<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A Amendment 2
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
------------------------
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)
Delaware 41-0404230
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(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)
Registrant's telephone number, including area code (410) 528-2755
---------------
Not applicable
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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 November 9, 1998.
<PAGE>
INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Part I - Financial Information ..................................................... 3
- ------
Item 1. Financial Statements(unaudited) ........................................... 3
Consolidated Balance Sheets as of -
September 30, 1998 and June 30,1998 ....................................... 3
Consolidated Statements of Operations -
Three months ended September 30, 1998 and
September 30, 1997 ........................................................ 4
Condensed Consolidated Statements of Cash Flows-Three months
ended September 30, 1998 and September 30, 1997 ........................... 5
Notes to the Consolidated Financial Statements ............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 9
Part II - Other Information ......................................................... 14
- -------
Item 1. Legal Proceedings ......................................................... 14
Item 6. Exhibits and Reports on Form 8-K .......................................... 14
Signatures ................................................................ 15
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
--------------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 7,382 $ 9,697
Accounts receivable, net 237,719 238,613
Inventories 132,907 124,793
Other current assets 8,173 8,423
--------------- -------------
Total current assets 386,181 381,526
Property, plant and equipment, net 148,955 145,305
Cost in excess of net assets acquired and other identifiable 238,499 250,650
intangibles, net
Other assets and deferred charges 19,610 19,397
--------------- -------------
Total Assets $793,245 $796,878
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Short-term borrowings $ 78,595 $ 60,262
Current maturities of long-term debt 14,768 28,531
Accounts payable, trade 116,185 120,775
Accrued warranty 14,852 14,947
Other accrued liabilities 84,424 88,713
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Total current liabilities 308,824 313,228
Long-term debt 176,960 177,083
Other liabilities 93,176 100,727
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Total liabilities 578,960 591,038
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 38,516 33,185
Accumulated other comprehensive income (4,396) (7,510)
--------------- -------------
Total Stockholder's Equity 214,285 205,840
--------------- -------------
Total Liabilities and Stockholder's Equity $793,245 $796,878
--------------- -------------
--------------- -------------
</TABLE>
See Notes To Consolidated Financial Statements
3
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
September 30, September 30,
1998 1997
--------------------------------------
<S> <C> <C>
Net Sales $ 251,400 $ 245,126
Cost of Sales 183,865 178,039
--------------- -------------
Gross Profit 67,535 67,087
Operating Expenses:
Selling, general and administrative 55,088 55,207
Restructuring 751 0
Amortization of intangible assets 2,902 2,900
--------------- -------------
58,741 58,107
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Income from operations 8,794 8,980
Interest expense, net 6,506 6,558
Other (income) expense, net (4,061) (152)
--------------- -------------
Income before income taxes 6,349 2,574
Minority interest (earnings) loss (10) 126
Income taxes 1,529 1,158
--------------- -------------
Net income $4,830 $1,290
--------------- -------------
--------------- -------------
</TABLE>
See Notes To Consolidated Financial Statements
4
<PAGE>
AAF-McQUAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
September 30, September 30,
1998 1997
-------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,830 $ 1,290
Adjustments to reconcile to cash from
operating activities:
Depreciation and amortization 6,858 6,688
Foreign currency transaction (gains) losses (259) 183
Changes in operating assets and liabilities (13,060) (3,681)
--------------- -------------
Net cash from operating activities (1,631) 4,480
Cash flows from investing activities:
Capital expenditures, net (5,241) (3,637)
--------------- -------------
Net cash from investing activities (5,241) (3,637)
Cash flows from financing activities:
Net borrowing (repayments) under short-term
borrowing arrangements 18,333 4,911
Payments on long-term debt (13,886) (2,720)
--------------- -------------
Net cash from financing activities 4,447 2,191
Effect of exchange rate changes on cash 110 156
--------------- -------------
Net increase (decrease) in cash and cash equivalents (2,315) 3,190
Cash and cash equivalents at beginning of period 9,697 10,827
--------------- -------------
Cash and cash equivalents at end of period $ 7,382 $ 14,017
--------------- -------------
--------------- -------------
</TABLE>
See Notes To Consolidated Financial Statements
5
<PAGE>
Notes to the Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and all of its 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 months ended September 30, 1998 and September 30, 1997,
the balance sheets at September 30, 1998, and June 30, 1998, and the
consolidated statements of cash flows for the three months ended September 30,
1998 and September 30, 1997.
The operating results for the three months ended September 30, 1998 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 closest Saturday
to September 30. For clarity in presentation all periods presented herein are
shown to end on the 30th 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 recent activity related to new product
introductions and discontinued product lines.
Note 2. Inventories:
Inventories consist of the following:
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
--------------- -------------
<S> <C> <C>
FIFO Cost:
Raw Materials $ 54,998 $ 46,513
Work-in-process 27,583 33,493
Finished goods 46,567 40,961
--------------- -------------
129,148 120,967
LIFO adjustment 3,759 3,826
--------------- -------------
$132,907 $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
<PAGE>
The components of comprehensive income for the first quarters of fiscal years
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
--------------- -------------
<S> <C> <C>
Net income $ 4,830 $ 1,290
Foreign currency translation adjustment 3,114 (488)
--------------- -------------
Total comprehensive income $ 7,944 $ 802
--------------- -------------
--------------- -------------
</TABLE>
Note 4. Income Taxes:
The tax provisions for the three month periods ended September 30, 1998 and
1997 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 three months ended September 30, 1998 and 1997, 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 quarter ended September
30, 1998 reflects the effect of the indemnification settlement agreement and the
IRS settlement described below which was recognized as income for financial
reporting purposes but is not taxable for income tax purposes. The Company
estimates that its effective income tax rate for the year ended June 30, 1999
will be 45%.
During the first quarter of fiscal year 1999, as a result of the
indemnification settlement agreement and the IRS settlement described below, 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. 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. The Company continues to implement actions in accordance with the
restructuring plan. In addition, the Company restructured its German operations
of the Filtration Products Group during the first quarter of fiscal year 1999,
recording a charge of $0.8 million which primarily represents severance
accruals.
Note 6. 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 described above, the Company expects to receive payments from
certain former shareholders of approximately $5.0 million in fiscal year 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 has recognized $2.9
million in other income in the first quarter of fiscal year 1999.
7
<PAGE>
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.
Income Tax:
The Internal Revenue Service ("IRS") has completed its examination of the
Company's tax returns for the years 1987 through 1994 and has issued a final
executed closing agreement which was received by the Company in September.
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations:
Net Sales
Consolidated net sales for the first quarter of fiscal year 1999 were
$251.4 million. This represents an increase of $6.3 million, or 2.6%, from
$245.1 million for the first quarter of fiscal year 1998. The Commercial Air
Conditioning and Refrigeration Group reported a net sales increase of $9.2
million, or 5.8%, which was offset by a decrease in net sales of $1.5 million,
or 1.7%, in the Filtration Products Group for the quarter as compared to the
prior year. The following table presents the Company's revenues by business
segment. The first quarter of fiscal year 1999 reflects a 14 week period as
compared to a 13 week period for the first quarter of 1998.
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
--------------- -------------
(dollars in thousands)
<S> <C> <C>
Net sales:
Commercial Air Conditioning and Refrigeration $ 166,756 $ 157,584
Filtration Products 88,444 89,938
Eliminations/other (3,800) (2,396)
--------------- -------------
Total $ 251,400 $ 245,126
--------------- -------------
--------------- -------------
</TABLE>
The Commercial Air Conditioning and Refrigeration Group's net sales
increased $9.2 million, or 5.8%, to $166.8 million for the first quarter of
fiscal year 1999 versus the first quarter of fiscal year 1998. This increase was
attained despite the sale of the industrial fan business in October of 1997
which contributed $5.8 million in the first quarter of fiscal year 1998.
Excluding the fan business, net sales increased $15.0 million, or 9.9%, year
over year for the first quarter.
North American net sales increased 1.6% in the first quarter of fiscal year
1999, or 7.0% excluding the industrial fan business, compared to the first
quarter of fiscal year 1998. This sales increase is primarily attributable to
increased sales in air handling systems. Strong market demand for air handling
rooftop, self contained and new air handling products continued to grow
resulting in increased sales of $9.3 million for the first quarter of fiscal
year 1999 as compared to the first quarter of fiscal year 1998. Additionally,
the service organization had a net sales increase of $1.1 million for the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998
due to strong demand for replacement parts and retrofit demand. These net sales
increases were offset by a 4.4% decrease in chiller products for the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998
primarily due to reduced centrifugal chiller sales. Centrifugal chiller net
sales decreased in the export markets, especially the Asian regions. As a result
of the weak economic conditions in the Asian markets, management believes that
sales to this area will continue to slow. The decrease in centrifugal chiller
net sales was partially offset by increased demand for air cooled chiller
products and increased compressor sales. Terminal products net sales remained
flat for the first quarter of fiscal year 1999 as compared to the first quarter
of fiscal year 1998 as volume growth in terminal products was offset by an
overall decline in the unit ventilator market.
International net sales volume increased 16.3% in the first quarter of
fiscal year 1999 versus the comparable period of the prior fiscal year. Domestic
chiller product sales increases experienced in Italy, France and the United
Kingdom and strong export sales in Italy and the United Kingdom resulted in a
net sales increase of $5.1 million for the first quarter of fiscal year 1999 as
compared to the first quarter of fiscal year 1998. International net sales
increases also resulted from two refrigeration contracts and the establishment
of a sales office in Dubai.
9
<PAGE>
Backlog for the Commercial Air Conditioning and Refrigeration Group was
$125.5 million at the end of the first quarter of fiscal year 1999 as compared
to $144.7 million and $138.5 million at the end of the first quarter and fiscal
year end 1998, respectively. The decrease results from normal volatility in
order flow, continued softness in the Asian markets and the timing of shipments.
Additionally, terminal products backlog is down due to decreased unit ventilator
market conditions.
The Filtration Products Group's net sales decreased $1.5 million, or 1.7%,
to $88.4 million for the first quarter of fiscal year 1999 versus the first
quarter of fiscal year 1998. Compared to the first quarter of fiscal year 1998,
domestic net sales remained flat and international net sales decreased 1.5% in
the first quarter of fiscal year 1999. In the domestic markets, net sales
increases in air filtration product markets were offset by reductions in the
environmental product business resulting from the recent reorganization which
focuses on core products. European net sales increased 13.6% for the first
quarter of fiscal year 1999 compared to the first quarter of fiscal year 1998.
This increase resulted from volume increases in air filtration products in all
regions, increased volume of air pollution control systems in France and
machinery filtration systems in the European markets. Asia sales decreased $4.4
million for the first quarter of fiscal year 1999 as compared to the first
quarter of fiscal year 1998. This decrease is attributable to the continuing
weak economic conditions in the Asian markets and a Korean project in the first
quarter of fiscal year 1998 which was not repeated in the current year.
Management expects sales growth in the Asian market to continue slowing due to
the economic conditions being experienced in the region. Latin American
environmental product sales decreased $1.2 million during the first quarter of
fiscal year 1999 versus the comparable period of fiscal year 1998 due to soft
market demand.
Gross Profit
Consolidated gross margin was $67.5 million or 26.9% of sales for the first
quarter of fiscal year 1999 versus $67.1 million or 27.4% of sales for the first
quarter of fiscal year 1998. In the Commercial Air Conditioning and
Refrigeration Group, gross profit as a percentage of sales was 25.4% in the
first quarter of fiscal year 1999 as compared to 25.8% of sales in the first
quarter of fiscal year 1998. Gains in gross margin resulting from price
increases and product mix of air handling products were partially offset by
unfavorable manufacturing variances and lower margin sales of chiller and
terminal products. The Filtration Products Group's gross profit as a percentage
of sales decreased in the first quarter from 29.4% in fiscal year 1998 to 28.4%
in fiscal year 1999. This decrease resulted from margin rate deterioration in
Asia due to competitive price pressures and product mix in Latin America more
than offsetting favorable gains in product mix in Europe.
Operating Expenses
Operating expenses were $58.7 million or 23.4% of sales for the first
quarter of fiscal year 1999 as compared to $58.1 million or 23.7% of sales
for the first quarter of fiscal year 1998. Expense reductions resulting from
Company-wide cost containment measures and the reorganization of the
Filtration Products Group were offset by volume related expense increases in
the Commercial Air Conditioning and Refrigeration Group during the first
quarter of fiscal year 1999 including commission expense increases from
changes in distribution pricing and warranty expense increases related to new
product introductions in the chiller business and a discontinued product
line. The Filtration Products Group incurred expenses, primarily severance,
related to the restructuring of its German operations. Research and
development remained consistent year over year for the first quarter. The
Company continues to incur certain strategic expenses to enhance its position
in the global market and costs associated with upgrading software systems to
enhance business performance.
Income from Operations
Income from operations for the first quarter of fiscal years 1999 and 1998
was $8.8 million and $9.0 million, respectively. As a percentage of sales,
income from operations was 3.5% for the first quarter of fiscal year 1999 and
3.7% for the first quarter of fiscal year 1998. The Commercial Air Conditioning
and Refrigeration Group had a decrease in income from operations from $5.3
million, or 3.4% of sales, to $3.8 million, or 2.3% of sales, for the first
quarter of fiscal year 1999 as compared to the first quarter of fiscal year
10
<PAGE>
1998, respectively, as a result of the warranty expenses noted above. The
Filtration Products segment had an increase in income from operations to $5.3
million, or 5.9% of sales, in the first quarter of fiscal year 1999 from $4.3
million, or 4.8% of sales, in the first quarter of fiscal year 1998.
Net Interest Expense and Other (Income) Expense
Net interest expense was $6.5 million in the first quarter of fiscal year
1999 as compared to $6.6 million for the first quarter of fiscal year 1998. Net
other income for the first quarter of fiscal year 1999 was $4.8 million compared
to $0.2 million in the first quarter of fiscal year 1998. 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 6. The Company also recorded a $1.5 million gain
related to the termination of a pension plan in Canada. The remaining components
of other income and expenses resulted from foreign currency gains and equity
affiliate transactions.
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 quarter of fiscal year 1999, funds used by operating activities
were $1.6 million as compared to net cash provided by operations of $4.5 million
in the prior fiscal year for the comparable period. The decrease in operating
cash provided for the first quarter of fiscal year 1999 reflects higher working
capital requirements, primarily increased investment in inventory. During the
first quarter of fiscal year 1999, cash used in investing activities was $5.2
million, reflecting increased capital spending on the information technology
enhancement project. As a result of a settlement agreement reached with the
former shareholders of the Company regarding certain indemnification matters,
the Company 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 were $13.9 million. Cash of $18.3 million was
provided by net borrowing under short-term borrowing arrangements for long term
debt repayment and working capital requirements during the quarter.
During the first quarter of fiscal year 1999, the Company amended its bank
credit facility, effective as of June 30, 1998, to restate certain financial
covenants. At the end of the first quarter of fiscal year 1999, the Company had
approximately $39 million in additional borrowing capacity under the amended
revolving credit facility.
As a result of approaches received from interested parties, OYL has
appointed BancAmerica Robertson Stephens as its financial advisor to pursue a
sale process which may or may not result in a sale of the Company. The
short-term credit facilities provided to two subsidiaries of the Company and
supported by letters of credit from OYL (17 million for J&E Hall Limited
(U.K.) and $6.0 million for AAF-McQuay Canada Inc.) were extended from an
expiration date of September 30, 1998 to December 31, 1998. 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, 1999. Each of these support arrangements may be extended for additional time
periods with the consent of OYL and the banks providing the facilities. The time
period of any extension will depend upon a number of factors, including the
status of the sale process described earlier. Certain executive compensation
programs may be triggered as a result of a sale.
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.
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
11
<PAGE>
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 $25.0 million (having incurred approximately $18.8 million as of
September 30, 1998). 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, will
be Year 2000 compliant. 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> <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 February 1999
-------------------------------------------------------------------------------------------------------------
Commercial Air Conditioning ERP In Process September 1997 April 1999
-------------------------------------------------------------------------------------------------------------
Product compliance In Process May 1998 TBD
-------------------------------------------------------------------------------------------------------------
Materials suppliers In Process June 1998 TBD
-------------------------------------------------------------------------------------------------------------
Other IT issues including third Scheduled September 1998 TBD
parties
-------------------------------------------------------------------------------------------------------------
Equipment and facilities Scheduled September 1998 TBD
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Year 2000 activities are currently on schedule, and the Company anticipates
successful implementation of the scheduled ERP projects and systems upgrades.
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.
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
12
<PAGE>
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 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, unforeseen difficulties in maintaining mutually beneficial
relationships with strategic initiatives partners, the Year 2000 issue, and the
potential sale process. 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.
13
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Internal Revenue Service ("IRS") has completed its examination of
the Company's tax returns for the years 1987 through 1994 and has issued a final
executed closing agreement which was received by the Company in September.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
Exhibit 27 Financial Data Schedule ( filed herewith)
Exhibit 10.1 Severance Agreement dated September 8, 1998 with Joseph B. Hunter
Exhibit 10.2 Divestment Incentive Program Agreement dated September 8, 1998 with Gerald L. Boehrs*
Exhibit 10.3 Divestment Incentive Program Agreement dated September 8, 1998 with Michael J.
Christopher*
Exhibit 10.4 Divestment Incentive Program Agreement dated September 8, 1998 with Andrew R.
Morrison*
</TABLE>
* Portions of the document have been omitted pursuant to a
request for confidential treatment. The full documents have
been filed separately.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the period.
14
<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 November 10, 1998 By: /S/ ANDREW R. MORRISON
------------------- ------------------------
Andrew R. Morrison
Chief Financial Officer
DATE November 10, 1998 /S/ BRUCE D. KRUEGER
-------------------- ------------------------
Bruce D. Krueger Controller
(Principal Accounting Officer)
15
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
Exhibit 27 Financial Data Schedule ( filed herewith)
Exhibit 10.1 Severance Agreement dated September 8, 1998 with Joseph B. Hunter
Exhibit 10.2 Divestment Incentive Program Agreement dated September 8, 1998 with Gerald
L. Boehrs*
Exhibit 10.3 Divestment Incentive Program Agreement dated September 8, 1998 with Michael
J. Christopher*
Exhibit 10.4 Divestment Incentive Program Agreement dated September 8, 1998 with Andrew
R. Morrison*
</TABLE>
* Portions of the document have been omitted pursuant to a request for
confidential treatment. The full documents have been filed separately.
16
<PAGE>
Exhibit 10.1
SEVERANCE PROGRAM
This Severance Program is hereby entered into this 8th day of
September 1998, between AAF-McQuay Inc. (hereinafter "the Company") and Joseph
B. Hunter (hereinafter "Employee"), who are collectively referred to herein as
the "Parties."
WHEREAS, the Company's shareholder plans to sell the Company, and the
Company wants to provide an incentive package to certain key employees in
exchange for their agreement to remain employed up to and beyond the sale of the
Company.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration as hereinafter recited, the
receipt and adequacy of which are hereby acknowledged, the parties, intending to
be legally bound, covenant and agree as follows:
1. The Employee agrees to continue his employment with the Company
in his position as President, Chief Executive Officer, and to
perform his customary and regular duties, up to and including the
effective date of the sale of the Company (the "Effective Date").
The Company agrees that it will continue to pay the Employee his
salary at his current monthly rate of $35,974 (Thirty Five
Thousand Nine Hundred Seventy Four Dollars). The Employee further
agrees that, if the purchasing company makes a written offer to
the Employee on or prior to the Effective Date of a comparable
position for at least two years along with comparable salary and
benefits in a location not requiring the Employee to relocate,
the Employee will accept that employment and remain employed by
the purchasing company for at least two years after the Effective
Date. An offer or request pursuant to this paragraph 1 is
hereinafter referred to as a "Continued Employment Offer."
2. If the Employee agrees to, and remains, employed as described in
paragraph 1 above, and if he has not breached any of the
provisions of this Agreement (including, without limitation,
sections 4 and 5 hereof) (a "Breach"), he will be eligible to
receive the following severance payment:
If the Employee remains employed up to and including the
Effective Date and the purchasing company does not make a
Continued Employment Offer, the Company agrees to pay the
Employee $863,376, (Eight Hundred Sixty Three Thousand Three
Hundred Seventy Six Dollars) which amount is equal to 24
months compensation at his current rate, as severance pay,
less applicable withholding tax. This severance pay will be
considered earned as of the first business day after the
Effective Date and will be paid to the Employee within one
week after the Effective Date. If the Employee's employment
with the Company is terminated without
<PAGE>
cause prior to the expiration of two years from the date of
acceptance of his Continued Employment Offer, this severance
pay will be considered earned as of the first business day
after such termination and will be paid to the Employee
within one week after such termination.
3. If the Employee's employment with the Company terminates for any
reason (other than a termination without cause) prior to the
Effective Date or, in the event the purchasing company makes a
Continued Employment Offer, or if the Employee commits a Breach,
the Company shall have no obligation to make any payments of any
kind to the Employee, including but not limited to severance
payments as described above.
4. The Employee recognizes that the Company's business interests
require a confidential relationship between the Company and the
Employee. Accordingly, THE EMPLOYEE AGREES DURING HIS EMPLOYMENT
WITH THE COMPANY FOR A TWO-YEAR PERIOD THEREAFTER TO KEEP
CONFIDENTIAL AND NOT TO DISCLOSE TO ANYONE ANY CONFIDENTIAL OR
PROPRIETARY INFORMATION OF THE COMPANY, INCLUDING PARTICIPATION
IN THIS SEVERANCE PROGRAM.
5. The Parties agree that any breach by the Employee of the
confidentiality provisions in this Agreement will cause
immediate, material and irreparable injury and damage, and that
there is no adequate remedy at law for such breach. In the event
of a breach of the confidentiality provisions of the Agreement,
the Company or its successor shall be entitled immediately to
seek enforcement of this Agreement in a court of competent
jurisdiction by means of a decree of specific performance, and
injunction without the posting of a bond, any other form of
equitable relief, and any other remedy it may have at law or in
equity. In the event that a court holds any provision of this
Agreement to be unenforceable, the parties agree that that
provision shall be reduced to the degree necessary to render it
enforceable without affecting the rest of this Agreement.
6. In the event any dispute arises under this Agreement that is
adjudicated to a final verdict in the Employee's favor by a court
of competent jurisdiction, no further appeal is permitted and the
Employee has complied with paragraph 4 hereof, the Company shall
reimburse the Employee for his reasonable expenses of counsel
incurred in connection with such dispute from the time the
Company is notified of the dispute to its final adjudication.
<PAGE>
7. Any other provision of this Agreement notwithstanding, this
Agreement shall terminate and no longer be of any force or effect
(i) immediately if the Company aborts the sale process and, (ii)
in any case if a sale of the Company has not occurred on or
before June 30, 1999 (the "Termination Date").
8. Each of the parties hereto (a) consents to submit himself or
itself to the personal jurisdiction of any federal court located
in the State of Maryland or any Maryland State court in the event
any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that he
or it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such
court, and (c) agrees that he or it will not bring any action
relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal
court sitting in the State of Maryland or a Maryland State court.
9. This Agreement supersedes all prior Agreements between the
parties concerning the subject matter hereof, and this Agreement
constitutes the entire Agreement between the parties with respect
to the subject matter hereof. This Agreement may be modified only
by a written instrument signed by the Employee and by the
President of the Company. The validity and construction of this
Agreement and any of its provisions shall be determined under the
laws of the State of Maryland.
10. The Employee acknowledges that he has read this Agreement in its
entirety, understands all of its terms and conditions, that he
has the opportunity to consult with any individuals of his choice
including legal counsel of his choice, that he is entering into
this Agreement of his own free will, without coercion from any
source, and that he agrees to abide by all of the terms and
conditions herein contained.
IN WITNESS HEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
WITNESS: AAF-McQUAY INC.
______ September 8, 1998________ By:___/s/ Andrew R. Morrison___________
Andrew R. Morrison
Chief Financial Officer
______ September 8, 1998________ ___/s/ Joseph B. Hunter________________
Employee
<PAGE>
Exhibit 10.2
* Portions of this document, marked with an asterisk "*", have been omitted
pursuant to a request for confidential treatment. The full documents
have been filed separately.
DIVESTMENT INCENTIVE PROGRAM
This Divestment Incentive Program is hereby entered into this 8th day
of September 1998, between AAF-McQuay Inc. (hereinafter "the Company") and
Gerald L. Boehrs (hereinafter "Employee"), who are collectively referred to
herein as the "Parties."
WHEREAS, the Company's shareholder plans to sell the Company, and the
Company wants to provide an incentive package to certain key employees in
exchange for their agreement to remain employed up to and beyond the sale of the
Company.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration as hereinafter recited, the
receipt and adequacy of which are hereby acknowledged, the parties, intending to
be legally bound, covenant and agree as follows:
1. The Employee agrees to continue his employment with the Company
in his position as President, AAF International, and to perform
his customary and regular duties, up to and including the
effective date of the sale of the Company (the "Effective Date").
The Company agrees that it will continue to pay the Employee his
salary at his current monthly rate of $17,767 (Seventeen
Thousand, Seven Hundred Sixty Seven Dollars). The Employee
further agrees that, if the purchasing company makes a written
offer to the Employee on or prior to the Effective Date of a
comparable position for at least two years along with comparable
salary and benefits in a location not requiring the Employee to
relocate, the Employee will accept that employment and remain
employed by the purchasing company for at least two years after
the Effective Date. An offer or request pursuant to this
paragraph 1 is hereinafter referred to as a "Continued Employment
Offer."
2. If the Employee agrees to, and remains, employed as described in
paragraph 1 above, and if he has not breached any of the
provisions of this Agreement (including, without limitation,
sections 4 and 5 hereof) (a "Breach"), he will be eligible to
receive the following additional incentive payments:
(a) If the Employee remains employed up to and including the
Effective Date and the purchasing company does not make a
Continued Employment Offer, the Company agrees to pay the
Employee $426,420, (Four Hundred Twenty Six Thousand, Four
Hundred and Twenty Dollars) which amount is equal to 24
months compensation at his current rate, as severance pay,
less applicable withholding tax. This severance pay will be
considered earned as of the first business day after the
Effective Date and will be paid to the Employee within one
week after the Effective Date. If the
<PAGE>
Employee's employment with the Company is terminated without
cause prior to the expiration of two years from the date of
acceptance of his Continued Employment Offer, this severance
pay will be considered earned as of the first business day
after such termination and will be paid to the Employee
within one week after such termination.
(b) Provided that the Company is sold prior to the Termination
Date of this Agreement, it is the Company's intention to
create a bonus pool (the "Executive Bonus Pool"). The
Employee's share of the Executive Bonus Pool will be a
function both of the Employee's base salary and a
performance factor. Individual payouts will be based on
appraised performance during the sale process by the
Employee's direct supervisor and additional higher levels of
senior management, including the CEO. In addition, potential
payouts, less applicable withholding tax, will be based upon
the selling price and the ultimate equity proceeds received
by the current shareholder as described below:
<TABLE>
<CAPTION>
Employee Equity Proceeds to Shareholder Employee's Potential Share of
Executive Bonus Pool
<S> <C> <C>
Gerald L. Boehrs * $ 0
$181.155
$298,257
$435,007
$589,227
</TABLE>
Interpolation will apply based on actual equity proceeds to
shareholder. In addition, the Potential Bonus amounts listed
above are based on the assumption that the Employee meets or
exceeds the expectations of management during the sale
process and are subject to change.
If the Employee remains employed up to and including the
Effective Date and the purchasing company makes a Continued
Employment Offer, 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
Effective Date and 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
first anniversary of the Effective Date. If the Employee
remains employed up to and including the Effective Date and
the purchasing company does not make a Continued Employment
* Portions of this document have been omitted pursuant to a request for
confidential treatment. The full documents have been filed separately.
<PAGE>
Offer, 100% of the Employee's share, if any, of the
Executive Bonus Pool will be paid to the Employee on the
Effective Date.
3. If the Employee's employment with the Company terminates for any
reason (other than a termination without cause) prior to the
Effective Date or, in the event the purchasing company makes a
Continued Employment Offer, or if the Employee commits a Breach,
the Company shall have no obligation to make any payments of any
kind to the Employee, including but not limited to severance
payments or, in certain cases, incentive payments as described
above.
4. The Employee recognizes that the Company's business interests
require a confidential relationship between the Company and the
Employee. Accordingly, THE EMPLOYEE AGREES DURING HIS EMPLOYMENT
WITH THE COMPANY FOR A TWO-YEAR PERIOD THEREAFTER TO KEEP
CONFIDENTIAL AND NOT TO DISCLOSE TO ANYONE ANY CONFIDENTIAL OR
PROPRIETARY INFORMATION OF THE COMPANY, INCLUDING PARTICIPATION
IN THIS DIVESTMENT INCENTIVE PROGRAM.
5. The Parties agree that any breach by the Employee of the
confidentiality provisions in this Agreement will cause
immediate, material and irreparable injury and damage, and that
there is no adequate remedy at law for such breach. In the event
of a breach of the confidentiality provisions of the Agreement,
the Company or its successor shall be entitled immediately to
seek enforcement of this Agreement in a court of competent
jurisdiction by means of a decree of specific performance, and
injunction without the posting of a bond, any other form of
equitable relief, and any other remedy it may have at law or in
equity. In the event that a court holds any provision of this
Agreement to be unenforceable, the parties agree that that
provision shall be reduced to the degree necessary to render it
enforceable without affecting the rest of this Agreement.
6. In the event any dispute arises under this Agreement that is
adjudicated to a final verdict in the Employee's favor by a court
of competent jurisdiction, no further appeal is permitted and the
Employee has complied with paragraph 4 hereof, the Company shall
reimburse the Employee for his reasonable expenses of counsel
incurred in connection with such dispute from the time the
Company is notified of the dispute to its final adjudication.
7. Any other provision of this Agreement notwithstanding, this
Agreement shall terminate and no longer be of any force or effect
(i) immediately if the Company aborts the sale process and, (ii)
in any case if a sale of the
<PAGE>
Company has not occurred on or before June 30, 1999 (the
"Termination Date").
8. Each of the parties hereto (a) consents to submit himself or
itself to the personal jurisdiction of any federal court located
in the State of Maryland or any Maryland State court in the event
any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that he
or it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such
court, and (c) agrees that he or it will not bring any action
relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal
court sitting in the State of Maryland or a Maryland State court.
9. This Agreement supersedes all prior Agreements between the
parties concerning the subject matter hereof, and this Agreement
constitutes the entire Agreement between the parties with respect
to the subject matter hereof. This Agreement may be modified only
by a written instrument signed by the Employee and by the
President of the Company. The validity and construction of this
Agreement and any of its provisions shall be determined under the
laws of the State of Maryland.
10. The Employee acknowledges that he has read this Agreement in its
entirety, understands all of its terms and conditions, that he
has the opportunity to consult with any individuals of his choice
including legal counsel of his choice, that he is entering into
this Agreement of his own free will, without coercion from any
source, and that he agrees to abide by all of the terms and
conditions herein contained.
IN WITNESS HEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
WITNESS: AAF-McQUAY INC.
__September 8, 1998_____________ By:____/s/ Joseph B. Hunter__________
Joseph B. Hunter
President and Chief Executive Officer
__September 8, 1998_____________ /s/ Gerald L. Boehrs ________________
Employee
<PAGE>
Exhibit 10.3
* Portions of this document, marked with an asterisk "*", have been omitted
pursuant to a request for confidential treatment. The full documents
have been filed separately.
DIVESTMENT INCENTIVE PROGRAM
This Divestment Incentive Program is hereby entered into this 8th day
of September 1998, between AAF-McQuay Inc. (hereinafter "the Company") and
Michael J. Christopher (hereinafter "Employee"), who are collectively referred
to herein as the "Parties."
WHEREAS, the Company's shareholder plans to sell the Company, and the
Company wants to provide an incentive package to certain key employees in
exchange for their agreement to remain employed up to and beyond the sale of the
Company.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration as hereinafter recited, the
receipt and adequacy of which are hereby acknowledged, the parties, intending to
be legally bound, covenant and agree as follows:
1. The Employee agrees to continue his employment with the Company
in his position as Executive Vice President, and to perform his
customary and regular duties, up to and including the effective
date of the sale of the Company (the "Effective Date"). The
Company agrees that it will continue to pay the Employee his
salary at his current monthly rate of $17,681 (Seventeen
Thousand, Six Hundred, Eighty One Dollars). The Employee further
agrees that, if the purchasing company makes a written offer to
the Employee on or prior to the Effective Date of a comparable
position for at least two years along with comparable salary and
benefits in a location not requiring the Employee to relocate,
the Employee will accept that employment and remain employed by
the purchasing company for at least two years after the Effective
Date. An offer or request pursuant to this paragraph 1 is
hereinafter referred to as a "Continued Employment Offer."
2. If the Employee agrees to, and remains, employed as described in
paragraph 1 above, and if he has not breached any of the
provisions of this Agreement (including, without limitation,
sections 4 and 5 hereof) (a "Breach"), he will be eligible to
receive the following additional incentive payments:
(a) If the Employee remains employed up to and including the
Effective Date and the purchasing company does not make a
Continued Employment Offer, the Company agrees to pay the
Employee $424,360, (Four Hundred Twenty Four Thousand
Dollars), which amount is equal to 24 months compensation at
his current rate, as severance pay, less applicable
withholding tax. This severance pay will be considered
earned as of the first business day after the Effective Date
and will be paid to the
<PAGE>
Employee within one week after the Effective Date. If the
Employee's employment with the Company is terminated without
cause prior to the expiration of two years from the date of
acceptance of his Continued Employment Offer, this severance
pay will be considered earned as of the first business day
after such termination and will be paid to the Employee
within one week after such termination.
(b) Provided that the Company is sold prior to the Termination
Date of this Agreement, it is the Company's intention to
create a bonus pool (the "Executive Bonus Pool"). The
Employee's share of the Executive Bonus Pool will be a
function both of the Employee's base salary and a
performance factor. Individual payouts will be based on
appraised performance during the sale process by the
Employee's direct supervisor and additional higher levels of
senior management, including the CEO. In addition, potential
payouts, less applicable withholding tax, will be based upon
the selling price and the ultimate equity proceeds received
by the current shareholder as described below:
<TABLE>
<CAPTION>
Employee Equity Proceeds to Shareholder Employee's Potential Share of
Executive Bonus Pool
<S> <C> <C>
Michael J. Christopher * $ 0
$175,030
$288,173
$420,299
$569,304
</TABLE>
Interpolation will apply based on actual equity proceeds to
shareholder. In addition, the Potential Bonus amounts listed
above are based on the assumption that the Employee meets or
exceeds the expectations of management during the sale
process and are subject to change.
If the Employee remains employed up to and including the
Effective Date and the purchasing company makes a Continued
Employment Offer, 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
Effective Date and 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
first anniversary of the Effective Date. If the Employee
remains employed up to and including the Effective Date and
the purchasing company does not make a Continued Employment
* Portions of this document have been omitted pursuant to a request for
confidential treatment. The full documents have been filed separately.
<PAGE>
Offer, 100% of the Employee's share, if any, of the
Executive Bonus Pool will be paid to the Employee on the
Effective Date.
3. If the Employee's employment with the Company terminates for any
reason (other than a termination without cause) prior to the
Effective Date or, in the event the purchasing company makes a
Continued Employment Offer, or if the Employee commits a Breach,
the Company shall have no obligation to make any payments of any
kind to the Employee, including but not limited to severance
payments or, in certain cases, incentive payments as described
above.
4. The Employee recognizes that the Company's business interests
require a confidential relationship between the Company and the
Employee. Accordingly, THE EMPLOYEE AGREES DURING HIS EMPLOYMENT
WITH THE COMPANY FOR A TWO-YEAR PERIOD THEREAFTER TO KEEP
CONFIDENTIAL AND NOT TO DISCLOSE TO ANYONE ANY CONFIDENTIAL OR
PROPRIETARY INFORMATION OF THE COMPANY, INCLUDING PARTICIPATION
IN THIS DIVESTMENT INCENTIVE PROGRAM.
5. The Parties agree that any breach by the Employee of the
confidentiality provisions in this Agreement will cause
immediate, material and irreparable injury and damage, and that
there is no adequate remedy at law for such breach. In the event
of a breach of the confidentiality provisions of the Agreement,
the Company or its successor shall be entitled immediately to
seek enforcement of this Agreement in a court of competent
jurisdiction by means of a decree of specific performance, and
injunction without the posting of a bond, any other form of
equitable relief, and any other remedy it may have at law or in
equity. In the event that a court holds any provision of this
Agreement to be unenforceable, the parties agree that that
provision shall be reduced to the degree necessary to render it
enforceable without affecting the rest of this Agreement.
6. In the event any dispute arises under this Agreement that is
adjudicated to a final verdict in the Employee's favor by a court
of competent jurisdiction, no further appeal is permitted and the
Employee has complied with paragraph 4 hereof, the Company shall
reimburse the Employee for his reasonable expenses of counsel
incurred in connection with such dispute from the time the
Company is notified of the dispute to its final adjudication.
7. Any other provision of this Agreement notwithstanding, this
Agreement shall terminate and no longer be of any force or effect
(i) immediately if the Company aborts the sale process and, (ii)
in any case if a sale of the
<PAGE>
Company has not occurred on or before June 30, 1999 (the
"Termination Date").
8. Each of the parties hereto (a) consents to submit himself or
itself to the personal jurisdiction of any federal court located
in the State of Maryland or any Maryland State court in the event
any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that he
or it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such
court, and (c) agrees that he or it will not bring any action
relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal
court sitting in the State of Maryland or a Maryland State court.
9. This Agreement supersedes all prior Agreements between the
parties concerning the subject matter hereof, and this Agreement
constitutes the entire Agreement between the parties with respect
to the subject matter hereof. This Agreement may be modified only
by a written instrument signed by the Employee and by the
President of the Company. The validity and construction of this
Agreement and any of its provisions shall be determined under the
laws of the State of Maryland.
10. The Employee acknowledges that he has read this Agreement in its
entirety, understands all of its terms and conditions, that he
has the opportunity to consult with any individuals of his choice
including legal counsel of his choice, that he is entering into
this Agreement of his own free will, without coercion from any
source, and that he agrees to abide by all of the terms and
conditions herein contained.
IN WITNESS HEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
WITNESS: AAF-McQUAY INC.
__September 8, 1998_____________ By:____/s/ Joseph B. Hunter__________
Joseph B. Hunter
President and Chief Executive Officer
__September 8, 1998_____________ ______/s/ Michael J. Christopher_________
Employee
<PAGE>
Exhibit 10.4
* Portions of this document, marked with an asterisk "*", have been omitted
pursuant to a request for confidential treatment. The full documents have
been filed separately.
DIVESTMENT INCENTIVE PROGRAM
This Divestment Incentive Program is hereby entered into this 8th day
of September 1998, between AAF-McQuay Inc. (hereinafter "the Company") and
Andrew R. Morrison (hereinafter "Employee"), who are collectively referred to
herein as the "Parties."
WHEREAS, the Company's shareholder plans to sell the Company, and the
Company wants to provide an incentive package to certain key employees in
exchange for their agreement to remain employed up to and beyond the sale of the
Company.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration as hereinafter recited, the
receipt and adequacy of which are hereby acknowledged, the parties, intending to
be legally bound, covenant and agree as follows:
1. The Employee agrees to continue his employment with the Company
in his position as Chief Financial Officer, and to perform his
customary and regular duties, up to and including the effective
date of the sale of the Company (the "Effective Date"). The
Company agrees that it will continue to pay the Employee his
salary at his current monthly rate of $16,500 (Sixteen Thousand,
Five Hundred Dollars). The Employee further agrees that, if the
purchasing company makes a written offer to the Employee on or
prior to the Effective Date of a comparable position for at least
two years along with comparable salary and benefits in a location
not requiring the Employee to relocate, the Employee will accept
that employment and remain employed by the purchasing company for
at least two years after the Effective Date. An offer or request
pursuant to this paragraph 1 is hereinafter referred to as a
"Continued Employment Offer."
2. If the Employee agrees to, and remains, employed as described in
paragraph 1 above, and if he has not breached any of the
provisions of this Agreement (including, without limitation,
sections 4 and 5 hereof) (a "Breach"), he will be eligible to
receive the following additional incentive payments:
(a) If the Employee remains employed up to and including the
Effective Date and the purchasing company does not make a
Continued Employment Offer, the Company agrees to pay the
Employee $396,000, (Three Hundred Ninety Six Thousand
Dollars) which amount is equal to 24 months compensation at
his current rate, as severance pay, less applicable
withholding tax. This severance pay will be considered
earned as of the first business day after the Effective Date
and will be paid to the Employee within one week after the
Effective Date. If the
<PAGE>
Employee's employment with the Company is terminated without
cause prior to the expiration of two years from the date of
acceptance of his Continued Employment Offer, this severance
pay will be considered earned as of the first business day
after such termination and will be paid to the Employee
within one week after such termination.
(b) Provided that the Company is sold prior to the Termination
Date of this Agreement, it is the Company's intention to
create a bonus pool (the "Executive Bonus Pool"). The
Employee's share of the Executive Bonus Pool will be a
function both of the Employee's base salary and a
performance factor. Individual payouts will be based on
appraised performance during the sale process by the
Employee's direct supervisor and additional higher levels of
senior management, including the CEO. In addition, potential
payouts, less applicable withholding tax, will be based upon
the selling price and the ultimate equity proceeds received
by the current shareholder as described below:
<TABLE>
<CAPTION>
Employee Equity Proceeds to Shareholder Employee's Potential Share of
Executive Bonus Pool
<S> <C> <C>
Andrew R. Morrison * $ 0
$152,938
$251,800
$367,249
$497,447
</TABLE>
Interpolation will apply based on actual equity proceeds to
shareholder. In addition, the Potential Bonus amounts listed
above are based on the assumption that the Employee meets or
exceeds the expectations of management during the sale
process and are subject to change.
If the Employee remains employed up to and including the
Effective Date and the purchasing company makes a Continued
Employment Offer, 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
Effective Date and 50% of the Employee's share, if any, of
the Executive Bonus Pool will be paid to the Employee on the
first anniversary of the Effective Date. If the Employee
remains employed up to and including the Effective Date and
the purchasing company does not make a Continued Employment
* Portions of this document have been omitted pursuant to a request for
confidential treatment. The full documents have been filed separately.
<PAGE>
Offer, 100% of the Employee's share, if any, of the
Executive Bonus Pool will be paid to the Employee on the
Effective Date.
3. If the Employee's employment with the Company terminates for any
reason (other than a termination without cause) prior to the
Effective Date or, in the event the purchasing company makes a
Continued Employment Offer, or if the Employee commits a Breach,
the Company shall have no obligation to make any payments of any
kind to the Employee, including but not limited to severance
payments or, in certain cases, incentive payments as described
above.
4. The Employee recognizes that the Company's business interests
require a confidential relationship between the Company and the
Employee. Accordingly, THE EMPLOYEE AGREES DURING HIS EMPLOYMENT
WITH THE COMPANY FOR A TWO-YEAR PERIOD THEREAFTER TO KEEP
CONFIDENTIAL AND NOT TO DISCLOSE TO ANYONE ANY CONFIDENTIAL OR
PROPRIETARY INFORMATION OF THE COMPANY, INCLUDING PARTICIPATION
IN THIS DIVESTMENT INCENTIVE PROGRAM.
5. The Parties agree that any breach by the Employee of the
confidentiality provisions in this Agreement will cause
immediate, material and irreparable injury and damage, and that
there is no adequate remedy at law for such breach. In the event
of a breach of the confidentiality provisions of the Agreement,
the Company or its successor shall be entitled immediately to
seek enforcement of this Agreement in a court of competent
jurisdiction by means of a decree of specific performance, and
injunction without the posting of a bond, any other form of
equitable relief, and any other remedy it may have at law or in
equity. In the event that a court holds any provision of this
Agreement to be unenforceable, the parties agree that that
provision shall be reduced to the degree necessary to render it
enforceable without affecting the rest of this Agreement.
6. In the event any dispute arises under this Agreement that is
adjudicated to a final verdict in the Employee's favor by a court
of competent jurisdiction, no further appeal is permitted and the
Employee has complied with paragraph 4 hereof, the Company shall
reimburse the Employee for his reasonable expenses of counsel
incurred in connection with such dispute from the time the
Company is notified of the dispute to its final adjudication.
7. Any other provision of this Agreement notwithstanding, this
Agreement shall terminate and no longer be of any force or effect
(i) immediately if the Company aborts the sale process and, (ii)
in any case if a sale of the
<PAGE>
Company has not occurred on or before June 30, 1999 (the
"Termination Date").
8. Each of the parties hereto (a) consents to submit himself or
itself to the personal jurisdiction of any federal court located
in the State of Maryland or any Maryland State court in the event
any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement, (b) agrees that he
or it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such
court, and (c) agrees that he or it will not bring any action
relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a federal
court sitting in the State of Maryland or a Maryland State court.
9. This Agreement supersedes all prior Agreements between the
parties concerning the subject matter hereof, and this Agreement
constitutes the entire Agreement between the parties with respect
to the subject matter hereof. This Agreement may be modified only
by a written instrument signed by the Employee and by the
President of the Company. The validity and construction of this
Agreement and any of its provisions shall be determined under the
laws of the State of Maryland.
10. The Employee acknowledges that he has read this Agreement in its
entirety, understands all of its terms and conditions, that he
has the opportunity to consult with any individuals of his choice
including legal counsel of his choice, that he is entering into
this Agreement of his own free will, without coercion from any
source, and that he agrees to abide by all of the terms and
conditions herein contained.
IN WITNESS HEREOF, the parties have duly executed this Agreement as of
the day and year first written above.
WITNESS: AAF-McQUAY INC.
__September 8, 1998_____________ By:____/s/ Joseph B. Hunter__________
Joseph B. Hunter
President and Chief Executive Officer
__September 8, 1998_____________ ___/s/ Andrew R. Morrison_____________
Employee
<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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> OCT-03-1999
<CASH> 7382
<SECURITIES> 0
<RECEIVABLES> 245571
<ALLOWANCES> 7852
<INVENTORY> 132907
<CURRENT-ASSETS> 386181
<PP&E> 201769
<DEPRECIATION> 52814
<TOTAL-ASSETS> 793245
<CURRENT-LIABILITIES> 290008
<BONDS> 176960
0
0
<COMMON> 250
<OTHER-SE> 214035
<TOTAL-LIABILITY-AND-EQUITY> 793245
<SALES> 251400
<TOTAL-REVENUES> 251400
<CGS> 183865
<TOTAL-COSTS> 183865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6506
<INCOME-PRETAX> 6349
<INCOME-TAX> 1529
<INCOME-CONTINUING> 4830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4830
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
