<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 33-80701
AAF-MCQUAY INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 41-0404230
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
111 SOUTH CALVERT STREET, BALTIMORE, MARYLAND 21202
- --------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (410) 528-2755
NOT APPLICABLE
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate 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. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,497 shares of Common Stock,
par value $100.00 per share, were outstanding as of May 10, 1999.
1
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INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
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<CAPTION>
Page
----
<S> <C>
Part I - Financial Information..................................... 3
- ------
Item 1. Financial Statements (unaudited).......................... 3
Consolidated Balance Sheets as of-
March 31, 1999 and June 30, 1998.......................... 3
Consolidated Statements of Operations-
Three months ended March 31, 1999 and March 31, 1998; and
the nine months ended March 31, 1999 and
March 31, 1998............................................ 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended March 31, 1999 and
March 31, 1998............................................ 5
Notes to the Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 7A Quantitative and Qualitative Disclosure About Market Risk 15
PART II - Other Information......................................... 16
- -------
Item 1. Legal Proceedings......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................... 16
Signatures................................................................. 17
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------------- ----------------
(unaudited)
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,846 $ 9,697
Accounts receivable 212,008 238,613
Inventories 137,061 124,793
Other current assets 9,463 8,423
---------------- ----------------
Total current assets 368,378 381,526
Property, plant and equipment, net 146,137 145,305
Cost in excess of net assets acquired and other identifiable intangibles, net 232,064 250,650
Other assets and deferred charges 18,733 19,397
---------------- ----------------
Total Assets $ 765,312 $ 796,878
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term borrowings $ 83,490 $ 60,262
Current maturities of long-term debt 46,772 28,531
Accounts payable, trade 103,906 120,775
Accrued warranty 15,456 14,947
Other accrued liabilities 80,321 88,713
---------------- ----------------
Total current liabilities 329,945 313,228
Long-term debt 137,625 177,083
Other liabilities 93,428 100,727
---------------- ----------------
Total liabilities 560,998 591,038
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 33,894 33,185
Accumulated other comprehensive income (9,745) (7,510)
---------------- ----------------
Total Stockholder's Equity 204,314 205,840
---------------- ----------------
Total Liabilities and Stockholder's Equity $ 765,312 $ 796,878
---------------- ----------------
---------------- ----------------
</TABLE>
See Notes To Consolidated Financial Statements
3
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AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------------- ---------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 221,634 $ 230,882 $ 688,748 $ 709,388
Cost of Sales 165,733 168,975 509,894 518,610
---------------- ---------------- --------------- ----------------
Gross Profit 55,901 61,907 178,854 190,778
Operating Expenses:
Selling, general and 48,468 50,916 152,530 159,617
administrative
Restructuring 720 --- 1,289 ---
Amortization of intangible assets 2,820 2,917 8,553 8,768
---------------- ---------------- -------------- ----------------
52,008 53,833 162,372 168,385
---------------- ---------------- --------------- ----------------
Income from operations 3,893 8,074 16,482 22,393
Interest expense, net 5,731 6,103 17,975 19,279
Other (income) expense, net 773 173 (3,948) (7,162)
---------------- ---------------- --------------- ----------------
Income (loss) before income taxes (2,611) 1,798 2,455 10,276
Minority interest loss (125) (16) (165) (257)
Income taxes 681 810 1,596 4,622
---------------- ---------------- --------------- ----------------
Net income (loss) $ (3,417) $ 972 $ 694 $ 5,397
---------------- ---------------- --------------- ----------------
---------------- ---------------- --------------- ----------------
</TABLE>
See Notes To Consolidated Financial Statements
4
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AAF-MCQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
March 31, March 31,
1999 1998
--------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 694 $ 5,397
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization 21,214 20,049
Foreign currency transaction (gains) losses (421) (30)
Restructuring spending (4,259) ----
Gain on sale of business ---- (6,626)
Changes in operating assets and liabilities (4,381) 7,726
----------------- -----------------
Net cash from operating activities 12,847 26,516
Cash flows from investing activities:
Capital expenditures, net (14,610) (17,349)
Proceeds from sale of business ---- 17,133
----------------- -----------------
Net cash from investing activities (14,610) (216)
Cash flows from financing activities:
Net borrowings (repayments) under short-term
borrowing arrangements 23,228 (6,880)
Payments on long-term debt (21,217) (19,886)
----------------- -----------------
Net cash from financing activities 2,011 (26,766)
Effect of exchange rate changes on cash (99) (205)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 149 (671)
Cash and cash equivalents at beginning of period 9,697 10,827
----------------- -----------------
Cash and cash equivalents at end of period $ 9,846 $ 10,156
----------------- -----------------
----------------- -----------------
</TABLE>
See Notes To Consolidated Financial Statements
5
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company
and all of its wholly-owned subsidiaries. All inter-company transactions have
been eliminated. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-K. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K (the "Annual Report") for the year ended
June 30, 1998. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The accompanying financial statements reflect the statements of
operations for the three and nine months ended March 31, 1999 and March 31,
1998, the balance sheets at March 31, 1999 and June 30, 1998, and the
consolidated statements of cash flows for the nine months ended March 31, 1999
and March 31, 1998.
The operating results for the nine months ended March 31, 1999 are not
necessarily indicative of the operating results that may be expected for the
full year ending June 30, 1999. The Company's period end is the Saturday closest
to March 31. For clarity in presentation all periods presented herein are shown
to end on the last calendar day of the month.
During the first quarter of fiscal year 1999, the Company made a change in
accounting estimate related to its warranty provision. The Company increased its
warranty provision by $2.5 million due to current activity related to new
product introductions and discontinued product lines.
NOTE 2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------------- ---------------
(dollars in thousands)
<S> <C> <C>
FIFO Cost:
Raw Materials........................... $ 50,870 $ 46,513
Work-in-process......................... 28,097 33,493
Finished goods.......................... 54,470 40,961
----------------- ---------------
133,437 120,967
LIFO adjustment......................... 3,624 3,826
----------------- ---------------
----------------- ---------------
$ 137,061 $ 124,793
----------------- ---------------
----------------- ---------------
</TABLE>
NOTE 3. COMPREHENSIVE INCOME:
In the first quarter of fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS 130 requires disclosure of total non-stockholder changes in equity in
interim periods and additional disclosures of the components of non-stockholder
changes in the equity on an annual basis. Total non-stockholder components in
equity includes all changes in equity during a period except those resulting
from investments by and distribution to stockholders.
6
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The components of comprehensive income for the three and nine months ended
March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- -------------------------------
March 31, March 31, 1998 March 31, 1999 March 31, 1998
1999
------------ --------------- -------------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ (3,417) $ 972 $ 694 $ 5,397
Foreign currency translation adjustment. (3,574) (898) (2,228) (1,676)
------------ --------------- -------------- ----------------
Total comprehensive income (loss) $ (6,991) $ 74 $(1,534) $ 3,721
------------ --------------- -------------- ----------------
------------ --------------- -------------- ----------------
</TABLE>
NOTE 4. INCOME TAXES:
The tax provisions for the third quarter and nine month periods ended March
31, 1999 and 1998 are based on the estimated effective tax rates applicable for
the full years, and after giving effect to significant unusual items related
specifically to the interim periods. The difference between the Company's
reported tax provision, for the third quarter and nine months ended March 31,
1999 and 1998, and the tax provision computed based on U.S. statutory rates is
primarily attributable to nondeductible goodwill amortization and unbenefitted
foreign losses. Additionally, the Company's effective tax rate for the nine
months ended March 31, 1999 reflects the effect of the indemnification
settlement agreement and the IRS settlement which was recognized as income for
financial reporting purposes but is not taxable for income tax purposes.
During the first quarter of fiscal year 1999, as a result of the
indemnification settlement agreement and the IRS settlement, the Company
realized certain deferred tax benefits related to periods prior to the
acquisition by OYL. The effect of realizing these tax benefits was to reduce net
deferred tax liabilities and goodwill by $9.7 million.
NOTE 5. DEBT AND FINANCIAL INSTRUMENTS:
In April 1999, the Company received a waiver of a single financial covenant
under its bank credit facility for the third quarter. In addition, the facility
was amended whereby the interest rate premiums charged under the bank credit
facility were increased from 1.625% to 3.00% for LIBOR based borrowings and from
0.625% to 2.00% for prime rate based borrowings.
The Company anticipates that further modifications to the financial
covenants most likely will be required for the Company to be in compliance at
year end. Consequently, and as required under generally accepted accounting
principles, the long-term portion of the bank term loan currently outstanding
under the bank credit agreement of $24.7 million has been classified under
current maturities of long-term debt on the March 31, 1999 balance sheet. The
Company most likely will pursue additional changes to the bank credit agreement
in the near future. The Company anticipates that certain reclassifications from
current maturities of long term-debt to long-term debt will be made when the
Company reports its full year financial results later this year.
During the second quarter of fiscal year 1999, the Company entered into an
interest rate swap with a $50 million notional amount with an expiration date of
October 2001 to protect against possible interest rate increases. Under the
terms of the swap, the Company pays a fixed rate of 4.58% and receives a
floating rate (3 month LIBOR). The swap was terminated in March 1999 and the
Company received a cash payment of $550,000 as early termination compensation
which is being amortized as a reduction to interest expense over the remaining
life of the swap.
The Company secures pricing on a portion of its copper and aluminum
requirements through forward contracts executed with certain suppliers. At April
2, 1999, contracts for 2.5 million pounds of copper at an average price of $0.69
per pound and 1.8 million pounds of aluminum at an average price of $0.65 per
pound were in place. These contracts have various expiration dates through
December 31, 1999.
7
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NOTE 6. RESTRUCTURING:
As described in Note 9 of the Annual Report, the Company commenced a
restructuring of its Filtration Products Group in the fourth quarter of fiscal
year 1998. Through March 31, 1999, the Company has spent $4.3 million of the
$7.3 million restructuring reserve primarily for severance charges and
professional fees. The remaining reserve relates to activities which will take
place in the fourth quarter of fiscal year 1999. The Company continues to
implement actions in accordance with the restructuring plan. In addition to the
restructuring of the German operations of the Filtration Products Group during
the first quarter of fiscal year 1999, the Company restructured the Italian and
United Kingdom operations of the Commercial Air Conditioning business in the
third quarter. The Company recorded approximately $0.7 million which represents
primarily severance accruals.
NOTE 7. CONTINGENCIES:
INDEMNIFICATION:
The purchase agreement between OYL and the former owners of the Company
contained certain indemnifications relating to specified contingencies that
existed as of the acquisition date relating to certain environmental, tax and
litigation matters. On July 8, 1998, the Company and the former owners entered
into a settlement agreement in resolution of certain disputes which were pending
before the American Arbitration Association in Dallas, Texas, concerning the
interpretation of the indemnification obligation. As a result of the settlement
agreement, the Company paid $10.5 million of the $11.5 million promissory note
due to the former shareholders, discussed in Note 7 of the Consolidated
Financial Statements, and the parties agreed to discharge claims and
entitlements under the indemnification provisions in the purchase agreement. The
residual balance of the promissory note has been reclassified to other
liabilities for specified contingencies that existed as of the acquisition date.
In addition, as a result of the indemnification settlement agreement and
the IRS settlement, the Company expects to receive payments from certain former
shareholders of approximately $5.0 million in fiscal year 1999 of which $2.5
million has been received through March 31, 1999. Approximately $2.1 million of
the payments to be received from the former shareholders will be utilized to
fund obligations relating to the IRS settlement. In conjunction with this
settlement, the Company recognized $2.9 million in other income in the first
quarter of fiscal year 1999.
ENVIRONMENTAL MATTERS:
The Company is subject to potential liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
(CERCLA), and other federal, state and local statutes and regulations governing
the discharge of pollutants into the environment and the handling and disposal
of hazardous substances and waste. These statutes and regulations, among other
things, impose potential liability on the Company for the cost of remediation of
contamination arising from the Company's past and present operations and from
former operations of other entities at sites later acquired and now owned by the
Company. Many of the Company's facilities have operated for many years, and
substances which are or might be considered hazardous were generated, used, and
disposed of at some locations, both on- and off-site. Therefore, it is possible
that environmental liabilities in addition to those described in note 14 of the
Annual Report may arise in the future. The Company records liabilities if, in
management's judgment, environmental assessments or remedial efforts are
probable and the costs can be reasonably estimated. These accrued liabilities
are not discounted. Such estimates are adjusted if necessary based upon the
completion of a formal study or the Company's commitment to a formal plan of
action.
The Company is currently a plaintiff in several legal suits, assessing
insurance coverage, or pursuing other actions in an attempt to recover the cost
associated with above liabilities. No amounts have been recorded in the
accompanying Consolidated Balance Sheets relating to any such possible
recoveries.
8
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INCOME TAX:
The Internal Revenue Service ("IRS") completed its examination of the
Company's tax returns for the years 1987 through 1994 and issued a final
executed closing agreement which was received by the Company in September of
1998.
LITIGATION:
The Company is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Company's products. The Company is also involved in litigation and
administrative proceedings involving employment matters and commercial disputes.
Some of these lawsuits include claims for punitive as well as compensatory
damages. The Company is insured for product liability claims for amounts in
excess of established deductibles and accrues for the estimated liability on a
case-by-case basis up to the limits of the deductibles. All other claims and
lawsuits are also handled on a case-by-case basis.
The Company does not believe that the potential liability from the ultimate
outcome of environmental, income tax and litigation matters will have a material
adverse effect on the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
NET SALES
Consolidated net sales were $221.6 million and $688.7 million for the
quarter and nine months ended March 31, 1999. This represented decreases in net
sales of $9.2 million, or 4.0%, for the quarter and $20.6 million, or 2.9%, for
the nine months ended March 31, 1999 as compared to the comparable periods in
the prior year. The Commercial Air Conditioning and Refrigeration segment's net
sales decreased $3.8 million, or 2.6%, for the quarter and $4.3 million, or
0.9%, for the nine month period ended March 31, 1999 as compared to the
comparable periods in the prior year. The Filtration Products segment reported
decreases in net sales for the third quarter of $7.5 million, or 8.7%, and for
the nine month period ended March 31, 1999 of $17.5 million, or 6.5%, versus the
comparable periods in the prior year. The following table presents the Company's
revenues by business segment.
<TABLE>
<CAPTION>
Quarter ended Nine months ended
--------------------------------- -----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------------- ---------------- ----------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Commercial Air Conditioning
and Refrigeration.................... $ 144,270 $ 148,100 $ 446,104 $ 450,354
Filtration Products.................. 79,018 86,544 250,941 268,489
Eliminations/ other.................. (1,654) (3,762) (8,296) (9,455)
---------------- ---------------- ----------------- -----------------
---------------- ---------------- ----------------- -----------------
Total............................ $ 221,634 $ 230,882 $ 688,748 $ 709,388
---------------- ---------------- ----------------- -----------------
---------------- ---------------- ----------------- -----------------
</TABLE>
Commercial Air Conditioning and Refrigeration net sales decreased $3.8
million, or 2.6%, to $144.3 million for the third quarter of fiscal year 1999
and decreased $4.3 million, or 0.9%, to $446.1 million for the nine months ended
March 31, 1999 versus the comparable periods ended March 31, 1998. Excluding the
industrial fans business which was sold in the first quarter of fiscal year
1998, net sales for the nine month period ended March 31, 1999 increased $3.3
million, or 0.7%, versus the prior year. North American net sales decreased 1.4%
for the third quarter and 2.5% for the first nine months of fiscal year 1999, or
remained flat excluding the industrial fan business, as compared to the
comparable periods in the prior year. Applied air handling products net sales
increased 31.4% and 27.3% for the third quarter and nine month period ended
March 31, 1999 versus the comparable periods in fiscal year 1998. The strong
market demand for the rooftop, self contained and new air handling products
experienced in the first half of fiscal year 1999 continued resulting in
increased sales for the third quarter and the nine months ended March 31, 1999.
The service and parts organization had net sales increases of 6.3% and 6.6% for
the quarter and nine months ended March 31, 1999 as compared to the prior year
comparable periods due to strong demand for replacement parts and retrofit
demand. Chiller net sales decreased 22.3% and 13.3% for the third quarter and
nine month period ended March 31, 1999, respectively, versus the comparable
periods in fiscal year 1998. The sales decreases for the third quarter and the
nine month period ended March 31, 1999 are primarily due to decreased
centrifugal chiller sales to export markets, especially the Asian market. Export
sales to Asia are expected to remain slow due to the weak Asian market
conditions. Additionally, discontinued product lines contributed to the decrease
in sales for both the quarter and nine month periods ended March 31, 1999. The
management team continues to review the chiller product lines and evaluate the
markets within which to compete. Terminal product net sales decreased 9.1% and
8.3% for the third quarter and nine months ended March 31, 1999, respectively,
as compared to the comparable periods in fiscal year 1998. An overall decline in
the unit ventilator and packaged terminal air conditioner markets and lower fan
coil sales volume contributed to the net sales decreases for both periods.
Additionally, a significant water source heat pump project in the third quarter
of fiscal year 1998 was not repeated during the third quarter of fiscal year
1999.
10
<PAGE>
In the Commercial Air Conditioning and Refrigeration segment,
international sales volume decreased 2.7% for the third quarter of fiscal year
1999 and increased 5.4% for the nine months ended March 31, 1999 versus the
comparable periods in fiscal year 1998. For the quarter, net sales increases due
to strong demand in France and the new sales office in Dubai were offset by
reduced sales volume in the industrial refrigeration business in the United
Kingdom. Strong chiller sales in the European markets, increased market demand
in the Middle East and the Dubai sales office combined to increase international
sales for the nine month period March 31, 1999.
Backlog for the Commercial Air Conditioning and Refrigeration segment
was $124.4 million at the end of the third quarter of fiscal year 1999 as
compared to $141.1 million and $138.5 million at the end of the third quarter
and fiscal year end 1998, respectively. The decrease from the third quarter of
fiscal year 1998 backlog is attributable to the soft unit ventilator market
conditions and economic conditions in the Asian region.
Filtration Products net sales decreased $7.5 million, or 8.7%, for the
third quarter and $17.5 million, or 6.5%, for the nine months ended March 31,
1999 as compared to the comparable periods in the fiscal year 1998. Compared to
the same periods in the prior year, domestic net sales decreased 5.0% and 6.2%
for the third quarter and nine months ended March 31, 1999. These decreases
resulted primarily from the reorganization of the environmental products
business focusing on core product lines and a weakened clean room market. The
third quarter and the nine month period ended March 31, 1999 decreases in net
sales were partially offset by increased net sales in the air filtration
products business during the periods. These increases in sales are attributable
to improved commercial and industrial sales for the periods and improved retail
sales due to weather conditions in the quarter and higher volume for the nine
month period ended March 31, 1999. During the same periods, international sales
decreased 10.9% and 6.0%, respectively. European net sales decreased in the
third quarter of fiscal year 1999 as a result of reduced air pollution projects
while European sales for the nine month period ended March 31, 1999 were flat
versus the prior year. Asian sales volume increased 27.2% for the third quarter
as compared to the comparable period in the prior year as a result of increased
sales volume and a favorable currency impact in Korea. For the nine month period
ended March 31, 1999, Asia sales decreased 22.0% as compared to the comparable
period in fiscal year 1998 as a result of the continuing weak market conditions
being experienced in the Asian region and Asian clean room markets. Latin
American net sales volume decreased 66.2% and 46.6% in the third quarter and
nine month period ended March 31, 1999, respectively, due to continuing soft
market conditions. Management believes these trends will continue as the
economic conditions remain weak in the Asian and Latin American markets.
GROSS PROFIT
Consolidated gross margin decreased for both the third quarter and nine
month period ended March 31, 1999 as compared to the prior year's comparable
periods at $55.9 million, or 25.2% of net sales, and $178.9 million, or 26.0% of
net sales, respectively. In the Commercial Air Conditioning and Refrigeration
segment, gross profit as a percentage of sales decreased 1.9 percentage points
and 0.8 percentage points for the third quarter and nine month period ended
March 31, 1999, respectively, versus the comparable periods of fiscal year 1998.
The gross margin losses resulted from unfavorable manufacturing variances,
increased chiller product pricing pressures primarily in the Asian market, and
terminal product pricing pressures in a soft ventilator market. These losses in
gross margin were partially offset by price increases and favorable product mix
in applied air handling products. Gross margin as a percentage of sales remained
flat for the third quarter and decreased 0.9 percentage points for the nine
month period ended March 31, 1999 versus the comparable periods in fiscal year
1998 in the Filtration Products businesses. Product mix and competitive pricing
aimed at gaining market share in both the air filtration and environmental
product lines contributed to the decrease for the nine month period ended March
31, 1999.
OPERATING EXPENSES
Operating expenses were $52.0 million, or 23.5% of net sales, for the
third quarter of fiscal year 1999 versus $53.9 million, or 23.3% of net sales,
for the third quarter of fiscal year 1998. For the nine months ended March 31,
1999 and 1998, operating expenses were $162.4 million, or 23.6% of net sales,
versus $168.4 million, or 23.7% of net sales, respectively. Excluding
restructuring charges, operating expenses were $51.3
12
<PAGE>
million, or 23.1% of net sales, and $161.1 million, or 23.4% of net sales, for
the third quarter and nine month period ended March 31, 1999. The Commercial Air
Conditioning and Refrigeration segment operating expenses increased primarily as
a result of warranty expense increases related to new product introductions and
a discontinued product line in the chiller business. Increases in commission
expense as a result of changes in distribution pricing and increases in
logistics expenses in the chiller businesses also contributed to the increase in
operating expenses for this segment. These increased operating expenses as
compared to sales volume by the Commercial Air Conditioning and Refrigeration
segment were partially offset by improvements in operating expenses in the
Filtration Products segment. Expenses in the Filtration Products segment were
flat for the third quarter and decreased for the nine months ended March 31,
1999 as compared to the prior year as a result of the reorganization of the
environmental products business and reductions in sales volume. Research and
development costs remained consistent year over year for both the third quarter
and nine month period ended March 31, 1999.
INCOME FROM OPERATIONS
Income from operations for the third quarter was $3.9 million, or 1.8%
of net sales, and $8.1 million, or 3.5% of net sales, for fiscal years 1999 and
1998, respectively. For the nine month periods ended March 31, 1999 and 1998,
income from operations was $16.5 million, or 2.4% of net sales, and $22.4
million, or 3.2% of net sales, respectively. The Commercial Air Conditioning and
Refrigeration segment had a decrease in income from operations to $(3.5)
million, or (2.4%) of net sales, versus $2.3 million, or 1.5% of net sales, for
the third quarter of fiscal year 1999 versus the third quarter of fiscal year
1998. Income from operations for the Commercial Air Conditioning and
Refrigeration segment decreased to $(0.7) million, or (0.2%) of net sales, for
the nine months ended March 31, 1999 versus $5.6 million, or 1.3% of net sales,
for the comparable period in fiscal year 1998. The Filtration Products segment
had a decrease in income from operations to $4.5 million, or 5.7% of net sales,
for the third quarter of fiscal year 1999 from $4.9 million, or 5.7% of net
sales, for the third quarter of fiscal year 1998. Income from operations for the
Filtration Products segment was flat at $14.6 million, or 5.8% of net sales, for
the nine months ended March 31, 1999 versus $14.6 million, or 5.4% of net sales,
for the nine months ended March 31, 1998.
NET INTEREST EXPENSES AND OTHER (INCOME) EXPENSE
Net interest expense decreased to $5.7 million and $17.9 million during
the third quarter and nine months ended March 31, 1999 from $6.1 million and
$19.3 million for the comparable periods ended March 31, 1998. This decrease is
primarily the result of the capitalization of interest on the information
technology enhancement project and reduced average borrowing levels as the
Company reduced its borrowings with proceeds from the sale of the industrial fan
business in the first half of fiscal year 1998. Net other expense of $0.8
million and net other income of $3.9 million was reported for the quarter and
nine month period ended March 31, 1999 versus net other expense of $0.2 million
and net other income of $7.2 million for the comparable periods ended March 31,
1998. In the first quarter of fiscal year 1999, the Company recorded $2.9
million in other income as a result of favorable developments in the IRS audit
and the tax indemnification settlement with former shareholders of the Company
as described in Note 7. The Company also recorded a $1.5 million gain related to
the termination of a pension plan in Canada during the first quarter of fiscal
year 1999. In the third quarter of fiscal year 1999, the Company recognized $0.8
million of expenses related to the potential sale of the Company. During fiscal
year 1998, the Company recorded a $6.6 million gain on the sale of the
industrial fan business. The other components of other income include currency
gains and losses and income from equity affiliates during the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are provided by cash generated from operating
activities and supplemented when necessary by short-term credit facilities.
During the first nine months of fiscal year 1999, funds generated by operating
activities were $12.8 million as compared to $26.5 million in the prior fiscal
year for the comparable period. During the first nine months of fiscal year
1999, cash used in investing activities was $14.6 million, a redirection of
capital spending on information technology enhancement projects in accordance
with the Company's information technology strategy. As a result of a settlement
agreement reached with the former shareholders of the Company regarding certain
indemnified matters, the Company
13
<PAGE>
retired the $11.5 million promissory note due to the former shareholders on July
8, 1998 by making a cash payment of $10.5 million. Total payments on long term
debt for the first nine months were $21.2 million. Cash of $23.2 million was
provided by net borrowing under short term borrowing arrangements for long term
debt repayment and working capital requirements during the period.
In April 1999, the Company received a waiver of a single financial covenant
under its bank credit facility for the third quarter. In addition, the facility
was amended whereby the interest rate premiums charged under the bank credit
facility were increased from 1.625% to 3.00% for LIBOR based borrowings and from
0.625% to 2.00% for prime rate based borrowings. The Company anticipates that
further modifications to the financial covenants most likely will be required
for the Company to be in compliance at year end. Consequently, and as required
under generally accepted accounting principles, the long-term portion of the
bank term loan currently outstanding under the bank credit agreement of $24.7
million has been classified under current maturities of long-term debt on the
March 31, 1999 balance sheet. The Company most likely will pursue additional
changes to the bank credit agreement in the near future. The Company anticipates
that certain reclassifications from current maturities of long term-debt to
long-term debt will be made when the Company reports its full year financial
results later this year. At the end of the third quarter of fiscal year 1999,
the Company had approximately $30 million in additional borrowing capacity under
the amended revolving credit facility.
In 1998, as a result of approaches received from interested parties, OYL
appointed BancAmerica Robertson Stephens as its financial advisor to pursue a
sale process. In January 1999, the formal sale process was terminated. Deferred
costs of $0.8 million associated with the transaction were recognized in the
third quarter of fiscal year 1999.
A short-term credit facility provided to a subsidiary of the Company is
supported by a letter of credit from OYL which expires on September 30, 1999. In
addition, the Company has secured certain domestic letter of credit facilities
totaling $13.5 million that are supported by a letter of credit from OYL which
expires on March 21, 2000. Each of these support arrangements may be extended
for additional time periods with the consent of OYL and the banks providing the
facilities.
On an ongoing 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 businesses or exit low value added
or non-synergistic operations. In conjunction with this strategy, the Company
currently anticipates taking restructuring actions in both the Commercial Air
Conditioning and Refrigeration and Filtration Products segments.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowing capacity
available under the Amended Credit Facility, will be adequate to make payments
of principal and interest on debt, to permit anticipated capital expenditures
and to fund working capital requirements and other cash needs for the
foreseeable future. Nevertheless, the Company expects to remain leveraged to a
significant extent and expects its debt service obligations to 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 amend or refinance its existing
debt or obtain additional financing. There is no assurance that any such new
financing alternatives would be available, and, in any case, such new financing
(if available) would be expected to be more costly and burdensome than the debt
agreements currently in place.
YEAR 2000
The Company established a formal Year 2000 program during the fiscal year
ending June 30, 1998, which began with a worldwide assessment and development of
a central data base containing an inventory of the risk elements associated with
the Year 2000 issue for each of the Company's operations. The Company also
appointed an overall project coordinator and established an executive review
process. Prior to establishing a formal Year 2000 management process, the
Company had already decided to replace substantially all of its old systems with
new state-of-the-art Enterprise Resource Planning (ERP) systems. The Company
currently estimates expenditures for the new systems will aggregate
approximately $26.0 million (having incurred
14
<PAGE>
approximately $25.1 million as of March 31, 1999). Expenditures for additional
remedial actions beyond those required to install new systems will be managed by
the individual business units and recognized in operating expenses. The
Company's management believes that modernizing its information systems is
critical for the Company's stable and efficient growth, and it is the basis of
the Company's strategy for resolving its Year 2000 issues.
During May 1998, the Company began its review of the products it
manufactures and sells, and though testing is not complete, the Company believes
that its products, including the control systems provided by the Company, were
Year 2000 compliant in March 1999. The Company has also identified third parties
upon whom the Company is dependent for products or services, and commenced
actions during fiscal year ending June 30, 1998, to ensure those products and
services are compliant and will not be interrupted as a result of Year 2000.
The scheduled Year 2000 activities and current status are summarized in the
chart below:
<TABLE>
<CAPTION>
------------------------------------ ------------------ ----------------- -----------------
ACTIVITY STATUS STARTING ENDING
------------------------------------ ------------------ ----------------- -----------------
<S> <C> <C>
Assessment and inventory Complete September 1997 January 1998
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Coordinator and Executive review Complete February 1998 May 1998
process
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Industrial Refrigeration ERP Complete January 1997 April 1998
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Filtration Products ERP In Process April 1997 July 1999
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Commercial Air Conditioning ERP In Process September 1997 September 1999
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Product compliance Complete May 1998 March 1999
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Materials suppliers In Process June 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Other IT issues including third In Process September 1998 October 1999
parties
------------------------------------ ------------------ ----------------- -----------------
------------------------------------ ------------------ ----------------- -----------------
Equipment and facilities In Process September 1998 October 1999
------------------------------------ ------------------ ----------------- -----------------
</TABLE>
The Year 2000 activities are currently on schedule, and the Company anticipates
successful implementation of the scheduled ERP projects and systems upgrades.
The financial systems of the ERP project have been implemented and used during
the second and third quarters of fiscal year 1999 in the Commercial Air
Conditioning businesses. Additionally, the manufacturing and order entry systems
were implemented in half of the domestic plants during the third quarter. The
financial, bill of material and cost systems of the ERP project have been
implemented and used throughout fiscal year 1999 in the Filtration Products
businesses.
Failure by the Company to complete successfully the planned ERP projects and
systems upgrades or a failure by the Company's third party suppliers and/or
service providers to produce or deliver critical components or to transport
services could cause disruption in the Company's ability to manufacture and/or
deliver timely its products to its customers, which could result in increased
expenses, reduced billings and potential litigation. The precise costs
associated with such risks are difficult to predict at this time. The Company
currently does not have a contingency plan in place in the event it does not
complete all phases of the Year 2000 program. The Company plans to continue to
evaluate the status of completion of its Year 2000 program and determine whether
a contingency plan is necessary. The Company believes the Year 2000 activities
are adequate to address the Year 2000 risks faced by the Company; however, there
can be no assurance that the Year 2000 procedures and activities, even if
completed, will be adequate to address the Company's Year 2000 risk.
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. These risk factors include, but are not limited
14
<PAGE>
to, general economic conditions, environmental laws and regulations, the
weakening Asian markets, unforeseen competitive pressures, warranty expenses,
market acceptance of new products, unseasonably cool spring or summer weather, a
slow down in the chiller market, the soft unit ventilator market, the inability
to meet debt covenants, unforeseen difficulties in maintaining mutually
beneficial relationships with strategic initiatives partners, the Year 2000
issue, and the results of restructuring activities. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the reported market risks since the
end of the most recent fiscal year. Note 5 of the Notes to the Consolidated
Financial Statements (unaudited) discloses additional financial instrument that
have been entered into by the Company since the end of the most recent fiscal
year.
15
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
With respect to the Company's lawsuit against the excess insurance carrier
in connection with clean up expenses for the Scottsboro, Alabama, manufacturing
facility, the trial judge granted summary judgment on January 19, 1999, in favor
of the insurance carrier denying the Company's claim. The Company filed its
appeal of the trial court's decision during February 1999 to the Fifth Circuit
Court of Appeals, and during resulting settlement negotiations, the insurance
carrier agreed to pay the Company $250,000 in exchange for a full policy
release.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBITS
NUMBER DESCRIPTION
<S> <C>
Exhibit 27 Financial Data Schedule (filed herewith)
Exhibit 10.1 Seventh Amendment and Waiver to Credit Agreement
dated April 30, 1999 with the Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and
certain other financial institutions listed therein
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the period.
<PAGE>
SIGNATURES
- -------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AAF-MCQUAY INC.
DATE May 14, 1999 By: /s/ ANDREW R. MORRISON
-------------- --------------------------
Andrew R. Morrison
Chief Financial Officer
DATE May 14, 1999 /s/ BRUCE D. KRUEGER
--------------- ------------------------
Bruce D. Krueger
Controller
(Principal Accounting Officer)
17
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
10.1 Seventh Amendment and Waiver to Credit Agreement dated
April 30, 1999 with the Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain other financial
institutions listed therein
</TABLE>
18
<PAGE>
Exhibit 10.1
[EXECUTION COPY]
SEVENTH AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIS SEVENTH AMENDMENT AND WAIVER, dated as of April 30, 1999 (this
"AMENDMENT"), to the Credit Agreement referred to below is among AAF-McQUAY INC.
(formerly known as SnyderGeneral Corporation), a Delaware corporation (the "U.S.
BORROWER") AND THE LENDERS PARTIES HERETO.
W I T N E S S E T H:
WHEREAS, THE U.S. BORROWER, CERTAIN FINANCIAL INSTITUTIONS FROM TIME TO
TIME PARTIES THERETO (THE "LENDERS"), The Bank of Nova Scotia ("SCOTIABANK") and
Bank Bumiputra Malaysia Berhad, New York Branch as the Managing Agents for the
Lenders, and Scotiabank as the Administrative Agent for the Lenders have entered
into the Credit Agreement, dated as of July 21, 1994 (as amended, supplemented,
amended and restated or otherwise modified prior to the date hereof, the
"EXISTING CREDIT AGREEMENT");
WHEREAS, the U.S. Borrower has requested that the Lenders amend the
Existing Credit Agreement in certain respects as set forth below; and
WHEREAS, the Lenders 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.
I. PART
DEFINITIONS
A. SUBPART 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):
"AMENDMENT" is defined in the PREAMBLE.
"CREDIT AGREEMENT" is defined in the THIRD RECITAL.
"EXISTING CREDIT AGREEMENT" is defined in the FIRST RECITAL.
-1-
<PAGE>
A. SUBPART 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.
I. PART
AMENDMENTS TO THE
EXISTING CREDIT AGREEMENT
The Existing Credit Agreement is hereby amended in accordance with this
Part.
A. SUBPART 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.
1. SUBPART Section 1.1 of the Existing Credit Agreement is hereby amended
by inserting the following definitions in such Section in the appropriate
alphabetical order:
"KENTUCKY PROPERTY" means the real estate, office facility and
manufacturing facility located at 215 Central Avenue, Louisville, Kentucky
40208.
"MINNESOTA PROPERTY" means the real estate and office facility located
at 13600 Industrial Park Boulevard, Minneapolis, Minnesota 55441.
"SEVENTH AMENDMENT" means the Seventh Amendment and Waiver to this
Agreement, dated as of April 30, 1999, among the U.S. Borrower and the
Lenders party thereto.
"SEVENTH AMENDMENT EFFECTIVE DATE" means April 30, 1999.
1. SUBPART Section 1.1 of the Existing Credit Agreement is hereby further
amended as follows:
(i) The definition of "Applicable Base Rate Margin" contained in
Section 1.1 is hereby amended in its entirety to read as follows:
"APPLICABLE BASE RATE MARGIN" means, on or at any time after the Seventh
Amendment Effective Date, with respect to any Revolving Loan, Swing Line
Loan or Term-A Loan made or maintained as a Base Rate Loan, 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) 1.00% if the Leverage Ratio is less than 3.5:1 AND the Interest
Coverage Ratio is greater than 3.5:1;
<PAGE>
(b) 1.25% if the Leverage Ratio is less than 3.75:1 AND the Interest
Coverage Ratio is greater than 3.25:1 AND the foregoing CLAUSE (A) does not
apply;
(c) 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) and (B)
do not apply;
(d) 1.75% 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)
and (C) do not apply;
(e) 2.00% 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) and (D) do not apply; and
(f) 2.25% 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 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 2.25%.
(ii) The definition of "Applicable L/C Rate Margin" contained in
Section 1.1 is hereby amended in its entirety to read as follows:
"APPLICABLE L/C RATE MARGIN" means, on or at any time after the Seventh
Amendment Effective Date, with respect to any Letter of Credit, 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) 2.00% if the Leverage Ratio is less than 3.5:1 AND the Interest
Coverage Ratio is greater than 3.5:1;
(b) 2.25% if the Leverage Ratio is less than 3.75:1 AND the Interest
Coverage Ratio is greater than 3.25:1 AND the foregoing CLAUSE (A) does not
apply;
<PAGE>
(c) 2.50% 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) and (B)
do not apply;
(d) 2.75% 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)
and (C) do not apply;
(e) 3.00% 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) and (D) do not apply; and
(f) 3.25% 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 3.25%.
(iii) The definition of "Applicable LIBO Rate Margin" contained in
Section 1.1 is hereby amended in its entirety to read as follows:
"APPLICABLE LIBO RATE MARGIN" means, on or at any time after the Seventh
Amendment Effective Date, with respect to any Revolving Loan, Swing Line
Loan or Term-A Loan made or maintained as a LIBO Rate Loan, 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) 2.00% if the Leverage Ratio is less than 3.5:1 AND the Interest
Coverage Ratio is greater than 3.5:1;
(b) 2.25% if the Leverage Ratio is less than 3.75:1 AND the Interest
Coverage Ratio is greater than 3.25:1 AND the foregoing CLAUSE (A) does not
apply;
(c) 2.50% 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) and (B)
do not apply;
<PAGE>
(d) 2.75% 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)
and (C) do not apply;
(e) 3.00% 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) and (D) do not apply; and
(f) 3.25% 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 3.25%.
(iv) The definition of "Commitment Fee Rate" contained in Section 1.1
is hereby amended in its entirety to read as follows:
"COMMITMENT FEE RATE" means, on or at any time
after the Seventh Amendment Effective Date, a per annum rate equal to
0.50%."
A. SUBPART AMENDMENT TO SECTION 3.1.2. Clause (b) of Section 3.1.2 of the
Existing Credit Agreement is hereby amended by adding the following at
the end of such clause:
"; provided, however, that any Net Disposition Proceeds received from the
sale of the Kentucky Property and from the sale of the Minnesota Property
shall be applied PRO RATA to the remaining amortization payments of Term-A
Loans set forth in CLAUSE (C) of SECTION 3.1.1."
A. SUBPART AMENDMENT TO ARTICLE VI. Article VI of the Existing Credit
Agreement is hereby amended by adding a new Section 6.15 to read as follows:
"SECTION 6.15 YEAR 2000. Each Obligor has reviewed the areas
within its business and operations which could be adversely affected by,
and has developed or is developing a program to address on a timely basis,
the "Year 2000 Problem" (that is, the risk that computer applications used
by such Obligor may
<PAGE>
be unable to recognize and properly perform date-sensitive functions
involving certain dates prior to and any date after December 31, 1999).
Based on such review and program, the Year 2000 Problem could not
reasonably be expected to have a Material Adverse Effect."
A. SUBPART AMENDMENT TO SECTION 7.2.11. Clause (d) of Section 7.2.11 of
the Existing Credit Agreement is hereby amended in its entirety to read as
follows:
"(d) such sale, transfer, lease, contribution or conveyance of assets
(a "PERMITTED DISPOSITION") (other than capital stock of the U.S. Borrower
or any Subsidiary thereof) (i) is in a maximum amount not to exceed
$5,000,000 in any Fiscal Year; or (ii) is a sale of the (A) Kentucky
Property for a purchase price equal to at least $3,900,000 and (B)
Minnesota Property for a purchase price equal to at least $5,500,000;
PROVIDED, that the sum of the aggregate amount of cash consideration
pursuant to CLAUSE (I) that has not been applied to prepay Loans in
accordance with CLAUSE (E) of SECTION 3.1.1 plus the aggregate amount of
non-cash consideration from such Permitted Dispositions shall not exceed
$1,000,000 in any Fiscal Year; or".
I. PART
WAIVER
A. SUBPART WAIVER. By its signature below, each Lender hereby waives any
Default arising under clause (b) of Section 7.2.4 of the Existing Credit
Agreement for the Fiscal Quarter ended April 2, 1999.
I. PART
CONDITIONS TO EFFECTIVENESS
A. SUBPART SEVENTH AMENDMENT EFFECTIVE DATE. This Amendment, and the
amendments and modifications contained herein, shall be and become effective
when each of the conditions set forth in this Part shall have been fulfilled to
the satisfaction of the Administrative Agent; PROVIDED, that upon such
effectiveness, the waiver set forth in SUBPART 3.1 shall be deemed to have
become effective as of April 2, 1999.
1. SUBPART 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.
1. SUBPART 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,
<PAGE>
(1) all fees, costs and expenses due and payable as of the Seventh
Amendment Effective Date (including pursuant to Section 10.3 of
the Existing Credit Agreement); and
(1) 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 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 attention of Ms.
Grace Avedissian at Mayer, Brown & Platt, 1675 Broadway, New
York, New York 10019 (19th floor), telecopy number 212-262-1910
at or prior to 5:00 p.m. (New York time) on April 30, 1999.
1. SUBPART AFFIRMATION AND CONSENT. The Administrative Agent shall have
received, with counterparts for each Lender, a duly executed copy of an
Affirmation and Consent to this Amendment, dated as of the date hereof, in form
and substance satisfactory to the Administrative Agent, duly executed and
delivered by each of the Obligors other than the Borrower.
1. SUBPART 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.
I. PART
MISCELLANEOUS; REPRESENTATIONS
A. SUBPART 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.
A. SUBPART 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.
A. SUBPART FULL FORCE AND EFFECT; LIMITED AMENDMENT AND WAIVER. 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 and the waiver set forth herein shall be
limited precisely as provided for
<PAGE>
herein to the provisions expressly amended or waived 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.
A. SUBPART 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.
A. SUBPART SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
A. SUBPART 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.
A. SUBPART GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
A. SUBPART COMPLIANCE WITH WARRANTIES, NO DEFAULT, ETC. After giving
effect to the occurrence of the Seventh 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 statements set
forth in Section 5.2.1 of the Existing Credit Agreement are true and correct.
A. SUBPART 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:
(1) 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 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)
<PAGE>
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
(1) 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).
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
Title:
THE BANK OF NOVA SCOTIA
By
Title:
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By
Title:
BANK OF AMERICA NATIONAL TRUST
AND
SAVINGS ASSOCIATION
By
Title:
<PAGE>
CITICORP USA, INC.
By
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LIMITED NEW YORK BRANCH
By
Title:
SOCIETE GENERALE, NEW YORK BRANCH
By
Title:
KZH CRESCENT II LLC
By
Title:
TORONTO DOMINION (TEXAS, INC.)
By
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
<PAGE>
Title:
CERES FINANCE LTD.
By
Title:
STRATA FUNDING LTD.
By
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> APR-03-1997
<CASH> 9,846
<SECURITIES> 0
<RECEIVABLES> 219,762
<ALLOWANCES> 7,754
<INVENTORY> 137,061
<CURRENT-ASSETS> 368,378
<PP&E> 206,098
<DEPRECIATION> 59,961
<TOTAL-ASSETS> 765,312
<CURRENT-LIABILITIES> 329,945
<BONDS> 162,336
0
0
<COMMON> 250
<OTHER-SE> 204,064
<TOTAL-LIABILITY-AND-EQUITY> 765,312
<SALES> 688,748
<TOTAL-REVENUES> 688,748
<CGS> 509,894
<TOTAL-COSTS> 509,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,975
<INCOME-PRETAX> 2,455
<INCOME-TAX> 1,596
<INCOME-CONTINUING> 694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 694
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
