Filtration Products Group Headquarters and
research and development facility
Louisville, Kentucky 167,000 Owned Environmental products
Atlanta, Georgia 113,000 Leased Replacement filters
Columbia, Missouri 58,000 Owned Replacement filters
35,000 Leased Replacement filters
Hutchins, Texas 340,000 Owned Replacement filters
Elizabethtown, Pennsylvania 160,000 Leased Replacement filters
Fayetteville, Arkansas 175,000 Owned Replacement filters
Los Angeles, California 70,000 Leased Replacement filters
Lebanon, Indiana 154,000 Leased Replacement filters
Boucherville, Quebec 62,000 Owned Replacement filters
Cramlington, England 160,000 Owned Applied air handling systems and environmental products
Linton, England 27,000 Owned Replacement filters
Amsterdam, The Netherlands 16,000 Leased Administrative Office
Emmen, The Netherlands 75,000 Leased Replacement filters
97,000 Owned Replacement filters
Gasny, France 109,000 Owned Environmental products
Ecoparc, France 46,000 Leased Replacement filters
Vitoria, Spain 40,000 Owned Environmental products
Singapore 41,000 Owned Replacement filters
</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 Notes thereto.
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
12
<PAGE>
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, 1997 the Company had incurred over $10.5 million in
expenses including cleanup costs and attorney's fees. The Company currently
estimates cleanup costs through fiscal year 2007 to be approximately $6.8
million, of which $1.2 million is expected to be incurred in fiscal year 1998
and $700,000 is expected to be incurred in fiscal year 1999. 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 approximately $375,000 of the state's existing
oversight costs and to pay future oversight 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 $5.3 million through fiscal year 2007, of which $1.2 million is
expected to be incurred in fiscal year 1998 and $1.3 million is expected to be
incurred in fiscal year 1999. The primary insurance carrier has paid the limits
of its policy ($200,000). The Company is now in litigation with its excess
insurer. The Court granted the carrier summary judgment on the issue of
coverage, the Company appealed and the appeals court reversed the lower court's
ruling. The case is set for trial in November 1997. The insurer recently filed
another summary judgment motion. 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 and is
pursuing recoveries through the legal system. The Company currently estimates
that there will be additional costs of $5.0 million through 2007, of which $2.4
million is expected to be incurred in fiscal year 1998 and $0.3 million is
expected to be incurred in fiscal year 1999.
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 $5.4 million
through 2007.
13
<PAGE>
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 $7.4
million, $2.9 million and $2.4 million in fiscal years 1998, 1999 and 2000,
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 28, 1997, the sole shareholder elected the following persons as
members of the Board of Directors of the Company to serve until the next annual
meeting of the stockholder: Quek Leng Chan, Joseph B. Hunter, Gerald L. Boehrs,
Roger Tan Kim Hock, Ho Nyuk Choy, Lin Wan Min and Michael J. Christopher.
14
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company (i) prior to the OYL Acquisition (the "Predecessor
Company"), for the fiscal years ended December 31, 1992 and 1993 and for the
period from January 2 to May 1, 1994 and (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 years ended June 30, 1996 and June 30,
1997. 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.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- ----------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
YEAR ENDED YEAR ENDED JANUARY 2 TO MAY 2 TO ENDED (F) YEAR ENDED YEAR ENDED
DECEMBER31, DECEMBER 31, MAY 1, DECEMBER 31, JULY 1, JUNE 30, JUNE 30,
1992 1993 1994(E) 1994 1995 1996 1997
------------ ------------- ------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales..................... $ 749,448 $ 705,496 $ 232,484 $ 484,681 $ 428,510 $ 901,395 $ 947,933
Cost of sales................. 535,144 498,640 169,357 344,120 303,699 645,149 694,596
------------ ------------- ------------ ------------- ----------- ----------- -----------
Gross profit.................. 214,304 206,856 63,127 140,561 124,811 256,246 253,337
Operating expenses............ 184,471 203,344 72,777 116,320 101,535 199,550 212,741
------------ ------------- ------------ ------------- ----------- ----------- -----------
Operating income (loss)....... 29,833 3,512 (9,650) 24,241 23,276 56,696 40,596
Interest expense, net......... 42,314 41,785 13,723 16,192 11,671 24,957 25,961
Other (income) expense, net... (6,020)(b) 3,112 1,458 (30) (1,442) (3,219) 616
------------ ------------- ------------ ------------- ----------- ----------- -----------
Income (loss) before income
taxes, extraordinary item
and cumulative effect of
accounting changes.......... (6,461) (41,385) (24,831) 8,079 13,047 34,958 14,019
Income taxes(a)............... 6,485 4,444 324 6,834 6,755 18,423 6,906
Minority Interest Earnings.... -- -- -- -- -- -- 476
------------ ------------- ------------ ------------- ----------- ----------- -----------
Income (loss) before ,
extraordinary item and
cumulative effect of
accounting changes.......... (12,946) (45,829) (25,155) 1,245 6,292 16,535 6,637
Extraordinary item............ -- -- -- -- -- (1,635)(g) --
Cumulative effect of
accounting changes.......... (4,866)(c) (971)(d) -- -- -- -- --
------------ ------------- ------------ ------------- ----------- ----------- -----------
Net income (loss)............. $ (17,812) $ (46,800) $ (25,155) $ 1,245 $ 6,292 $ 14,900 $ 6,637
------------ ------------- ------------ ------------- ----------- ----------- -----------
------------ ------------- ------------ ------------- ----------- ----------- -----------
BALANCE SHEET DATA (end of
period):
Working capital............... $ 65,110 $ 58,384 $ 58,008 $ 30,496 $ 43,558 $ 92,613 $ 88,263
Total assets.................. 466,295 427,124 435,513 679,897 731,328 806,954 810,368
Total debt.................... 302,195 290,843 299,986 260,553 270,728 302,907 287,824
Stockholder's equity
(deficit)................... (9,133) (60,749) (73,209) 172,413 188,828 199,283 204,281
OTHER DATA:
EBITDA(h)..................... $ 57,179 $ 21,982 $ (4,910) $ 39,012 $ 38,269 $ 85,724 $ 65,071
Adjusted EBITDA(h)............ 57,179 57,180 (4,910) 39,012 38,269 85,724 65,071
Adjusted EBITDA margin........ 7.6% 8.1% --(i) 8.0% 8.9% 9.5% 6.9%
Depreciation and
amortization................ $ 21,326 $ 21,582 $ 6,198 $ 14,741 $ 13,551 $ 25,809 $ 25,567
Capital expenditures.......... 17,730 8,745 1,821 8,454 5,697 14,765 15,941
Net cash provided by (used in)
Operating activities........ (5,982) 15,252 (17,056) (5,542) (8,488) 27,962 26,223
Investing activities........ (17,730) (8,745) (1,821) (8,454) (5,697) (49,668) (21,285)
Financing activities........ (5,067) (10,381) 20,065 8,081 20,492 27,075 (15,083)
</TABLE>
15
<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) 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.
(c) 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.
(d) 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.
(e) The Predecessor Company recorded compensation charges in the period ending
May 1, 1994 totaling $8.8 million ($2.2 million for employment agreements,
$.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.
(f) 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.
(g) During the year ended June 30, 1996 the Company completed a refinancing of
its debt. As part of this 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.
(h) EBITDA represents income (loss) before extraordinary item, cumulative effect
of accounting change, interest expense, income tax expense, and depreciation
and amortization. Adjusted EBITDA excludes $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
16
<PAGE>
indicator of the operating performance of the Company. A reconciliation of
net income (loss) for each period presented is as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------
YEAR ENDED YEAR ENDED PERIOD FROM
DECEMBER 31, DECEMBER 31, JANUARY 2 TO
1992 1993 MAY 1, 1994
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net loss $ (17,812) $ (46,800) $ (25,155)
Interest.......................................................... 42,314 41,785 13,723
Income taxes...................................................... 6,485 4,444 324
Depreciation and amortization..................................... 21,326 21,582 6,198
Cumulative effect of accounting change............................ 4,866 971 --
Environmental charge.............................................. -- 35,198 --
------------ ------------ ------------
Adjusted EBITDA............................................... $ 57,179 $ 57,180 $ (4,910)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
---------------------------------------------------
PERIOD FROM SIX MONTHS
MAY 2 TO ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, JULY 1, JUNE 30, JUNE 30,
1994 1995 1996 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net income............................................. $ 1,245 $ 6,292 $ 14,900 $ 6,637
Interest............................................... 16,192 11,671 24,957 25,961
Income taxes........................................... 6,834 6,755 18,423 6,906
Depreciation and amortization.......................... 14,741 13,551 25,809 25,567
Extraordinary item, net of tax......................... -- -- 1,635 --
------------ ----------- ----------- -----------
EBITDA............................................. $ 39,012 $ 38,269 $ 85,724 $ 65,071
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
(i) 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.
(j) 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 (to reflect
the OYL acquisition as if it had occured on January 1, 1994) 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.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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. The results of operations have been combined for the unaudited six months
ended December 31, 1994 with the six months ended July 1, 1995 ("Comparable
Period ended July 1, 1995") to allow for the discussion and analysis of
comparable periods. 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
period ended July 1, 1995. The Company believes that the discussion and the
analysis of the trends for the 12 month period comparison would not be
substantially different than a separate discussion of the six month periods and
there were no significant events that have occurred during the 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. For clarity of presentation, all full fiscal
years are shown to begin on July 1 and end on June 30.
The following table sets forth the major components of the consolidated
results of operations of the Company for the three years ended June 30, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 801,825 $ 901,395 $ 947,933
Cost of sales................................................................ 568,957 645,149 694,596
---------- ---------- ----------
Gross profit................................................................. 232,868 256,246 253,337
Gross margin............................................................. 29.0% 28.4% 26.7%
SG&A expenses................................................................ $ 177,125 $ 186,072 $ 201,157
Amortization expense......................................................... 13,823 13,478 11,584
---------- ---------- ----------
Operating income............................................................. 41,920 56,696 40,596
Operating margin......................................................... 5.2% 6.3% 4.3%
Interest expense, net........................................................ $ 22,753 $ 24,957 $ 25,961
Other (income) expense, net.................................................. (1,152) (3,219) 616
---------- ---------- ----------
Income before taxes and extraordinary item................................... 20,319 34,958 14,019
Income taxes................................................................. 12,906 18,423 6,906
Minority interest............................................................ -- -- 476
---------- ---------- ----------
Income before extraordinary item............................................. 7,413 16,535 6,637
Extraordinary item, net of tax............................................... -- (1,635) --
---------- ---------- ----------
Net income................................................................... $ 7,413 $ 14,900 $ 6,637
---------- ---------- ----------
---------- ---------- ----------
</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 and
18
<PAGE>
operating income (loss) is generated by sales in the rest of the world,
primarily in Europe. (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SEGMENT DATA
NET SALES
Commercial Air Conditioning & Refrigeration.................................. $ 465,232 $ 566,773 $ 597,216
Filtration Products.......................................................... 338,207 341,707 352,819
Eliminations................................................................. (1,614) (7,085) (2,102)
---------- ---------- ----------
Total.................................................................. $ 801,825 $ 901,395 $ 947,933
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS)
Commercial Air Conditioning & Refrigeration.................................. $ 22,272 $ 37,187 $ 23,314
Filtration Products.......................................................... 33,494 34,876 28,869
Corporate & Amortization..................................................... (13,846) (15,367) (11,587)
---------- ---------- ----------
Total.................................................................. $ 41,920 $ 56,696 $ 40,596
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS) EXCLUDING AMORTIZATION
Commercial Air Conditioning & Refrigeration.................................. $ 22,272 $ 37,187 $ 23,314
Filtration Products.......................................................... 33,494 34,876 28,869
Corporate.................................................................... (23) (1,889) (3)
---------- ---------- ----------
Total.................................................................. $ 55,743 $ 70,174 $ 52,180
---------- ---------- ----------
---------- ---------- ----------
GEOGRAPHIC DATA
NET SALES
U.S. ........................................................................ $ 517,535 $ 559,505 $ 575,708
International................................................................ 284,290 341,890 372,225
---------- ---------- ----------
Total.................................................................. $ 801,825 $ 901,395 $ 947,933
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS)
U.S.......................................................................... $ 38,206 $ 46,880 $ 33,335
International................................................................ 17,560 25,183 18,848
Corporate and amortization................................................... (13,846) (15,367) (11,587)
---------- ---------- ----------
Total.................................................................. $ 41,920 $ 56,696 $ 40,596
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
1997 COMPARED TO 1996
CONSOLIDATED
Consolidated net sales were $947.9 million for the fiscal year ended June
30, 1997. This represents an increase in net sales of $46.5 million, or 5.2%,
from $901.4 million for the fiscal year ended June 30, 1996. Income from
operations was $40.6 million or 4.3% of net sales versus $56.7 million or 6.3%
of net sales for fiscal years 1997 and 1996, respectively. The Company's ongoing
implementation of certain cost improvement and strategic initiatives, in both
the Commercial Air Conditioning and Refrigeration Group and Filtration Products
Group, has unfavorably impacted operating income during the year ended June 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'
19
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1996 1997
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
NET SALES
Commercial Air Conditioning & Refrigeration............................................. $ 566,773 $ 597,216
Filtration Products..................................................................... 341,707 352,819
Eliminations............................................................................ (7,085) (2,102)
----------- -----------
Total............................................................................. $ 901,395 $ 947,933
----------- -----------
----------- -----------
OPERATING INCOME EXCLUDING AMORTIZATION
Commercial Air Conditioning & Refrigeration............................................. $ 37,187 $ 23,314
Filtration Products..................................................................... 34,876 28,869
Other................................................................................... (1,889) (3)
----------- -----------
Total............................................................................. $ 70,174 $ 52,180
----------- -----------
----------- -----------
</TABLE>
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
NET SALES. Group net sales were $597.2 million in fiscal year 1997, an
increase of $30.4 million, or 5.4%, from $566.8 million in fiscal year 1996.
North American sales increased 3.5% compared to the prior year. The sales
increase was primarily the result of certain chiller, rooftop and terminal
product sales increases. Air and water cooled chiller product sales increased
7.6% resulting from continued acceptance of products utilizing the single screw
technology and export sales increases, largely to Asia. Rooftop product sales
volume increased 9.2% attributable to strong market demand and gains in market
share. Terminal Products market share also grew yielding sales increases of
19.2% over the previous year. These North American sales increases were
substantially offset by the fiscal year 1997 decrease in absorption chiller
sales versus prior year sales. Absorption chiller sales declined over 60%
primarily related to the reduction in the number of natural gas rebate and
incentive programs offered by utility companies.
Fiscal year 1997 European subsidiary sales increased 10.3%. Refrigeration
sales increased approximately $30 million which is principally the result of
inclusion of only a partial year of sales in fiscal year 1996 due to the mid
year acquisition of J&E Hall. European commercial air conditioning sales
decreased 14.3% in fiscal year 1997 as compared to 1996 due to soft market
demand for chiller and air handling products in addition to several large jobs
in the prior year that were not repeated. Also, the strengthening U.S. dollar
unfavorably impacted sales by approximately $4 million in fiscal year 1997 due
to currency translation.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $23.3 million in fiscal year 1997, a decrease of $13.9 million,
or 37.3%, from $37.2 million in fiscal year 1996. Operating income excluding
amortization as a percent of sales decreased from 6.6% to 3.9%. The gross margin
rate decreased 1.1 percentage points from the prior year rate due primarily to
lower terminal product prices, the inclusion of several large high margin jobs
in the prior year which were not repeated and substantially increased air
handling product manufacturing costs due to new product start-up efforts.
Selling, General & Administrative expense ("SG&A") as a percentage of sales
increased 1.6 percentage points in fiscal year 1997 compared to fiscal year
1996. SG&A increases relate to volume increases, higher warranty costs, an
overall increased cost base due to the strengthening of the management
organization and increases in research and development expenses primarily in
single screw compressor technology.
The contribution to operating income from sales volume increases was offset
by several significant operating conditions during fiscal year 1997.
- NEW PRODUCT INTRODUCTION In fiscal year 1997, air handling operating
income decreased $6.7 million compared to the prior year. The introduction
of a new air handling product resulted in substantial manufacturing start
up costs and other expenses. However, market acceptance of this product
has been excellent with a backlog of several million dollars at the end of
fiscal year 1997. The
20
<PAGE>
improvement actions implemented by the Company in fiscal year 1997 are not
anticipated to yield full benefits immediately. While many of the
inefficiencies resulting from startup issues within this product line have
been resolved, management believes certain of these start up
inefficiencies will continue into fiscal year 1998.
- EUROPE Year over year operating income in European operations decreased
$5.3 million. This decrease is a combination of soft market conditions
plus the inclusion of several high margin jobs in the previous year
results.
- ABSORPTION CHILLER MARKET The cessation of natural gas rebates and
incentive programs by utilities unfavorably impacted the absorption
chiller market in fiscal year 1997. In addition to volume shrinkage during
fiscal year 1997, the Company encountered certain warranty problems on
absorption chiller units. As a result of the significant market downsize,
the Company recognized a charge for obsolete and excess inventory.
Absorption chiller sales decreased more than 60% during fiscal year 1997
as compared to 1996. These absorption chiller conditions reduced fiscal
year 1997 operating income by $3.5 million from the previous year.
FILTRATION PRODUCTS GROUP
NET SALES. Net sales were $352.8 million in fiscal 1997, an increase of
$11.1 million, or 3.3%, from $341.7 million for the fiscal year ended June 30,
1996. Environmental products sales increased 15.4% due to volume increases in
Europe, Asia and Latin America plus the acquisition of a German engineering
company. These increases were partially offset by decreased replacement air
filter sales in 1997 as compared to 1996.
International sales for fiscal year 1997 increased 10.6% from fiscal year
1996 resulting from continued growth in emerging markets in Asia and Latin
America plus an 11% increase in European environmental products sales in fiscal
year 1997. These sales increases were diluted by the impact of unfavorable
currency translation of approximately $7 million along with a decline in
European replacement air filter product sales due to soft market conditions.
Sales from U.S. operations for the fiscal year ended June 30, 1997 decreased
5.0% from fiscal year 1996. The decrease in domestic sales was primarily
attributable to complexities and difficulties in execution of new initiatives
such as the implementation of new software systems, field sales office
consolidation and establishment of a centralized call center and manufacturing
integration; all of which affected product delivery schedules. Management
believes difficulties in executing these initiatives have been largely contained
or overcome.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $28.9 million in fiscal year 1997, a decrease of $6.0 million,
or 17.2%, from $34.9 million for the fiscal year 1996. Operating income
excluding amortization as a percent of sales decreased from 10.2% to 8.2%. Gross
margins decreased to 31.0% from 33.3% as a percentage of sales for the fiscal
years ended June 30, 1997 and June 30, 1996, respectively. Fiscal year 1997
gross margin rates declined due primarily to high manufacturing cost variances
resulting from difficulties in the execution of certain strategic initiatives.
Additionally, certain product lines experienced margin rate deterioration due to
competitive pricing pressures and initiation of certain pricing strategies aimed
at increasing market share, principally in Europe. SG&A excluding amortization
as a percentage of fiscal year 1997 sales remained constant at the prior year
level. Expense reductions gained from cost containment measures and decreased
field sales expenses resulting from the field sales office consolidation were
more than offset by volume related expense increases plus incurrence of
strategic expenses such as staffing and developing an Asian office, software
systems consulting and increased expenditures in research and development
engineering to help meet the growing demand for new products.
NON-OPERATING EXPENSES
Interest expense was $26.0 million for the fiscal year ended June 30, 1997
versus $25.0 million for the fiscal year ended June 30, 1996. The interest
expense increase was primarily attributable a higher effective borrowing rate
and increased borrowings as a result of the J&E Hall Acquisition in mid year
fiscal year 1996. Amortization expense was $11.6 million for the fiscal year
ended June 30, 1997 versus $13.5 million for the fiscal year ended June 30, 1996
due to the Company changing its estimated useful life of goodwill
21
<PAGE>
from 25 to 40 years effective April 1, 1996. Other expense of $.6 million for
the year ended June 30, 1997 and other income of $3.2 million for the year ended
June 30, 1996 consists primarily of foreign currency transaction losses and
gains and income from equity affiliates. The change year over year is primarily
due to currency gains not repeated and reduced income from equity affiliates
during the current year.
Income tax expense was $6.9 million and the effective tax rate was 49.3% for
the fiscal year ended June 30, 1997 compared to income tax expense of $18.4
million and an effective tax rate of 52.7% for the fiscal year ended June 30,
1996. The effective income tax rate was substantially higher than the U.S.
federal statutory rate primarily due to nondeductible goodwill amortization and
foreign losses not benefited. The reduction in the effective rate was partially
attributable to the implementation of a foreign sales corporation, more
efficient utilization of foreign tax credits and the mix in earnings.
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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 1, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
NET SALES
Commercial Air Conditioning & Refrigeration............................................. $ 457,958 $ 566,773
Filtration Products..................................................................... 326,380 341,707
Lag Month............................................................................... 19,101 --
Eliminations............................................................................ (1,614) (7,085)
----------- -----------
Total............................................................................. $ 801,825 $ 901,395
----------- -----------
----------- -----------
OPERATING INCOME EXCLUDING AMORTIZATION
Commercial Air Conditioning & Refrigeration............................................. $ 22,518 $ 37,188
Filtration Products..................................................................... 32,608 34,875
Lag Month............................................................................... 640 --
Other................................................................................... (23) (1,889)
----------- -----------
Total............................................................................. $ 55,743 $ 70,174
----------- -----------
----------- -----------
</TABLE>
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
NET SALES. Net sales, including seven months of J&E Hall sales, were $566.8
million in fiscal year 1996, an increase of $108.8 million, or 23.8%, 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 68.3% over the
22
<PAGE>
Comparable Period ended July 1, 1995; substantially due to the acquisition of
J&E Hall which provided additional sales of $40.8 million and sales 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
export sales from operations in France.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $37.2 million in fiscal year 1996, an increase of $14.7 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 6.6%.
Gross margins decreased to 25.2% 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 2.8 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 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.
NON-OPERATING EXPENSES
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.
23
<PAGE>
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. For
the year ended June 30, 1997, net cash provided by operating activities was
$26.2 million as compared to a generation of $28.0 million for the year ended
June 30, 1996. This decrease is due to lower earnings, offset slightly by less
cash used in operating assets and liabilities. For the fiscal year ended June
30, 1997 net cash used by investing activities of $21.3 million consisted of
capital expenditures of $15.9 million and acquisition of businesses of $5.3
million while net cash used in financing activities was $15.1 million, comprised
of $10.3 million in scheduled payments on long-term debt, $2.0 million in term
debt borrowing and $6.8 million in net repayments under short-term borrowing
arrangements. During the year ended June 30, 1997, the Company reduced its cash
balances, primarily held at foreign subsidiaries, from $20.8 million to $10.8
million and applied such cash against its short-term borrowings.
The Company has secured certain letter of credit facilities totaling $25
million that are supported by letters of credit from OYL, the Company's parent,
which were fully utilized at June 30, 1997 and June 30, 1996. The commitments
made under these facilities expire in March 1998, but may be extended annually
for successive one year periods with the consent of OYL and the banks providing
the facilities.
J&E Hall Limited, a wholly-owned, U.K. based subsidiary of the Company, has
a short-term credit facility supported by a letter of credit from OYL.
Borrowings under this facility totaled $15.6 million at June 30, 1997 and $23.1
million at June 30, 1996. In addition, the Company's wholly-owned subsidiary in
Canada has a short-term credit facility supported by a letter of credit from
OYL. Borrowings under this facility were $5.8 million at June 30, 1997. Each of
these arrangements expire in September 1998, but may be extended annually for
successive one year periods with the consent of OYL and the banks providing the
facilities.
During fiscal year 1997, the Company has entered into an agreement to sell
the net assets of the industrial fan business. The sale transaction is expected
to close by no later than October 31, 1997 with expected gross sales proceeds of
approximately $18.0 million which will be used to reduce debt. The sale of the
fan business will not have a material effect on the Company's future financial
results. On an on-going basis the Company strives to evaluate its various
businesses and product lines with the objective to enhance shareholder value.
Consistent with this strategy the Company intends to pursue global business
opportunities that are synergistic with the Company's core business or exit low
value added or non-synergistic operations.
Planned capital expenditures are approximately $25 million for the year
ending June 30, 1998 and approximately $19 million for the year ending June 30,
1999.
The Company is in the process of replacing many of its legacy systems and
upgrading its systems to improve overall business performance and to accommodate
business for the year 2000. However, given the inherent risks for a project of
this magnitude and the resources required, actual results could differ
materially from those anticipated by the Company. The estimated total cost of
the project is approximately $16 million. The Company expects its year 2000 date
conversion project to be completed on a timely basis. However, there can be no
assurance that the systems of other companies on which the Company may rely also
will be timely converted or that such failure to convert by another company
would not have an adverse effect on the Company's systems. To date, the Company
has spent $1.9 million on the year 2000 project.
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
24
<PAGE>
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 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 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. The overall
net impact on the Company's average interest rate did not change significantly.
As of June 30, 1997, remaining borrowing availability under the $100 million
Revolving Credit portion of the Bank Agreement was $63.4 million. In August of
1997, the Company amended its Bank Agreement and reduced the Revolver commitment
portion from $100 million to $80 million.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Amended Credit Facility (as amended in August 1997) and other short-term credit
facilities, 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.
25
<PAGE>
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.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE IN THIS
FINANCIAL STATEMENTS REPORT
- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Report of the Independent Auditors................................................................... 28
Consolidated Balance Sheets-at June 30, 1997 and June 30, 1996....................................... 29
Consolidated Statements of Operations-Years ended June 30, 1997 and June 30, 1996, the period from
January 1, 1995 to July 1, 1995 and the period from May 2, 1994 to December 31, 1994............... 30
Consolidated Statements of Cash Flows-Years ended June 30, 1997 and June 30, 1996, the period from
January 1, 1995 to July 1, 1995 and the period from May 2, 1994 to December 31, 1994............... 31
Consolidated Statements of Stockholder's Equity-Years ended June 30, 1997 and June 30, 1996, the
period from January 1, 1995 to July 1, 1995 and the period from May 2, 1994 to December 31, 1994... 32
Schedule II--Report of the Independent Auditors Valuation and Qualifying Accounts and Reserves-Years
ended June 30, 1997 and June 30, 1996, the period from January 1, 1995 to July 1, 1995 and the
period from May 2, 1994 to December 31, 1994....................................................... 52
</TABLE>
27
<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, 1997 and June 30, 1996 and the related
consolidated statements of operations, cash flows and stockholder's equity for
the years ended June 30, 1997 and June 30, 1996, the period from January 1, 1995
to July 1, 1995 and the period from May 2, 1994 to December 31, 1994. 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.
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, 1997 and June 30, 1996 and the consolidated results
of their operations and their cash flows for the years ended June 30, 1997 and
June 30, 1996, the period from January 1, 1995 to July 1, 1995 and the period
from May 2, 1994 to December 31, 1994 in conformity with generally accepted
accounting principles.
[LOGO]
Baltimore, Maryland
August 29, 1997
28
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 10,827 $ 20,824
Accounts receivable..................................................................... 233,405 225,337
Inventories............................................................................. 124,192 115,273
Other current assets.................................................................... 6,858 5,055
---------- ----------
Total current assets................................................................ 375,282 366,489
Property, plant and equipment, net........................................................ 150,214 149,235
Cost in excess of net assets acquired and other identifiable intangibles, net............. 266,784 271,840
Other assets and deferred charges......................................................... 18,088 19,390
---------- ----------
Total assets........................................................................ $ 810,368 $ 806,954
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings................................................................... $ 58,703 $ 65,538
Current maturities of long-term debt.................................................... 12,091 9,879
Accounts payable, trade................................................................. 116,877 108,792
Accrued warranty........................................................................ 12,979 14,256
Accrued employee compensation........................................................... 34,164 33,807
Other accrued liabilities............................................................... 52,205 41,604
---------- ----------
Total current liabilities........................................................... 287,019 273,876
Long-term debt............................................................................ 217,030 227,490
Deferred income taxes..................................................................... 52,611 51,589
Other liabilities......................................................................... 49,427 54,716
---------- ----------
Total liabilities................................................................... 606,087 607,671
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....................................................................... 29,074 22,437
Foreign currency translation adjustment................................................. (4,958) (3,319)
---------- ----------
Total stockholder's equity.......................................................... 204,281 199,283
---------- ----------
Total liabilities and stockholder's equity................................................ $ 810,368 $ 806,954
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED YEAR ENDED 1995 TO
JUNE 30, JUNE 30, JULY 1, MAY 2, 1994 TO
1997 1996 1995 DECEMBER 31, 1994
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 947,933 $ 901,395 $ 428,510 $ 484,681
Cost of sales.......................................... 694,596 645,149 303,699 344,120
----------- ----------- ----------- --------
Gross profit........................................... 253,337 256,246 124,811 140,561
Operating expenses:
Selling, general and administrative.................. 201,157 186,072 94,238 107,717
Amortization of intangible assets.................... 11,584 13,478 7,297 8,603
----------- ----------- ----------- --------
212,741 199,550 101,535 116,320
----------- ----------- ----------- --------
Income from operations................................. 40,596 56,696 23,276 24,241
Interest expense, net.................................. 25,961 24,957 11,671 16,192
Other (income) expense, net............................ 616 (3,219) (1,442) (30)
----------- ----------- ----------- --------
Income before income taxes and extraordinary item...... 14,019 34,958 13,047 8,079
Income taxes........................................... 6,906 18,423 6,755 6,834
Minority interest in earnings.......................... 476 -- -- --
----------- ----------- ----------- --------
Income before extraordinary item....................... 6,637 16,535 6,292 1,245
Extraordinary item, net of tax......................... -- -- (1,635) --
----------- ----------- ----------- --------
Net income............................................. $ 6,637 $ 14,900 $ 6,292 $ 1,245
----------- ----------- ----------- --------
----------- ----------- ----------- --------
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED YEAR ENDED 1995 TO
JUNE 30, JUNE 30, JULY 1, MAY 2, 1994 TO
1997 1996 1995 DECEMBER 31, 1994
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income........................................... $ 6,637 $ 14,900 $ 6,292 $ 1,245
Adjustments to reconcile to cash from operating
activities:
Extraordinary item................................. -- 2,681 -- --
Depreciation and amortization...................... 25,567 25,809 13,551 14,741
Foreign currency transaction (gains) losses........ 413 (1,444) (948) 617
Deferred income taxes.............................. 1,022 7,642 1,916 4,118
Changes in operating assets and liabilities:
Accounts receivable.............................. (11,981) (25,670) (30,268) (6,722)
Inventories...................................... (10,420) 249 (15,735) (2,349)
Other assets/liabilities, net.................... (6,339) 5,834 (1,693) (4,531)
Accounts payable and other accrued liabilities... 21,324 (2,039) 18,397 (12,661)
----------- ----------- ----------- -----------------
Net cash from operating activities..................... 26,223 27,962 (8,488) (5,542)
----------- ----------- ----------- -----------------
Cash flows from investing activities:
Capital expenditures, net............................ (15,941) (14,765) (5,697) (8,454)
Acquisitions of businesses........................... (5,344) (34,903) -- --
----------- ----------- ----------- -----------------
Net cash from investing activities..................... (21,285) (49,668) (5,697) (8,454)
Cash flows from financing activities:
Net borrowing (repayment) under short-term borrowing
arrangements....................................... (6,835) (915) 14,929 8,947
Payments on long-term debt........................... (10,248) (102,894) (7,947) (262,627)
Proceeds from issuance of long-term debt............. 2,000 135,988 3,345 190,000
Payment of debt issuance cost........................ -- (5,104) -- (6,784)
Proceeds from contribution of capital................ -- -- 10,165 78,545
----------- ----------- ----------- -----------------
Net cash from financing activities..................... (15,083) 27,075 20,492 8,081
Effect of exchange rate changes on cash................ 148 (787) (1,318) 3,272
----------- ----------- ----------- -----------------
Net increase (decrease) in cash and cash equivalents... (9,997) 4,582 4,989 (2,643)
Cash and cash equivalents at beginning of period....... 20,824 16,242 11,253 13,896
----------- ----------- ----------- -----------------
Cash and cash equivalents at end of period............. $ 10,827 $ 20,824 $ 16,242 $ 11,253
----------- ----------- ----------- -----------------
----------- ----------- ----------- -----------------
</TABLE>
See Notes to Consolidated Financial Statements
31
<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>
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
Net income............................................. -- -- 6,637 -- 6,637
Currency translation adjustment........................ -- -- -- (1,639) (1,639)
----- ---------- --------- ----------- ----------
Balance June 30, 1997.................................. $ 250 $ 179,915 $ 29,074 $ (4,958) $ 204,281
----- ---------- --------- ----------- ----------
----- ---------- --------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
32
<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), a wholly-owned subsidiary of AAF-McQuay Group, Inc., and its
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.
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
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 had been paid and charged
against the related liability.
The Company is a worldwide manufacturer and marketer of commercial air
conditioning and refrigeration and air filtration products and systems primarily
for commercial, institutional and industrial
33
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION (CONTINUED)
customers. 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 subsidiaries. All intercompany transactions and balances have
been eliminated. The accompanying financial statements reflect the financial
results of the Company for the fiscal years ended June 30, 1997 and June 30,
1996 and the periods from January 1, 1995 to July 1, 1995 and from May 2, 1994
to December 31, 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.
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 requires 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, 1997 and
June 30, 1996. Cost is determined by the last-in, first-out (LIFO) method for
U.S. inventories, (62% and 63%, respectively), and the first-in, first-out
(FIFO) method for the Company's foreign subsidiaries (38% and 37%,
respectively).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated using the straight-line method
over their estimated useful lives as follows:
<TABLE>
<S> <C>
20 to 40
Buildings.................................................... years
Machinery and Equipment...................................... 3 to 12 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.
34
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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 $425,000, ($1,444,000),
($948,000), and $617,000 for the fiscal years and periods ended June 30, 1997,
June 30, 1996, July 1, 1995, and December 31, 1994, 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
35
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $10.6 million, $8.2
million, $4.3 million, and $5.5 million for the fiscal years and periods ended
June 30, 1997, June 30, 1996, July 1, 1995, and December 31, 1994, 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.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Accounts receivable, trade............................................ $ 233,498 $ 224,921
Accounts receivable, other............................................ 7,536 6,728
---------- ----------
241,034 231,649
Less allowance for doubtful receivables............................... 7,629 6,312
---------- ----------
$ 233,405 $ 225,337
---------- ----------
---------- ----------
</TABLE>
The Company manufactures and sells heating, ventilating, air conditioning,
refrigeration 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>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
FIFO cost:
Raw materials......................................................... $ 51,393 $ 46,870
Work-in-process....................................................... 27,618 23,365
Finished goods........................................................ 42,109 42,067
---------- ----------
121,120 112,302
LIFO adjustment....................................................... 3,072 2,971
---------- ----------
$ 124,192 $ 115,273
---------- ----------
---------- ----------
</TABLE>
36
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Land...................................................................................... $ 10,962 $ 11,495
Buildings................................................................................. 65,069 62,455
Machinery and equipment................................................................... 111,129 98,710
---------- ----------
187,160 172,660
Less accumulated depreciation and amortization............................................ 36,946 23,425
---------- ----------
$ 150,214 $ 149,235
---------- ----------
---------- ----------
</TABLE>
At June 30, 1997, substantially all property, plant and equipment are
encumbered by various debt obligations of the Company.
6. INTANGIBLE ASSETS
Intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
---------- ----------
<S> <C> <C>
Cost in excess of net assets acquired..................................................... $ 159,977 $ 154,964
Other intangibles:
Technology.............................................................................. 14,304 12,676
Trademarks.............................................................................. 61,161 61,161
Drawings................................................................................ 54,000 54,000
Workforce............................................................................... 18,417 18,417
---------- ----------
Total other intangibles................................................................. 147,882 146,254
Less accumulated amortization........................................................... 41,075 29,378
---------- ----------
$ 266,784 $ 271,840
---------- ----------
---------- ----------
</TABLE>
Cost in excess of net assets acquired and other intangibles increased as a
result of acquisitions made throughout fiscal year 1997.
7. DEBT
In July 1994, the Company entered into a Revolving Credit, Letter of Credit,
and Term Loan Agreement (Bank Agreement). 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 an $80 million Receivables
Securitization Program. The February 1996 amendment significantly restated Bank
Agreement commitment amounts, repayment terms, interest rates, and security
provisions. In August 1996, the Company terminated the Receivables
Securitization program and increased the Revolver commitment portion of the Bank
Agreement from $35 million to $100 million. In August of 1997, the Company
amended its Bank Agreement and reduced the Revolver commitment portion from $100
million to $80 million. The Revolving Credit portion of the Bank Agreement
("Revolver"), as amended in August 1997, expires in February, 2001 and provides
for maximum aggregate short-term borrowings of $80 million and up to $75 million
for letters of credit. However, the combined amount of short-term borrowings
plus letters of credit cannot exceed $80 million. Use of the Revolver is subject
to the Company's availability (as defined in the Bank Agreement) and is based on
the Company's level of domestic receivables and inventories. At June 30, 1997,
under the August 1996 amendment, borrowings of $33.0 million were outstanding
under this facility, $1.7 million in letters of credit were issued and
outstanding and the Company had approximately $63.4 million in additional
borrowing availability. The Company is required to pay a commitment fee of 3/8%
on the unused portion of the Revolver.
37
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
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, 1997 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, 1997 the Company's borrowing rate under
the Bank Agreement, was approximately 7.20%. The average effective interest rate
under the Bank Agreement for the fiscal year ended June 30, 1997 was
approximately 7.18%.
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 Program"). The Securitization
Program provided for up to $80 million in short term borrowings. Availability
was 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 were included in the Company's
June 30, 1996 consolidated balance sheet. Related financing costs have been
included in interest expense. The Securitization program was terminated in
August 1996 when the Company increased its Revolving Credit Commitment portion
of its Bank Agreement.
At June 30, 1997 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 7%. Outstanding
borrowings against international lines of credit amounted to approximately $25.2
million and $29.5 million at June 30, 1997 and June 30, 1996, respectively. In
addition, certain of the Company's foreign subsidiaries have non-borrowing bank
facilities (letters of credit, guarantees, performance bonds, etc.) totaling
$25.0 million as of June 30, 1997 and June 30, 1996 of which approximately $19.2
million was used at June 30, 1997 and $18.0 million was used at June 30, 1996.
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 $0.7 million and $0.1 million at June 30, 1997
and June 30, 1996, 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, 1997 and June 30, 1996. The commitments made under these
facilities expire in March of 1998, but may be extended annually for successive
one year periods with the consent of OYL and the banks providing the facilities.
The weighted average effective interest rate on short-term borrowings was
7.1% at June 30, 1997 and 6.1% at June 30, 1996.
38
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1997 1996
---------- ----------
<S> <C> <C>
Senior Term Loans......................................................................... $ 65,000 $ 73,000
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%.................. 125,000 125,000
Other issues.............................................................................. 27,621 27,869
---------- ----------
229,121 237,369
Less: Current maturities.................................................................. (12,091) (9,879)
---------- ----------
$ 217,030 $ 227,490
---------- ----------
---------- ----------
</TABLE>
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 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 August of 1997 retroactive to June 30, 1997) relating
to net worth, leverage ratio, interest coverage, and fixed charge coverage. At
June 30, 1997 and June 30, 1996 the Company was in compliance with the amended
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, 1997 or
June 30, 1996.
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).
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 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.
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
$11.5 million and $13.3 million at June 30, 1997 and June 30, 1996,
respectively.
The Company paid cash interest of $24.8 million, $21.7 million $10.9
million, and $29.4 million for the fiscal years and periods ended June 30, 1997,
June 30, 1996, July 1, 1995, and December 31, 1994, respectively.
39
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Maturities of long-term debt during each of the next five fiscal years
subsequent to June 30, 1997 are as follows (dollars in millions): 1998, $12.1;
1999, $31.5; 2000, $24.8; 2001, $23.5; 2002, $1.0.
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.
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%;
otherwise, 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. There were no interest rate derivative transactions completed
during the fiscal year ended June 30, 1997.
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, 1997 and June 30, 1996 was
approximately $32.2 million and $34.7 million, respectively. The U.S. dollar
equivalent notional amount of these foreign exchange forward contracts by
applicable foreign currency at June 30, 1997 and June 30, 1996 was as follows:
Canadian dollars, $4.2 million and $10.7 million; Singapore dollars $3.1 million
and $5.9 million; German marks $3.1 million and $0.0 million; Italian lira $4.3
million and $2.6 million; French francs $13.4 million and $15.2 million; and
various other currencies $4.1 million and $0.3 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 receivable 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. The carrying amount of all other
long-term debt approximates fair value. The carrying amount of the Company's
long-term debt at June 30, 1997 of $229.1 million approximates fair value. The
aggregate fair value of the Company's long-term debt at June 30, 1996 was $233.6
million compared to the carrying value of $237.4 million. The fair values 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
40
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FINANCIAL INSTRUMENTS (CONTINUED)
remaining terms of the agreements and the counterparties' credit standing. At
June 30, 1997 and June 30, 1996 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, 1997 and June 30,
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................................................. $ 9,816 $ 11,987
Tax over book fixed assets basis............................................................. 758 811
Accrual for pension and retirement benefits.................................................. 5,527 5,343
Accrual for other expenses................................................................... 20,641 21,199
Tax credit carryforwards..................................................................... 1,605 4,760
Other........................................................................................ 3,456 2,823
--------- ---------
Total deferred tax assets.................................................................... 41,803 46,923
Valuation allowance.......................................................................... (18,670) (21,089)
--------- ---------
Net deferred tax assets...................................................................... 23,133 25,834
Deferred tax liabilities:
Unrepatriated earnings of foreign subsidiaries............................................... 3,774 2,519
Book over tax fixed assets basis............................................................. 23,564 24,574
Book over tax intangible asset basis......................................................... 35,319 37,046
Book over tax inventory basis................................................................ 7,557 7,583
Other........................................................................................ 5,530 5,701
--------- ---------
Total deferred tax liabilities............................................................... 75,744 77,423
--------- ---------
Net deferred tax liabilities................................................................. $ 52,611 $ 51,589
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets for net operating loss carryforwards and other items at
June 30, 1997 and June 30, 1996 includes approximately $16 million and $16
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, 1997, June 30, 1996, July 1, 1995, and December
31, 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Federal taxes--Current.............................................. $ 986 $ 3,650 $ 1,061 $ --
Federal taxes--Deferred............................................. 1,095 6,199 1,553 3,256
State taxes......................................................... 297 1,024 240 609
Foreign taxes--Current.............................................. 3,592 6,107 3,538 2,107
Foreign taxes--Deferred............................................. 936 1,443 363 862
----------- --------- --------- ------
Total............................................................... $ 6,906 $ 18,423 $ 6,755 $ 6,834
----------- --------- --------- ------
----------- --------- --------- ------
</TABLE>
During the fiscal years and periods ended June 30, 1997, June 30, 1996, July
1, 1995, and December 31, 1994 the Company paid income taxes of approximately
$5.9 million, $8.7 million, $3.2 million, and
41
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
$4.1 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>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
Statutory U.S. Federal income tax provision......................... $ 4,907 $ 12,237 $ 4,567 $ 2,828
Nondeductible goodwill amortization................................. 1,224 1,871 1,153 1,312
Foreign tax credits not utilized.................................... 337 2,375 1,155 940
State taxes, net of federal benefit................................. 297 1,024 156 396
Other............................................................... 141 916 (276) 1,358
----------- --------- --------- ------
Reported tax provision.............................................. $ 6,906 $ 18,423 $ 6,755 $ 6,834
----------- --------- --------- ------
----------- --------- --------- ------
</TABLE>
At June 30, 1997 the Company has net operating loss and tax credit
carryforwards of approximately $30 million and $1.5 million, respectively, in
the United States and various foreign countries. Approximately $6.0 million of
the net operating loss carryforwards and $1.5 million of the tax credit
carryforwards expire in fiscal years 1998 through 2011. The remaining net
operating loss carryforwards can be carried forward indefinitely.
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, 1997, June 30, 1996, July 1, 1995,
and December 31, 1994 includes the following components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Service cost....................................................... $ 309 $ 301 $ 127 $ 199
Interest cost on the projected benefit obligation.................. 1,912 1,916 987 1,244
Return on plan assets.............................................. (3,031) (4,144) (2,418) (153)
Net amortization and deferral...................................... 977 2,431 1,624 (1,023)
--------- --------- --------- ------------
Total pension expense.............................................. $ 167 $ 504 $ 320 $ 267
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
Pension expense for the Company's foreign pension plans for the fiscal years
and periods ended June 30, 1997, June 30, 1996, July 1, 1995, and December 31,
1994 includes the following components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Service cost....................................................... $ 2,816 $ 950 $ 538 $ 386
Interest cost on the projected benefit obligation.................. 3,769 1,656 949 897
Return on plan assets.............................................. (5,101) (1,820) (1,051) (959)
Amortization of (gain) loss........................................ 839 (18) -- --
--------- --------- --------- -----
Total pension expense.............................................. $ 2,323 $ 768 $ 436 $ 324
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
42
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the domestic defined benefit plans as of June 30, 1997
and June 30, 1996 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Vested benefits........................................... $ 13,645 $ 10,859 $ 9,855 $ 15,124
Nonvested benefits........................................ 589 257 110 721
------------ ------------ ------------ ------------
Accumulated benefit obligation and projected benefit
obligation.............................................. 14,234 11,116 9,965 15,845
Fair value of plan assets................................. 16,884 7,552 11,428 10,972
------------ ------------ ------------ ------------
Plan assets (in excess) less than projected benefit
obligation.............................................. (2,650) 3,564 (1,463) 4,873
Unrecognized net gain..................................... 3,457 1,719 1,934 1,676
------------ ------------ ------------ ------------
Pension liability included in balance sheet............... $ 807 $ 5,283 $ 471 $ 6,549
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The funded status of the Company's foreign defined benefit plans, including
termination indemnities, as of June 30, 1997 and June 30, 1996 is presented
below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Vested benefits........................................... $ 43,816 $ 782 $ 33,667 $ 985
Nonvested benefits........................................ 314 -- 333 --
------------ ------ ------------ ------
Accumulated benefit obligation............................ 44,130 782 34,000 985
Additional benefits related to future compensation
levels.................................................. 15,311 390 9,750 356
------------ ------ ------------ ------
Projected benefit obligation.............................. 59,442 1,172 43,750 1,341
Fair value of plan assets................................. 57,752 -- 48,928 --
------------ ------ ------------ ------
Plan assets (in excess) less than projected benefit
obligation.............................................. 1,690 1,172 (5,178) 1,341
Unrecognized net gain/(loss).............................. 8,395 (55) 1,762 110
------------ ------ ------------ ------
Pension (asset) liability included in balance sheet....... $ (6,705) $ 1,227 $ (3,416) $ 1,451
------------ ------ ------------ ------
------------ ------ ------------ ------
</TABLE>
The weighted average discount rate used to measure the projected obligation
for the domestic plans was 8.00% and 7.75% as of June 30, 1997 and June 30,
1996, respectively. 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 6.0% to 8.5% at June 30, 1997 and June 30, 1996. The
assumed rate of increase in future compensation levels ranged from 4.0% to 5.0%
at June 30, 1997 and June 30, 1996. The expected long-term rate of return on
assets was 7.0% to 9.0% for the fiscal year and period ended June 30, 1997, June
30, 1996, July 1, 1995, and December 31, 1994.
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
43
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
$1,071,000, $1,411,000, $646,000, and $1,190,000 under this plan during the
fiscal years and periods ended June 30, 1997, June 30, 1996, July 1, 1995, and
December 31, 1994, 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, 1997,
June 30, 1996, July 1, 1995 and December 31, 1994 the Company expensed
$1,111,000, $1,094,000, $616,000, and $988,000, 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 9.5 percent decreasing gradually for four 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, 1997 assuming
a one percentage point increase in the medical trend rate in each year is
$406,000 and $62,000, respectively. The weighted average discount rate used in
determining the June 30, 1997 and June 30, 1996 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, 1997. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.5%
at June 30, 1997 and June 30, 1996. 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, 1997, June 30, 1996,
July 1, 1995, and December 31, 1994 includes the following components (dollars
in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Service cost.......................................................... $ 196 $ 218 $ 86 $ 133
Interest cost on the accumulated postretirement benefit obligation.... 406 410 195 277
Net amortization and deferral......................................... (42) (11) (24) --
----- ----- ----- -----
Postretirement benefit expense........................................ $ 560 $ 617 $ 257 $ 410
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Postretirement benefit expense for the Company's foreign defined benefit
healthcare plans for the fiscal years and periods ended June 30, 1997, June 30,
1996, July 1, 1995, and December 31, 1994 includes the following components
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Service cost for the current period................................... $ -- $ -- $ -- $ 37
Interest cost on the accumulated postretirement benefit obligation.... 60 57 35 74
Net amortization and deferral......................................... (20) (20) (14) --
--- --- --- -----
Postretirement benefit expense........................................ $ 40 $ 37 $ 21 $ 111
--- --- --- -----
--- --- --- -----
</TABLE>
44
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of both domestic and foreign defined benefit health care
plans at June 30, 1997 and June 30, 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
---------------------- ----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
PLANS PLAN PLANS PLAN
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 2,689 $ 718 $ 3,104 $ 828
Fully eligible active plan participants.................................. 762 -- 751 --
Active plan participants................................................. 1,844 -- 2,021 --
Unrecognized gain........................................................ 1,038 442 308 462
----------- --------- ----------- ---------
Accrued postretirement benefit obligation................................ $ 6,333 $ 1,160 $ 6,184 $ 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 was contingent upon certain
performance measures being achieved and other conditions specified in the
agreement. The option provision of this contract has been superceded by the
adoption of a Company Stock Option Plan.
In 1997, the Company adopted a Stock Option Plan which provides for the
grant of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay Group
Inc. The Company anticipates the granting of options under the stock option 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.
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):
<TABLE>
<CAPTION>
YEAR
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 8,560
1999............................................................................... 6,135
2000............................................................................... 4,122
2001............................................................................... 2,859
2002............................................................................... 2,349
Thereafter......................................................................... 10,769
</TABLE>
Rental expense associated with third party operating leases was
approximately $11.4 million, $11.6 million, $5.6 million, and $7.8 million for
the fiscal years and periods ended June 30, 1997, June 30, 1996, July 1, 1995,
and December 31, 1994, 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, 1997, June 30, 1996, July 1, 1995, and December 31, 1994
averaged approximately $945,800, $832,000, $684,000, and $758,000, respectively
under this contract. This contract extends through December 31, 2000 but
includes certain early termination options.
45
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. On January 29, 1997, the Company
instituted an action before the American Arbitration Association in Dallas,
Texas, to enforce the Company's rights to indemnification of all its claimed
losses; the arbitration is in the discovery and scheduling stages.
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 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 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, 1997
the Company and Predecessor Company had incurred over $10.5 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 $6.8 million on a nondiscounted basis
through the year 2007 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
46
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONTINGENCIES (CONTINUED)
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 $5.3 million on a nondiscounted basis through the year 2007 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. In November 1995, the Court granted
the carrier's Motion for Summary Judgment as to liability but denied the Motion
concerning the Company's bad faith and insurance code claims. The Company
appealed the order and the Appeals Court reversed the lower Court ruling. The
case has been set for trial in November 1997. The insurance carrier has filed a
new motion for Summary Judgment. No amounts have been recorded in the
accompanying Consolidated Balance Sheets relating to these potential recoveries.
The Predecessor Company discovered contaminants in the soil and/or
groundwater at its manufacturing facilities in Faribault, Minnesota, Scottsboro,
Alabama, Staunton, Virginia and certain other manufacturing sites. The level of
contamination exceeds mandated levels and will require remediation. Based upon
estimates prepared by environmental consultants, at June 30, 1997 the Company
estimates that related probable remediation costs will be approximately $10.4
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 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.
47
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONTINGENCIES (CONTINUED)
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 two industry
segments: Commercial Air Conditioning and Refrigeration ("Commercial Air
Conditioning & Refrigeration"), the manufacture, sale and distribution of
heating, ventilating, air conditioning, industrial refrigeration and freezing
equipment products, and Filtration Products ("Filtration Products"), the
manufacture and sale of air filtration products and systems. 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,
1997, June 30, 1996, July 1, 1995, and December 31, 1994:
<TABLE>
<CAPTION>
CLASSIFIED BY INDUSTRY:
<S> <C> <C> <C> <C>
JANUARY 1, MAY 2,
YEAR ENDED YEAR ENDED 1995 TO 1994 TO
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Commercial Air Conditioning & Refrigeration.......... $ 597,216 $ 566,773 $ 253,874 $ 283,966
Filtration Products.................................. 352,819 341,707 175,520 201,705
Eliminations......................................... (2,102) (7,085) (884) (990)
----------- ----------- ----------- --------
Total............................................ $ 947,933 $ 901,395 $ 428,510 $ 484,681
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Operating Income (Loss):
Commercial Air Conditioning & Refrigeration.......... $ 23,314 $ 37,187 $ 15,342 $ 12,362
Filtration Products.................................. 28,869 34,876 15,230 21,530
Corporate & Amortization............................. (11,587) (15,367) (7,296) (9,651)
----------- ----------- ----------- --------
Total............................................ $ 40,596 $ 56,696 $ 23,276 $ 24,241
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Total Assets:
Commercial Air Conditioning & Refrigeration.......... $ 331,540 $ 331,798 $ 272,799 $ 236,465
Filtration Products.................................. 202,579 185,656 182,643 172,510
Corporate, Goodwill & Intangibles.................... 276,249 289,500 275,886 270,922
----------- ----------- ----------- --------
Total............................................ $ 810,368 $ 806,954 $ 731,328 $ 679,897
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Depreciation/Amortization:
Commercial Air Conditioning & Refrigeration.......... $ 8,363 $ 7,114 $ 3,415 $ 4,079
Filtration Products.................................. 5,526 5,144 2,806 2,701
Corporate, Goodwill & Intangible Amortization........ 11,678 13,551 7,330 7,961
----------- ----------- ----------- --------
Total............................................ $ 25,567 $ 25,809 $ 13,551 $ 14,741
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Capital Expenditures:
Commercial Air Conditioning & Refrigeration.......... $ 9,006 $ 8,983 $ 3,229 $ 5,147
Filtration Products.................................. 6,871 5,782 2,468 3,115
Corporate............................................ 64 -- -- 192
----------- ----------- ----------- --------
Total............................................ $ 15,941 $ 14,765 $ 5,697 $ 8,454
----------- ----------- ----------- --------
----------- ----------- ----------- --------
</TABLE>
48
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CLASSIFIED GEOGRAPHICALLY:
<S> <C> <C> <C> <C>
JANUARY 1, MAY 2,
YEAR ENDED YEAR ENDED 1995 TO 1994 TO
JUNE 30, JUNE 30, JULY 1, DECEMBER 31,
1997 1996 1995 1994
----------- ----------- ----------- -----------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
U.S. ................................................ $ 575,708 $ 559,505 $ 261,159 $ 329,866
Europe............................................... 314,483 297,976 134,712 113,412
Other................................................ 57,742 43,914 32,639 41,403
----------- ----------- ----------- --------
Total............................................ $ 947,933 $ 901,395 $ 428,510 $ 484,681
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Operating Income (loss):
U.S. .................................................. $ 33,335 $ 46,880 $ 18,785 $ 25,217
Europe............................................... 13,225 20,339 7,616 6,798
Other................................................ 5,623 4,844 4,171 1,877
Corporate & Amortization............................. (11,587) (15,367) (7,296) (9,651)
----------- ----------- ----------- --------
Total............................................ $ 40,596 $ 56,696 $ 23,276 $ 24,241
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Total Assets:
U.S. .................................................. $ 295,295 $ 294,002 $ 285,412 $ 291,529
Europe............................................... 202,538 194,311 154,866 111,409
Other................................................ 36,286 29,141 15,164 6,037
Corporate, Goodwill & Intangibles.................... 276,249 289,500 275,886 270,922
----------- ----------- ----------- --------
Total............................................ $ 810,368 $ 806,954 $ 731,328 $ 679,897
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Depreciation/Amortization:
U.S. ................................................ $ 10,335 $ 8,769 $ 4,451 $ 4,991
Europe............................................... 3,170 3,107 1,576 1,593
Other................................................ 384 382 194 196
Corporate, Goodwill & Intangible Amortization........ 11,678 13,551 7,330 7,961
----------- ----------- ----------- --------
Total............................................ $ 25,567 $ 25,809 $ 13,551 $ 4,741
----------- ----------- ----------- --------
----------- ----------- ----------- --------
Capital Expenditures:
U.S. ................................................ $ 9,484 $ 11,109 $ 4,427 $ 6,939
Europe............................................... 5,712 2,912 1,020 912
Other................................................ 681 744 250 411
Corporate--U.S. ..................................... 64 -- -- 192
----------- ----------- ----------- --------
Total............................................ $ 15,941 $ 14,765 $ 5,697 $ 8,454
----------- ----------- ----------- --------
----------- ----------- ----------- --------
</TABLE>
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
Hong Leong and its subsidiary companies, including OYL and the Company, have
a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 1997 and June 30, 1996 pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $16.3 and $14.4
million, respectively of the Company's products to various OYL entities in the
ordinary
49
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
course of business. Additionally during fiscal year 1997, the Company purchased
approximately $3.3 million of product from OYL and its subsidiary companies in
the ordinary course of business. 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.
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. The Company has been paid or was owed $207,000 and $228,000
pursuant to the OMC Agreement, $81,000 and $39,000 pursuant to the Shenzhen
Agreement, and $27,000 and $3,000 pursuant to the PT OYL agreement for the years
ended June 30, 1997 and June 30, 1996, respectively. 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.
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 in the amount
of L17.0 million which supports the J&E Hall L17.0 million revolving credit
facility. OYL has also issued a $6.0 million letter of credit which supports a
revolving line of credit facility for the Company's subsidiary in Canada. No
fees were paid to OYL in connection with either letter of credit.
The Company also has available letter of credit facilities totaling $25
million that are supported by letters of credit from OYL which were fully
utilized at June 30, 1997 and June 30, 1996. The commitments made under these
new facilities expire in March 1998, 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.
50
<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, 1997 and June 30, 1996 and the related consolidated
statements of operations, cash flows and stockholder's equity for the years
ended June 30, 1997 and 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 have issued
our report thereon dated August 29, 1997 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 referred 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.
[LOGO]
Baltimore, Maryland
August 29, 1997
51
<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
<S> <C> <C> <C> <C> <C>
ADDITIONS
------------------------
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Allowance for doubtful receivables................ $ 6,313 $ 2,985 $ 18 $ 1,687 $ 7,629
Accrued warranty expense.......................... 22,312 17,065 $ (12) 14,600 22,212
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
</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.
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
INTRODUCTION
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Joseph B. Hunter................... 60 President and Chief Executive Officer and Director
Gerald L. Boehrs................... 56 Executive Vice President and Chief Operating Officer of Commercial Air
Conditioning Group and Director
Thomas K. Barber................... 55 Managing Director of Industrial Refrigeration
Michael J. Christopher............. 53 Executive Vice President and Chief Operating Officer of Filtration
Products Group and Director
Andrew R. Morrison................. 45 Chief Financial Officer and Secretary
John M. Sichter.................... 53 Controller
Ronald J. Pederson................. 38 Treasurer
Dennis R. Marcott.................. 45 President of Environmental Products Division, Filtration Products
Group
Robert E. Brymer................... 39 President of Air Filtration Division, Filtration Products Group
Ho Nyuk Choy....................... 43 Director
Tan Sri Quek Leng Chan............. 54 Director
Liu Wan Min........................ 53 Director
Roger Tan Kim Hock................. 50 Director
</TABLE>
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 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 the 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 and served as the Chief Financial Officer from March of
1995 though November 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.
ANDREW R. MORRISON has served as Chief Financial Officer of the Company
since July 1997 and served as the Treasurer from December 1995 until July 1997.
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.
53
<PAGE>
RONALD J. PEDERSON has served as the Treasurer since July 1997. From March
1995 until July 1997, Mr. Pederson served as the Assistant Treasurer of the
Company. He served as Manager of Treasury Operations from February of 1988
forward.
DENNIS R. MARCOTT has served as President of Environmental Products Division
of the Filtration Products Group since June 1996. From November 1994 to 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 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. Since 1996, Mr Liu has
served as the Group Managing Director of Nanyang Press Bhd, a Hong Leong Group
Company.
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.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid or
accrued 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 years ended
June 30, 1997, June 30, 1996, and the six month period ended July 1, 1995.
<TABLE>
<CAPTION>
ANNUAL 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...................... 1997 402,120 140,000 -- -- 6,763(b)
President and Chief Executive 1996 365,095 400,625 -- -- 12,219(b)
Officer 1995 180,000 130,027 -- -- 531(b)
Gerald L. Boehrs...................... 1997 207,022 -- -- -- 6,889(b)
Executive Vice President 1996 177,323 87,975 -- 136,557(c) 7,026(b)
1995 86,769 59,813 -- 139,808(c) 3,188(b)
Michael J. Christopher................ 1997 198,638 -- -- -- 6,537(b)
Executive Vice President and Chief 1996 175,077 102,272 -- -- 10,267(b)
Operating Officer of the Filtration 1995 81,077 59,375 -- -- --
Products Group
Barton L. Bailey...................... 1997 168,939 -- -- -- 2,968(b)
Vice President, Human Resources 1996 158,543 91,085 25,834(d) 170,729(c) 6,594(b)
1995 77,106 44,513 64,951(e) 174,760(c) 3,188(b)
Dennis R. Marcott..................... 1997 150,692 6,163 -- -- 3,180(b)
President of Environmental Products 1996 129,308 60,000 -- -- 1,530(b)
Division 1995 62,500 35,714 112,077(f) -- 3,188(b)
Robert E. Brymer...................... 1997 145,769 -- -- -- 6,767(b)
President of Air Filtration Products 1996 120,769 54,735 -- -- 6,220(b)
Division 1995 51,653 15,264 -- -- 2,844(b)
</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) Represents contributions by the Company to the Company's 401(k) plan.
(c) Represents payouts from the Company's Equity Participation Plan.
(d) Represents compensation for additional taxes payable on his 1996 Equity
Participation Plan payout resulting from Mr. Bailey's relocation to Maryland
from Texas.
(e) 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 $25,834 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.
(f) Includes reimbursement for taxes and reimbursement for moving expenses. Mr.
Marcott was reimbursed $29,920 for income taxes payable on amounts disbursed
by the Company on Mr. Macott'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
55
<PAGE>
Chief Executive Officer of the Company at a current base salary of $402,120 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 option provision of this contract has been
superceded by the adoption of a Company Stock Option Plan.
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.
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.
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 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 and
Bailey 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. 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 July 31, 1997, the Company entered into a
Separation of Employment Agreement, General Release and Consulting Agreement
with Barton L. Bailey, the former Vice President of Human Resources of the
Company. Pursuant to the Severance Agreement, the Company is obligated to (i)
pay Mr. Bailey $169,110 as severance pay, in 12 monthly installments and
maintain certain
56
<PAGE>
of his employee benefits until July 31, 1998, (ii) provide Mr. Bailey
outplacement services for three months, (iii) compensate Mr. Bailey for the cost
of real estate commissions on the sale of his principle residence, and (iv)
provide Mr. Bailey all benefits due him under the terms of the Executive Salary
Continuation Agreement which are fully vested and nonforfeitable. Further, Mr.
Bailey and the Company have entered into a consulting arrangement pursuant to
which Mr. Bailey has agreed to perform 40 hours per week of consulting services
for the Company until August 31, 1997 for which the Company will pay Mr. Bailey
$4,000 for the period plus $100 per hour for each hour Mr. Bailey works in
excess of 40 hours per week. Consulting requirements subsequent to August 31,
1998 will be mutually agreed upon at a rate of $100 per hour.
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. 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
In 1997, the Company adopted a Stock Option Plan which provides for the
grant of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay Group
Inc. The Company anticipates the granting of options under the stock option 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.
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.
57
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 30, 1997 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 AMG Holdings N.V., a
Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost, The
Netherlands). AMG Holdings N.V. is a wholly-owned subsidiary of AMG Holdings
B.V., a Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost,
The Netherlands). AMG Holdings B.V. 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 45.2% 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, 1997 for 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.................................................... 84,591,028(a) 62.5
Liu Wan Min............................................................... 8,002,200 5.9
Ho Nyuk Choy.............................................................. 44,000 *
Joseph B. Hunter.......................................................... 25,000 *
All current directors and executive officers as a group (13 persons)...... 92,662,228 68.4
</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.................................................... 112,082,455(b) 45.2
All current directors and executive officers as a group (13 persons)...... 112,082,455 45.2
</TABLE>
* Less than one percent (1%). (a) Includes 84,591,028 shares held by Hume, a
company publicly traded on the Kuala Lumpur Stock Exchange. Approximately
45.2% 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 112,032,455 shares held by Hong Leong.
58
<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 in the amount
of L17.0 million which supports the J&E Hall L17.0 million revolving credit
facility. OYL has also issued a $6.0 million letter of credit which supports a
revolving line of credit facility for Company subsidiaries in Canada. No fees
were paid to OYL in connection with either letter of credit.
The Company also has available letter of credit facilities totaling $25
million that are supported by letters of credit from OYL which were fully
utilized at June 30, 1997 and June 30, 1996. The commitments made under these
new facilities expire in March 1998, 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. The Company has been paid or was owed $207,000 and $228,000
pursuant to the OMC Agreement, $81,000 and $39,000 pursuant to the Shenzhen
Agreement, and $27,000 and $3,000 pursuant to the PT OYL agreement for the years
ended June 30, 1997 and June 30, 1996, respectively. 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.
Hong Leong and its subsidiary companies, including OYL and the Company, have
a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 1997 and June 30, 1996
59
<PAGE>
pursuant to this policy, the Company and various of its subsidiaries sold an
aggregate of approximately $16.3 and $14.4 million, respectively of the
Company's products to various OYL entities in the ordinary course of business.
Additionally during fiscal year 1997, the Company purchased approximately $3.3
million of product from OYL and its subsidiary companies in the ordinary course
of business. 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.
60
<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, 1997 and June 30, 1996
Consolidated Statements of Operations--
Years ended June 30, 1997 and June 30, 1996, the period from
January 1, 1995 to July 1, 1995, and the period from May 2, 1994
to December 31, 1994
Consolidated Statements of Cash Flows--
Years ended June 30, 1997 and June 30, 1996,the period from
January 1, 1995 to July 1, 1995, and the period from May 2, 1994
to December 31, 1994
Consolidated Statements of Stockholder's Equity (Deficit)--
Years ended June 30, 1997 and June 30, 1996, the period from
January 1, 1995 to July 1, 1995, and the period from May 2, 1994
to December 31, 1994
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
<TABLE>
<C> <S>
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 Option 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)
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 NEPI Irrevocable Trust Agreement(1)
10.16 Paying Agent Agreement dated May 2, 1994 with OYL, Richard W. Snyder and certain
other parties specified therein(1)
10.17 $11,500,000 Note dated May 2, 1994 to Bank One, Texas, N.A.(1)
10.18 $13,500,000 Reimbursement Agreement dated March 22, 1995 with the Bank of Nova
Scotia(1)
10.19 L22,000,000 Line of Credit Agreement dated November 30, 1995 with Bank of America(1)
10.20 $11,500,000 Amended Line of Credit Agreement dated April 5, 1995 with Citibank
N.A.(1)
10.21 SnyderGeneral Stock Purchase Agreement dated March 31, 1994 with OYL, Richard W.
Snyder and certain other parties listed therein(1)
</TABLE>
61
<PAGE>
<TABLE>
<C> <S>
10.22 SnyderGeneral Tax Indemnification Agreement dated May 2,1994 with Richard W. Snyder
and certain other parties listed therein(1)
10.23 Final Form of J&E Hall Stock Purchase Agreement dated , 1995 with APV plc(1)
10.24 Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L.
Sentra Manufacturing(1)
10.25 Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L.
Electrical Company Ltd.(1)
10.26 Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L.
Manufacturing Company SDN BHD(1)
10.27 Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air
Conditioning & Refrigeration Company Ltd.(1)
10.28 Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and
McQuay Air Conditioning (Singapore) Pte. Ltd.(1)
10.29 Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.(1)
10.30 Credit Agreement dated July 21, 1994 with the Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial institutions listed therein(1)
10.31 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)
10.32 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)
10.33 Third Amendment to Credit Agreement dated February 7, 1996 with The Bank of Nova
Scotia, Bank Bumiputra Malaysia Berhad, New York Branch and certain financial
institutions listed therein(2)
10.34 Fourth Amendment to Credit Agreement dated August 1996 with The Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and certain financial institutions
listed therein(5)
10.35 Fifth Amendment to Credit Agreement dated August 1997 with The Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and certain financial institutions
listed therein(5)
10.36 Separation of Employment Agreement, General Release, Consulting Agreement and Non-
Competition Agreement dated as of June 21, 1996 with Charles J. Tambornino(3)
10.37 Separation of Employment Agreement, General Release and Consulting Agreement dated as
of July17, 1997 with Barton L. Bailey(5)
10.38 Stock Option Plan effective January 1, 1996(4)
21 Subsidiaries(5)
24 Power of Attorney(5)
27 Financial Data Schedule(5)
</TABLE>
- ------------------------
(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) Incorporated by reference to the Company's Form 10-K as filed with the
Commission on September 17, 1996.
(4) Incorporated by reference to the Company's Form 10-Q as filed with the
Commission on May 9, 1997.
(5) Filed herewith.
(c) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three month
perod ended June 30, 1997.
62
<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 22, 1997.
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 22, 1997
- ------------------------------
Joseph B. Hunter
PRINCIPAL EXECUTIVE OFFICER
/s/ ANDREW R. MORRISON September 22, 1997
- ------------------------------
Andrew R. Morrison
CHIEF FINANCIAL OFFICER
/s/ JOHN M. SICHTER September 22, 1997
- ------------------------------
John M. Sichter
CONTROLLER
PRINCIPAL ACCOUNTING OFFICER
The Board of Directors:
<TABLE>
<S> <C>
Joseph B. Hunter Michael J.
Liu Wan Min Christopher
Ho Nyuk Choy Quek Leng Chan
Gerald L. Boehrs Roger Tan Kim Hock
</TABLE>
By: /s/ JOSEPH B. HUNTER September 22, 1997
- ------------------------------
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.
63
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.34 Fourth Amendment to Credit Agreement dated August 1996 with The Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial institutions listed therein
10.35 Fifth Amendment to Credit Agreement dated August 1997 with The Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial institutions listed therein
10.37 Separation of Employment Agreement, General Release, and Consulting Agreement dated as of July 17, 1997
with Barton L. Bailey
21 Subsidiaries
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
64
<PAGE>
Exhibit 10.34
[EXECUTION COPY]
FOURTH AMENDMENT TO
CREDIT AGREEMENT AND AMENDMENT TO
U.S. BORROWER SECURITY AGREEMENT
THIS FOURTH AMENDMENT, dated as of August 23, 1996 (this "Amendment"), to
the Credit Agreement referred to below (and to the U.S. Borrower Security
Agreement referred to hereinbelow) is entered into among AAF-McQUAY INC.
(formerly known as SnyderGeneral Corporation), a Delaware corporation (the
"U.S. Borrower"), the Lenders parties hereto, THE BANK OF NOVA SCOTIA
("Scotiabank") and BANK BUMIPUTRA MALAYSIA BERHAD, NEW YORK BRANCH as the
managing agents (collectively referred to as the "Managing Agents") for the
Lenders, and Scotiabank as the administrative agent (the "Administrative
Agent") for the Lenders.
W I T N E S S E T H:
WHEREAS, the U.S. Borrower, the Lenders and the Agents have heretofore
entered into the Credit Agreement, dated as of July 21, 1994 (together with
all Exhibits, Schedules and attachments thereto, in each case as amended or
otherwise modified prior to the date hereof, the "Credit Agreement");
WHEREAS, in connection with the Credit Agreement the U.S. Borrower was
required to execute and deliver that certain U.S. Borrower Security Agreement,
dated as of July 21, 1994 (as amended or otherwise modified prior to the date
hereof, the "U.S. Borrower Security Agreement");
WHEREAS, the U.S. Borrower has requested the Lenders and the Agents to
amend the Credit Agreement and the U.S. Borrower Security Agreement in certain
respects as set forth below; and
WHEREAS, the Lenders and the Agents are willing, on and subject to the
terms and conditions set forth below, to amend the Credit Agreement in certain
respects as provided below (the Credit Agreement, as amended pursuant to the
terms of this Amendment, being referred to as the "Amended Credit Agreement")
and amend the U.S. Borrower Security Agreement as provided in Subpart 2.4
below;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the U.S. Borrower, the Lenders and the Agents
hereby agree as follows:
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. The following terms (whether or not
underscored) when used in this Amendment shall have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"Administrative Agent" is defined in the preamble.
"Amended Credit Agreement" is defined in the fourth recital.
"Amendment" is defined in the preamble.
"Amendment No. 4" is defined in Subpart 3.1.
"Credit Agreement" is defined in the first recital.
"Fourth Amendment Effective Date" is defined in Subpart 3.1.
"Managing Agents" is defined in the preamble.
"Scotiabank" is defined in preamble.
"U.S. Borrower" is defined in the preamble.
"U.S. Borrower Security Agreement" is defined in the second recital.
SUBPART 1.2. Other Definitions. Terms for which meanings are provided
in the Credit Agreement are, unless otherwise defined herein or the context
otherwise requires, used in this Amendment with such meanings.
PART II
AMENDMENTS TO THE
CREDIT AGREEMENT
-2-
<PAGE>
Effective on (and subject to the occurrence of) the Fourth Amendment
Effective Date, the Credit Agreement is hereby amended in accordance with this
Part II and the U.S. Borrower Security Agreement is hereby amended in
accordance with Subpart 2.4; except as so amended or modified by this
Amendment, the Credit Agreement and the U.S. Borrower Security Agreement shall
continue in full force and effect.
SUBPART 2.1. Amendments to Article I. Article I of the Credit Agreement
is hereby amended in accordance with Subparts 2.1.1 and 2.1.2.
SUBPART 2.1.1. Section 1.1 ("Defined Terms") of the Credit Agreement is
hereby amended by inserting in such Section the following definitions in the
appropriate alphabetical order:
"Fourth Amendment" means the Fourth Amendment to Credit Agreement
and Amendment to U.S. Borrower Security Agreement, dated as of August 23,
1996, among the U.S. Borrower, the Lenders parties thereto and the
Agents.
"Fourth Amendment Effective Date" is defined in Subpart 3.1 of the
Fourth Amendment.
SUBPART 2.1.2. Section 1.1 of the Credit Agreement is hereby further
amended as follows:
(a) The definition of "Applicable Base Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable Base Rate Margin" means, with respect to any Revolving
Loan, Swing Line Loan or Term-A Loan made or maintained as a Base Rate
Loan on or after the Fourth Amendment Effective Date, a per annum rate of
interest determined by reference to the Leverage Ratio and Interest
Coverage Ratio, in each case as indicated in the Compliance Certificate
most recently delivered pursuant to clause (c) of Section 7.1.1, equal
to:
(a) 0% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
-3-
<PAGE>
(b) .25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing
clause (a) does not apply;
(c) .375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) .50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a), (b) and (c) do not apply;
(e) .625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply; and
(f) .875% if the Leverage Ratio is greater than or equal to
4.25:1 or the Interest Coverage Ratio is less than or equal to
2.75:1;
provided, that, the Applicable Base Rate Margin shall only be decreased
from the then existing Applicable Base Rate Margin if each of the
Interest Coverage Ratio and Leverage Ratio (as reflected in the most
recently delivered Compliance Certificate) is contained within the ranges
set forth in the same clause (a), (b), (c), (d) or (e) above; provided,
further, that, in the event the U.S. Borrower fails to deliver a
Compliance Certificate within 45 days after the end of any Fiscal Quarter
as required pursuant to clause (c) of Section 7.1.1, the Applicable Base
Rate Margin from and including the 46th day after the end of such Fiscal
Quarter to but not including the date the U.S. Borrower delivers to the
Administrative Agent a Compliance Certificate shall conclusively be equal
to .875%.
(b) The definition of "Applicable L/C Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable L/C Rate Margin" means, with respect to any Letter of
Credit, on or at any time after the Fourth Amendment Effective Date, a
per annum rate determined by
-4-
<PAGE>
reference to the Leverage Ratio and Interest Coverage Ratio, in each case
as indicated in the Compliance Certificate most recently delivered
pursuant to clause (c) of Section 7.1.1, equal to:
(a) 1.0% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
(b) 1.25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing
clause (a) does not apply;
(c) 1.375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) 1.50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a), (b) and (c) do not apply;
(e) 1.625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply;
(f) 1.875% if the Leverage Ratio is greater than or equal to
4.25:1 or the Interest Coverage Ratio is less than or equal to
2.75:1;
provided, that, the Applicable L/C Rate Margin shall only be decreased
from the then existing Applicable L/C Rate Margin if each of the Interest
Coverage Ratio and Leverage Ratio (as reflected in the most recently
delivered Compliance Certificate) is contained within the ranges set
forth in the same clause (a), (b), (c), (d) or (e) above; provided,
further, that, in the event the U.S. Borrower fails to deliver a
Compliance Certificate within 45 days after the end of any Fiscal Quarter
as required pursuant to clause (c) of Section 7.1.1, the Applicable L/C
Rate Margin from and including the 46th day after the end of such Fiscal
quarter to but not including the date the U.S. Borrower delivers to
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the Administrative Agent a Compliance Certificate shall conclusively be
equal to 1.875%.
(c) The definition of "Applicable LIBO Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable LIBO Rate Margin" means, with respect to any Revolving
Loan, Swing Line Loan or Term-A Loan made or maintained as a LIBO Rate
Loan on or after the Fourth Amendment Effective Date, a per annum rate of
interest determined by reference to the Leverage Ratio and Interest
Coverage Ratio, in each case as indicated in the Compliance Certificate
most recently delivered pursuant to clause (c) of Section 7.1.1, equal
to:
(a) 1.0% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
(b) 1.25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing
clause (a) does not apply;
(c) 1.375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) 1.50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a) ,(b) and (c) do not apply;
(e) 1.625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply; and
(f) 1.875% if the Leverage Ratio is greater than or equal to
4.25:1 or the Interest Coverage Ratio is less than or equal to
2.75:1;
provided, that, (x) the Applicable LIBO Rate Margin shall not apply to
Swing Line Loans and (y) the Applicable LIBO Rate Margin shall only be
decreased from the then existing
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Applicable LIBO Rate Margin if each of the Interest Coverage Ratio and
Leverage Ratio (as reflected in the most recently delivered Compliance
Certificate) is contained within the ranges set forth in the same clause
(a), (b), (c), (d) or (e) above; provided, further, that, in the event
the U.S. Borrower fails to deliver a Compliance Certificate within
45 days after the end of any Fiscal Quarter as required pursuant to
clause (c) of Section 7.1.1, the Applicable LIBO Rate Margin from and
including the 46th day after the end of such Fiscal Quarter to but not
including the date the U.S. Borrower delivers to the Administrative Agent
a Compliance Certificate shall conclusively be equal to 1.875%.
(d) The definition of "Borrowing Base Amount" is hereby amended in its
entirety to read as follows:
"Borrowing Base Amount" means, at any time on or after the Fourth
Amendment Effective Date, the sum (without duplication) of
(a) the Net Asset Value of all Eligible Accounts of the U.S.
Borrower at such time as certified by the U.S. Borrower to the
Lenders in the most recently delivered Borrowing Base Certificate,
plus
(b) the Net Asset Value of all Eligible Inventory of the U.S.
Borrower at such time as certified by the U.S. Borrower to the
Lenders in the most recently delivered Borrowing Base Certificate.
(e) The definition of "Commitment Fee Rate" is hereby amended in its
entirety to read as follows:
"Commitment Fee Rate" means, on or at any time after the Fourth
Amendment Effective Date, a per annum rate determined by reference to the
Leverage Ratio and Interest Coverage Ratio, in each case as indicated in
the Compliance Certificate most recently delivered pursuant to clause (c)
of Section 7.1.1, equal to:
(a) .25% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
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(b) .30% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing
clause (a) does not apply;
(c) .325% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3:25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) .375% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a), (b) and (c) do not apply;
(e) .375% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply; and
(f) .50% if the Leverage Ratio is greater than or equal to
4.25:1 or the Interest Coverage Ratio is less than or equal to
2.75:1;
provided, that, the Commitment Fee Rate shall only be decreased from the
then existing Commitment Fee Rate if each of the Interest Coverage Ratio
and Leverage Ratio (as reflected in the most recently delivered
Compliance Certificate) is contained within the ranges set forth in the
same clause (a), (b), (c), (d) or (e) above; provided, further, that, in
the event the U.S. Borrower fails to deliver a Compliance Certificate
within 45 days after the end of any Fiscal Quarter as required pursuant
to clause (c) of Section 7.1.1, the Commitment Fee Rate from and
including the 46th day after the end of such Fiscal Quarter to but not
including the date the U.S. Borrower delivers to the Administrative Agent
a Compliance Certificate shall conclusively be equal to .50%.
(f) The definition of "Disqualified Account" is hereby amended in its
entirety to read as follows:
"Disqualified Account" of any Person means an Account which, when
scheduled to the Administrative Agent or at any time thereafter, is of
any of the following types:
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(a) such Account (i) is unpaid more than seventy-five (75)
days after the due date stated on the original invoice or (ii) has a
stated due date more than thirty (30) days after the date of such
original invoice and is unpaid more than one hundred and thirty-five
(135) days after the date of such original invoice;
(b) such Account arises out of a sale not made in the ordinary
course of such Person's business, or a sale to a Person which is an
Affiliate of the U.S. Borrower, or controlled by an Affiliate or
employee of the U.S. Borrower;
(c) such Account fails to meet or violates any warranty,
representation or covenant contained in this Agreement or any of the
other Loan Documents relating to the Accounts of such Person;
(d) such Account is owing from an account debtor
(i) which has filed a petition for bankruptcy or any
other petition for relief under the Bankruptcy Code or any
similar statute (unless the account debtor is a
debtor-in-possession in a Chapter 11 case and has available
debtor-in-possession financing from sources and under terms
reasonably acceptable to the Administrative Agent and the
Account is entitled to priority under Section 507 of the
Bankruptcy Code as an administrative expense allowed under
Section 503(b) of the Bankruptcy Code), or made an assignment
for the benefit of creditors,
(ii) against which any petition or other application for
relief under the Bankruptcy Code or any similar statute has
been filed or
(iii) which has failed, suspended its business
operations, become insolvent, suffered a receiver or a trustee
to be appointed for any of its assets or affairs, or is
generally failing to pay its debts as they become due;
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(e) such Account arises from a sale to an account debtor
outside the United States or Canada, unless the account debtor's
obligations (or that portion of such obligations which is acceptable
to the Administrative Agent) with respect to such sale are secured
by a letter of credit, guaranty or eligible bankers' acceptance
having terms, and from such issuers and confirmation banks, as are
acceptable to the Administrative Agent;
(f) such Account is owing from an account debtor if fifty
percent (50%) or more of all Accounts owing from such account debtor
are past due pursuant to the criteria set forth in clause (a) of
this definition;
(g) such Account is one in which the Administrative Agent does
not have a senior, perfected security interest in, or such Account
is subject to a Lien which is not permitted under Section 7.2.3; or
(h) such Account arises from a sale made to an account debtor
on cash terms.
(g) The definition of "Letter of Credit Commitment Amount" is hereby
amended in its entirety to read as follows:
"Letter of Credit Commitment Amount" means, on any date on or after
the Fourth Amendment Effective Date, a maximum Dollar Equivalent of
$75,000,000, as such amount may be permanently reduced from time to time
pursuant to Section 2.2.
(h) The definition of "Net Asset Value" is hereby amended in its entirety
to read as follows:
"Net Asset Value" means, at any time of any determination thereof,
for any time on or after the Fourth Amendment Effective Date,
(a) an amount equal to 85% of the book value of all Eligible
Accounts as reflected on the books of the U.S. Borrower and the
applicable U.S. Subsidiaries, in accordance with GAAP, net of all
credits, discounts and
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allowances that have not already been deducted pursuant to the
definition of "Disqualified Accounts"; and
(b) an amount (without duplication) equal to (i) 60% of all
Eligible Inventory consisting of finished goods and raw material and
(ii) 20% of all Eligible Inventory consisting of work-in-process, in
each case based on the lesser of the market value and the cost of
goods (determined on a first-in, first-out basis) and as reflected
on the books of the U.S. Borrower and the applicable U.S.
Subsidiaries, in each case as at such time, based on the lesser of
the market value and the cost of goods in accordance with GAAP and
net of related book reserves that have not already been deducted
pursuant to the definition of "Disqualified Inventory".
(i) The definition of "Revolving Loan Commitment Amount" is hereby
amended in its entirety to read as follows:
"Revolving Loan Commitment Amount" means, at any time on or after
the Fourth Amendment Effective Date, $100,000,000, as such amount may be
reduced from time to time pursuant to Section 2.2.
(j) Clause (b) of the definition of "Revolving Loan Commitment
Termination Date" is hereby amended in its entirety to read as follows:
(b) February 14, 2001, the fifth-year anniversary of the Third
Amendment Effective Date;
(k) The definition of "Stated Maturity Date" is hereby amended in its
entirety to read as follows:
"Stated Maturity Date" means February 14, 2001, the fifth-year
anniversary of the Third Amendment Effective Date.
(l) The definition of "Third Amendment Effective Date" is hereby amended
in its entirety to read as follows:
"Third Amendment Effective Date" means February 14, 1996.
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SUBPART 2.2. Amendments to Article VII. Article VII of the Credit
Agreement is hereby amended in accordance with Subparts 2.2.1 through 2.2.8.
SUBPART 2.2.1. Section 7.1.6 ("Future Subsidiaries") of the Credit
Agreement is hereby amended by inserting immediately following the clause
which reads "or a directly-owned Foreign Subsidiary of the U.S. Borrower or a
U.S. Subsidiary of the U.S. Borrower" appearing in the first sentence of such
Section a new clause which shall read as follows: "with total assets which, in
the aggregate, equal or exceed $500,000 as of, initially, the time such Person
becomes such a Foreign Subsidiary and, at any time thereafter, as of the end
of any succeeding Fiscal Quarter".
SUBPART 2.2.2. Clause (c) of Section 7.2.2 ("Indebtedness") of the
Credit Agreement is hereby amended in its entirety to read as follows:
(c) Indebtedness
(i) existing as of the Effective Date which is identified in
Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure Schedule
and any extensions, renewals, refundings or replacements thereof;
provided, that any such extension, renewal, refunding or replacement
is in an aggregate principal amount not greater than the principal
amount of, and is on terms no less favorable to the obligor thereof
than the terms of, the Indebtedness so extended, renewed, refunded
or replaced; and
(ii) in respect of the Senior Notes in an aggregate principal
amount not to exceed $125,000,000, and interest thereon;
SUBPART 2.2.3. Clause (c) of Section 7.2.3 ("Liens") of the Credit
Agreement is hereby amended in its entirety to read as follows:
(c) Liens identified in Item 7.2.3(c) ("Ongoing Liens") of the
Disclosure Schedule and granted prior to the Effective Date to secure the
payment of Indebtedness of the type permitted and described in
clause (c)(i) of Section 7.2.2;
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SUBPART 2.2.4. Clause (j) of Section 7.2.5 ("Investments") of the Credit
Agreement is hereby amended in its entirety to read as follows:
(j) Investments by the U.S. Borrower in (i) the U.K. Subsidiary
and/or the Guernsey Subsidiary in an aggregate amount not to exceed
$30,000,000 and (ii) until September 30, 1996, the Receivables Entity in
an aggregate amount not to exceed $6,000,000;
SUBPART 2.2.5. The last sentence of Section 7.2.5 ("Investments") of the
Credit Agreement is hereby amended in its entirety to read as follows:
Notwithstanding the foregoing, neither the U.S. Borrower nor any
Subsidiary of the U.S. Borrower shall make any Investment in any
Restricted Subsidiary so long as such Subsidiary is a Restricted
Subsidiary; provided, that if a Subsidiary of the U.S. Borrower becomes a
"Restricted Subsidiary" pursuant to clause (c) of the definition thereof,
then Investments in such Restricted Subsidiary which were made or
permitted under this Section 7.2.5 prior to such Subsidiary becoming a
Restricted Subsidiary shall continue to be permitted under this Section
and such Investments shall not constitute an Event of Default.
SUBPART 2.2.6. Section 7.2.7 ("Capital Expenditures, etc.") of the
Credit Agreement is hereby amended by deleting the amount "$19,000,000" set
forth opposite the Fiscal Year "1997" appearing in the first sentence of such
Section and inserting in lieu thereof the amount "$21,000,000".
SUBPART 2.2.7. Section 7.2.11 ("Asset Dispositions, etc.") of the Credit
Agreement is hereby amended by (i) inserting the word "or" at the end of
clause (d) of such Section, (ii) deleting clause (f) in its entirety and (iii)
deleting the semicolon (";") and the word "or" at the end of clause (e) of
such Section and inserting a period (".") in lieu thereof.
SUBPART 2.2.8. Section 7.2.12 ("Modification of Certain Agreements") of
the Credit Agreement is hereby amended in its entirety to read as follows:
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SECTION 7.2.12. Modification of Certain Agreements. The U.S.
Borrower will not, without the prior consent of the Agents, consent to
any amendment, supplement or other modification of any of the terms or
provisions contained in, or applicable to, the Stock Purchase Agreement,
the Seller Note, the Tax Indemnification Agreement, the Senior Note
Indenture, the Senior Notes or any document or instrument evidencing or
applicable to any Subordinated Debt, other than any amendment, supplement
or other modification which extends the date or reduces the amount of any
required repayment or redemption.
SUBPART 2.3. Amendment to Article VIII. Section 8.1.5 ("Default on
other Indebtedness") of the Credit Agreement is hereby amended in its entirety
to read as follows:
SECTION 8.1.5. Default on Other Indebtedness. (a) An "Event of
Default" (as defined in the Senior Note Indenture) shall have occurred
and be continuing under the Senior Note Indenture or (b) a default shall
occur in the payment when due (subject to any applicable grace period),
whether by acceleration or otherwise, of any Indebtedness (other than
Indebtedness described in Section 8.1.1) of the U.S. Borrower or any of
its Subsidiaries or any other Obligor having a principal amount,
individually or in the aggregate, in excess of $1,000,000, or a default
shall occur in the performance or observance of any obligation or
condition with respect to such Indebtedness if the effect of such default
is to accelerate the maturity of any such Indebtedness or such default
shall continue unremedied for any applicable period of time sufficient to
permit the holder or holders of such Indebtedness, or any trustee or
agent for such holders, to cause such Indebtedness to become due and
payable prior to its expressed maturity.
SUBPART 2.4. Amendment to the U.S. Borrower Security Agreement. Clause
(c) of Section 2.1 of the U.S. Borrower Security Agreement is hereby amended
in its entirety to read as follows:
(c) all accounts, contracts, contract rights, chattel paper,
documents, instruments, and general intangibles of the Grantor, whether
or not arising out of or in connection with the sale or lease of goods or
the rendering of
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services, and all rights of the Grantor now or hereafter existing in and
to all security agreements, guaranties, leases and other contracts
securing or otherwise relating to any such accounts, contracts, contract
rights, chattel paper, documents, instruments, and general intangibles
(any and all such accounts, contracts, contract rights, chattel paper,
documents, instruments, and general intangibles being the "Receivables",
and any and all such security agreements, guaranties, leases and other
contracts being the "Related Contracts");
SUBPART 2.5. Conforming Amendments to Exhibit F to Credit Agreement.
Exhibit F (Form of Borrowing Base Certificate) to the Credit Agreement is
hereby amended in its entirety to read as set forth in Annex III hereto.
SUBPART 2.6. Covenant Compliance and Rates and Fees in respect of Loans
and Letters of Credit outstanding or issued prior to the Fourth Amendment
Effective Date. Notwithstanding anything in the foregoing to the contrary,
any determination of applicable interest rates and fees in respect of Loans
and Letters of Credit outstanding or issued under the Credit Agreement prior
to the Fourth Amendment Effective Date, and any determination of compliance
with the provisions of the Credit Agreement (including with the financial
covenants set forth in Section 7.2.4 of the Credit Agreement) for any period
prior to the Fourth Amendment Effective Date, shall be made pursuant to the
terms of the Credit Agreement as in effect immediately prior to the Fourth
Amendment Effective Date and the defined terms applicable to any such
determination shall have the meanings provided in the Credit Agreement as in
effect immediately prior to the Fourth Amendment Effective Date.
PART III
CONDITIONS TO EFFECTIVENESS; EXPIRATION
SUBPART 3.1. Fourth Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective
on the date (the "Fourth Amendment Effective Date") when each of the
conditions set forth in this Subpart 3.1 shall have been fulfilled to the
satisfaction of the Administrative Agent and each of the Lenders; provided,
that,
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such date shall occur prior to the termination date set forth in Subpart 3.2
(whereupon this Amendment shall be known and may be referred to as "Amendment
No. 4").
SUBPART 3.1.1. Execution of Counterparts. The Administrative Agent
shall have received counterparts of this Amendment, duly executed and
delivered on behalf of the U.S. Borrower, each Agent and each of the Lenders.
SUBPART 3.1.2. Affirmation and Consent. (a) The Administrative Agent
shall have received, with counterparts for each Lender, a duly executed copy
of the Obligor Affirmation and Consent to this Amendment, substantially in the
form of Annex I hereto and duly executed and delivered by each of the Obligors
parties thereto.
(b) The Administrative Agent shall have received, with counterparts for
each Lender, a duly executed copy of the Shareholder Affirmation and Consent
to this Amendment, substantially in the form of Annex II hereto and duly
executed and delivered by each of the Initial Shareholders parties thereto.
SUBPART 3.1.3. Resolutions, etc. The Administrative Agent shall have
received from each of the U.S. Borrower and each other Obligor a certificate,
dated the Fourth Amendment Effective Date, of its Secretary or Assistant
Secretary as to
(a) resolutions of its Board of Directors then in full force and
effect authorizing the execution, delivery and performance of this
Amendment and each other Loan Document to be executed by it; and
(b) the incumbency and signatures of those of its officers
authorized to act with respect to this Amendment, and each other Loan
Document to be executed by it,
upon which certificate each Lender may conclusively rely until it shall have
received a further certificate of the Secretary or Assistant Secretary of such
Obligor cancelling or amending such prior certificate.
SUBPART 3.1.4. Termination of the Receivables Purchase Facility, Payment
of all Obligations thereunder and Release of
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Liens. The Administrative Agent shall have received evidence satisfactory to
it that the Receivables Purchase Agreement and each of the other Receivables
Purchase Facility Documents have been terminated by the parties thereto and
are of no further force or effect, all commitments (if any) thereunder or in
connection therewith have been terminated, all fees, costs, and amounts
(whether in respect of principal, interest, fees or premium) payable under or
in connection with the Receivables Purchase Facility Documents have been paid
in full, and all Liens securing payment of any such fees, costs or amounts
have been released and the Administrative Agent shall have received all
Uniform Commercial Code Form UCC-3 termination statements or other instruments
as may be suitable or appropriate in connection therewith. In furtherance of
(but not in limitation of) the foregoing, the Administrative Agent shall have
received (a) a statement as to the aggregate amount owing under the
Receivables Purchase Facility Documents, (b) copies of documents satisfactory
to the Administrative Agent, executed on behalf of the requisite parties
reconveying the receivables sold under the Receivables Purchase Facility
Documents to the Receivables Entity and releasing all right, title and
interests in such receivables together with executed releases of all financing
statements filed with respect thereto (the "Subject Documents"), (c) a letter
from the Receivables Agent under the Receivables Purchase Facility Documents
to the effect that upon payment of the outstanding balance under the
Receivables Purchase Facility Documents, the Subject Documents will be
released to the Administrative Agent and may be recorded, (d) executed
documents of transfer satisfactory to the Administrative Agent conveying all
receivables from the Receivables Entity to the U.S. Borrower free and clear of
all Liens, together with executed releases of all financing statements filed
by the Receivables Entity with respect to such receivables, and (e) evidence
acceptable to the Administrative Agent that all commitments (if any) under the
Receivables Purchase Facility Documents will be terminated upon payment of the
outstanding balance under the Receivables Purchase Facility Documents.
SUBPART 3.1.5. Material Adverse Change. Since June 30, 1995, there
shall have been no material adverse change in the financial condition,
operations, assets, business, properties or prospects of the U.S. Borrower or
the U.S. Borrower and its Subsidiaries, taken as a whole.
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SUBPART 3.1.6. Amendments to Mortgages. The Administrative Agent shall
have received counterparts of all amendments to Mortgages previously delivered
pursuant to Section 5.1.14 of the Credit Agreement (as such Mortgages may have
been amended or otherwise modified prior to the Fourth Amendment Effective
Date), dated as of (or a date reasonably near to) the Fourth Amendment
Effective Date, duly executed by the appropriate Obligor, each such amendment
(together in each case with an endorsement to the applicable title insurance
policy) in form and substance satisfactory to the Administrative Agent, as the
Administrative Agent may require.
SUBPART 3.1.7. Opinions of Counsel. The Administrative Agent shall have
received such opinions, each dated the Fourth Amendment Effective Date, in
form and substance and from counsel satisfactory to, and as may be required
by, the Administrative Agent and each of the Lenders.
SUBPART 3.1.8. Closing Fees, Expenses, etc. The Administrative Agent
shall have received for its own account, or for the account of each Agent and
each Lender, as the case may be, all fees, costs and expenses due and payable
as of the Fourth Amendment Effective Date (including pursuant to Sections 3.3
and 10.3 of the Credit Agreement).
SUBPART 3.1.9. Legal Details, etc. All documents executed or submitted
pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its
counsel shall have received all information and such counterpart originals or
such certified or other copies or such materials as the Administrative Agent
or its counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
SUBPART 3.2. Expiration. If the Fourth Amendment Effective Date shall
not have occurred on or prior to September 2, 1996, the agreements of the
parties hereto contained in this Amendment shall terminate effective
immediately on such date and without any further action.
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PART IV
MISCELLANEOUS; REPRESENTATIONS;
GRANT OF ADDITIONAL SECURITY
SUBPART 4.1. Cross-References. References in this Amendment to any Part
or Subpart are, unless otherwise specified or otherwise required by the
context, to such Part or Subpart of this Amendment.
SUBPART 4.2. Loan Document Pursuant to Credit Agreement. This Amendment
is a Loan Document executed pursuant to the Credit Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Credit Agreement (and, following the Fourth Amendment
Effective Date, the Amended Credit Agreement).
SUBPART 4.3. Full Force and Effect; Limited Amendment. Except as
expressly amended hereby, all of the representations, warranties, terms,
covenants, conditions and other provisions of the Credit Agreement and the
other Loan Documents shall remain unamended and unwaived and shall continue to
be, and shall remain, in full force and effect in accordance with their
respective terms. The amendments set forth herein shall be limited precisely
as provided for herein to the provisions expressly amended herein and shall
not be deemed to be an amendment to, waiver of, consent to or modification of
any other term or provision of the Credit Agreement, any other Loan Document
referred to therein or herein or of any transaction or further or future
action on the part of the U.S. Borrower or any other Obligor which would
require the consent of the Lenders under the Credit Agreement or any of the
other Loan Documents.
SUBPART 4.4. Payment of Fees and Expenses. The U.S. Borrower hereby
agrees to pay and reimburse the Administrative Agent for all of its reasonable
fees and expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and related documents, including all
reasonable fees and disbursements of counsel to the Administrative Agent.
SUBPART 4.5. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
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SUBPART 4.6. Counterparts. This Amendment may be executed by the
parties hereto in several counterparts, each of which when executed and
delivered shall be deemed to be an original and all of which shall constitute
together but one and the same agreement.
SUBPART 4.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
SUBPART 4.8. Compliance with Warranties, No Default, etc. Both before
and after giving effect to the occurrence of the Fourth Amendment Effective
Date and the amendments to the Credit Agreement set forth above, the U.S.
Borrower represents and warrants to the Agents and the Lenders that the
following statements are true and correct:
(a) the representations and warranties set forth in Article VI
(excluding, however, those contained in Section 6.7 and clause (c) of
Section 6.11) of the Credit Agreement and in each other Loan Document
(including the U.S. Borrower Security Agreement) are true and correct in
all material respects with the same effect as if then made (unless stated
to relate solely to an earlier date, in which case such representations
and warranties were true and correct as of such earlier date);
(b) except as disclosed by the U.S. Borrower to the Administrative
Agent and the Lenders pursuant to Section 6.7 of the Credit Agreement and
clause (c) of Section 6.11 of the Credit Agreement,
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge of the U.S. Borrower, threatened against the U.S. Borrower
or any of its Subsidiaries which is reasonably likely to materially
adversely affect the U.S. Borrower's consolidated business,
operations, assets, revenues, properties or prospects or which
purports to affect the legality, validity or enforceability of this
Amendment, the Amended Credit Agreement or any other Loan Document;
and
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(ii) no development has occurred in any labor controversy,
litigation, arbitration or governmental investigation or proceeding
disclosed pursuant to Section 6.7 of the Credit Agreement or
clause (c) of Section 6.11 of the Credit Agreement which is
reasonably likely to materially adversely affect the consolidated
businesses, operations, assets, revenues, properties or prospects of
the U.S. Borrower and its Subsidiaries; and
(c) no Default shall have then occurred and be continuing.
SUBPART 4.9. Additional General Representations. In order to induce the
Lenders and the Agents to enter into this Amendment, the U.S. Borrower hereby
additionally represents and warrants as follows:
(a) the execution and delivery of this Amendment and the performance
by the U.S. Borrower, each of its Subsidiaries (including AAFH) and each
other Obligor of each of their respective obligations hereunder, under
each other Loan Document, under the Credit Agreement as amended hereby
and, upon the occurrence of the Fourth Amendment Effective Date, under
the Amended Credit Agreement are within such Person's corporate powers,
have been duly authorized by all necessary corporate action, have
received all necessary governmental approval (if any shall be required),
and do not (i) contravene such Person's Organic Documents,
(ii) contravene any contractual restriction, law or governmental
regulation or court decree or order binding on or affecting such Person
or (iii) result in, or require the creation or imposition of, any Lien on
any of such Person's properties (other than pursuant to a Loan Document);
and
(b) this Amendment, each other Loan Document, the Credit Agreement
as amended hereby and, upon the occurrence of the Fourth Amendment
Effective Date, the Amended Credit Agreement are the legal, valid and
binding obligations of the U.S. Borrower, each of its Subsidiaries
(including AAFH) and each other Obligor enforceable in accordance with
their respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization
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or similar laws affecting creditors' rights generally and by principles
of equity).
SUBPART 4.10. Grant of Additional Security. In order to induce the
Agents and the Lenders to enter into this Amendment and thereby, among other
things, increase the Revolving Loan Commitment Amount and the Letter of Credit
Commitment Amount and provide for the inclusion of "Eligible Accounts" in the
computation of the "Borrowing Base Amount", the U.S. Borrower hereby assigns
and pledges to the Administrative Agent for its benefit and the ratable
benefit of each of the Lenders and the Issuers, and hereby grants to the
Administrative Agent, for its benefit and the ratable benefit of each of the
Lenders and the Issuers, a security interest in all of the following, whether
now or hereafter existing or acquired, and in addition to (and in no way in
limitation of) any and all of the other "Collateral" under (and as such term
is defined in) the U.S. Borrower Security Agreement, all accounts, contracts,
contract rights, chattel paper, documents, instruments, and general
intangibles of the U.S. Borrower, whether or not arising out of or in
connection with the sale or lease of goods or the rendering of services, and
all rights of the U.S. Borrower now or hereafter existing in and to all
security agreements, guaranties, leases and other contracts securing or
otherwise relating to any such accounts, contracts, contract rights, chattel
paper, documents, instruments, and general intangibles.
SUBPART 4.11. Extension of Liens. In addition to, and in no way in
limitation of, the forgoing Subpart 4.10, the U.S. Borrower hereby extends all
Liens currently securing the Obligations until the same have been fully paid,
and all such Liens are hereby ratified and confirmed. The U.S. Borrower
hereby acknowledges that none of the Liens or other rights securing the
payment of the Obligations are released, diminished, or affected hereby, and
the same are recognized to be valid and subsisting.
SUBPART 4.12. Representations and Warranties as to Additional Security.
In furtherance of the foregoing Subparts 4.10 and 4.11, the U.S. Borrower
hereby represents and warrants to the Agents and the Lenders that the
following statements are true:
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<PAGE>
(a) the representations and warranties made by the U.S. Borrower as
Grantor under the U.S. Borrower Security Agreement (including after
giving effect to the amendment thereto pursuant to Subpart 2.4) are true
and correct as of the date hereof;
(b) the place(s) of business and chief executive office of the U.S.
Borrower and the office(s) where the U.S. Borrower keeps its records
concerning the Receivables are located at the address set forth below the
name of the U.S. Borrower on the signature page hereof; and
(c) the U.S. Borrower Security Agreement, together with the grant of
the security interest pursuant to the foregoing Subpart 4.10 and the
continuance of the UCC-1 Financing Statements filed in the jurisdictions
set forth on Schedule I hereto (each of such financing statements is in
appropriate form and has been duly filed in all appropriate filing
offices), creates a valid and perfected first priority security interest
in all "Collateral" under (and as such term is defined in) the
U.S. Borrower Security Agreement (including after giving effect to the
amendment thereto pursuant to Subpart 2.4) of the U.S. Borrower, securing
the payment of the Obligations, and all filings and other actions
necessary or reasonably desirable to perfect and protect such security
interest have been duly taken.
SUBPART 4.13. Adjusted Percentages. Each of the Lenders party hereto
hereby acknowledges and agrees that upon the occurrence of the Fourth
Amendment Effective Date, such Lender's Percentage for purposes of the Amended
Credit Agreement shall be as set forth opposite its signature hereto, as such
percentage may be amended from time to time hereafter, including pursuant to
Lender Assignment Agreement(s) executed by such Lender and its Assignee
Lender(s) and delivered pursuant to Section 10.11 of the Amended Credit
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC. (formerly known
as
SnyderGeneral Corporation)
By /s/BARTON BAILEY
Title: Vice President
THE BANK OF NOVA SCOTIA, as
Administrative Agent and
as a Managing Agent
By /s/AUTHORIZED SIGNATURE
Title: Unit Head
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW
YORK BRANCH, as a Managing Agent
By /s/AUTHORIZED SIGNATURE
Title:
LENDERS:
Revolving Loan Commitment: THE BANK OF NOVA SCOTIA
30.58720932%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
16.20930230% Title: Unit Head
Revolving Loan Commitment: BANK BUMIPUTRA MALAYSIA BERHAD,
NEW
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<PAGE>
15.66720930% YORK BRANCH
Term-A Loan Commitment:
16.20930233% By /s/AUTHORIZED SIGNATURE
Title:
Revolving Loan Commitment: BANK OF AMERICA NATIONAL TRUST AND
21.18744186% SAVINGS ASSOCIATION
Term-A Loan Commitment:
13.44186047% By /s/AUTHORIZED SIGNATURE
Title:
Revolving Loan Commitment: CITICORP USA, INC.
8.13953488%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
5.53488373% Title:
Revolving Loan Commitment: THE LONG-TERM CREDIT BANK OF JAPAN,
8.13953488% LIMITED NEW YORK BRANCH
Term-A Loan Commitment:
5.53488373% By /s/JAY SHANKAR
Title: Vice President
Revolving Loan Commitment: SOCIETE GENERALE, SOUTHWEST AGENCY
8.13953488%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
5.53488373% Title:
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<PAGE>
Revolving Loan Commitment: COMERICA BANK
8.13953488%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
5.53488373% Title
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<PAGE>
Revolving Loan Commitment: RESTRUCTURED OBLIGATIONS BACKED BY
0.00000000% SENIOR ASSETS B.V.
Term-A Loan Commitment: By Chancellor Senior Secured
12.00000000% Management, Inc., as
Portfolio Advisor
By /s/GREGORY L. SMITH
Title: Vice President
Revolving Loan Commitment: CRESCENT/MACH I PARTNERS, L.P.
0.00000000%
By TCW Asset Management Company,
Term-A Loan Commitment: its Investment Manager
9.33333333%
By /s/AUTHORIZED SIGNATURE
Title:
Revolving Loan Commitment: CERES FINANCE LTD.
0.00000000%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
7.16000000% Title: Director
Revolving Loan Commitment: STRATA FUNDING LTD.
0.00000000%
Term-A Loan Commitment: By /s/AUTHORIZED SIGNATURE
3.50666667% Title: Director
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<PAGE>
Exhibit 10.35
[EXECUTION COPY]
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT, dated as of August 29, 1997 (this "Amendment"), to
the Credit Agreement referred to below is entered into among AAF-McQUAY INC.
(formerly known as SnyderGeneral Corporation), a Delaware corporation (the "U.S.
Borrower"), the Lenders parties hereto, THE BANK OF NOVA SCOTIA ("Scotiabank")
and BANK BUMIPUTRA MALAYSIA BERHAD, NEW YORK BRANCH as the managing agents
(collectively referred to as the "Managing Agents") for the Lenders, and
Scotiabank as the administrative agent (the "Administrative Agent") for the
Lenders.
W I T N E S S E T H:
WHEREAS, the U.S. Borrower, the Lenders and the Agents have entered into
the Credit Agreement, dated as of July 21, 1994 (as amended or otherwise
modified prior to the date hereof, the "Existing Credit Agreement");
WHEREAS, the U.S. Borrower has requested in a letter dated August 15, 1997,
to the Administrative Agent that the Revolving Loan Commitment Amount be
permanently reduced on the Fifth Amendment Effective Date from $100,000,000 to
$80,000,000 (the "Revolving Loan Commitment Amount Reduction");
WHEREAS, the U.S. Borrower has requested the Lenders to amend the Existing
Credit Agreement in certain respects as set forth below; and
WHEREAS, the Lenders and the Agents are willing, on and subject to the
terms and conditions set forth below, to amend the Existing Credit Agreement as
provided below (the Existing Credit Agreement, as amended pursuant to the terms
of this Amendment, being referred to as the "Credit Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the U.S. Borrower and the Lenders hereby agree as follows.
<PAGE>
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. The following terms (whether or not
underscored) when used in this Amendment shall have the following meanings (such
meanings to be equally applicable to the singular and plural forms thereof):
"Administrative Agent" is defined in the preamble.
"Amendment" is defined in the preamble.
"Amendment No. 5" is defined in Subpart 3.1.
"Credit Agreement" is defined in the third recital.
"Existing Credit Agreement" is defined in the first recital.
"Fifth Amendment Effective Date" is defined in Subpart 3.1.
"Managing Agents" is defined in the preamble.
"Scotiabank" is defined in preamble.
"U.S. Borrower" is defined in the preamble.
SUBPART 1.2. Other Definitions. Terms for which meanings are provided in
the Existing Credit Agreement are, unless otherwise defined herein or the
context otherwise requires, used in this Amendment with such meanings.
PART II
AMENDMENTS TO THE
EXISTING CREDIT AGREEMENT;
BARRY BLOWER SALE
Effective on (and subject to the occurrence of) the Fifth Amendment
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Part II and the date for the consummation of the sale of the
Borrower's Barry Blower business
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<PAGE>
unit is extended on the terms set forth in Subpart 2.3; except as so amended or
modified by this Amendment, the Existing Credit Agreement and May, 1997 Consent
shall continue in full force and effect.
SUBPART 2.1. Amendments to Article I. Article I of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.1.1 and 2.1.2.
SUBPART 2.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in such Section in the
appropriate alphabetical order:
"Computer Capital Expenditures" means Capital Expenditures made by the
U.S. Borrower or its Subsidiaries for the purchase of computer hardware,
software and consulting services and related expenses in connection with
the upgrade of its computer systems.
"Fifth Amendment" means the Fifth Amendment to this Agreement, dated
as of August 29, 1997, among the U.S. Borrower and the Lenders parties
thereto.
"Fifth Amendment Effective Date" is defined in Subpart 3.1 of the
Fifth Amendment.
"May, 1997 Consent" means the Consent and Limited Waiver relating to
(inter alia), the sale of the Borrower's Barry Blower business unit, as
previously executed and delivered by the Borrower and the Lenders.
SUBPART 2.1.2. Section 1.1 of the Existing Credit Agreement is hereby
further amended as follows:
(a) The definition of "Applicable Base Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable Base Rate Margin" means, with respect to any Revolving
Loan, Swing Line Loan or Term-A Loan made or maintained as a Base Rate Loan
on or after the Fifth Amendment Effective Date, a per annum rate of
interest determined by reference to the Leverage Ratio and Interest
Coverage Ratio, in each case as indicated in the Compliance
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Certificate most recently delivered pursuant to clause (c) of Section 7.1.1,
equal to:
(a) 0% if the Leverage Ratio is less than 3.0:1 and the Interest
Coverage Ratio is greater than 4.0:1;
(b) .25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing clause
(a) does not apply;
(c) .375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) .50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a), (b) and (c) do not apply;
(e) .625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply;
(f) .875% if the Leverage Ratio is less than 4.50:1 and the
Interest Coverage Ratio is greater than 2.50:1 and the foregoing
clauses (a), (b), (c), (d) and (e) do not apply; and
(g) 1.00% if the Leverage Ratio is greater than or equal to
4.50:1 or the Interest Coverage Ratio is less than or equal to 2.50:1;
provided, that the Applicable Base Rate Margin shall only be decreased from
the then existing Applicable Base Rate Margin if each of the Interest
Coverage Ratio and Leverage Ratio (as reflected in the most recently
delivered Compliance Certificate) is contained within the ranges set forth
in the same clause (a), (b), (c), (d), (e) or (f) above; provided further,
that in the event the U.S. Borrower fails to deliver a Compliance
Certificate within 45 days after the end of any Fiscal Quarter as required
pursuant to clause (c) of Section 7.1.1, the Applicable Base Rate Margin
from and
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<PAGE>
including the 46th day after the end of such Fiscal Quarter to but not
including the date the U.S. Borrower delivers to the Administrative Agent a
Compliance Certificate shall conclusively be equal to 1.0%.
(b) The definition of "Applicable L/C Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable L/C Rate Margin" means, with respect to any Letter of
Credit, on or at any time after the Fifth Amendment Effective Date, a per
annum rate determined by reference to the Leverage Ratio and Interest
Coverage Ratio, in each case as indicated in the Compliance Certificate
most recently delivered pursuant to clause (c) of Section 7.1.1, equal to:
(a) 1.0% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
(b) 1.25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing clause
(a) does not apply;
(c) 1.375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
(d) 1.50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a), (b) and (c) do not apply;
(e) 1.625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply;
(f) 1.875% if the Leverage Ratio is less than 4.50:1 and the
Interest Coverage Ratio is greater than 2.50:1 and the foregoing
clauses (a), (b), (c), (d) and (e) do not apply; and
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<PAGE>
(g) 2.125% if the Leverage Ratio is greater than or equal to
4.50:1 or the Interest Coverage Ratio is less than or equal to 2.50:1;
provided, that the Applicable L/C Rate Margin shall only be decreased from
the then existing Applicable L/C Rate Margin if each of the Interest
Coverage Ratio and Leverage Ratio (as reflected in the most recently
delivered Compliance Certificate) is contained within the ranges set forth
in the same clause (a), (b), (c), (d), (e) or (f) above; provided further,
that in the event the U.S. Borrower fails to deliver a Compliance
Certificate within 45 days after the end of any Fiscal Quarter as required
pursuant to clause (c) of Section 7.1.1, the Applicable L/C Rate Margin
from and including the 46th day after the end of such Fiscal Quarter to but
not including the date the U.S. Borrower delivers to the Administrative
Agent a Compliance Certificate shall conclusively be equal to 2.125%.
(c) The definition of "Applicable LIBO Rate Margin" is hereby amended in
its entirety to read as follows:
"Applicable LIBO Rate Margin" means, with respect to any Revolving
Loan, Swing Line Loan or Term-A Loan made or maintained as a LIBO Rate Loan
on or after the Fifth Amendment Effective Date, a per annum rate of
interest determined by reference to the Leverage Ratio and Interest
Coverage Ratio, in each case as indicated in the Compliance Certificate
most recently delivered pursuant to clause (c) of Section 7.1.1, equal to:
(a) 1.0% if the Leverage Ratio is less than 3.0:1 and the
Interest Coverage Ratio is greater than 4.0:1;
(b) 1.25% if the Leverage Ratio is less than 3.5:1 and the
Interest Coverage Ratio is greater than 3.5:1 and the foregoing clause
(a) does not apply;
(c) 1.375% if the Leverage Ratio is less than 3.75:1 and the
Interest Coverage Ratio is greater than 3.25:1 and the foregoing
clauses (a) and (b) do not apply;
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<PAGE>
(d) 1.50% if the Leverage Ratio is less than 4.0:1 and the
Interest Coverage Ratio is greater than 3.0:1 and the foregoing
clauses (a) ,(b) and (c) do not apply;
(e) 1.625% if the Leverage Ratio is less than 4.25:1 and the
Interest Coverage Ratio is greater than 2.75:1 and the foregoing
clauses (a), (b), (c) and (d) do not apply;
(f) 1.875% if the Leverage Ratio is less than 4.50:1 and the
Interest Coverage Ratio is greater than 2.50:1 and the foregoing
clauses (a), (b), (c), (d) and (e) do not apply; and
(g) 2.125% if the Leverage Ratio is greater than or equal to
4.50:1 or the Interest Coverage Ratio is less than or equal to 2.50:1;
provided, that (x) the Applicable LIBO Rate Margin shall not apply to Swing
Line Loans and (y) the Applicable LIBO Rate Margin shall only be decreased
from the then existing Applicable LIBO Rate Margin if each of the Interest
Coverage Ratio and Leverage Ratio (as reflected in the most recently
delivered Compliance Certificate) is contained within the ranges set forth
in the same clause (a), (b), (c), (d), (e) or (f) above; provided further,
that in the event the U.S. Borrower fails to deliver a Compliance
Certificate within 45 days after the end of any Fiscal Quarter as required
pursuant to clause (c) of Section 7.1.1, the Applicable LIBO Rate Margin
from and including the 46th day after the end of such Fiscal Quarter to but
not including the date the U.S. Borrower delivers to the Administrative
Agent a Compliance Certificate shall conclusively be equal to 2.125%.
(d) Clause (i) of the proviso contained in the definition of "EBITDA" is
hereby amended in its entirety to read as follows:
"(i) exclude non-cash charges associated with the recording of
expenses in connection with an Approved Equity Compensation Plan (it being
agreed that any cash expenses associated with an Approved Equity
Compensation Plan shall reduce EBITDA Dollar for Dollar on the date
incurred)"
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<PAGE>
(e) Clause (b)(iii) of the definition of "Fixed Charge Coverage Ratio" is
hereby amended in its entirety to read as follows:
"(iii) Base Capital Expenditures (other than Computer Capital
Expenditures, in an amount not to exceed $10,000,000 over the term of this
Agreement)"
(f) Clause (b)(iii) of the definition of "Unconsolidated Fixed Charge
Coverage Ratio" is hereby amended in its entirety to read as follows:
"(iii) Capital Expenditures of the U.S. Borrower and its U.S.
Subsidiaries (exclusive of (i) Capital Expenditures made by Foreign
Subsidiaries and (ii) Computer Capital Expenditures in an amount not to
exceed $10,000,000 over the term of this Agreement) made during such
period"
SUBPART 2.2. Amendments to Article VII. Article VII of the Existing
Credit Agreement is hereby amended in accordance with Subparts 2.2.1 through
2.2.3.
SUBPART 2.2.1. Clauses (b), (d) and (e) of Section 7.2.4 of the Existing
Credit Agreement are hereby amended in their entirety to read as follows:
(b) Leverage Ratio. The U.S. Borrower will not permit the Leverage
Ratio as of the end of any Fiscal Quarter during any period (or such Fiscal
Quarter) set forth below to be greater than the ratio set forth opposite
such period (or such Fiscal Quarter):
Maximum Leverage
Period Ratio
------- ----------------
03/29/96 through
(and including)
09/27/96 4.25:1.0
12/27/96 through (and
including) 03/28/97 4.00:1.0
06/27/97 4.50:1.0
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<PAGE>
09/27/97 through (and
including) 12/27/97 4.75:1.0
03/28/98 4.50:1.0
06/27/98 4.25:1.0
09/26/98 4.00:1.0
12/26/98 3.60:1.0
03/27/99 3.50:1.0
06/30/99 3.25:1.0
09/30/99 and each
Fiscal Quarter
thereafter 3.00:1.0
(d) Interest Coverage Ratio. The U.S. Borrower will not permit the
Interest Coverage Ratio as of the end of any Fiscal Quarter during any
period (or such Fiscal Quarter) set forth below to be less than the ratio
set forth opposite such period (or such Fiscal Quarter):
Interest
Coverage
Period Ratio
-------- ---------
03/29/96 through (and
including) 06/28/96 2.50:1.0
09/27/96 2.75:1.0
12/27/96 through (and
including) 03/28/97 3.00:1.0
06/27/97 2.50:1.0
09/27/97 through (and
including) 12/27/97 2.35:1.0
03/28/98 through (and
including) 06/27/98 2.50:1.0
09/26/98 2.60:1.0
12/26/98 2.75:1.0
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<PAGE>
03/27/99 through (and
including) 06/30/99 3.00:1.0
09/30/99 and each
Fiscal Quarter
thereafter 3.50:1.0
(e) Fixed Charge Coverage Ratio. The U.S. Borrower will not permit
the Fixed Charge Coverage Ratio as of the end of any Fiscal Quarter during
any period (or such Fiscal Quarter) set forth below to be less than the
ratio set forth opposite such period (or such Fiscal Quarter):
Fixed Charge
Coverage
Period Quarter Ratio
-------------- ------------
Effective Date through
(and including)
06/27/97 1.10:1.0
09/27/97 through (and
including) 12/27/97 0.95:1
03/28/98 1.00:1
06/27/98 through (and
including) 12/26/98 1.05:1
03/27/99 and each
Fiscal Quarter
thereafter 1.10:1
SUBPART 2.2.2. Clause (h) of Section 7.2.5 of the Existing Credit
Agreement is hereby amended by deleting the figure "$5,000,000" and inserting
the figure "$10,000,000" in its place.
SUBPART 2.2.3. Section 7.2.7 of the Existing Credit Agreement is hereby
amended by deleting the amount "$19,000,000" set forth opposite the Fiscal Year
"1998" and inserting the figure "$25,000,000" in its place.
SUBPART 2.3. Extension of Sale Date (Barry Blower Business Unit). The
parties hereto agree to the sale of the Borrower's Barry Blower business unit on
or prior to October 31, 1997
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<PAGE>
(instead of during the Fiscal Year 1997), provided that such sale is otherwise
consummated on the terms and conditions set forth in the May, 1997 Consent.
SUBPART 2.4. Covenant Compliance; Rates and Fees in respect of Loans and
Letters of Credit outstanding or issued prior to the Fifth Amendment Effective
Date. Notwithstanding anything in the foregoing to the contrary, any
determination of applicable interest rates and fees in respect of Loans and
Letters of Credit outstanding or issued under the Existing Credit Agreement
prior to the Fifth Amendment Effective Date, and any determination of compliance
with the provisions of the Existing Credit Agreement (including with the
financial covenants set forth in Section 7.2.4 of the Existing Credit Agreement)
for any period prior to the Fifth Amendment Effective Date, shall be made
pursuant to the terms of the Existing Credit Agreement as in effect immediately
prior to the Fifth Amendment Effective Date and the defined terms applicable to
any such determination shall have the meanings provided in the Existing Credit
Agreement as in effect immediately prior to the Fifth Amendment Effective Date.
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. Fifth Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective on
the date (the "Fifth Amendment Effective Date") when each of the conditions set
forth in this Subpart 3.1 shall have been fulfilled to the satisfaction of the
Administrative Agent (whereupon this Amendment shall be known and may be
referred to as "Amendment No. 5").
SUBPART 3.1.1. Execution of Counterparts. The Administrative Agent shall
have received counterparts of this Amendment, duly executed and delivered on
behalf of the U.S. Borrower and the Required Lenders.
SUBPART 3.1.2. Affirmation and Consent. The Administrative Agent shall
have received, with counterparts for each Lender, a duly executed copy of the
Obligor Affirmation and Consent to this Amendment, substantially in the form of
Annex I hereto and duly
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<PAGE>
executed and delivered by each of the Obligors other than the Borrower.
SUBPART 3.1.3. Resolutions, etc. The Administrative Agent shall have
received from each of McQuay-TPC Corp., a Delaware corporation ("McQuay-TPC"),
and TriState McQuay (formerly known as Thermal Products Company) ("TPC"), a
certificate, dated the Fifth Amendment Effective Date, of such Obligor's
Secretary or Assistant Secretary or the Secretary or Assistant Secretary of its
general partner, as the case may be, as to
(a) resolutions of its Board of Directors or partnership action, as
the case may be, then in full force and effect authorizing the execution,
delivery and performance of the Obligor Guaranty, the Obligor Security
Agreement and each other Loan Document to be executed by it; and
(b) the incumbency and signatures of those of its officers or the
officers of its general partner, as the case may be, authorized to act with
respect to the Obligor Guaranty, the Obligor Security Agreement and each
other Loan Document executed by it,
upon which certificate each Lender may conclusively rely until it shall have
received a further certificate of the Secretary or Assistant Secretary of such
Obligor or such Obligor's general partner, as the case may be, canceling or
amending such prior certificate.
SUBPART 3.1.4. U.S. Borrower Pledge Agreement. The Administrative Agent
shall have received, with counterparts for each Lender, a duly executed copy of
a supplement to the U.S. Borrower Pledge Agreement, dated on or prior to the
date hereof, duly executed and delivered by an Authorized Officer of the U.S.
Borrower, with a stock certificate evidencing all of the issued and outstanding
shares of capital stock of McQuay-TPC, which stock certificate shall be
accompanied by an undated stock power duly executed in blank; and the
Administrative Agent and its counsel shall be satisfied that
(a) the Lien granted to the Administrative Agent, for the benefit of
the Agents, the Issuers and the Lenders, in
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<PAGE>
all Pledged Shares is a first priority security interest; and
(b) no Lien exists on any Pledged Shares other than the Lien created
in favor of the Administrative Agent, for the benefit of the Agents, the
Issuers and the Lenders, pursuant to the U.S. Borrower Pledge Agreement.
SUBPART 3.1.5. Obligor Guaranty. The Administrative Agent shall have
received, with counterparts for each Lender, a supplement to the Obligor
Guaranty, in each case dated as of the Fifth Amendment Effective Date and duly
executed and delivered by an Authorized Officer of McQuay-TPC and TPC.
SUBPART 3.1.6. Security Agreements. The Administrative Agent shall have
received executed counterparts of a supplement to the Obligor Security
Agreement, in each case dated as of the Fifth Amendment Effective Date and duly
executed and delivered by an Authorized Officer of McQuay-TPC and TPC, together
with
(a) Uniform Commercial Code financing statements (Form UCC-1), naming
such Obligor, as the debtor and the Administrative Agent as the secured
party, or other similar instruments or documents, filed under the Uniform
Commercial Code of all jurisdictions as may be necessary or, in the opinion
of the Administrative Agent, desirable to perfect the security interest of
the Administrative Agent pursuant to such Obligor Security Agreement; and
(b) executed copies of proper Uniform Commercial Code Form UCC-3
termination statements, if any, necessary to release all Liens (other than
Liens permitted by clauses (c) and (e) of Section 7.2.3) and other rights
of any Person in any collateral described in the Obligor Security Agreement
previously granted by such Obligor.
SUBPART 3.1.7. Amendment Fees, Expenses, etc. The Administrative Agent
shall have received for its own account, or for the account of each Lender, as
the case may be,
(a) all fees, costs and expenses due and payable as of the Fifth
Amendment Effective Date (including pursuant to Section 10.3 of the
Existing Credit Agreement); and
-13-
<PAGE>
(b) an amendment fee in an amount equal to 10 basis points on the
amount of each Lender's Percentage of the Revolving Loan Commitment
multiplied by the Revolving Loan Commitment Amount (after giving effect to
the Revolving Loan Commitment Amount Reduction) and the outstanding
principal amount of Term Loans owing to such Lender, but payable only to
each Lender that has telecopied its executed signature page to this
Amendment to the Administrative Agent (Attn: Meredith Wedeking) at telecopy
number 212-225-5090 prior to 12:00 noon (New York time) on August 29, 1997.
SUBPART 3.1.8. Legal Details, etc. All documents executed or submitted
pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its counsel
shall have received all information and such counterpart originals or such
certified or other copies or such materials as the Administrative Agent or its
counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
PART IV
MISCELLANEOUS; REPRESENTATIONS
SUBPART 4.1. Cross-References. References in this Amendment to any Part
or Subpart are, unless otherwise specified or otherwise required by the context,
to such Part or Subpart of this Amendment.
SUBPART 4.2. Loan Document Pursuant to Existing Credit Agreement. This
Amendment is a Loan Document executed pursuant to the Existing Credit Agreement
and shall be construed, administered and applied in accordance with all of the
terms and provisions of the Existing Credit Agreement.
SUBPART 4.3. Full Force and Effect; Limited Amendment. Except as expressly
amended hereby, all of the representations, warranties, terms, covenants,
conditions and other provisions of the Existing Credit Agreement and the other
Loan Documents shall remain unamended and unwaived and shall continue to be, and
shall remain, in full force and effect in accordance with their respective
terms. The amendments set forth herein shall be
-14-
<PAGE>
limited precisely as provided for herein to the provisions expressly amended
herein and shall not be deemed to be an amendment to, waiver of, consent to or
modification of any other term or provision of the Existing Credit Agreement,
any other Loan Document referred to therein or herein or of any transaction or
further or future action on the part of the U.S. Borrower or any other Obligor
which would require the consent of the Lenders under the Existing Credit
Agreement or any of the other Loan Documents.
SUBPART 4.4. Payment of Fees and Expenses. The U.S. Borrower hereby
agrees to pay and reimburse the Administrative Agent for all of its reasonable
fees and expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and related documents, including all
reasonable fees and disbursements of counsel to the Administrative Agent.
SUBPART 4.5. Successors and Assigns. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
SUBPART 4.6. Counterparts. This Amendment may be executed by the parties
hereto in several counterparts, each of which when executed and delivered shall
be deemed to be an original and all of which shall constitute together but one
and the same agreement.
SUBPART 4.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
SUBPART 4.8. Compliance with Warranties, No Default, etc. After giving
effect to the occurrence of the Fifth Amendment Effective Date and the
amendments to the Existing Credit Agreement set forth above, the U.S. Borrower
represents and warrants to the Agents and the Lenders that the following
statements are true and correct:
(a) the representations and warranties set forth in Article VI
(excluding, however, those contained in Section 6.7 and clause (c) of
Section 6.11) of the Existing Credit Agreement and in each other Loan
Document are true and correct in all material respects with the same effect
as if
-15-
<PAGE>
then made (unless stated to relate solely to an earlier date, in which case such
representations and warranties were true and correct as of such earlier date);
(b) except as disclosed by the U.S. Borrower to the Administrative
Agent and the Lenders pursuant to Section 6.7 of the Existing Credit
Agreement and clause (c) of Section 6.11 of the Existing Credit Agreement,
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge of the U.S. Borrower, threatened against the U.S. Borrower
or any of its Subsidiaries which is reasonably likely to materially
adversely affect the U.S. Borrower's consolidated business,
operations, assets, revenues, properties or prospects or which
purports to affect the legality, validity or enforceability of this
Amendment, the Existing Credit Agreement or any other Loan Document;
and
(ii) no development has occurred in any labor controversy,
litigation, arbitration or governmental investigation or proceeding
disclosed pursuant to Section 6.7 of the Existing Credit Agreement or
clause (c) of Section 6.11 of the Existing Credit Agreement which is
reasonably likely to materially adversely affect the consolidated
businesses, operations, assets, revenues, properties or prospects of
the U.S. Borrower and its Subsidiaries; and
(c) no Default shall have then occurred and be continuing.
SUBPART 4.9. Additional General Representations. In order to induce the
Lenders and the Agents to enter into this Amendment, the U.S. Borrower hereby
additionally represents and warrants as follows:
(a) the execution and delivery of this Amendment and the performance
by the U.S. Borrower, each of its Subsidiaries and each other Obligor of
each of their respective obligations hereunder, under each other Loan
Document and under the Existing Credit Agreement as amended
-16-
<PAGE>
hereby are within such Person's corporate powers, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval (if any shall be required), and do not (i) contravene such Person's
Organic Documents, (ii) contravene any contractual restriction, law or
governmental regulation or court decree or order binding on or affecting such
Person or (iii) result in, or require the creation or imposition of, any Lien on
any of such Person's properties (other than pursuant to a Loan Document); and
(b) this Amendment, each other Loan Document and the Existing Credit
Agreement as amended hereby are the legal, valid and binding obligations of
the U.S. Borrower, each of its Subsidiaries and each other Obligor
enforceable in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally and by
principles of equity).
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By /s/ANDREW R. MORRISON
Title: Corporate Secretary &
CEO
LENDERS:
THE BANK OF NOVA SCOTIA
By/s/ J. ALAN EDWARDS
Title:
BANK BUMIPUTRA MALAYSIA BERHAD, NEW
YORK BRANCH
By /s/ABDUL NADIR MAHAMUND
Title: General Manager
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/AUTHORIZED SIGNATURE
Title: Vice President
-18-
<PAGE>
CITICORP USA, INC.
By /s/AUTHORIZED SIGNATURE
Title: Vice President
-19-
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By /s/SHUICHI TAJIMA
Title: Deputy General Manager
SOCIETE GENERALE, SOUTHWEST AGENCY
By /s/LOUIS P. LaVILLE, III
Title: Vice President
COMERICA BANK
By /s/AUTHORIZED SIGNATURE
Title: International Banking
Officer
-20-
<PAGE>
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS B.V.
By Chancellor Senior Secured
Management, Inc., as
Portfolio Advisor
By /s/REGINALD J. WOODARD
Title: Assistant Vice President
CRESCENT/MACH I PARTNERS, L.P.
By TCW Asset Management Company,
its Investment Manager
By /s/AUTHORIZED SIGNATURE
Title:
CERES FINANCE LTD.
By /s/AUTHORIZED SIGNATURE
Title: Director
STRATA FUNDING LTD.
By /s/AUTHORIZED SIGNATURE
Title: Director
-21-
<PAGE>
Exhibit 10.37
July 17, 1997
Mr. Barton L. Bailey
373 Broadview Lane
Annapolis, MD 21401
Dear Bart,
CONSULTING RELATIONSHIP
Following your separation from the Company, AAF-McQuay Inc. may be able to
utilize your services in the role of a specialized consultant.
On the basis that a minimum base requirement will be for 40 hours of service
during the month of August 1997, payment for that period will be $4,000.
Any additional requirements during August 1997, above the 40 hours, will be
compensated for at the rate of $100 per hour.
Requirements beyond the month of August 1997 will be identified, mutually
agreed in writing and compensated for at a rate of $100 per hour.
We trust that you will find the above proposal satisfactory and look forward
to a new relationship on the proposed terms.
Sincerely,
Joseph B. Hunter
<PAGE>
SEPARATION OF EMPLOYMENT AGREEMENT,
GENERAL RELEASE AND CONSULTING AGREEMENT
This Separation of Employment Agreement, General Release and Consulting
Agreement (herein "Agreement") is hereby entered into as of this 17th day of
July 1997 between AAF-McQuay Inc., its parents, subsidiaries, affiliates,
divisions, predecessors, purchasers, assigns, representatives and successors
(hereinafter collectively referred to as "the Company") and Barton L. Bailey
(hereinafter "Mr. Bailey"), who are collectively referred 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. Bailey'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:
Separation and Severance
a. The Company and Mr. Bailey agree that Mr. Bailey's employment with
the Company will terminate effective July 31, 1997. The Company
agrees that it will pay Mr. Bailey $169,110 as severance pay, in
twelve monthly payments of $14,092.50, less all lawful deductions for
FICA, Medicare, and Federal State and local taxes, the adequacy of
which is hereby acknowledged, commencing on September 1, 1997 and on
the 1st day of each consecutive month thereafter until August 1, 1998.
This Agreement terminates and supersedes the terms of the "Senior
Executive Severance Agreement" executed by Mr. Bailey and the Company
on April 26, 1994 including, but not limited to, the provision in
Paragraph 1(a)(i) of that Agreement requiring Mr. Bailey to seek
comparable employment opportunities over the twelve month period after
his termination of employment from the Company. The Company agrees
that in the even of the death of Mr. Bailey 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, without limitation,
any set-off, counterclaim, recoupment, defense or other right that the
Company may have against him or anyone else.
b. The Company agrees to provide Mr. Bailey his current level of health
care benefits, group life insurance and long term disability until
July 31, 1998 under the terms and conditions that applied to Mr. Bailey
<PAGE>
immediately prior to his separation of employment from the Company.
Mr. Bailey recognizes and agrees that for the 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 July 31,
1998. The Company further agrees to provide Mr. Bailey with
continuation coverage under its group health plan at Mr. Bailey's
expense until February 1, 1999, 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. Bailey on the same basis as is offered to other
retirees.
c. The Company will provide an outplacement service for a three month
period and will compensate Mr. Bailey for the cost of real estate
commissions on the sale of his principal residence.
d. The Company further agrees to retain Mr. Bailey as a consultant for
specific projects as may be identified from time to time and as
mutually agreed upon.
e. It is expressly understood that all benefits due Mr. Bailey 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 been "terminated, involuntarily without
good cause" and had remained in the employ of the Company through an
Early Retirement date of February 1, 2003.
f. Mr. Bailey 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.
________________________________ _________________________
Joseph B. Hunter Barton L. Bailey
President and Chief Executive Officer,
AAF-McQuay Inc.
2.
<PAGE>
Exhibit 21
AAF-McQuay Inc.
Subsidiaries
AMG Holdings B.V. (The Netherlands)
AMG Holdings N.V. (The Netherlands)
AAF-McQuay Group Inc. (Delaware)
AAF-McQuay Inc. (Delaware)
AAF-McQuay Holdings Inc. (Texas)
AAF-McQuay Export Inc. (Barbados)
American Air Filter Company, Inc. (Delaware)
McQuay-Perfex Export Co. (Minnesota)
AAF-McQuay International Inc.(Delaware)
McQuay-TPC Corp. (Delaware)
AAF-McQuay Canada Inc. (Canada)
AAF Luftreinigungssyteme Gesellschaft m.b.H. (Austria)
AAF-SA (Belgium)
AAF-SA (France)
AAF-McQuay Holding France (France)
AAF-McQuay France (France)
McQuay France (France)
AAF Luftechnik GmbH (Germany)
Beth Luftechnik GmbH (Germany)
AAF Environmental Control E.P.E. (Greece)
AAF S.r.l. (Italy)
McQuay Europa S.r.l. (Italy)
McQuay Italia S.p.A. (Italy)
AAF, S.A. (Spain)
AAF-International B.V. (The Netherlands)
AAF-McQuay Netherlands B.V. ( The Netherlands)
AAF Hava Filtreleri Ve Ticaret A.S. (Turkey)
AAF-Limited (United Kingdom)
AAF-McQuay UK Limited (United Kingdom)
J & E Hall Limited (United Kingdom)
Coulstock & Place Engineering Co. Limited (United Kingdom)
AAF Pty. Ltd. (Australia)
AAF S.A. de C.V. (Mexico)
AAF (Asia) Pte Limited (Singapore)
Purificaction de Aire Venezolana, C.A. (Venezuela)
American Air Filter Brazil Ltda. (Brazil)
AAF-Korea Company, Ltd. (Korea)
TriState McQuay (Delaware)
<PAGE>
Exhibit 24
AAF-MCQUAY INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned Director(s) of
AAF-McQuay Inc., incorporated in the State of Delaware, hereby
constitute and appoint Joseph B. Hunter, Jr. and Michael J. Christopher,
and either of them, the true and lawful agents and attorney-in-fact of
the undersigned with full power and authority in either said agent and
attorney-in-fact, to sign for the undersigned and 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 such agent and attorney-in-fact, as herein
authorized.
Dated as of: September 15, 1997
/S/ JOSEPH B. HUNTER /S/ MICHAEL J. CHRISTOPHER
- ---------------------------- ----------------------------
Joseph B. Hunter Michael J. Christopher
/S/ LIU WAN MIN /S/ QUEK LENG CHAN
- ---------------------------- ----------------------------
Liu Wan Min Quek Leng Chan
/S/ HO NYUK CHOY /S/ ROGER TAN KIM HOCK
- ---------------------------- ----------------------------
Ho Nyuk Choy Roger Tan Kim Hock
/S/ GERALD L. BOEHRS
- ----------------------------
Gerald L. Boehrs
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company'sconsolidated financial statements included in the company's Form 10-K
for the year ended June 30, 1997 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-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 10827
<SECURITIES> 0
<RECEIVABLES> 241034
<ALLOWANCES> 7629
<INVENTORY> 124192
<CURRENT-ASSETS> 375282
<PP&E> 187160
<DEPRECIATION> 36946
<TOTAL-ASSETS> 810368
<CURRENT-LIABILITIES> 287019
<BONDS> 217030
0
0
<COMMON> 250
<OTHER-SE> 204031
<TOTAL-LIABILITY-AND-EQUITY> 810368
<SALES> 947933
<TOTAL-REVENUES> 947933
<CGS> 694596
<TOTAL-COSTS> 694596
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25961
<INCOME-PRETAX> 14019
<INCOME-TAX> 6906
<INCOME-CONTINUING> 6637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6637
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
