UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/x/ |
Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended June 30, 2001
/ / | 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 the Registrant as specified in its charter)
Delaware (State or other Jurisdiction of Incorporation or Organization) |
41-0404230 (I.R.S. Employer Identification No.) |
|
10300 Ormsby Park Place, Suite 600 Louisville, Kentucky (Address of principal executive offices) |
40223 (Zip Code) |
Registrant's telephone number, including area code (502) 637-0011
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Not Applicable
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2001 was $-0-.
The number of shares outstanding of the registrant's only class of common stock as of September 26, 2001 (latest practicable date) was 2,497.
Index
AAF-MCQUAY INC. AND SUBSIDIARIES
|
|
Page |
||
---|---|---|---|---|
Part I | ||||
Item 1 | Business | 3 | ||
Item 2 | Properties | 11 | ||
Item 3 | Legal Proceedings | 12 | ||
Item 4 | Submission of Matters to a Vote of Securities Holders | 13 | ||
Part II |
||||
Item 5 | Market for Registrant's Common Stock and Related Stockholder Matters | 13 | ||
Item 6 | Selected Financial Data | 14 | ||
Item 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
Item 7a | Quantitative and Qualitative Disclosures about Market Risk | 21 | ||
Item 8 | Financial Statements and Supplemental Data | 22 | ||
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 50 | ||
Part III |
||||
Item 10 | Directors and Executive Officers of the Registrant | 51 | ||
Item 11 | Executive Compensation | 53 | ||
Item 12 | Security Ownership of Certain Beneficial Owners and Management | 55 | ||
Item 13 | Certain Relationships and Related Transactions | 56 | ||
Part IV |
||||
Item 14 | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 58 |
2
General
AAF-McQuay Inc. (the "Company"), a Delaware corporation, is a leading worldwide manufacturer and marketer of commercial air conditioning and air filtration products and systems primarily for commercial, institutional and industrial customers. The Company believes that it is the leading global manufacturer of air filtration products for non-vehicular applications and is a major participant in the global commercial heating, ventilation, air conditioning and refrigeration ("HVAC&R") market. The Company maintains production facilities in nine countries and its products are sold in over 80 countries. The Company believes that its geographic and product diversification makes it less susceptible to an economic downturn in any particular market or region.
In 1994, O.Y.L. Industries Berhad ("OYL"), a member of the Hong Leong Group Malaysia ("Hong Leong"), one of Malaysia's leading manufacturers and exporters of commercial and industrial air conditioners, refrigerators, freezers and electrical components, purchased all the outstanding stock of the Company for approximately $420 million, including the assumption of debt (the "OYL Acquisition"). As part of the funding, OYL made a cash investment of $170 million, applied both to purchase the prior owner's interest and to restructure the Company's debt. OYL is a subsidiary of Hume Industries Malaysia Berhad ("Hume"). Hume, like OYL, is a publicly traded Malaysian company controlled by Hong Leong. Mr. Quek Leng Chan is Hong Leong's controlling shareholder.
The Company believes its affiliation with Hong Leong, which has a significant Asian presence, substantially improves the Company's financial and operating flexibility and access to Asian markets. The Company has also expanded into other new markets outside Asia, including Latin America. In addition, the Company seeks to expand its product lines through research and development and seeks to pursue strategic technology joint ventures and acquisitions.
During 2001, the Company conducted business in two principal segments: Commercial Air Conditioning & Refrigeration and Filtration Products.
Commercial Air Conditioning and Refrigeration
The Company, through the Commercial Air Conditioning and Refrigeration segment, is a worldwide leader in the design, manufacture, sale and service of HVAC&R equipment principally for the commercial, industrial and institutional markets. Products include chillers, applied air handling systems, applied terminal systems, industrial refrigerators, service and parts. In the United States, the Company believes that its share of the commercial air conditioning market is approximately 10%. The Company's products are sold primarily under the widely recognized McQuay® brand name and services are marketed under the McQuayServiceSM name. This equipment has been installed in many prominent facilities around the world, including the GTE Headquarters in Dallas, Texas, Motorola production facilities in the United Kingdom and Singapore, Emirates Tower, U.A.E., the Jumerirah Beach Hotel, U.A.E., Kodak facilities in Ontario, Philips Semiconductor facilities in China, Taiwan and Singapore and the Jai Lie Building in Wuhan, China. The Company's broad range of standard and custom products and services fulfill the HVAC&R requirements of most building types and sizes and offer multiple solutions to a variety of HVAC&R needs. The Company markets its commercial HVAC&R equipment principally to building contractors, architects, consulting engineers, building developers and building owners. In addition, the Company manufactures, sells, and services industrial refrigeration equipment under the J&E Hall brand names, including J&E Hall, Hallmark®, and Thermotank®. Principal customers for refrigeration products are in the food and beverage, chemical and naval and maritime industries. Three of the Company's facilities used to produce its air conditioning and
3
refrigeration products have earned ISO 9001 certification and four facilities have earned ISO 9002 certification.
The Company's Commercial Air Conditioning and Refrigeration products are divided among the following business units: (i) chiller products, (ii) applied air handling systems, (iii) applied terminal systems, and (iv) industrial refrigeration.
Chiller Products. The Company's chiller products include centrifugal, screw, scroll and reciprocating chillers, condensing units and air-cooled condensers, all of which frequently contain state of the art control systems. These products are normally engineered and assembled to meet specific design criteria for a wide range of commercial, institutional and industrial applications. Typical applications include large square footage buildings which require integrated HVAC&R systems, served by chillers ranging in capacity from 10 to over 2,300 tons (the cooling capacity of air conditioning units is measured in tons; one ton being equivalent to 12,000 Btu/h and generally adequate to air condition approximately 350 to 500 square feet of space). The Company is also the only HVAC&R manufacturer to offer a broad line of dual compressor centrifugal chillers, which offer improved energy efficiency because of their unique part-load capability. The dual compressor centrifugal chiller provides the Company with additional competitive advantages by virtue of its small footprint, built-in redundancy, and its utilization of HFC-134a, a non-chloroflorocarbon refrigerant.
Under the trade name McQuayServiceSM, the Company services both its own and its competitors' products and systems and provides start-up assistance, warranty support, full after market service, and chiller retrofit services. The Company's service operations are conducted primarily in North America through 20 field offices and employ approximately 300 personnel. In addition to providing a non-cyclical source of revenues, the Company's service business provides access to the growing replacement and retrofit markets.
Applied Air Handling Systems. Applied air handling systems include indoor and roof mounted air handling units, packaged rooftop systems, self-contained systems and coils with capacities up to 135 tons that are generally mounted on the roof of a building, in ceilings and/or duct work, or installed on each floor of a multi-story building. These units generally combine heating and cooling capabilities in a single or self-contained configuration. The Company has a line of advanced technology air handlers which combine European and North American designs to meet the market's growing demand for quiet, reliable, high quality air handlers in response to demand for improved indoor air quality.
Applied Terminal Systems. Applied terminal systems consist of HVAC&R units that provide heating and cooling for a defined space on a "localized" basis. They include fan-coil units, water source heat pumps, packaged terminal air conditioners ("PTAC"), heat pumps, and unit ventilators. Capacities of individual units are less than 20 tons and typically include electronic controls. Typical applications include facilities where air conditioning is required on a "room-by-room" basis such as hotels/motels, condominiums, schools and office buildings. Within the United States, the Company believes that it is a leading manufacturer of water source heat pumps and unit ventilators. The large installed base is expected to provide significant replacement and service opportunities.
The Company globally serves its installed base by providing high value support services and original specification Certified McQuay Parts. The parts business also serves the broader HVAC&R replacement market through the distribution of PTAC equipment and replacement components under its Spectrum Parts banner. The Company provides value added customer service through e-commerce, electronic parts catalogs and industry leading order cycle times.
Industrial Refrigeration. The acquisition of J&E Hall in December 1995 expanded the Company's product offerings and also accelerated its development of the single screw compressors that both the Company and J&E Hall had been developing separately for several years. The Company believes that single screw chillers, rather than the twin screw chillers produced by a number of its competitors in the
4
commercial HVAC&R markets, provide competitive advantages, including improvements in efficiency and cost, lower service requirements and noise reduction.
J&E Hall sells and services industrial refrigeration equipment under several well known J&E Hall brand names, including J&E Hall, Hallmark® and Thermotank®. The principal customers for industrial refrigeration products are concentrated in the food and meat processing, dairy, brewing and beverage (soft and alcoholic), chemical, petrochemical, pharmaceutical, naval and merchant marine industries. In fiscal year 1997, the Company acquired Coulstock & Place Engineering Co. Ltd., a motor rewind specialist providing support for the compressor business.
Competition in the global industrial refrigeration business is fragmented and over the last two years, the industry has consolidated into a few global companies. Recognizing the consolidation within the industrial refrigeration industry, over capacity in the market place and strength of its trading currency (pound sterling), J&E Hall embarked on a major restructuring exercise in the beginning of fiscal year 2000, which was completed in June 2001. The Company believes that these actions will strengthen the Company and enable it to maintain its position as a leading UK provider of refrigeration solutions through its extensive network of 13 regional offices.
Commercial Air Conditioning and Refrigeration Strategic Partnerships.
The Company, through its Commercial Air Conditioning and Refrigeration segment, has entered into selective strategic partnerships throughout the world to maximize its market penetration through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local companies in India, Japan, Hungary, Greece, Italy, Mexico and Puerto Rico. The Company has formed strategic partnerships in selected metropolitan markets to increase its market penetration in the domestic market, having already formed partnerships in Philadelphia, Pennsylvania and Atlanta, Georgia. In addition, the Company has established regional sales offices in Miami, Florida (to sell its products throughout Latin America), Beirut, Lebanon and Dubai, UAE and markets its products throughout Asia, including China, through manufacturing and sales joint ventures established by OYL.
Filtration Products
The Company's Filtration Products Segment engages in the manufacture, sale and distribution of air filtration products and systems, including air filters. The Company's filtration products are sold worldwide to commercial, institutional and industrial customers as well as retailers for residential use. The Filtration Products segment's largest customers include Shinwa Corporation, Wal-Mart Stores, Inc., Intel, Lowes, General Electric, Menard Cashway, and TRU*SERVE. Within its Filtration Products segment, the Company has two principal businesses: replacement filters and environmental products. Replacement filters are sold to commercial and industrial building owners, contractors, retailers for residential applications, hospitals and computer chip manufacturers for clean room applications, locomotive and air conditioning original equipment manufacturers and railroad companies. The Company has marketed its replacement filters under the AmericanAirFilter® and AAF® brand names since the 1920's and also under private label. The environmental products business has two major product areas: Air Pollution Control Products and Systems ("APC") and Machinery Filtration and Acoustical Systems ("MFAS") products. Environmental products are sold throughout the world for a wide variety of commercial, institutional and industrial applications. Three of the Company's facilities used to produce its air filtration products have earned ISO 9001 certification, and four facilities have earned ISO 9002 certification.
5
Replacement Filter Products
The Company believes that it is one of the world's largest manufacturers and distributors of commercial, industrial and residential air filters, which are used to remove airborne contaminants from intake and conditioned air, for a wide variety of applications. The Company estimates its global and North American served market share in non-vehicular applications to be approximately 15% and 20%, respectively. The Company's filters, including replacement filters, are sold globally under the AmericanAirFilter® and AAF® brand names and under private label. The filters are designed to be used in all types of air filtration systems regardless of the original manufacturer.
The Filtration Products segment's replacement filter products consist of a broad product line including: (i) standard filters and equipment for use in a wide range of commercial, institutional, industrial and residential settings; (ii) custom-designed 99.9999%+ high-efficiency filters and equipment for "clean rooms" required by certain industries such as semiconductor manufacturers and health care; and (iii) specialty intake air filtration systems for locomotives and other niche applications.
Environmental Products
Air Pollution Control Products and Systems. The Company's APC equipment is designed to improve atmospheric quality by removing airborne pollutants such as dust, mist and fumes from air exhaust streams. The Company's APC systems are sold primarily in Europe, Latin America and Asia and include design and construction services. The Company markets APC equipment to a broad range of industrial customers including the food, pharmaceutical, chemical, steel, cement, power generation, waste incineration, chemical and pulp and paper industries, as well as special market niches such as woodworking companies, welding shops and restaurants. The Company's APC equipment includes wet and dry scrubbers, cartridge and fabric filter collectors, electrostatic precipitators and dust and mist collection products. These products collect contaminants, recover materials from the manufacturing process and solve in-plant air quality problems. APC systems, offered by the Company, are integrated systems engineered to combine air pollution control equipment with peripheral equipment, ductwork and instrumentation to produce an integrated emission control process.
Machinery Filtration and Acoustical Systems. MFAS products and systems are designed to remove particulate contamination from air supplies to machines to reduce the performance inhibiting effects of corrosion, erosion and fouling. Acoustical systems are designed to protect the environment in which the machines are installed from excessive noise generated by the machines and their ancillary processes.
Machinery filtration systems can include weather protection, mechanical separators, high efficiency barrier filters enhanced by lower efficiency pre-filtration and self-cleaning reverse pulse filters, and they can also incorporate air tempering equipment including anti-ice systems and evaporative coolers. Acoustical equipment includes air intake ducts and silencers, high temperature exhaust ducts and silencers, ventilation fan silencers and machinery enclosures, all designed individually or as integrated systems with ancillary access, supports, controls and instrumentation systems. The Company designs and supplies MFAS products and systems to major machinery manufacturers for the oil, gas, electrical and chemical/petro-chemical industries in the global market. Continued research and development of products and systems allows the Company to provide a complete range of products and a single source, total package capability for its customers.
Filtration Products Strategic Partnerships
The Company, through its Filtration Products segment, has entered into selective strategic partnerships and alliances throughout the world to maximize its market penetration through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local companies in Japan, Korea, India, Saudi Arabia
6
and Malaysia to manufacture and distribute its products. In addition, the Company has entered into technology sharing agreements for the development of antimicrobial filters.
Financial Information About Industry Segments, and Domestic Operations and Export Sales
See Note 16 "Segment Information" in the Notes to the Consolidated Financial Statements.
Sales and Distribution
General. The Company has a diverse base of customers. No customer of the Commercial Air Conditioning and Refrigeration segment or the Filtration Products segment accounted for more than 10% of the Company's net sales of these products during any of the past three fiscal years.
Commercial Air Conditioning and Refrigeration. The Company distributes its commercial HVAC&R equipment and systems in the United States and Canada through a network of approximately 125 independent manufacturers' representatives and joint ventures that sell on a commission basis. Replacement parts for HVAC&R equipment are sold through a network of 90 independent parts distributors and two Company-owned stores. Service products and contracts are sold through the Company's own sales force working from offices located throughout the United States and Canada. The Company distributes its commercial HVAC&R products and parts internationally through a combination of direct sales personnel, independent distributors and joint venture partners selling in over 80 countries throughout the world. Backlog for the Commercial Air Conditioning and Refrigeration segment at June 30, 2001 and 2000 was $111 million and $124 million, respectively. The Company anticipates that substantially all of these orders will be filled in the next 12 months.
Filtration Products. The Company deploys separate sales forces and distribution channels to market its replacement filter and environmental products. The Company employs the industry's largest commercial replacement filter direct sales force, with approximately 120 factory sales people worldwide to market commercial replacement filters. Residential replacement filters are sold primarily in the United States through national retail stores, such as Wal-Mart Stores, Inc., Menard Cashway Intel, Lowes and TRU*SERVE. Environmental products are sold through factory direct sales people, independent distributors, agents and joint venture partners. Backlog for the Filtration Products segment at June 30, 2001 and 2000 was $71 million and $61 million, respectively. The Company anticipates that substantially all of these orders will be filled in the next 12 months.
Manufacturing
Commercial Air Conditioning and Refrigeration. The Company's commercial HVAC&R products are manufactured in 6 factories in the United States, Italy and the United Kingdom. The Company's industrial refrigeration products are manufactured in three manufacturing facilities in the United Kingdom. See "Properties."
Filtration Products. In the Company's filter manufacturing business, fiberglass filtermedia is manufactured at 3 facilities located in the United States, Singapore and The Netherlands and then shipped to filter assembly facilities throughout Europe and North America from which finished products are then shipped to customers. Air filtration equipment and systems are manufactured at facilities that are geographically dispersed throughout the world including 12 locations for replacement filters and 3 locations for environmental products. See "Properties."
Purchasing
The principal component parts and materials purchased by the Company for use in its equipment and systems are compressors, electric motors, filter media, copper tubes, glass pellets and castings, all of which are readily available through multiple sources. No single supplier has accounted for more than
7
10% of the annual purchases by the Company of raw materials or component parts in any of the past three fiscal years. The Company believes it has contracts and commitments or readily available sources of supply sufficient to meet its anticipated raw material or key component requirements. The Company maintains alternate sources for key components where dependence upon a single supplier could have an adverse impact upon production to the extent that it is technologically and commercially feasible.
The Company negotiates corporate-wide agreements with many of its major suppliers of purchased material. These agreements, which are typically from one to three years in length, are intended to increase the responsiveness of suppliers to the Company's needs and to provide the Company with assured sources of supplies at competitive prices and terms.
Competition
General. The commercial HVAC&R and filtration products business segments are highly competitive. In the commercial HVAC&R industry, the principal methods of competition are lead time, product performance, feature availability, energy efficiency, price, and service. In the refrigeration industry, competitive factors include price, quality and a vertically integrated approach of supplying products. In the filtration products business, participants generally compete on the basis of service, price, quality, reliability, efficiency, and conditions of sale and range of product offering. Certain portions of these markets are also very fragmented, both geographically and by product line. The Company believes its competitive position is strengthened in those international markets in which it has both a manufacturing and a marketing presence and that it has a competitive advantage through its affiliation with Hong Leong and OYL in gaining access to certain markets where barriers exist for non-local companies.
Commercial Air Conditioning and Refrigeration. International markets for commercial HVAC&R products are competitive and fragmented along geographic and product lines. On a global basis, the Company's primary competitors across the full range of its HVAC&R product offerings are Carrier Corporation (a subsidiary of United Technologies Corporation), The Trane Company (a division of American Standard, Inc.) and York International Corporation. Outside North America, the Company also competes with numerous European and Japanese companies. Competition in the global industrial refrigeration business is fragmented, consisting of a limited number of large companies and a significant number of local companies. The Company believes that price and quality in addition to a vertically integrated approach to supplying products and systems are significant competitive factors in selling industrial refrigeration products.
Filtration Products. Competition in the air filtration products and systems, air pollution control equipment and systems and MFAS businesses is very fragmented. Globally, the Company competes with many companies along each product line. The Company believes that price, quality and breadth of product offerings are among the leading competitive factors in selling air filtration products and systems.
Research and Development
The Company's research and development programs are involved in creating new products, enhancing and redesigning existing equipment and systems to reduce manufacturing costs and increasing product efficiency. The Company spent approximately $9.0, $8.7 and $8.9 million during its 2001, 2000, and 1999 fiscal years, respectively, for research and development.
A significant focus of the Company's research and development efforts since 1988 has been to develop and extend its range of water-cooled and air-cooled chillers using advanced single screw compressor technology. The Company introduced its first single screw air conditioning product in 1994 and has continued to expand the product line and its application through fiscal 2001. J&E Hall has been marketing industrial refrigeration products using single screw compressor technology since 1978.
8
The Company expects to further enhance single screw air conditioning product technology during fiscal year 2002 with the introduction of the next generation screw compressor and screw chiller products. Single screw compressor technology will continue to be an important element of research and development programs in the Commercial Air Conditioning and Refrigeration segment.
The Company has developed and is now producing the next generation of air handlers which is highly energy and sound efficient. The product is available in a variety of configurations and material options. The Company expects this family of products to meet the growing market for quiet, high quality air handlers.
Since the OYL acquisition, the Filtration Products segment continues to introduce new products, including a new range of self supporting pleated air filters; a new range of cleaners; a new extended surface pleated filter that exceeds the standards proposed in ASHRAE 62-1989R (American Society of Heating, Refrigeration and Air Conditioning Engineers); a variety of replacement filters treated with antimicrobial agents that inhibit the growth of various microbial contaminants on the filter media; and a range of self-cleaning filters for gas turbines.
Patents and Trademarks
The Company holds numerous patents related to the design and use of its equipment and systems that are considered important to the overall conduct of its business. The Company's policy is to maintain patent protection for as many of its new products as possible. The Company believes that certain of its patents are important to distinguish the Company's equipment and systems from those of its competitors; however, the Company does not consider any particular patent, or any groups of related patents, essential to its operations. The Company believes that its rights in its patents are adequately protected. In fiscal year 2001, the Filtration Products segment obtained 5 patents related to filter media and filter design and construction.
The Company owns several registered trademarks and operates under certain trade names that are important in the marketing of its products, including AmericanAirFilter®, AAF®, McQuay®, McQuayServiceSM, HermanNelson®, Thermotank®, Hallmark®, J&E Hall and Beth®. The Company believes that its rights to use tradenames and trademarks are adequately protected. The Company's trademarks have various terms and expirations. The Company's policy is to renew significant trademarks prior to the expiration of their current term.
Employees
As of June 30, 2001, the Company employed approximately 5,200 employees worldwide, with approximately 3,400 persons employed in the United States and 1,800 employed in non-U.S. locations. The Company has a total of seven labor union bargaining agreements, covering approximately 2,000 employees, of which one agreement, covering 503 employees, will expire in fiscal year 2002. The Company currently believes that it will be able to obtain new labor agreements without interruption of work when these agreements expire. The Company considers its relations with its employees to be good.
Environmental Regulations
Environmental laws that affect or could affect the Company's domestic operations include, among others, the Comprehensive Environmental Response, Compensation & Liability Act ("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, any regulations promulgated under these acts and various other federal, state and local laws and regulations governing environmental matters. The Company's foreign operations are also subject to various environmental statutes and regulations.
9
Some of the refrigerants used in HVAC&R equipment manufactured by the Company are regulated under international agreements and domestic and foreign laws and regulations governing stratospheric ozone depleting chemicals.
In 1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol has been amended several times since 1987, including in 1990 (the "London Amendments"), in 1992 (the "Copenhagen Amendments"), in 1997 (the "Montreal Amendments"), and in 1999 (the "Beijing Amendments"). Over 140 countries (including the United States) have ratified the Montreal Protocol and the London Amendments. More than 100 countries (including the United States) have also agreed to abide by the Montreal Protocol as amended by the Copenhagen Amendments. The United States has not yet ratified the Montreal and Beijing Amendments.
Under the Montreal Protocol, as amended, the production and consumption (defined as production plus imports minus exports) of chlorofluorocarbons ("CFC") by participating industrialized countries is banned, with limited exceptions, as of January 1, 1996. Additionally, the Montreal Protocol places a cap on the consumption of hydrochlorofluorocarbons ("HCFC") beginning on January 1, 1996 and mandates a gradual phaseout culminating in 2020, for participating industrialized countries, with a ten-year service tail exemption allowing industrialized countries to supply old equipment with HCFCs during this period. In addition, certain countries, not including the United States, declared during December 1995 that they would take all appropriate measures to limit the use of HCFCs as soon as possible.
The federal Clean Air Act Amendments of 1990 establish minimum statutory timetables for the phaseout of production and consumption of ozone-depleting chemicals in the United States, and authorize the EPA to establish regulatory timetables which meet or exceed those set forth in the Montreal Protocol, as amended. Pursuant to that authority, the EPA has adopted regulations mandating, among other things and with limited exceptions, (a) a total ban on the consumption of CFCs by January 1, 1996 (b) a prohibition on the consumption of HCFC-142b and HCFC-22 (a refrigerant used in some equipment manufactured by the Company) for new equipment manufactured on or after January 1, 2010, (c) a ban on consumption of HCFC-142b and HCFC-22 for use in any equipment beginning on January 1, 2020, and (d) a phaseout of other HCFCs commencing in 2015 and culminating on December 31, 2029.
The manner in which the other signatories to the Montreal Protocol implement its requirements and regulate ozone-depleting refrigerants could differ from the approach and timetables adopted in the United States.
With respect to the ban on consumption of CFCs (which began January 1, 1996), the Company was a leader in the industry in redesign of its large cooling capacity central station system HVAC&R equipment to utilize hydrofluorocarbon-134a ("HFC-134a"), a non-chlorinated refrigerant that is believed to be harmless to the ozone layer and is not scheduled for elimination pursuant to the Montreal Protocol.
Substantially all major manufacturers of HVAC&R products, including the Company, produce HVAC&R equipment for smaller cooling capacity applications that utilize HCFC-22. The Company (and its competitors) must develop substitute refrigerants for use in HVAC&R products that currently use HCFC-22 prior to the phaseout of HCFC-22. Presently, the EPA has identified several refrigerants that it considers acceptable HCFC-22 substitutes for certain uses applicable to some of the Company's products. The Company is conducting a comprehensive program to introduce ozone friendly refrigerant for all products in the near future.
10
Item 2. Properties
A description of the Company's principal facilities with the approximate square feet of building space is summarized below. Unless otherwise specified below, the facilities are devoted to manufacturing:
Location |
Square Feet |
Leased/Owned |
Principal Function |
|||
---|---|---|---|---|---|---|
Commercial Air Conditioning and Refrigeration | ||||||
Plymouth, Minnesota | 166,000 | Owned | Americas headquarters, testing, research and development, and applied air handling systems business unit administrative facility | |||
Staunton, Virginia | 665,000 | Owned | Chiller products | |||
Owatonna, Minnesota | 68,000 | Owned | Applied air handling system products | |||
Faribault, Minnesota | 244,000 | Owned | Applied air handling system products | |||
Auburn, New York | 417,000 | Owned | Applied terminal system products | |||
Scottsboro, Alabama | 270,000 | Owned | Held for sale | |||
Cecchina, Italy | 175,000 | Owned | Europe headquarters and chiller products | |||
Dayton, Ohio | 100,000 | Leased | Parts distribution | |||
Dartford, England | 105,000 | Leased | Headquarters for industrial refrigeration business | |||
Derby, England | 17,000 | Leased | Spares distribution and compressor remanufacturing facility | |||
Birkenhead, England | 7,000 | Owned | Compressor remanufacturing facility | |||
Doncaster, England | 5,300 | Owned | Motor rewinding facility | |||
7,900 | Leased | Cabling facility | ||||
Filtration Products |
||||||
Louisville, Kentucky |
60,000 |
Leased |
Americas headquarters |
|||
Atlanta, Georgia | 113,000 | Leased | Replacement filters | |||
Columbia, Missouri | 58,000 | Owned | Replacement filters | |||
35,000 | Leased | Replacement filters | ||||
Hutchins, Texas | 340,000 | Owned | Replacement filters | |||
Elizabethtown, Pennsylvania | 160,000 | Leased | Replacement filters | |||
Fayetteville, Arkansas | 175,000 | Owned | Replacement filters | |||
Los Angeles, California | 70,000 | Leased | Replacement filters | |||
Lebanon, Indiana | 154,000 | Leased | Replacement filters | |||
Boucherville, Quebec | 62,000 | Owned | Replacement filters | |||
Cramlington, England | 160,000 | Owned | Applied air handling systems and environmental products | |||
Linton, England | 27,000 | Owned | Replacement filters |
11
Amsterdam, The Netherlands | 16,000 | Leased | European headquarters and administrative office | |||
Emmen, The Netherlands | 97,000 | Owned | Replacement filters | |||
75,000 | Leased | Replacement filters | ||||
Lubeck, Germany | 19,000 | Leased | Engineering office | |||
Gasny, France | 109,000 | Owned | Environmental products | |||
Ecoparc, France | 46,000 | Leased | Replacement filters | |||
Vitoria, Spain | 40,000 | Owned | Environmental products | |||
Singapore | 41,000 | Owned | Replacement filters |
In addition to the properties above, the Company also leases numerous facilities worldwide for use as sales and service offices, regional warehouses and distribution centers. The Company also leases 11,000 square feet for its Corporate headquarters in Louisville, Kentucky.
Substantially all of the Company's property is subject to encumbrances. See Notes 5 and 7 to the Consolidated Financial Statements and Notes thereto.
Item 3. Legal Proceedings
Environmental Proceedings
The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants into the environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.
Based upon estimates prepared by environmental consultants, at June 30, 2001 the Company estimates that related probable remediation costs will be approximately $14.0 million. The Company believes that these costs have been adequately reserved for on the balance sheet and are included in other liabilities. The Company has settled or exhausted its remedies against all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying Consolidated Balance Sheets relating to any potential recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are difficult to predict at this time.
Miscellaneous
The Company is involved in various other lawsuits arising out of the conduct of its business. The Company believes that the outcome of any such pending claims or proceedings will not have a material adverse effect upon its business or financial condition. The Company maintains various insurance policies regarding many of such matters, including general liability and property damage insurance, as well as product liability, workers' compensation and other policies, which it believes provide adequate coverage for its operations. See Note 15 to the Consolidated Financial Statements.
12
Item 4. Submission of Matters to a Vote of Security Holders
On April 24, 2001, OYL, the Company's sole shareholder, elected the following persons as members of the Board of Directors of the Company to serve until the next annual meeting of the stockholder: Quek Leng Chan, Ho Nyuk Choy, Roger Tan Kim Hock and Liu Wan Min. On July 1, 2001, the sole shareholder accepted the resignation of Roger Tan Kim Hock and elected Kwek Leng San as Director.
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is owned by a single shareholder, OYL. There is no public trading market for the Company's common stock.
13
Item 6. Selected Financial Data
The following table sets forth selected consolidated historical financial data of the Company for the fiscal years ended June 30, 2001, 2000, 1999, 1998, and 1997. The Company's fiscal year ends on the Saturday closest to June 30. For clarity of presentation in the consolidated financial statements, all fiscal years are shown to begin on July 1 and end on June 30.
The table should be read in conjunction with Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes included herein.
Selected Financial Data
|
2001 |
2000 |
1999 |
1998 |
1997 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
INCOME STATEMENT DATA: | ||||||||||||||||||
Net sales | $ | 870,854 | $ | 867,704 | $ | 924,028 | $ | 965,749 | $ | 947,933 | ||||||||
Cost of sales | 638,825 | 641,346 | 691,222 | 709,639 | 697,294 | |||||||||||||
Gross profit | 232,029 | 226,358 | 232,806 | 256,110 | 250,639 | |||||||||||||
Operating expenses | 189,442 | 196,662 | 216,669 | 224,833 | 212,741 | |||||||||||||
Restructuring expenses | 7,237 | 3,493 | 5,170 | 7,578 | | |||||||||||||
Operating income | 35,350 | 26,203 | 10,967 | 23,699 | 37,898 | |||||||||||||
Interest expense, net | 19,372 | 21,627 | 23,975 | 25,131 | 25,961 | |||||||||||||
Other (income) expense, net | (4,542 | ) | 1,566 | (5,324 | ) | (6,454 | ) | 616 | ||||||||||
Income (loss) before income taxes | 20,520 | 3,010 | (7,684 | ) | 5,022 | 11,321 | ||||||||||||
Income taxes | 8,540 | 2,647 | (1,444 | ) | 3,791 | 6,283 | ||||||||||||
Minority interest earnings | 238 | 261 | 286 | 215 | 476 | |||||||||||||
Net income (loss) | $ | 11,742 | $ | 102 | $ | (6,526 | ) | $ | 1,016 | $ | 4,562 | |||||||
BALANCE SHEET DATA (end of period): | ||||||||||||||||||
Working capital | $ | 56,056 | $ | 61,144 | $ | 42,034 | $ | 59,119 | $ | 82,174 | ||||||||
Total assets | 654,014 | 685,400 | 755,195 | 795,933 | 810,294 | |||||||||||||
Total debt | 201,487 | 218,854 | 266,419 | 265,876 | 287,824 | |||||||||||||
Stockholder's equity | 187,241 | 183,508 | 186,428 | 196,661 | 198,193 | |||||||||||||
OTHER DATA: | ||||||||||||||||||
EBITDA(a) | $ | 69,164 | $ | 54,733 | $ | 45,104 | $ | 56,884 | $ | 62,373 | ||||||||
EBITDA margin | 7.9 | % | 6.3 | % | 4.8 | % | 5.9 | % | 6.6 | % | ||||||||
Depreciation and amortization | $ | 29,510 | $ | 30,356 | $ | 29,099 | $ | 26,946 | $ | 25,567 | ||||||||
Capital expenditures | 16,006 | 7,881 | 19,514 | 23,922 | 15,941 | |||||||||||||
Net cash provided by (used in) | ||||||||||||||||||
Operating activities | 28,957 | 47,643 | 18,362 | 27,456 | 26,223 | |||||||||||||
Investing activities | (9,892 | ) | 5,115 | (19,514 | ) | (6,789 | ) | (21,285 | ) | |||||||||
Financing activities | (15,043 | ) | (48,981 | ) | 544 | (21,948 | ) | (15,083 | ) |
FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following should be read in conjunction with Item 6"Selected Financial Data" and the Consolidated Financial Statements and the Notes thereto.
2001 Compared to 2000
Consolidated net sales were $870.9 million for the fiscal year ended June 30, 2001 compared to $867.7 million for the prior year, an increase of $3.2 million. In October 1999, the Company sold its commercial air conditioning operation in France, which had sales of $11.6 million in fiscal 2000. Additionally, the Company estimates that sales have decreased by approximately $23.3 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding the net sales attributable to the operation in France for fiscal 2000 and currency impact, net sales for fiscal 2001 increased $38.1 million or 4.5%, as compared to the prior year. Income from operations was $35.4 million or 4.1% of net sales compared to $26.2 million or 3.0% for fiscal 2001 and 2000, respectively. Gross margin increased year over year from 26.1% of net sales to 26.6% driven by improved manufacturing productivity and material cost reduction programs. Selling, general and administrative expenses as a percent of net sales decreased from 21.4% for fiscal 2000 to 20.4% for fiscal 2001 as a result of cost control programs and lower commission and warranty expense.
Commercial Air Conditioning and Refrigeration
Net sales for the Commercial Air Conditioning and Refrigeration segment were $535.0 million in fiscal 2001 compared to $540.9 million in fiscal 2000, a decrease of $5.9 million. The decrease is partially due to the sale of the commercial air conditioning and refrigeration operation in France in 1999. Additionally, the Company estimates that sales have decreased by $5.7 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding these two items, sales increased $11.4 million or 2.2% primarily due to increased North America sales.
North America fiscal 2001 net sales increased approximately 3.5%. This increase was primarily attributable to increased rooftop applied air handling product demand and increased service revenue, partially offset by decreased sales in applied terminal systems. Applied air handling sales increased 7.8% from the prior year, service revenues increased 13.8% and applied terminal systems sales decreased 7.6%.
International net sales in fiscal 2001 decreased 2.4%, excluding the impact of the sale of the operation in France and the impact of the unfavorable currency trends on translating European sales activity. The decrease is attributable to the ongoing restructuring in the industrial refrigeration business in the United Kingdom where the Company has exited from certain non-core business.
Backlog for the Commercial Air Conditioning and Refrigeration segment was $111 million and $124 million at June 30, 2001 and 2000, respectively. The decrease in backlog was primarily attributable to the softening of office building construction, negatively impacting air handling volume.
Operating income excluding amortization and restructuring was $30.2 million, or 5.6% of net sales, in fiscal 2001 as compared to $13.0 million, or 2.4% of net sales, in fiscal 2000. The gross margin rate increased by 1.6 percentage points from the prior year primarily due to improved manufacturing efficiency in the domestic chiller business unit and increased field service volume. Selling, general and administrative expenses as a percent of sales decreased 1.7 percentage points with the majority of the improvement resulting from lower commission and warranty expense.
15
Filtration Products
Net sales for the Filtration Products segment were $340.6 million in fiscal 2001, an increase of $12.0 million from the net sales of $328.6 million in fiscal 2000. The Company estimates that sales have decreased approximately $17.6 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding the currency impact, net sales increased $29.7 million or 9.0%.
Domestic operations net sales increased 6.4% in fiscal 2001 compared to fiscal 2000. The growth was primarily attributable to continued strong clean room market demand and an increase in MFAS North America projects. International sales volume increased 11.1% from fiscal 2000, excluding the impact of the unfavorable currency trends on translating European sales activity. The increase is primarily attributable to improved air filtration product sales in Asia and an increase in APC systems volume in Latin America.
Operating income excluding amortization and restructuring was $26.3 million in fiscal year 2001, a decrease of $1.7 million or 6.1%, from $28.0 million for fiscal year 2000. Operating income excluding amortization and restructuring as a percent of sales decreased from 8.5% in fiscal 2000 to 7.7% in fiscal 2001. Gross margins decreased to 27.5% from 29.0% as a percentage of net sales for the fiscal years 2001 and 2000, respectively. The decrease in gross margin percentage was primarily the result of competitive pricing pressures in North America and Europe in the replacement filter business. Selling, general and administrative expenses as a percentage of sales decreased 0.6 percentage points in fiscal 2001 from fiscal 2000, primarily due to continued management focus on overhead cost reduction.
Non-operating Expenses
Interest expense was $19.4 million for fiscal 2001 compared to $21.6 million for fiscal 2000. The decrease in interest expense is primarily due to the reduced borrowing levels. During fiscal 2001 and 2000, the Company had net other income (expense) of $4.5 million and $(1.6) million, respectively. The increase in income in fiscal 2001 is primarily related to the sale of property in Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million. Additionally, the Company repurchased $16.2 million of its Senior Notes at a discount resulting in a net gain of $0.4 million. In fiscal 2000, the Company recorded a $1.3 million loss related to the sale of the commercial air conditioning operation in France, which was completed in October 1999. The remaining components of other income and expenses primarily result from foreign currency and equity affiliate transactions.
The provision for income taxes was $8.5 million and the effective tax rate was 41.6% for fiscal 2001 compared to an income tax provision of $2.6 million and an effective tax rate of 87.9% for fiscal 2000. The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.
2000 Compared to 1999
Consolidated net sales were $867.7 million for the fiscal year ended June 30, 2000 compared to $924.0 million for the prior year, a decrease of $56.3 million. The primary reason for the decrease is the sale of the Company's commercial air conditioning operation in France in October 1999 which was the cause of $40.8 million of the year over year decrease. Also, the Company estimates that $16.4 million of the decrease was attributable to having one less week of sales in the fiscal year 2000 as compared to fiscal year 1999. Excluding these two non-recurring items, sales increased $0.9 million or 0.1% compared to the prior year. Income from operations was $26.2 million or 3.0% of sales compared to $11.0 million or 1.2% of net sales for the fiscal years 2000 and 1999, respectively. Gross margin increased year over year from 25.2% of net sales to 26.1% driven by improved manufacturing productivity and material cost reduction programs. Selling, general and administrative expenses as a percent of net sales decreased from 22.2% to 21.4%, for the fiscal years 2000 and 1999, respectively, primarily as a result of lower warranty expenses.
16
Commercial Air Conditioning and Refrigeration
Net sales for the Commercial Air Conditioning and Refrigeration segment were $540.9 million in fiscal 2000 compared to $598.6 million in fiscal 1999, a decrease of $57.7 million. The sale of the operation in France in October 1999 attributed to $40.8 million of the decrease with another estimated $10.3 million due to one less week of sales in fiscal year 2000 as compared to fiscal year 1999. Excluding these two non-recurring items, sales decreased 1.2% year over year primarily due to the product rationalization program in the North American applied terminal systems business unit and the unfavorable currency trends on translating European sales activity.
North American net sales decreased approximately 1.9% excluding the estimated impact of one less week of sales in fiscal 2000 reporting period compared to fiscal 1999. This decrease was primarily due to the applied terminal systems business unit where sales decreased 11.1% as a result of the market reaction to the product rationalization program introduced during fiscal year 1999. Chiller product net sales for fiscal 2000 decreased 8.5% from fiscal 1999. This decrease was primarily the result of the restructuring of the chiller business unit implemented in the prior year. The sales decreases in the chiller products and applied terminal systems business units were partially offset by net sales increases in the applied air handling and parts business units. The parts business unit increased sales by 17.0% year over year as a result of strong demand for replacement parts while sales increased 4.6% in the applied air handling business unit due to strong demand for air handling and self contained units.
International net sales in fiscal year 2000 decreased 0.2%, excluding the impact of the sale of the operation in France and the estimated impact of one less week of sales, from fiscal 1999 primarily due to the ongoing restructuring in the industrial refrigeration business in the United Kingdom where the Company has begun exiting from certain non-core business and the impact of unfavorable currency trends on translating European sales activity. Excluding the industrial refrigeration business and unfavorable currency impact of approximately $4.9 million, net sales in fiscal 2000 increased 23.6% from fiscal 1999 primarily due to strong chiller demand in Italy and the United Kingdom and further penetration into Middle East markets.
Backlog for the Commercial Air Conditioning and Refrigeration segment was $124 million as compared to $134 million at June 30, 2000 and 1999, respectively. The decrease in backlog was primarily attributable to the sale of the commercial air conditioning operation in France and also the market reaction to the applied terminal systems product rationalization program introduced in fiscal 1999.
Operating income excluding amortization and restructuring was $13.0 million, or 2.4% of net sales, in fiscal 2000 as compared to $2.0 million, or 0.3% of net sales, in fiscal 1999. The gross margin rate increased by 1.0 percentage point from the prior year rate primarily due to improved manufacturing productivity in the North American plants. Selling, general and administrative expenses as a percent of sales decreased 1.5 percentage points with the majority of the improvement resulting from lower warranty expenses in North America related to favorable experience compared to the prior year.
Filtration Products
Net sales for the Filtration Products segment were $328.6 million in fiscal 2000, a decrease of $5.5 million from the net sales of $334.1 million in fiscal 1999. Excluding the estimated impact of the additional week in fiscal 1999, net sales increased approximately 0.2% year over year.
Domestic operations net sales increased 1.5% in fiscal 2000 compared to fiscal 1999. The growth was primarily attributable to a strengthened clean room market. International sales volume decreased 0.8% from fiscal 1999 due to sales volumes increases in Latin America and Asia offset by unfavorable European results. Latin American sales increased 96.4% compared to fiscal 1999 as the result of certain large air pollution control system projects during fiscal 2000, while Asia net sales increased
17
4.9% versus the prior year primarily due to improving market conditions. Net sales for Europe decreased 6.5% primarily due to the impact of the unfavorable currency trends on translating European sales activity which represented an estimated $12.2 million decrease in net sales. Excluding the unfavorable currency impact, net sales for Europe increased 1.7%.
Operating income excluding amortization and restructuring was $28.0 million in fiscal year 2000, an increase of $4.8 million or 20.6%, from $23.2 million for fiscal year 1999. Operating income excluding amortization and restructuring as a percent of sales increased from 7.0% in fiscal 1999 to 8.5% in fiscal 2000. Gross margins increased to 29.0% from 27.8% as a percentage of net sales for the fiscal years 2000 and 1999, respectively. The increase in gross margin percentage was primarily attributable to material cost reduction programs in the replacement filter products business globally. Selling, general and administrative expenses as a percentage of sales decreased 0.5 percentage points in fiscal year 2000 from fiscal year 1999, primarily due to continued management focus in reducing overhead expenses throughout the Company.
Non-operating Expenses
Interest expense was $21.6 million for fiscal year 2000 compared to $24.0 million for fiscal year 1999. The decrease in interest expense is primarily due to the reduced borrowing levels from the favorable net cash from operating and investing activities during fiscal 2000. During fiscal years 2000 and 1999, the Company had net other (income) expense of $1.6 million and $(5.3) million, respectively. The increase in expense in fiscal year 2000 is primarily related to events that occurred in the first quarters of fiscal years 2000 and 1999. In the first quarter of fiscal year 2000, the Company accrued a $1.3 million loss related to the sale of the commercial air conditioning operation in France, which was completed in October 1999. In the first quarter of fiscal year 1999, the Company recognized $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. 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 primarily result from foreign currency and equity affiliate transactions.
The provision for income taxes was $2.6 million and the effective tax rate was 87.9% for fiscal year 2000 compared to a benefit of $1.4 million and an effective tax rate of (18.8)% for fiscal year 1999. The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.
Sale of Businesses and Restructuring
On an on-going basis the Company seeks to evaluate its various businesses and product lines with the objective of enhancing shareholder value. Consistent with this strategy, the Company intends to pursue global business opportunities that are synergistic with the Company's core business or exit low value-added and non-synergistic operations. In October 1999, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million.
The Company also seeks to identify opportunities to improve its cost structure on an on-going basis. These opportunities may involve the elimination of certain positions or the closure of manufacturing facilities. As more fully described in Note 9 to the Consolidated Financial Statements, the Company recognized restructuring charges of $7.2, $3.5, and $5.2 million during fiscal years 2001, 2000, and 1999, respectively. These restructuring charges relate to actions that have been implemented in both the Commercial Air Conditioning and Refrigeration and Filtration Products segments. The Company continues to identify and evaluate other opportunities to improve its cost structure and may recognize additional restructuring charges in the future.
18
In September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL for approximately $13.1 million, which would result in an immaterial gain. Proceeds from the sale are planned to be used to pay down debt.
Liquidity and Capital Resources
Cash generated from operating activities and supplemented when necessary by short-term credit facilities provides the Company's liquidity needs. For the year ended June 30, 2001, net cash provided by operating activities was $29.0 million as compared to a generation of $47.6 million for the year ended June 30, 2000. For the fiscal year ended June 30, 2001 net cash used by investing activities of $9.8 million included $16.0 million in capital expenditures of which $5.1 million relates to the consolidation of domestic air handling operations in Minnesota, offset by cash proceeds of $6.9 million from the sale of property in the United Kingdom (see below).
On September 30, 1999, the Company refinanced its Bank Credit Agreement with a New Term Loan of $30 million and a New Revolving Credit Facility of $90 million ("New Bank Credit Agreement"). The New Bank Credit Agreement expires in February 2003, was used to retire all obligations under the previous Bank Agreement and is designed to provide added flexibility and borrowing availability. The New Bank Credit Agreement also provides favorable interest rates and fees compared to the previous Bank Credit Agreement. At June 30, 2001, the Company had borrowed $53.5 million under the New Revolving Credit Facility, $7.5 million in letters of credit were issued and outstanding, and the Company had remaining borrowing availability of $29.0 million.
A short-term credit facility provided to a subsidiary of the Company is supported by a £8.5 million ($12.0 million) letter of credit from the Company's parent, OYL, which expires on May 31, 2002. Approximately £2.8 million ($3.9 million) of the facility was utilized at June 30, 2001. This support arrangement may be extended for additional time periods with the consent of OYL and the bank providing the facilities.
Total net payments on short-term and long-term debt for the year ended June 30, 2001 was $15.0 million which is a result of $8.0 million in payments on long-term debt, $15.5 million in repurchases of Senior Notes, net additional borrowings under short-term arrangements of $7.8 million and $0.7 million in proceeds from the issuance of new long-term debt. Total debt of the Company has been reduced from $218.9 million at June 30, 2000 to $201.5 million at June 30, 2001.
In October 2000, cash proceeds from the sale of property in the United Kingdom of $6.9 million was used to reduce short-term borrowings. In October 1999, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million with the proceeds being used to reduce debt.
Planned capital expenditures are approximately $16.0 million for each of fiscal 2002 and 2003.
The ongoing costs of compliance with existing environmental laws and regulations and the estimated costs to clean up and monitor existing contaminated sites is not expected to have a material adverse effect on the Company's capital expenditures or financial position. See "Legal Proceedings" and Note 15 to the Consolidated Financial Statements.
The Company has manufacturing facilities and sells products in various countries around the world. As a result, the Company is exposed to movements in exchange rates of various currencies against the U.S. dollar. Management's response to currency movements varies (e.g., changes in pricing actions, changes in cost structures and changes in hedging strategy). Currently, the Company enters into short-term forward exchange contracts to hedge its exposure to currency fluctuations affecting certain foreign currency denominated trade payables and certain intercompany debt of its foreign subsidiaries. The Company will continue to report, from time to time, fluctuations in both earnings and equity due to foreign exchange movements since it is not cost-effective to establish a hedging strategy that eliminates all risks.
19
Management believes, based upon current levels of operations and forecasted earnings, that cash flows from operations, together with borrowings under the New Bank Credit Agreement and other short-term credit facilities, will be adequate to make payments of principal and interest on debt, to permit anticipated capital expenditures and to fund working capital requirements and other cash needs. Nevertheless, the Company will remain leveraged to a significant extent and its debt service obligations will continue to be substantial. If the Company's sources of funds were to fail to satisfy the Company's requirements, the Company may need to refinance its existing debt or obtain additional financing. There is no assurance that any such new financing alternatives would be available and, in any case, such new financing (if available) could be expected to be more costly and restrictive than the debt agreements currently in place.
Goodwill and Other Intangible Assets
In June 2001, the Financial Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangibles Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company is required to apply the new rules on accounting for goodwill and other intangible assets beginning the first quarter of fiscal 2003, although it has the option to adopt the new Standards in the first quarter of fiscal year 2002. The Company is currently assessing the financial impact that SFAS Nos. 141 and 142 will have on its earnings and financial position.
Seasonality
The demand for certain replacement filter products, particularly residential filters, is seasonal in nature. Normally, sales of residential filters are relatively low in the winter and early spring with an increase in sales during the late spring, summer and fall months. Replacement air filter sales in the commercial and industrial markets are also higher during the spring and summer months, although these sales are driven primarily by maintenance cycles. Sales of some air filtration equipment are seasonal to the extent that construction activity increases during the warmer months.
Sales of commercial air conditioning equipment are generally not seasonal. However, the Company's air conditioning service business is seasonal in nature due to off-season maintenance cycles and service needs during the summer months. Demand for unitary air conditioning equipment in the small unit commercial new construction markets varies according to the season, with increased demand generally from March to October. Demand in the small unit commercial replacement markets is impacted by seasonal temperature fluctuations. Sales of unit ventilators for educational facilities tend to increase in the second and third calendar quarters of any given year in part due to the start of a new school year as well as the availability of bond or other funds budgeted for capital expenditures.
Euro Conversion
Management has implemented systems for the conversion to the Euro effective July 1, 2001. The Euro conversion has not had a material effect on the Company's operating results or competitive position. The Company will continue to investigate opportunities for European-wide system infrastructures.
20
Forward-Looking Statements
When used in this report the words "believes," "anticipates," "estimates," "plans" and "expects" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently believed to be valid. 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 to, economic conditions in the United States, changes in world financial markets, environmental laws and regulations, risks associated with currency fluctuations, a weakening in Latin America and Asian markets, unforeseen competitive pressures, warranty expenses, market acceptance of new products, unseasonably cool spring or summer weather, unforeseen difficulties in maintaining mutually beneficial relationships with strategic partnerships and alliances, 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 on which those statements are made. The Company undertakes no obligation to update any forward-looking statements to reflect unanticipated events or circumstances occurring after that date.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's earnings are affected by fluctuations in the value of the U.S. dollar, as compared to foreign currencies, as a result of transactions in foreign markets. At June 30, 2001, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's transactions are denominated would result in a decrease in operating income of approximately $0.6 million for the year ending June 30, 2001. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' services become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.
Total short-term and long-term debt outstanding at June 30, 2001 was $201.5 million, consisting of $81.0 million in variable rate borrowing and $120.5 million in fixed rate borrowing. At this level of variable rate borrowing, a hypothetical 10% increase in interest rates would decrease pre-tax current year earnings by approximately $0.6 million for the year ended June 30, 2001. At June 30, 2001, the fair value of the Company's fixed rate debt outstanding was estimated at $120.5 million using quoted market price. A hypothetical 10% change in interest rates would not result in a material change in the fair value of the Company's fixed rate debt. The Company may, at times, seek to limit the impacts of interest rate fluctuations on its debt through the use of interest rate derivative instruments. See Note 8 to the Consolidated Financial Statements for further information.
21
Item 8. Financial Statements and Supplementary Data
|
Page in this Report |
|
---|---|---|
Financial Statements |
||
Report of the Independent Auditors |
23 |
|
Consolidated Balance Sheets as of June 30, 2001 and 2000 |
24 |
|
Consolidated Statements of Operations Years ended June 30, 2001, 2000 and 1999 |
25 |
|
Consolidated Statements of Cash Flows Years ended June 30, 2001, 2000 and 1999 |
26 |
|
Consolidated Statements of Stockholder's Equity Years ended June 30, 2001, 2000 and 1999 |
27 |
|
Consolidated Statements of Comprehensive Income Years ended June 30, 2001, 2000 and 1999 |
28 |
|
Schedule IIValuation and Qualifying Accounts and Reserves Years ended June 30, 2001, 2000 and 1999 |
50 |
22
REPORT OF INDEPENDENT AUDITORS
The
Board of Directors and Stockholder
AAF-McQuay Inc.
We have audited the accompanying consolidated balance sheets of AAF-McQuay Inc. and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, cash flows, stockholder's equity and comprehensive income for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AAF-McQuay Inc. and subsidiaries at June 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Louisville,
Kentucky
August 10, 2001
23
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
June 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 14,254 | $ | 11,522 | ||||||
Accounts receivable | 191,942 | 204,523 | ||||||||
Inventories | 101,802 | 103,835 | ||||||||
Other current assets | 8,370 | 8,216 | ||||||||
Total current assets | 316,368 | 328,096 | ||||||||
Property, plant and equipment, net |
118,744 |
124,998 |
||||||||
Cost in excess of net assets acquired and other identifiable intangibles, net | 201,731 | 214,311 | ||||||||
Other assets and deferred charges | 17,171 | 17,995 | ||||||||
Total assets | $ | 654,014 | $ | 685,400 | ||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||||
Current liabilities: | ||||||||||
Short-term borrowings | $ | 63,938 | $ | 57,859 | ||||||
Current maturities of long-term debt | 6,120 | 7,319 | ||||||||
Accounts payable, trade | 100,585 | 105,637 | ||||||||
Accrued warranty | 19,567 | 18,743 | ||||||||
Accrued employee compensation | 27,155 | 29,784 | ||||||||
Other accrued liabilities | 42,947 | 47,610 | ||||||||
Total current liabilities | 260,312 | 266,952 | ||||||||
Long-term debt. |
131,429 |
153,676 |
||||||||
Deferred income taxes | 26,029 | 34,911 | ||||||||
Other liabilities | 49,003 | 46,353 | ||||||||
Total liabilities | 466,773 | 501,892 | ||||||||
Stockholder's equity: |
||||||||||
Preferred stock ($1 par value; 1,000 shares authorized, none issued) | | | ||||||||
Common stock ($100 par value; 8,000 shares authorized, 2,497 shares issued and outstanding) | 250 | 250 | ||||||||
Additional paid-in capital | 179,915 | 179,915 | ||||||||
Retained earnings | 29,606 | 17,864 | ||||||||
Accumulated other comprehensive income (loss) | (22,530 | ) | (14,521 | ) | ||||||
Total stockholder's equity | 187,241 | 183,508 | ||||||||
Total liabilities and stockholder's equity | $ | 654,014 | $ | 685,400 | ||||||
See Notes to Consolidated Financial Statements.
24
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
|
Years Ended June 30, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
1999 |
||||||||
Net sales | $ | 870,854 | $ | 867,704 | $ | 924,028 | |||||
Cost of sales | 638,825 | 641,346 | 691,222 | ||||||||
Gross profit | 232,029 | 226,358 | 232,806 | ||||||||
Operating expenses: |
|||||||||||
Selling, general and administrative | 177,245 | 185,512 | 205,299 | ||||||||
Amortization of intangible assets | 12,197 | 11,150 | 11,370 | ||||||||
Restructuring charges | 7,237 | 3,493 | 5,170 | ||||||||
196,679 | 200,155 | 221,839 | |||||||||
Income from operations | 35,350 | 26,203 | 10,967 | ||||||||
Interest expense, net | 19,372 | 21,627 | 23,975 | ||||||||
Other (income) expense, net | (4,542 | ) | 1,566 | (5,324 | ) | ||||||
Income (loss) before income taxes | 20,520 | 3,010 | (7,684 | ) | |||||||
Income taxes | 8,540 | 2,647 | (1,444 | ) | |||||||
Minority interest in earnings | 238 | 261 | 286 | ||||||||
Net income (loss) | $ | 11,742 | $ | 102 | $ | (6,526 | ) | ||||
See Notes to Consolidated Financial Statements.
25
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
Years Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
1999 |
|||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | 11,742 | $ | 102 | $ | (6,526 | ) | |||||
Adjustments to reconcile to cash from operating activities: | ||||||||||||
Depreciation and amortization | 29,510 | 30,356 | 29,099 | |||||||||
Gain (loss) on the sale of business/property | (4,538 | ) | 1,331 | | ||||||||
Deferred income taxes | (8,882 | ) | 943 | (4,417 | ) | |||||||
Other non-cash items, net | 298 | 94 | (738 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 7,278 | 6,823 | 10,769 | |||||||||
Inventories | (334 | ) | 9,225 | 5,685 | ||||||||
Accounts payable and other accrued liabilities | (3,124 | ) | (2,477 | ) | (17,444 | ) | ||||||
Other assets/liabilities, net | (2,993 | ) | 1,246 | 1,934 | ||||||||
Net cash from operating activities | 28,957 | 47,643 | 18,362 | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures | (16,006 | ) | (7,881 | ) | (19,514 | ) | ||||||
Acquisition of additional interest in joint venture, net of cash | (807 | ) | | | ||||||||
Proceeds from the sale of business/property | 6,921 | 12,996 | | |||||||||
Net cash from investing activities | (9,892 | ) | 5,115 | (19,514 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Net borrowings (repayments) under short-term borrowing arrangements | 7,765 | (29,743 | ) | 27,340 | ||||||||
Payments on long-term debt | (8,036 | ) | (47,851 | ) | (26,796 | ) | ||||||
Proceeds from issuance of long-term debt | 738 | 30,000 | | |||||||||
Repurchase of senior notes | (15,510 | ) | | | ||||||||
Payment of debt issuance costs | | (1,387 | ) | | ||||||||
Net cash from financing activities | (15,043 | ) | (48,981 | ) | 544 | |||||||
Effect of exchange rate changes on cash |
(1,290 |
) |
(1,423 |
) |
79 |
|||||||
Net increase (decrease) in cash and cash equivalents | 2,732 | 2,354 | (529 | ) | ||||||||
Cash and cash equivalents at beginning of year | 11,522 | 9,168 | 9,697 | |||||||||
Cash and cash equivalents at end of year | $ | 14,254 | $ | 11,522 | $ | 9,168 | ||||||
See Notes to Consolidated Financial Statements.
26
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Foreign Currency Translation Adjustments |
Minimum Pension Liability Adjustments |
Total |
|||||||||||||
Balance, June 30, 1998 | $ | 250 | $ | 179,915 | $ | 24,288 | $ | (7,792 | ) | $ | | $ | 196,661 | ||||||
Net loss | | | (6,526 | ) | | | (6,526 | ) | |||||||||||
Currency translation adjustment | | | | (3,707 | ) | | (3,707 | ) | |||||||||||
Balance, June 30, 1999 | 250 | 179,915 | 17,762 | (11,499 | ) | | 186,428 | ||||||||||||
Net income | | | 102 | | | 102 | |||||||||||||
Currency translation adjustment | | | | (3,022 | ) | | (3,022 | ) | |||||||||||
Balance, June 30, 2000 | 250 | 179,915 | 17,864 | (14,521 | ) | | 183,508 | ||||||||||||
Net income | | | 11,742 | | | 11,742 | |||||||||||||
Currency translation adjustment | | | | (4,844 | ) | | (4,844 | ) | |||||||||||
Minimum pension liability adjustment, net of tax of $2,110 | | | | | (3,165 | ) | (3,165 | ) | |||||||||||
Balance, June 30, 2001 | $ | 250 | $ | 179,915 | $ | 29,606 | $ | (19,365 | ) | $ | (3,165 | ) | $ | 187,241 | |||||
See Notes to Consolidated Financial Statements.
27
AAF-McQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
|
Years Ended June 30, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
1999 |
||||||||
Net income (loss) | $ | 11,742 | $ | 102 | $ | (6,526 | ) | ||||
Other comprehensive income (loss): | |||||||||||
Foreign currency translation adjustments | (4,844 | ) | (3,851 | ) | (3,707 | ) | |||||
Write off of accumulated foreign currency translation adjustments due to sale of business | | 829 | | ||||||||
Minimum pension liability adjustment, net of tax of 2,110 | (3,165 | ) | | | |||||||
Comprehensive income (loss) | $ | 3,733 | $ | (2,920 | ) | $ | (10,233 | ) | |||
See Notes to Consolidated Financial Statements.
28
AAF-McQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The accompanying financial statements include the accounts of AAF-McQuay Inc. (the Company), a wholly owned subsidiary of AAF-McQuay Group Inc., and its subsidiaries. AAF-McQuay Group Inc. is a wholly owned subsidiary of O.Y.L. Industries Berhad ("OYL").
The Company is a worldwide manufacturer and marketer of commercial air conditioning and refrigeration and air filtration products and systems primarily for commercial, institutional and industrial customers. The Company maintains production facilities in nine countries and its products are sold in over 80 countries.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated. The accompanying financial statements reflect the financial results of the Company for the fiscal years ended June 30, 2001, 2000 and 1999. The Company's fiscal year end is the Saturday closest to June 30 and, for clarity of presentation in the consolidated financial statements, fiscal years are shown to begin on July 1 and end on June 30.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Cash and Cash Equivalents
The Company invests cash in excess of operating requirements in short-term time deposits. These investments have original maturities of less than three months and are considered cash equivalents for financial reporting purposes.
Inventories
Inventories are valued at the lower of cost or market at June 30, 2001 and 2000. Cost is determined by the last-in, first-out (LIFO) method for U.S. inventories (65% in 2001 and 59% in 2000), and the first-in, first-out (FIFO) method for the Company's foreign subsidiaries (35% in 2001 and 41% in 2000).
Property, Plant and Equipment
Property, plant and equipment are capitalized at cost and depreciated using the straight-line method over their estimated useful lives as follows:
Buildings | 20 to 40 years | |
Machinery and Equipment | 3 to 12 years |
Maintenance and repairs are charged to operations when incurred, while expenditures, which have the effect of extending the useful life of an asset, are capitalized.
29
Cost of Computer Software Developed or Obtained for Internal Use
The Company capitalizes qualifying costs of computer software developed or obtained for internal use and amortizes these costs on a straight-line basis over the software's useful life, which is generally a period of three to five years.
Intangible Assets
The excess of cost over fair values of net assets acquired is being amortized on a straight-line basis over forty years. Other identifiable intangibles acquired include trademarks and tradenames, technical drawings, technology; and assembled work force, which are being amortized on a straight-line basis over forty, fifteen and ten years, respectively.
On a periodic basis, the Company evaluates the carrying value of its intangible assets to determine if the facts and circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined based on the undiscounted cash flow of the entity acquired over the remaining amortization period, the Company's carrying value of intangible assets is reduced to the then estimated fair value of such assets.
In June 2001, the Financial Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangibles Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company is required to apply the new rules on accounting for goodwill and other intangible assets beginning the first quarter of fiscal 2003, although it has the option to adopt the new Standards in the first quarter of fiscal year 2002. The Company is currently assessing the financial impact that SFAS Nos. 141 and 142 will have on its earnings and financial position.
Derivative Financial Instruments
The Company uses derivative financial instruments, principally, in the management of its interest rate and foreign currency exposures. The Company does not enter into speculative derivative transactions.
The differential between interest rate payments due and amounts receivable under interest rate swap agreements is recognized as yield adjustments to interest expense over the term of the related debt.
Gains and losses on foreign exchange forward contracts are recognized in income and offset the foreign exchange gains and losses on the underlying foreign currency transactions.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and for Hedging Activities, which was amended by Statement Nos. 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that do not receive hedge accounting treatment are adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or are recognized in other
30
comprehensive income until the hedged item is recognized in earnings. The Company adopted Statement No. 133, as amended, on July 1, 2000 resulting in no cumulative effect of an accounting change being recognized in the consolidated statements of operations or comprehensive income.
Foreign Currencies
Assets and liabilities of the Company's subsidiaries outside the U.S. are translated into U.S. dollars at the exchange rates in effect at the end of the period. Revenue and expense accounts are translated at a weighted average of exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary's financial statements from local currency (the functional currency) to U.S. dollars are reflected as a separate component of stockholder's equity.
Transaction gains and losses that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included currently in other (income) expense in the results of the Company's operations. The Company recognized net foreign currency transaction (gains) losses of $1,101,000, $25,000 and $(738,000), for the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
Revenue Recognition
Revenues are generally recognized as products are shipped and title passes to the customer or services are rendered. Revenues and costs associated with long-term contracts are recognized on the percentage-of-completion method. Provisions are recorded for losses on contracts whenever it is estimated that costs will exceed contract value.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB 101 had no effect on the Company's results of operations or financial position.
Product Warranties
Product warranties are provided as charges to current expense for estimated normal warranty costs and, if applicable, for specific performance issues known to exist on products sold. The expenses estimated to be incurred are provided at the time of sale, based primarily upon estimates derived from experience. Warranty costs on some purchased parts and components are partially reimbursed to the Company by supplying vendors. Estimated obligations beyond one year are classified as other long-term liabilities. Revenue from the sale of extended warranty and related service contracts is deferred and amortized over the respective contract life on a straight-line basis.
Research and Development Costs
Research and development costs were approximately $9.0, $8.7 and $8.9 million, for the fiscal years ended June 30, 2001, 2000 and 1999, respectively, and are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.
31
Stock-Based Compensation
As described in Note 12, the Company has elected to follow the accounting provisions of Accounting Principles Board Opinion ("APB") No. 25 for stock-based compensation and to furnish the pro forma disclosures required under SFAS No. 123.
Income Taxes
The Company uses the liability method for financial accounting and reporting of income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between financial statement carrying amounts and the tax bases of assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when these differences reverse.
3. Accounts Receivable
Accounts receivable consist of the following (dollars in thousands):
|
2001 |
2000 |
||||
---|---|---|---|---|---|---|
Accounts receivable, trade | $ | 189,500 | $ | 200,408 | ||
Accounts receivable, other | 8,653 | 11,083 | ||||
198,153 | 211,491 | |||||
Less allowance for doubtful receivables | 6,211 | 6,968 | ||||
$ | 191,942 | $ | 204,523 | |||
The Company manufactures and sells heating, ventilating, air conditioning, refrigeration and air filtration products to companies in various industries with the most significant sales concentration being in the construction industry. The Company performs periodic evaluations of its customers' financial condition and generally does not require collateral. For domestic equipment sales, it is the Company's practice to attach liens in the event of non-payment, when such recourse is available. Trade receivables generally are due within 30-90 days.
4. Inventories
Inventories consist of the following (dollars in thousands):
|
2001 |
2000 |
|||||
---|---|---|---|---|---|---|---|
FIFO cost: | |||||||
Raw materials | $ | 42,706 | $ | 42,278 | |||
Work-in-process | 17,691 | 19,313 | |||||
Finished goods | 41,851 | 42,325 | |||||
102,248 | 103,916 | ||||||
LIFO adjustment | (446 | ) | (81 | ) | |||
$ | 101,802 | $ | 103,835 | ||||
32
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in thousands):
|
2001 |
2000 |
||||
---|---|---|---|---|---|---|
Land | $ | 7,693 | $ | 8,845 | ||
Buildings | 59,794 | 57,627 | ||||
Machinery and equipment | 141,321 | 134,517 | ||||
208,808 | 200,989 | |||||
Less accumulated depreciation and amortization | 90,064 | 75,991 | ||||
$ | 118,744 | $ | 124,998 | |||
At June 30, 2001, substantially all property, plant and equipment are encumbered by various debt obligations of the Company. Depreciation expense was $17.3, $19.2, and $17.7 million for fiscal 2001, 2000 and 1999, respectively. Pursuant to the close of the Scottsboro, Alabama air handling manufacturing facility (see Note 9), certain assets with a carrying amount of $3.4 million are held for sale. The assets, consisting principally of building and land, are expected to be sold by the end of fiscal 2003.
6. Intangible Assets
Intangible assets consist of the following (dollars in thousands):
|
2001 |
2000 |
|||||
---|---|---|---|---|---|---|---|
Cost in excess of net assets acquired | $ | 143,867 | $ | 144,142 | |||
Other intangibles: | |||||||
Technology | 14,021 | 14,129 | |||||
Trademarks | 58,874 | 58,874 | |||||
Drawings | 54,000 | 54,000 | |||||
Workforce | 17,046 | 17,046 | |||||
Total other intangibles | 143,941 | 144,049 | |||||
Less accumulated amortization | 86,077 | 73,880 | |||||
$ | 201,731 | $ | 214,311 | ||||
Amortization of intangible assets in the Consolidated Statement of Operations for fiscal 2001 includes the write-off of intangibles and goodwill in the amount of $1.1 million related to the Company's German subsidiary. This write-off was based on an analysis of projected undiscounted cash flows, which were no longer deemed adequate to support the value of intangibles and goodwill associated with the business.
7. Debt
In September 1999, the Company refinanced a previous bank agreement with a new Bank Credit Agreement. The Bank Credit Agreement expires in February 2003 and includes a $30 million term loan ("Term Loan") and a $90 million revolving credit commitment ("Revolver"). Use of the Revolver is subject to the Company's availability (as defined in the Bank Agreement) and is based on the Company's level of domestic receivables and inventories. Interest on advances is generally payable
33
quarterly, at the Company's option on 1.) the higher of the domestic base rate (prime) or a rate based on the Federal Funds Rate plus a specified premium or 2.) the average rate at which Eurodollar deposits are offered to prime banks in the London interbank market ("LIBOR") plus a specified premium. The interest rate premiums are determined by an interest rate matrix, which is based on a certain financial ratio as described in the Bank Credit Agreement. As of June 30, 2001, the Company's interest rate premiums were LIBOR + 1.75% or prime + 0% for Revolver borrowings and LIBOR + 2.00% or prime + 0% for Term Loan borrowings. The interest rate premiums are subject to a 0.25% increase or decrease depending on the applicable ratio. At June 30, 2001, the Company's borrowing rate under the Revolver was approximately 5.6%. The average effective interest rate under the Revolver for the fiscal year ended June 30, 2001 was approximately 7.8%. A commitment fee of 0.25% is required on the unused portion of the Revolver. At June 30, 2001, the Company had borrowed $53.5 million under the Revolving Credit Facility, $7.5 million in letters of credit were issued and outstanding, and the Company had remaining borrowing availability of $29.0 million. At June 30, 2000, the Company had borrowed $31.9 million under the Revolving Credit Facility.
At June 30, 2001, certain of the Company's foreign subsidiaries had available lines of credit with foreign banks of approximately $40.0 million which may be drawn as needed at an average interest rate of approximately 7.0%. Outstanding borrowings against international lines of credit amounted to approximately $10.5 and $26.0 million at June 30, 2001 and 2000, respectively. In addition, certain of the Company's foreign subsidiaries have non-borrowing bank facilities (letters of credit, guarantees, performance bonds, etc.) totaling $21.3 million as of June 30, 2001 and $22.3 million as of June 30, 2000 of which approximately $12.4 million was used at June 30, 2001 and $15.6 million was used at June 30, 2000.
The weighted average effective interest rate on short-term borrowings was 5.8% and 8.9% at June 30, 2001 and 2000, respectively.
Long-term debt consists of the following (dollars in thousands):
|
2001 |
2000 |
|||||
---|---|---|---|---|---|---|---|
Senior Term Loans | $ | 17,975 | $ | 23,075 | |||
Senior Unsecured Notes due February 15, 2003, bearing interest at 8.875% | 108,834 | 125,000 | |||||
Other issues | 10,740 | 12,920 | |||||
137,549 | 160,995 | ||||||
Less: Current maturities | (6,120 | ) | (7,319 | ) | |||
$ | 131,429 | $ | 153,676 | ||||
The term loan portion of the Bank Credit Agreement is a direct obligation of the Company. This term loan is secured by substantially all the domestic assets of the Company and its domestic subsidiaries and a portion of the capital stock of certain foreign subsidiaries. Interest is generally payable quarterly. As of June 30, 2001, the repayment schedule calls for 19 monthly payments of $425,000 with a final payment of $9.9 million due at maturity (February 1, 2003).
34
The Bank Credit Agreement contains covenants that, among other things, imposes limitations on incurrence of indebtedness, capital expenditures, transactions with affiliates, mergers and the disposition of assets, investments by the Company, and transactions involving the capital of the Company, including payment of any dividends. In addition, the Bank Credit Agreement contains financial covenants relating to net worth and fixed charge coverage. The Company is in compliance with the Bank Credit Agreement.
The term loan portion of the Bank Credit Agreement contains provisions requiring accelerated payments as a result of asset sales above a prescribed minimum. Accelerated payments of $3.5 million were required during the fiscal year ended June 30, 2000. No accelerated payments were required for the years ended June 30, 2001 or 1999.
In February 1996, the Company issued the 8.875% Senior Unsecured Notes ("Senior Notes") with the proceeds being used to reduce indebtedness under the previous bank agreement. The Senior Notes were issued under an indenture agreement which, among other things, contains restrictive covenants relating to dividend distributions, additional debt, sale of assets, transactions with affiliates, guarantees and investments by the Company and its subsidiaries. The Senior Notes are not redeemable prior to maturity (February 15, 2003) and are not subject to any sinking fund requirement.
During the year ended June 30, 2001, the Company repurchased bond principal amounts totaling $16.2 million of its Senior Notes at a discount, resulting in a gain of approximately $0.4 million after write-off of associated debt issuance costs. The Company plans to hold these repurchased notes until their maturity in February 2003.
Included in other issues of long-term debt are various term loans incurred by certain foreign subsidiaries, as well as obligations under Industrial Revenue Bonds and mortgage notes. The foreign term loans are secured by certain assets of the issuing foreign subsidiary and contain various repayment terms ranging from 3 to 14 years.
The Company paid cash interest of $18.3, $20.7 and $23.1 million for the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
Maturities of long-term debt during each of the next five fiscal years subsequent to June 30, 2001 are as follows (dollars in millions): 2002$6.1; 2003$122.8; 2004$1.0; 2005$1.1; 2006$1.0.
35
The Company operates internationally and borrows at floating interest rates, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates. The Company may utilize derivatives to reduce those risks. The notional amounts of derivatives noted below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The Company does not hold or issue derivative financial instruments for trading purposes.
Interest rate risk management: The Company may, at times, seek to limit the impacts of rising interest rates on its variable rate debt through the use of interest rate derivative instruments. In January 2000, the Company entered into an interest rate swap transaction whereby the Company receives a fixed rate of 7.04% and pays a floating rate on the basis of 3-month LIBOR. The January 2000 swap has a three-year term and a notional amount of $30 million and effectively converts a portion of the Company's fixed rate borrowings to a floating rate. In September 2000, the Company sold an interest rate floor with a notional amount of $30 million, which requires the Company to make payments if 3-month LIBOR falls below a certain level. The Company received a payment of $165,000 as selling price for the floor. The measurement dates and maturity dates of the swap and floor match interest payment dates and maturity date of the Senior Notes. The Company records the swap and floor in its balance sheet at fair market value. As of June 30, 2001, the fair market value of the interest rate swap and floor was an asset of $1.4 million and a liability of $1.2 million, respectively. The net result of these positions recognized in operations for the year ended June 2001 was income of $0.3 million.
Foreign currency management: The Company enters into short-term foreign exchange contracts to hedge its exposure to currency fluctuations affecting certain foreign currency denominated trade payables and certain intercompany debt of its foreign subsidiaries. The notional amount of foreign exchange forward contracts outstanding at June 30, 2001 and 2000 respectively, was approximately $28.9 and $20.3 million, respectively. The U.S. dollar equivalent notional amount of these foreign exchange forward contracts by applicable foreign currency at June 30, 2001 and 2000 was as follows: Canadian dollars$4.5 and $5.9 million; Singapore dollars$0 and $0.9 million; Euro-related currencies$6.8 and $2.8 million; British pounds$12.4 and $9.2 million; Mexican peso$5.0 and $0 million; and various other currencies$0.2 and $1.5 million.
The Company is exposed to credit-related losses in the event of non-performance by counter parties to derivative financial instruments. The Company monitors the credit worthiness of the counter parties and presently does not anticipate nonperformance by the counter parties. The credit exposure of derivative financial instruments is represented by the fair value of contracts with a positive fair value.
36
SFAS No. 107, Disclosures about Fair Values of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values reported in the balance sheets for cash and cash equivalents, accounts receivable and short-term borrowings approximate their respective fair values. The fair value of the Company's Senior Unsecured Notes is estimated using a quoted market price. The carrying amount of the Company's long-term debt at June 30, 2001 of $137.5 million approximates fair value. The fair values of the Company's foreign exchange forward contracts are based on current settlement values and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit standing. At June 30, 2001 and 2000, the net carrying amount of these contracts approximates their fair value.
9. Restructuring
The Company initiated several restructuring plans during fiscal 2001 in both the Commercial Air Conditioning and Refrigeration and Filtration Products segments. Restructuring reserves of approximately $7.2 were recorded. During the first quarter of fiscal 2001, the Company announced its intention to close its air handling manufacturing facility in Scottsboro, Alabama. Related to this closure, the Company recorded a restructuring reserve of approximately $2.2 million, primarily related to severance accruals for the elimination of approximately 330 employees. Additionally during fiscal 2001, the Commercial Air Conditioning and Refrigeration segment continued restructuring efforts in its United Kingdom operations recording a reserve of approximately $4.4 million. This reserve primarily represents severance accruals related to the elimination of approximately 180 employees in its industrial refrigeration headquarters and air handling, plate freezer and compressor manufacturing units. The remaining restructuring reserves of approximately $0.6 million primarily relate to severance costs for the Filtration Products segment and the elimination of approximately 15 positions in Germany. At June 30, 2001, the Company had utilized $6.0 million of the reserves related to these restructuring plans. The Company expects to complete these restructuring efforts by the end of fiscal 2002.
During fiscal year 2000, restructuring reserves of $3.5 million were recorded. The Commercial Air Conditioning and Refrigeration business segment continued the restructuring of the United Kingdom operations in the third and fourth quarters of fiscal 2000, recording approximately $2.7 million primarily representing severance accruals. Additionally, the Filtration Products business segment restructured the United Kingdom operations in the fourth quarter of fiscal 2000 resulting in a restructuring charge of approximately $0.8 million for severance accruals. These combined efforts resulted in the elimination of approximately 140 employees in the United Kingdom. At June 30, 2001, the Company had utilized substantially all of the $3.5 million reserves recorded in fiscal 2000 related to these restructuring plans.
During fiscal 1999, restructuring reserves of $5.2 million were recorded. The Commercial Air Conditioning and Refrigeration business segment commenced restructuring efforts of the United Kingdom and Italian operations in the third quarter, recording approximately $1.0 million representing primarily severance accruals. Additionally, the chiller business unit was reorganized in the fourth quarter resulting in a restructuring charge of approximately $1.0 million for severance accruals. These combined efforts resulted in the elimination of approximately 120 employees. The Filtration Products business segment restructured the German operations in the first quarter and additional European operations and domestic operations in the fourth quarter of fiscal year 1999. Total restructuring charges of $3.2 million were recorded. Components of the $3.2 million related primarily to severance accruals related to the elimination of approximately 40 positions. At June 30, 2000, the Company had utilized substantially all of the $5.2 million reserve recorded in fiscal year 1999 related to these restructuring plans.
37
10. Provision for Income Taxes
Pretax income (loss) subject to taxation by the U.S. and foreign jurisdictions for the fiscal years ended 2001, 2000 and 1999 was as follows:
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Domestic | $ | 14,700 | $ | 4,513 | $ | (9,460 | ) | |||
Foreign | 5,820 | (1,503 | ) | 1,776 | ||||||
Total | $ | 20,520 | $ | 3,010 | $ | (7,684 | ) | |||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2001 and 2000 are as follows (dollars in thousands):
|
2001 |
2000 |
|||||
---|---|---|---|---|---|---|---|
Deferred tax assets: | |||||||
Net operating loss carryforwards | $ | 10,012 | $ | 14,644 | |||
Fixed assets | 951 | 1,012 | |||||
Post-retirement benefits | 4,813 | 4,476 | |||||
Other accruals | 23,304 | 22,769 | |||||
Tax credit carryforwards | 390 | 2,458 | |||||
Other | 5,950 | 3,095 | |||||
Total deferred tax assets | 45,420 | 48,454 | |||||
Valuation allowance | (12,281 | ) | (19,865 | ) | |||
Net deferred tax assets | $ | 33,139 | $ | 28,589 | |||
Deferred tax liabilities: | |||||||
Unrepatriated foreign earnings | $ | 2,755 | $ | 2,755 | |||
Fixed assets | 13,790 | 16,611 | |||||
Intangible assets | 28,907 | 30,708 | |||||
Inventories | 6,028 | 7,453 | |||||
Other | 7,688 | 5,973 | |||||
Total deferred tax liabilities | 59,168 | 63,500 | |||||
Net deferred tax liabilities | $ | 26,029 | $ | 34,911 | |||
Deferred tax assets for net operating loss carryforwards and other items at June 30, 2001 and 2000 include approximately $2.0 million and $2.6 million, respectively, related to periods prior to the acquisition by OYL which have been offset by a valuation allowance. If realized, the benefit of these deferred tax assets will be applied to reduce goodwill related to the acquisition. During fiscal year 2001, the deferred tax asset valuation allowance decreased by approximately $7.6 million. The decrease is principally attributable to the release of valuation allowances associated with the use or expiration of corresponding deferred tax assets during the fiscal year. There is no additional tax on repatriation of any current year earnings because of the availability of tax credits. During fiscal year 2000, the deferred tax asset valuation allowance increased by approximately $5.5 million. The increase was principally attributable to the recognition of tax asset valuation allowances associated with tax loss carryforwards and tax credit carryforwards generated during the fiscal year.
38
Significant components of the provision (benefit) for income taxes are as follows (dollars in thousands):
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Federal taxescurrent | $ | 9,792 | $ | 2,278 | $ | (2,398 | ) | |||
Federal taxesdeferred | (4,223 | ) | (168 | ) | (568 | ) | ||||
State taxes | 1,307 | 377 | (331 | ) | ||||||
Foreign taxescurrent | 3,229 | 3,428 | 1,853 | |||||||
Foreign taxesdeferred | (1,565 | ) | (3,268 | ) | | |||||
Total | $ | 8,540 | $ | 2,647 | $ | (1,444 | ) | |||
During the fiscal years ended June 30, 2001, 2000 and 1999, the Company paid income taxes (net of tax refunds) of approximately $15.5, $(1.8), and $0.6 million, respectively. A reconciliation between the Company's reported tax provision (benefit) and the tax provision (benefit) computed based on the U.S. statutory rate is as follows (dollars in thousands):
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Statutory U.S. Federal income tax provision | $ | 7,182 | $ | 1,054 | $ | (2,690 | ) | |||
Nondeductible goodwill amortization | 1,089 | 1,095 | 1,116 | |||||||
State taxes, net of federal benefit | 1,307 | 377 | (331 | ) | ||||||
Other | (1,038 | ) | 121 | 461 | ||||||
Reported tax provision | $ | 8,540 | $ | 2,647 | $ | (1,444 | ) | |||
At June 30, 2001, the Company has net operating loss and tax credit carryforwards of approximately $29 million and $0.4 million, respectively, in the United States and various foreign countries. Approximately $1.6 million of the net operating loss carryforwards and all tax credit carryforwards expire in fiscal years 2002 through 2012. The remaining net operating loss carryforwards can be carried forward indefinitely.
11. Employee Benefit Plans
The Company has frozen defined benefit pensions plans in effect for certain of the Company's domestic hourly employees and active defined benefit pension plans for certain of its foreign employees. Benefits are computed using formulas, which are generally based on age and years of service. Plan assets consist primarily of common stock, insurance contracts and government obligations. The Company's method of funding pension costs is to contribute amounts to the plans sufficient to meet minimum funding requirements, plus such amounts as the Company may determine to be appropriate from time to time.
39
The Company also sponsors defined benefit health care plans for certain salaried and non-salaried employees whereby certain health care and life insurance benefits are provided on retirement. The benefits are provided only for a frozen group of active employees and retirees.
The following table sets forth the funded status of the defined benefit pension and defined benefit health care plans, and amounts recognized in the Consolidated Balance Sheet (dollars in thousands):
|
Pension Benefits Plans in the United States |
Pension Benefits Plans outside the United States |
Other Postretirement Benefits All Plans |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
2001 |
2000 |
2001 |
2000 |
|||||||||||||
Change in Benefit Obligation | |||||||||||||||||||
Benefit obligation at beginning of year | $ | 25,269 | $ | 27,306 | $ | 98,986 | $ | 93,379 | $ | 6,338 | $ | 5,879 | |||||||
Service cost | 131 | 241 | 3,211 | 3,516 | 205 | 217 | |||||||||||||
Interest cost | 1,854 | 1,831 | 5,457 | 5,181 | 450 | 395 | |||||||||||||
Plan participants' contributions | | | 888 | 1,097 | | | |||||||||||||
Actuarial (gains)/losses | 1,148 | (1,491 | ) | (6,185 | ) | (2,404 | ) | (3,397 | ) | 343 | |||||||||
Benefits paid | (2,430 | ) | (2,574 | ) | (5,428 | ) | (2,908 | ) | (542 | ) | (496 | ) | |||||||
Curtailments (gain)/loss | | (44 | ) | 3,535 | | | | ||||||||||||
Settlements | (84 | ) | | | 6,302 | | | ||||||||||||
Sale of business | | | | (660 | ) | | | ||||||||||||
Effects of currency exchange rates | | | (7,012 | ) | (4,517 | ) | | | |||||||||||
Benefit obligation at end of year | $ | 25,888 | $ | 25,269 | $ | 93,452 | $ | 98,986 | $ | 3,054 | $ | 6,338 | |||||||
Change in Plan Assets | |||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 28,723 | $ | 26,671 | $ | 93,699 | $ | 87,174 | $ | | $ | | |||||||
Actual return on plan assets | (3,625 | ) | 4,284 | (7,124 | ) | 9,948 | | | |||||||||||
Benefits paid | (2,430 | ) | (2,574 | ) | (5,429 | ) | (2,908 | ) | (542 | ) | (496 | ) | |||||||
Employer contributions | 664 | 342 | 2,191 | 2,561 | 542 | 496 | |||||||||||||
Contributions by plan participants | | | 888 | 1,097 | | | |||||||||||||
Settlements | (126 | ) | | | | | | ||||||||||||
Effects of currency exchange rates | | | (6,217 | ) | (4,174 | ) | | | |||||||||||
Fair value of plan assets at end of year | 23,206 | 28,723 | 78,008 | 93,698 | | | |||||||||||||
Funded status | (2,682 | ) | 3,454 | (15,444 | ) | (5,288 | ) | (3,054 | ) | (6,338 | ) | ||||||||
Unrecognized net actuarial (gain)/loss | 361 | (7,135 | ) | 24,121 | 13,837 | (3,769 | ) | (362 | ) | ||||||||||
Prepaid (accrued) benefit cost | $ | (2,321 | ) | $ | (3,681 | ) | $ | 8,677 | $ | 8,549 | $ | (6,823 | ) | $ | (6,700 | ) | |||
Amounts recognized in the Consolidated Balance Sheet | |||||||||||||||||||
Prepaid benefit cost | $ | 1,972 | $ | 1,320 | $ | 9,616 | $ | 9,589 | $ | | $ | | |||||||
Accrued benefit cost | (4,712 | ) | (5,001 | ) | (5,795 | ) | (1,040 | ) | (6,823 | ) | (6,700 | ) | |||||||
Accumulated other comprehensive loss | 419 | | 4,856 | | | | |||||||||||||
Net amount recognized | $ | (2,321 | ) | $ | (3,681 | ) | $ | 8,677 | $ | 8,549 | $ | (6,823 | ) | $ | (6,700 | ) | |||
40
The aggregate accumulated benefit obligation for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets was $10.5 and $10.6 million as of June 30, 2001 and 2000, respectively. The aggregate projected benefit obligation for defined benefit pension plans with a projected benefit obligation in excess of plan assets was $54.8 and $50.9 million as of June 30, 2001 and 2000, respectively. The aggregate fair value of plan assets for defined benefit pension plans with either an accumulated benefit obligation or a projected benefit obligation in excess of plan assets was $44.1 and $55.5 million as of June 30, 2001 and 2000, respectively.
The net periodic benefit cost related to the defined benefit pension plans included the following components (dollars in thousands):
|
Pension Benefits Plans In the United States |
Pension Benefits Plans Outside the United States |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2001 |
2000 |
1999 |
2001 |
2000 |
1999 |
|||||||||||||
Service cost | $ | 94 | $ | 240 | $ | 241 | $ | 3,125 | $ | 3,682 | $ | 3,210 | |||||||
Interest cost | 1,864 | 1,825 | 1,848 | 5,613 | 5,293 | 5,117 | |||||||||||||
Expected return on plan assets | (2,528 | ) | (2,317 | ) | (2,321 | ) | (7,614 | ) | (7,226 | ) | (7,173 | ) | |||||||
Net amortization/deferral | (319 | ) | (76 | ) | (103 | ) | 400 | 392 | 163 | ||||||||||
Curtailment | 45 | (44 | ) | (18 | ) | | | | |||||||||||
Net periodic (benefit) cost | $ | (844 | ) | $ | (370 | ) | $ | (353 | ) | $ | 1,524 | $ | 2,141 | $ | 1,317 | ||||
Assumptions as of June 30: | |||||||||||||||||||
Discount rate | 7.25 | % | 7.75 | % | 7.00 | % | Ranging from 5.50% to 6.00% | ||||||||||||
Expected return on plan assets | 9.00 | % | 9.00 | % | 9.00 | % | Ranging from 7.00% to 8.50% | ||||||||||||
Rate of compensation increase | N/A | N/A | N/A | Ranging from 4.00% to 5.00% |
The net periodic benefit cost related to the defined benefit health care plans included the following components (dollars in thousands):
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Service cost | $ | 205 | $ | 204 | $ | 256 | ||||
Interest cost | 469 | 393 | 400 | |||||||
Net amortization/deferral | 1 | (18 | ) | (29 | ) | |||||
Net periodic benefit cost | $ | 675 | $ | 579 | $ | 627 | ||||
Weighted average discount rate as of June 30 | 7.25 | % | 7.75 | % | 7.00 | % |
The health care cost trend rate used to determine the health care benefit obligation was 8.5% for 2001. This rate decreases gradually annually to the ultimate medical trend rate of 5.00% in 2008, and remains at that level thereafter. The trend rate is a significant factor in determining the amounts reported. A one-percentage-point change in these assumed health care cost trend rates would have the following effects (dollars in thousands):
|
Increase |
Decrease |
|||||
---|---|---|---|---|---|---|---|
Effect on total service and interest cost components | $ | 65 | $ | (55 | ) | ||
Effect on postretirement benefit obligation | 244 | (216 | ) |
41
The Company has a defined contribution plan that covers domestic employees. Company contributions to the plan are based on employee compensation. The Company expensed $1.5 million, $1.3 million and $1.3 million under this plan during the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
The Company also sponsors a 401(k) defined contribution plan that covers domestic employees. Participants may contribute a percentage of their compensation to the plan. The Company with certain limitations matches contributions. During the fiscal years ended June 30, 2001, 2000 and 1999, the Company expensed $1.5 million, $1.2 million and $1.2 million, respectively, related to this plan.
12. Stock-based Compensation
In 1998, the Company adopted a Stock Option Plan which provides for the grant of non-qualified stock options to certain members of management and key employees to purchase the common stock of the Company's parent AAF-McQuay Group Inc. which has 1,000 shares outstanding. The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based compensation.
Under the stock option plan, options to purchase common stock may be granted until 2007. Options may be granted at fair market value at the date of the grant or at fair market value at the date of grant discounted for a lack of marketability and are exercisable up to 10 years after the date of grant unless terminated sooner or in the event of a public offering of the Company's shares, two years following the later of the public offering or the date the grantee becomes vested in that portion of the option. Generally, stock options vest and thus can be exercised at 331/3% on each of the first three anniversaries of the date of the grant or 100% at termination of employment because of disability, death or wrongful termination or change in ownership control.
The Company recognized income of $1.1 million during fiscal 1999 for stock option grants receiving variable accounting treatment under APB No. 25. These options were forfeited in 2001.
As of June 30, 2001, 2000 and 1999, there were stock options for 6.6, 10.3 and 40.0 shares of AAF-McQuay Group, Inc. issued and outstanding under the plan. Transactions are summarized as follows:
|
Stock Options |
Weighted Average Exercise Price |
|||
---|---|---|---|---|---|
Outstanding at June 30, 1998 | 38.3 | $ | 197,997 | ||
Granted, vested over three years | 5.3 | 203,214 | |||
Forfeited | 3.6 | 203,214 | |||
Outstanding at June 30, 1999 | 40.0 | $ | 198,219 | ||
Forfeited | 29.7 | 196,204 | |||
Outstanding at June 30, 2000 | 10.3 | $ | 203,214 | ||
Forfeited | 3.7 | 203,214 | |||
Outstanding at June 30, 2001 | 6.6 | $ | 203,214 | ||
Shares exercisable at June 30, 1999 |
27.3 |
$ |
195,880 |
||
Shares exercisable at June 30, 2000 | 7.0 | $ | 203,214 | ||
Shares exercisable at June 30, 2001 | 6.0 | $ | 203,214 |
42
In electing to follow APB No. 25 for expense recognition purposes, the Company is obligated to provide the expanded disclosures required under SFAS No. 123 for stock-based compensation including, if materially different from reported results, disclosure of pro forma net income had compensation expense been measured under the fair value recognition provisions of SFAS No. 123. No options were granted in fiscal year 2000 or 2001. The weighted-average fair values at date of grant for options granted in 1999 was $43,468, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:
Expected life in years | 10.0 | ||
Interest Rate | 6.0 | % | |
Dividend Yield | 0 | % |
The Company's pro forma net income (loss) for the years ended June 30, 2001, 2000, and 1999 would be $11.7, $0.1, and ($7.3) million, respectively. For pro forma disclosure, stock-based compensation is amortized to expense on a straight-line basis over the vesting period.
13. Leases and Commitments
The following is a schedule of future minimum lease payments required under third party operating leases that have initial or remaining noncancelable lease terms in excess of one year (dollars in thousands):
Year |
|
||
---|---|---|---|
2002 | $ | 7,178 | |
2003 | 5,266 | ||
2004 | 3,999 | ||
2005 | 3,097 | ||
2006 | 2,744 | ||
Thereafter | 12,225 |
Rental expense associated with third party operating leases was approximately $10.9, $10.5 and $9.1 million for the fiscal years ended June 30, 2001, 2000 and 1999, respectively. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other property and equipment.
The Company has a contract whereby a third party manages certain of its data processing operations. Monthly charges during the fiscal years ended June 30, 2001, 2000 and 1999 averaged approximately $732,000, $838,000 and $767,000, respectively, under this contract. This contract extends through December 31, 2005.
14. Indemnification Agreement
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
43
obligation. As a result of the settlement agreement, the Company paid $10.5 million of a $11.5 million promissory note due to the former shareholders; the parties agreed to discharge claims and entitlements under the indemnification provisions in the purchase agreement. The residual balance of the promissory note was 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 expected to receive payments of approximately $5 million and to incur approximately $2.1 million in obligations relating to the IRS settlement. The Company has now received substantially all payments due under the settlement and funded substantially all obligations.
15. Contingencies
Environmental Matters
The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants into the environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.
Based upon estimates prepared by environmental consultants, at June 30, 2001 the Company estimates that related probable remediation costs will be approximately $14.0 million. The Company believes that these costs have been adequately reserved for on the balance sheet and are included in other liabilities. The Company has settled or exhausted its remedies against all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying Consolidated Balance Sheets relating to any potential recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are difficult to predict at this time.
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 and litigation matters will have a material adverse effect on it.
44
16. Business Segments and Geographic Information
The Company globally manufactures and markets commercial air conditioning and air filtration products and systems within two principal segments: Commercial Air Conditioning and Refrigeration, the manufacture, sale and distribution of heating, ventilating, air conditioning, industrial refrigeration equipment products, and Filtration Products, the manufacture and sale of air filtration products and systems. Information relating to operations in each industry segment and information by geographic area is as follows as of and for the fiscal years ended June 30, 2001, 2000 and 1999:
Classified By Industry: |
2001 |
2000 |
1999 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||||||||
Net Sales: | |||||||||||||
Commercial Air Conditioning and Refrigeration | $ | 534,965 | $ | 540,898 | $ | 598,646 | |||||||
Filtration Products | 340,593 | 328,586 | 334,129 | ||||||||||
Eliminations | (4,704 | ) | (1,780 | ) | (8,747 | ) | |||||||
Total | $ | 870,854 | $ | 867,704 | $ | 924,028 | |||||||
Operating Income (Loss): | |||||||||||||
Commercial Air Conditioning and Refrigeration | $ | 17,195 | $ | 3,705 | $ | (6,643 | ) | ||||||
Filtration Products | 19,885 | 22,885 | 15,367 | ||||||||||
Corporate | (1,730 | ) | (387 | ) | 2,243 | ||||||||
Total | $ | 35,350 | $ | 26,203 | $ | 10,967 | |||||||
Total Assets: | |||||||||||||
Commercial Air Conditioning and Refrigeration | $ | 383,987 | $ | 404,546 | $ | 461,619 | |||||||
Filtration Products | 269,619 | 278,847 | 287,636 | ||||||||||
Corporate | 408 | 2,007 | 5,940 | ||||||||||
Total | $ | 654,014 | $ | 685,400 | $ | 755,195 | |||||||
Depreciation/Amortization: | |||||||||||||
Commercial Air Conditioning and Refrigeration | $ | 19,149 | $ | 20,595 | $ | 18,685 | |||||||
Filtration Products | 10,339 | 9,728 | 10,311 | ||||||||||
Corporate | 22 | 33 | 103 | ||||||||||
Total | $ | 29,510 | $ | 30,356 | $ | 29,099 | |||||||
Capital Expenditures: | |||||||||||||
Commercial Air Conditioning and Refrigeration | $ | 10,319 | $ | 4,125 | $ | 16,731 | |||||||
Filtration Products | 5,682 | 3,693 | 2,783 | ||||||||||
Corporate | 5 | 63 | | ||||||||||
Total | $ | 16,006 | $ | 7,881 | $ | 19,514 | |||||||
The Company estimates corporate expenses and determines fixed allocations of these expenses for each business segment at the beginning of the fiscal year. Any over or under allocation of actual expenses incurred results in income or expense reported at the corporate level. The $(1.7), $(0.4), and $2.2 million noted above represent the over (under) allocation of expenses for fiscal years 2001, 2000 and 1999, respectively. Assets at the corporate level consist of cash, receivables, property and other assets.
45
The reconciliation of segment profit to the Company's earnings before taxes for each year is as follows:
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||
Operating Income from business segments | $ | 37,080 | $ | 26,590 | $ | 8,724 | ||||
Over (under) allocation of corporate expenses | (1,730 | ) | (387 | ) | 2,243 | |||||
Interest expense, net | (19,372 | ) | (21,627 | ) | (23,975 | ) | ||||
Other income (expense), net | 4,542 | (1,566 | ) | 5,324 | ||||||
Income (loss) before income taxes | $ | 20,520 | $ | 3,010 | $ | (7,684 | ) | |||
Classified By Geographic Region |
2001 |
2000 |
1999 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||||||
Net Sales: | |||||||||||
U.S. | $ | 559,956 | $ | 537,372 | $ | 544,661 | |||||
Europe | 245,756 | 271,549 | 322,653 | ||||||||
Other | 65,142 | 58,783 | 56,714 | ||||||||
Total | $ | 870,854 | $ | 867,704 | $ | 924,028 | |||||
Transfers between geographic areas are not significant.
The composition of the Company's property, plant and equipment, net, between those in the United States and those in Europe and other countries as of the end of each year is as follows:
|
2001 |
2000 |
1999 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
||||||||||
U.S | $ | 95,561 | $ | 97,390 | $ | 104,815 | |||||
Europe | 19,146 | 24,419 | 36,798 | ||||||||
Other | 4,037 | 3,189 | 3,473 | ||||||||
Total | $ | 118,744 | $ | 124,998 | $ | 145,086 | |||||
17. Related Party Transactions
Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years ended June 30, 2001, 2000 and 1999, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $6.7, $9.5 and $6.7 million, respectively, of the Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2001, 2000 and 1999, the Company purchased approximately $3.1, $8.4 and $1.2 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy from and sell to OYL and Hong Leong related entities in the future.
46
The Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted OMC, Shenzhen and PT OYL, respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively through Shenzhen's, OMC's and PT OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned royalty payments ranging from 2% to 5% of the accumulated net sales of such products. The Company has been paid or was owed $340,500, $506,400 and $166,000 pursuant to the OMC Agreement, $225,000, $525,600 and $105,000 pursuant to the Shenzhen Agreement, and $0, $11,621 and $8,000 pursuant to the PT OYL Agreement for the years ended June 30, 2001, 2000 and 1999, respectively. Each of OMC, Shenzhen and PT OYL are subsidiaries of OYL.
In August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's Republic of China in exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from Wuhan-McQuay of $449,500, $43,000 and $0 for the years ended June 30, 2001, 2000 and 1999, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition and receipt of approval from the Government of the People's Republic of China.
J & E Hall Limited, a wholly owned, U.K. based subsidiary of the Company, had a short-term credit facility supported by a letter of credit from OYL. Borrowings under this facility totaled $24.1 million at June 30, 2000. This arrangement expired in September 2000. AAF-McQuay UK Limited, a wholly owned subsidiary of the Company, carries a new short-term credit facility with availability of £8.5 million ($12.0 million) supported by a letter of credit from OYL. Borrowings under this facility totaled £2.8 million ($3.9 million) at June 30, 2001.
47
18. Investment in Affiliates
The Company has entered into a number of partnerships with local entities throughout the world to maximize its brand name exposure, increase its market penetration and enhance its manufacturing and distribution capabilities. The Company currently has fourteen (14) joint ventures (20% to 50% Company ownership) accounted for by the equity method. The Company sold $18.4, $17.4, and $27.6 million for fiscal years 2001, 2000 and 1999, respectively, to these joint ventures. The Company has loans outstanding to eight of the joint ventures for a total principal sum of $3.3 and $3.8 million as of June 30, 2001 and 2000, respectively. Summary financial information for the affiliated companies (20% to 50% owned) is as follows:
|
2001 |
2000 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||
Current assets | $ | 25,005 | $ | 28,798 | $ | 36,413 | ||||
Property, plant and equipment and other assets | 2,749 | 2,660 | 7,576 | |||||||
Current liabilities | 18,900 | 21,693 | 28,845 | |||||||
Long-term debt | 2,750 | 3,218 | 2,667 | |||||||
Net sales | 52,406 | 59,460 | 62,676 | |||||||
Gross profit | 12,073 | 15,234 | 14,502 | |||||||
Net income (loss) | 996 | 223 | (477 | ) |
Investments in affiliates of $3.9 and $4.6 million is included in Other assets and deferred charges in the Consolidated Balance Sheets at June 30, 2001 and 2000, respectively. The Company provides guarantees for obligations of its joint ventures totaling $1.4 million.
19. Other Income (Expense)
During the fiscal years ended June 30, 2001, 2000 and 1999, the Company had net other income (expense) of $4.5, $(1.6), and $5.3 million, respectively. In fiscal 2001, the Company completed the sale of property in Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million before taxes. Proceeds from the sale of approximately $6.9 million were used to reduce debt. Additionally, during the fiscal year ended June 30, 2001, the Company repurchased $16.2 million of its Senior Notes at a discount resulting in a net gain of approximately $0.4 million before taxes. See Note 7 for further discussion. In fiscal 2000, the Company recorded a loss of $1.3 million due to the sale of the commercial air conditioning operation in France in October 1999. In fiscal year 1999, the Company recorded $2.9 million in other income as a result of favorable developments in the IRS audit and tax indemnification settlement with former shareholders of the Company as described in Note 14. Additionally, during the fiscal year ended June 30, 1999, the Company recognized a $1.5 million gain related to the termination of a pension plan in Canada and $0.8 million in expense related to the potential sale of the Company. Gain or losses from foreign currency and equity affiliate transactions are also included in other income (expense) for the fiscal years ended June 30, 2001, 2000 and 1999.
48
20. Subsequent Event
In September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL for approximately $13.1 million, which would result in an immaterial gain. Proceeds from the sale are planned to be used to pay down debt.
21. Selected Quarterly Financial Data (Unaudited)
(Dollars in thousands)
|
Fiscal 2001 Quarters |
Fiscal 2000 Quarters |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
First |
Second |
Third |
Fourth |
First |
Second |
Third |
Fourth |
||||||||||||||||
Sales | $ | 215,009 | $ | 211,877 | $ | 210,997 | $ | 232,971 | $ | 225,127 | $ | 202,188 | $ | 215,060 | $ | 225,329 | ||||||||
Gross margin | 58,347 | 52,665 | 54,941 | 66,076 | 59,974 | 50,529 | 53,974 | 61,881 | ||||||||||||||||
Income from operations | 7,361 | 4,178 | 6,463 | 17,348 | 7,099 | 3,419 | 3,740 | 11,945 | ||||||||||||||||
Net income (loss) | 1,030 | 2,186 | 899 | 7,627 | (483 | ) | (1,685 | ) | (2,468 | ) | 4,738 |
49
Schedule II. Valuation and Qualifying Accounts and Reserves
AAF-MCQUAY INC.
(dollars in thousands)
Col. A |
Col. B |
Col. C Additions |
Col. D |
Col. E |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Description |
Balance at Beginning of period |
Charged to costs and expenses |
Charged to other accounts |
Deductions |
Balance at end of period |
||||||||||
Year Ended June 30, 2001 |
|||||||||||||||
Allowance for doubtful receivables | $ | 6,968 | $ | 1,015 | $ | 1,772(a | ) | $ | 6,211 | ||||||
Accrued warranty expense | 29,439 | 12,585 | 11,425(b | ) | 30,599 | ||||||||||
Year Ended June 30, 2000 |
|||||||||||||||
Allowance for doubtful receivables | $ | 7,057 | $ | 2,218 | $ | 2,307(a | ) | $ | 6,968 | ||||||
Accrued warranty expense | 28,627 | 14,963 | $ | 29 | 14,180(b | ) | 29,439 | ||||||||
Year Ended June 30, 1999 |
|||||||||||||||
Allowance for doubtful receivables | $ | 7,361 | $ | 698 | $ | 1,002(a | ) | $ | 7,057 | ||||||
Accrued warranty expense | 25,813 | 23,227 | 20,413(b | ) | 28,627 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
50
Item 10. Directors and Officers of the Registrant
The following table sets forth the name, age, and position of the Company's directors and executive officers.
Name |
Age |
Position |
||
---|---|---|---|---|
Ho Nyuk Choy | 47 | President, Chief Executive Officer and Director | ||
Eric R. Roberts | 43 | Executive Vice PresidentMcQuay Americas | ||
Robert E. Brymer | 43 | Vice PresidentAAF Americas | ||
Bruce D. Krueger | 39 | Vice President of Finance | ||
Stephen T. Kapsalis | 43 | Vice President of Strategic Business Development | ||
Gary R. Boyd | 49 | Vice President of Human Resources | ||
Dixie L. Randle | 48 | General Counsel and Secretary | ||
Ronald J. Pederson | 43 | Treasurer | ||
Tan Sri Quek Leng Chan | 58 | Director | ||
Liu Wan Min | 57 | Director | ||
Kwek Leng San | 46 | Director |
Ho Nyuk Choy joined AAF-McQuay Inc. in January 2000 as President and Chief Executive Officer and also continues to serve as the Joint Group Managing Director of OYL. Mr. Ho has served as Group Managing Director of OYL since 1993. From 1989 to 1993, he served in various management positions with OYL. Mr. Ho is a Director of McQuay Asia (Hong Kong) Limited.
Eric R. Roberts has served as Executive Vice President of McQuay Americas since June 2000. From October 1999 to June 2000, Mr. Roberts served as Vice President & General Manager of the Applied Air Handling business unit within the McQuay North America segment and was general manager of the business unit since March 1998. Mr. Roberts was Director of Marketing for McQuay International from January 1997 to March 1998. Prior to joining McQuay, Mr. Roberts was Director of Marketing for Onan Corporation, a division of Cummins Engine Company.
Robert E. Brymer has served as Vice President of AAF Americas since June 2000. From May 1999 to June 2000, Mr. Brymer was Vice PresidentSales & Marketing for McQuay International. From May 1998 to May 1999, Mr. Brymer served as a consultant for McQuay International prior to rejoining the Company. From June 1996 to April 1998, he served as PresidentAir Filtration Division of AAF International. Prior to June 1996, Mr. Brymer served in various executive capacities with AAF since joining them in May 1993 as Director of Marketing. Prior to joining AAF, he served as Vice President of Marketing and Sales for Wedge Innovations for three years and Director of Marketing and various other positions for Skil Tools for seven years.
Bruce D. Krueger has served as Vice President of Finance of the Company since November 1999. From October 1997 until October 1999, Mr. Krueger served as Vice President and Corporate Controller of the Company. He joined the Company as Vice President and Global Controller of the Air Filtration Division of AAF in January of 1996 and has held senior financial management positions in the air filtration industry since 1992. Prior to 1992, Mr. Krueger served as Director of Internal Audit at Clarcor and was with Coopers & Lybrand from 1984 to 1990.
Gary R. Boyd has served as Vice President of Human Resources for the Company since July 1997 and as Vice President of Human Resources for McQuay International from February 1996 until July 1997. From 1984 to 1996, Mr. Boyd served in various Human Resources positions at Cummins Engine Company, most recently as Director of Human Resources for Worldwide operations for Onan Corporation, a division of Cummins Engine Company.
51
Dixie L. Randle has served as the General Counsel and Secretary of the Company since October 1999. From April 1998 until October 1999, Ms. Randle served as General Counsel and Assistant Secretary, she served as Division General Counsel of the Commercial Air Conditioning segment from July 1994 to April 1998, and from May 1993 to July 1994, as Senior Attorney for the segment. Prior to 1993, she served on the in-house counsel staff of the Lehndorff Group of Companies, a commercial real estate investment and property management group and was with Vinson & Elkins from 1982 to 1987.
Stephen T. Kapsalis has served as Vice President of Strategic Business Development for the Company since August 2000. In that role, he is primarily responsible for growing the MFAS business and developing business opportunities worldwide. From 1995 to 1998, Mr. Kapsalis served as Vice President of the Environmental Products business unit in Europe, and from 1998 until assuming his current position, he served as Vice President of AAF Europe. Prior to joining the Company, he served as President of Winter Welding and Machine Corporation from 1990 to 1995 and served as a Manager in the Power Construction and Engineering Industry for eight years.
Ronald J. Pederson has served as the Treasurer since July 1997. From March 1995 until July 1997, Mr. Pederson served as the Assistant Treasurer of the Company. He served as Manager of Treasury Operations from February 1988 through March 1995.
Tan Sri Quek Leng Chan has served as Executive Chairman of Hume since 1990. He has served as Chairman and Chief Executive Officer of Hong Leong since 1968. Mr. Quek currently serves as Executive Chairman of Hong Leong Credit Berhad, Hong Leong Bank Berhad, Hong Leong Industries Berhad, Hong Leong Properties Berhad, Hume Cemboard Berhad, Camerlin Group Berhad and Tasek Corporation Berhad and as Chairman of Guoco Group Limited, Benchmark Group PLC and HLG Capital Berhad. Mr. Quek is Deputy Chairman of Brierley Investments Limited and a Director of OYL, First Capital Corporation Ltd, Hong Leong Finance Limited and Thistle Hotels PLC. Mr. Quek is a brother of Kwek Leng San.
Liu Wan Min currently serves as Joint Group Managing Director of OYL since December 1999 and has served as Deputy Chairman of OYL since 1993. From 1974 to 1993, Mr. Liu served as Group Managing Director of OYL. From 1996 through 1997, Mr. Liu served as the Group Managing Director of Nanyang Press Holdings Bhd.
Kwek Leng San has served on the Board of Directors of Hong Leong Industries Berhad since September 1990. Mr. Kwek currently serves as President & Chief Executive Officer of Hong Leong Industries Berhad and Hume Industries (Malaysia) Berhad and as Executive Chairman of Malaysian Pacific Industries Berhad. He is also the Group Managing Director of Camerlin Group Berhad and a director of Hume Cemboard Berhad, O.Y.L. Industries Bhd and Southern Steel Berhad. From September 1990 to August 1993, Mr. Kwek was the Group Managing Director of Malaysian Pacific Industries Berhad. Mr. Kwek is a brother to Tan Sri Quek Leng Chan. Mr. Kwek was elected as a Director of the Company at a special meeting of the sole shareholder on July 1, 2001.
Roger Tan Kim Hock has served as President and Chief Executive Officer of Hume since 1993. From 1988 to 1993, he served as Chief Executive Officer of HLG Securities Sdn Bhd. From 1985 through 1988 he served as the Managing Director of Hong Leong Industries Berhad and from 1976 through 1985, he served as the General Manager of Hong Leong Property Management Co Sdn Bhd. Mr. Tan resigned as a Director effective July 1, 2001.
Except for Kwek Leng San who was elected as a Director at a special meeting of the sole shareholder on July 1, 2001, each of the Directors has been a Director since May 2, 1994. All Directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. The Company does not currently pay the Directors any fees for serving on the Board of Directors, although the Company may consider a change in this policy in the future. Executive officers of the Company are elected by and serve at the discretion of the Board of Directors. Except as noted above, there are no family relationships among the Directors or executive officers of the Company.
52
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation paid or accrued by the Company to the following individuals for services rendered in all capacities to the Company and its subsidiaries during the 2001, 2000 and 1999 fiscal years: (i) the Chief Executive Officer and (ii) each of the next four most highly compensated executive officers.
Summary Compensation Table
|
|
Annual Compensation |
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position |
Year |
Salary $ |
Bonus $ |
Other Annual Compensation $(a) |
All Other Compensation $(b) |
|||||
Ho Nyuk Choy President and Chief Executive Officer and Director(c) |
2001 2000 1999 |
455,976 223,188 |
140,000 81,667 |
|
14,386 3,600 |
|||||
Eric R. Roberts Executive Vice President McQuay Americas |
2001 2000 1999 |
220,331 161,854 126,827 |
81,825 31,546 107,381 |
|
8,573 7,936 9,768 |
|||||
Robert E. Brymer Vice PresidentAAF Americas |
2001 2000 1999 |
200,000 170,769 48,846 |
(d) |
36,000 20,381 5,452 |
92,404 |
(e) |
8,270 6,894 |
|||
Bruce D. Krueger Vice President of Finance |
2001 2000 1999 |
190,001 181,490 176,539 |
61,023 47,960 98,379 |
(f) |
61,676 |
(g) |
8,363 9,378 7,811 |
|||
Stephen T. Kapsalis Vice President of Strategic Business Development |
2001 2000 1999 |
154,808 161,539 157,091 |
56,000 37,122 33,833 |
136,344 204,105 187,721 |
(h) (i) (j) |
7,680 7,488 8,465 |
53
Stock Option Plan
In 1997, the Company adopted a Stock Option Plan that provides for the grant of non-qualified stock options to certain members of management and key employees to purchase the common stock of the Company's parent AAF-McQuay Group Inc. The Company granted options under the stock option plan during fiscal year 1999. The related impact to the Statement of Operations was based on an independent valuation of the Company at or near the grant date.
There were no options granted during fiscal year 2000 or 2001.
The following table presents a summary of the options and their respective fiscal year end values for the three executive officers named in the summary compensation table who held options at the end of fiscal 2001:
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
|
Shares Acquired on Exercise |
Value Realized ($) |
Number of Securities Underlying Unexercised Options/SARs At Fiscal Year-End (#) |
Value of Unexercised In-The-Money Options/SARs At Fiscal Year-End ($) |
||||
---|---|---|---|---|---|---|---|---|
Eric R. Roberts Executive Vice President McQuay Americas |
none |
0 |
0.58 |
0 |
||||
Bruce D. Krueger Vice President of Finance |
none |
0 |
0.97 |
0 |
||||
Stephen T. Kapsalis Vice President of Strategic Business Development |
none |
0 |
0.60 |
0 |
Compensation Committee Interlocks and Insider Participation
Mr. Ho Nyuk Choy is the only officer or employee of the Company who participated in deliberations of the Company's Board of Directors concerning executive officer compensation during the last fiscal year. The Company's Board of Directors determines the compensation paid to the President and Chief Executive Officer.
54
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 26, 2001, with respect to the beneficial ownership of shares of the Company's Common Stock by each person known to the Company to own 5% or more of its Common Stock (determined in accordance with the applicable rules of the Commission), by each the Company's directors and current executive officers named in the summary compensation table, and by such directors and executive officers as a group.
Common Stock, par value $100.00 per share
Name |
Number of Shares |
Percent Outstanding |
|||
---|---|---|---|---|---|
5% Beneficial Owners | |||||
AAF-McQuay Group Inc.(a) | 2,497 | 100 | |||
10300 Ormsby Park Pl. Ste 600 | |||||
Louisville, KY 40223 | |||||
Directors and Executive Officers | |||||
Tan Sri Quek Leng Chan(a) | 2,497 | 100 | |||
Liu Wan Min | 0.00 | * | |||
Kwek Leng San | 0.00 | * | |||
Ho Nyuk Choy | 0.00 | * | |||
Bruce D. Krueger(b) | 0.97 | * | |||
Eric R. Roberts(b) | 0.38 | * | |||
Robert E. Brymer | 0.00 | * | |||
Stephen T. Kapsalis(b) | 0.60 | * | |||
All current directors and executive officers as a group (11 persons)(a),(b) | 2,499 | 100 |
Security Ownership of Management in Parents of the Company
The following tables set forth information as of June 30, 2001, for OYL and Hume with respect to the beneficial ownership of shares of each of those company's equity securities by the Company's directors and current executive officers who hold such securities and the directors and executive officers as a group.
55
OYL Ordinary Shares, par value RM 1.00 per share
Name |
Number of Shares |
Percent Outstanding |
||
---|---|---|---|---|
Tan Sri Quek Leng Chan | 84,868,828 | (a) | 64.4 | |
Liu Wan Min | 6,000,000 | 4.6 | ||
Ho Nyuk Choy | 204,000 | * | ||
Bruce D. Krueger | 1,400 | * | ||
All current directors and executive officers as a group (11 persons) | 91,074,228 | 69.0 |
Hume Ordinary Stock Units, par value RM 1.00 per unit
Name |
Number of Shares |
Percent Outstanding |
||
---|---|---|---|---|
Tan Sri Quek Leng Chan | 139,666,855 | (b) | 57.4 | |
Liu Wan Min | 1,439,000 | * | ||
All current directors and executive officers as a group (11 persons) | 141,105,855 | 58.0 |
Item 13. Certain Relationships and Related Transactions
Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years ended June 30, 2001, 2000 and 1999, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $6.7, $9.5 and $6.7 million, respectively, of the Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2001, 2000 and 1999, the Company purchased approximately $3.1, $8.4 and $1.2 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy from and sell to OYL and Hong Leong related entities in the future.
The Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted OMC, Shenzhen and PT OYL, respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively through Shenzhen's, OMC's and PT OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned royalty payments ranging from 2% to 5% of the accumulated net sales of such products. The Company has been paid or was owed $340,500, $506,400 and $166,000 pursuant to the OMC Agreement, $225,000, $525,600 and $105,000 pursuant to the Shenzhen Agreement, and $0, $11,621 and $8,000 pursuant to the PT OYL Agreement for the years ended June 30, 2001, 2000 and 1999 respectively. Each of OMC, Shenzhen and PT OYL are subsidiaries of OYL.
56
In August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's Republic of China in exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from Wuhan-McQuay of $449,500, $43,000 and $0 for the years ended June 30, 2001, 2000 and 1999, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition and receipt of approval from the Government of the People's Republic of China.
In September 2001, the Company's Board of Directors signed a resolution to sell the Company's Singapore subsidiary to OYL (see Note 20 to the Consolidated Financial Statements).
57
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Report of the Independent Auditors
Consolidated
Balance Sheets
at June 30, 2001 and 2000
Consolidated
Statements of Operations
Years ended June 30, 2001, 2000 and 1999
Consolidated
Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
Consolidated
Statements of Stockholder's Equity
Years ended June 30, 2001, 2000 and 1999
Consolidated
Statements of Comprehensive Income
Years ended June 30, 2001, 2000 and 1999
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
58
3.1 | Articles of Incorporation(1) | |
3.2 | By-Laws(1) | |
4.1 | Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company(5) | |
4.2 | Form of Note (included in Exhibit 4.1) | |
10.1 | Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L. Sentra Manufacturing(1) | |
10.2 | Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L. Electrical Company Ltd.(1) | |
10.3 | Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L. Manufacturing Company SDN BHD(1) | |
10.4 | Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air Conditioning & Refrigeration Company Ltd.(1) | |
10.5 | Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and McQuay Air Conditioning (Singapore) Pte. Ltd.(1) | |
10.6 | Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.(1) | |
10.7 | Stock Option Plan effective January 1, 1996(2) | |
10.8 | Revolving Credit, Term Loan and Security Agreement dated September 30, 1999 with PNC Bank, N.A.(4) | |
10.9 | First Amendment to Revolving Credit, Term Loan and Security Agreement dated October 25, 1999, with PNC Bank, N.A.(4) | |
10.10 | Second Amendment to Revolving Credit, Term Loan and Security Agreement dated November 12, 1999, with PNC Bank, N.A.(4) | |
10.11 | Third Amendment to Revolving Credit, Term Loan and Security Agreement dated June 26, 2001, with PNC Bank, N.A.(5) | |
21 | Subsidiaries | |
24 | Power of Attorney |
The Company did not file any reports on Form 8-K for the year ended June 30, 2001.
59
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Louisville, State of Kentucky, on September 26, 2001.
AAF-MCQUAY INC. | ||||
By: |
/s/ HO NYUK CHOY Ho Nyuk Choy President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
By: | /s/ HO NYUK CHOY Ho Nyuk Choy Principal Executive Officer |
September 26, 2001 | |||
By: |
/s/ BRUCE D. KRUEGER Bruce D. Krueger Vice President of Finance (Principal Finance and Accounting Officer) |
September 26, 2001 |
|||
The Board of Directors: |
|||||
Liu Wan Min | Quek Leng Chan | ||||
Ho Nyuk Choy | Kwek Leng San | ||||
By: |
/s/ HO NYUK CHOY Ho Nyuk Choy Attorney-in-Fact |
September 26, 2001 |
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security-holders during the period covered by this report.
60
Number |
Description |
|
---|---|---|
4.1 |
Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company |
|
4.2 |
Form of Note (included in Exhibit 4.1) |
|
10.11 |
Third Amendment to Revolving Credit, Term Loan and Security Agreement dated June 26, 2001, with PNC Bank, N.A. |
|
21 |
Subsidiaries |
|
24 |
Power of Attorney |
61
AAF-McQUAY INC.,
as Issuer,
and
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
INDENTURE
Dated as of February 14, 1996
$125,000,000
8 7/8% Senior Notes Due 2003
CROSS-REFERENCE TABLE
TIA |
Section |
Indenture Section |
||
---|---|---|---|---|
310 | (a)(1) | 7.10 | ||
(a)(2) | 7.10 | |||
(a)(3) | 7.12 | |||
(a)(4) | N.A. | |||
(b) | 7.8;7.10;10.2 | |||
(c) | N.A. | |||
311 | (a) | 7.11 | ||
(b) | 7.11 | |||
(c) | N.A. | |||
312 | (a) | 2.5 | ||
(b) | 10.3 | |||
(c) | 10.3 | |||
313 | (a) | 7.6 | ||
(b)(1) | 7.6 | |||
(b)(2) | 7.6 | |||
(c) | 7.6;10.2 | |||
(d) | 7.6 | |||
314 | (a) | 4.8;10.2 | ||
(b) | N.A. | |||
(c)(1) | 10.4 | |||
(c)(2) | 10.4 | |||
(c)(3) | N.A. | |||
(d) | N.A. | |||
(e) | 10.5 | |||
(f) | N.A. | |||
315 | (a) | 7.1(b) | ||
(b) | 7.5;10.2 | |||
(c) | 7.1(a) | |||
(d) | 7.1(c) | |||
(e) | 6.11 | |||
316 | (a)(last sentence) | 2.9 | ||
(a)(1)(A) | 6.5 | |||
(a)(1)(B) | 6.4 | |||
(a)(2) | N.A. | |||
(b) | 6.7 | |||
317 | (a)(1) | 6.8 | ||
(a)(2) | 6.9 | |||
(b) | 2.4 | |||
318 | (a) | 10.1 |
N.A. means Not Applicable
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture.
TABLE OF CONTENTS
Section |
|
Page |
||
---|---|---|---|---|
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE |
||||
1.1 |
Definitions |
1 |
||
1.2 | Incorporation by Reference of Trust Indenture Act | 9 | ||
1.3 | Rules of Construction | 10 | ||
ARTICLE II THE SECURITIES |
||||
2.1 |
Designation; Form and Dating |
10 |
||
2.2 | Execution and Authentication | 10 | ||
2.3 | Registrar and Paying Agent | 10 | ||
2.4 | Paying Agent To Hold Money in Trust | 11 | ||
2.5 | Securityholder Lists | 11 | ||
2.6 | Transfer and Exchange | 11 | ||
2.7 | Replacement Securities | 12 | ||
2.8 | Outstanding Securities | 12 | ||
2.9 | Treasury Securities | 12 | ||
2.10 | Temporary Securities | 12 | ||
2.11 | Cancellation | 13 | ||
2.12 | Defaulted Interest | 13 | ||
2.13 | CUSIP Number | 13 | ||
2.14 | Deposit of Moneys | 13 | ||
ARTICLE III REDEMPTION |
||||
3.1 |
No Redemption |
13 |
||
ARTICLE IV COVENANTS |
||||
4.1 |
Payment of Securities |
13 |
||
4.2 | Maintenance of Office or Agency | 14 | ||
4.3 | Corporate Existence | 14 | ||
4.4 | Payment of Taxes and Other Claims | 14 | ||
4.5 | Maintenance of Properties; Insurance; Books and Records; Compliance with Law | 14 | ||
4.6 | Compliance Certificates | 15 | ||
4.7 | Reports | 15 | ||
4.8 | Further Assurance to the Trustee | 16 | ||
4.9 | Limitation on Additional Indebtedness | 16 | ||
4.10 | Limitation on Liens | 17 | ||
4.11 | Limitation on Restricted Payments | 18 | ||
4.12 | Disposition of Proceeds of Asset Sales | 19 | ||
4.13 | Limitation on Transactions with Affiliates | 21 | ||
4.14 | Limitation on Investments, Loans and Advances | 22 | ||
4.15 | Change of Control | 22 | ||
4.16 | Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries | 23 | ||
4.17 | Conflicting Agreements | 24 | ||
4.18 | Waiver of Stay, Extension or Usury Laws | 24 | ||
4.19 | Limitation on Amendments to Certain Agreements | 24 | ||
4.20 | Insurance | 24 |
ARTICLE V SUCCESSOR CORPORATION |
||||
5.1 |
When Company May Merge, Etc |
24 |
||
5.2 | Successor Entity Substituted | 25 | ||
ARTICLE VI DEFAULT AND REMEDIES |
||||
6.1 | Events of Default | 25 | ||
6.2 | Acceleration | 26 | ||
6.3 | Other Remedies | 27 | ||
6.4 | Waiver of Past Default | 27 | ||
6.5 | Control by Majority | 27 | ||
6.6 | Limitation on Suits | 27 | ||
6.7 | Rights of Holders To Receive Payment | 28 | ||
6.8 | Collection Suit by Trustee | 28 | ||
6.9 | Trustee May File Proofs of Claim | 28 | ||
6.10 | Priorities | 29 | ||
6.11 | Undertaking for Costs | 29 | ||
ARTICLE VII TRUSTEE |
||||
7.1 |
Duties of Trustee |
29 |
||
7.2 | Rights of Trustee | 30 | ||
7.3 | Individual Rights of Trustee | 31 | ||
7.4 | Trustee's Disclaimer | 31 | ||
7.5 | Notice of Defaults | 31 | ||
7.6 | Reports by Trustee to Holders | 31 | ||
7.7 | Compensation and Indemnity | 31 | ||
7.8 | Replacement of Trustee | 32 | ||
7.9 | Successor Trustee by Merger, Etc | 32 | ||
7.10 | Eligibility; Disqualification | 33 | ||
7.11 | Preferential Collection of Claims Against Company | 33 | ||
ARTICLE VIII DISCHARGE OF INDENTURE; DEFEASANCE |
||||
8.1 |
Termination of Company's Obligations |
33 |
||
8.2 | Legal Defeasance and Covenant Defeasance | 34 | ||
8.3 | Application of Trust Money | 36 | ||
8.4 | Repayment to Company | 37 | ||
8.5 | Reinstatement | 37 | ||
ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS |
||||
9.1 | Without Consent of Holders | 37 | ||
9.2 | With Consent of Holders | 38 | ||
9.3 | Compliance with Trust Indenture Act | 38 | ||
9.4 | Revocation and Effect of Consents | 38 | ||
9.5 | Notation on or Exchange of Securities | 39 | ||
9.6 | Trustee To Sign Amendments, Etc | 39 | ||
ARTICLE X MISCELLANEOUS |
||||
10.1 | Trust Indenture Act Controls | 39 | ||
10.2 | Notices | 40 |
10.3 | Communications by Holders with Other Holders | 40 | ||
10.4 | Certificate and Opinion of Counsel as to Conditions Precedent | 40 | ||
10.5 | Statements Required in Certificate and Opinion of Counsel | 40 | ||
10.6 | Rules by Trustee, Paying Agent, Registrar | 41 | ||
10.7 | Legal Holidays | 41 | ||
10.8 | Governing Law | 41 | ||
10.9 | No Recourse Against Others | 41 | ||
10.10 | Successors | 41 | ||
10.11 | Duplicate Originals | 41 | ||
10.12 | Separability | 41 | ||
10.13 | Table of Contents, Headings, Etc | 41 | ||
SIGNATURES |
42 |
|||
EXHIBIT AForm of Security |
INDENTURE dated as of February 14, 1996, between AAF-McQUAY INC., a Delaware corporation, as Issuer (the "Company"), and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, as Trustee (the "Trustee").
The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of the 8 7/8% Senior Notes Due 2003 of the Company (the "Securities") to be issued as provided for in this Indenture.
The parties hereto agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Securities:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 Definitions.
"Acquired Indebtedness" means (a) with respect to any Person that becomes a Subsidiary of the Company after the Issue Date, Indebtedness of such Person existing at the time such Person becomes a Subsidiary of the Company, and (b) with respect to the Company or any of its Subsidiaries, any Indebtedness assumed by the Company or any of its Subsidiaries in connection with the acquisition of an asset from another Person.
"Affiliate" of any specified Person means any other Person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated", "controlling" and "controlled" have meanings correlative to the foregoing.
"Affiliate Transaction" has the meaning ascribed to such term in Section 4.13.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) or purchase or acquisition of Capital Stock, by the Company or any of its Subsidiaries in any other Person, in either case pursuant to which such Person shall become a Subsidiary of the Company or any of its Subsidiaries or shall be merged with or into the Company or any of its Subsidiaries or (ii) any acquisition by the Company or any of its Subsidiaries of the assets of any Person which constitute substantially all of an operating unit or business of such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease, "assignment or other transfer or disposition to any Person other than the Company or a Subsidiary of the Company, in one transaction or a series of related transactions, of (i) any Capital Stock of any Subsidiary of the Company or (ii) any other property or asset of the Company or any Subsidiary of the Company, in each case, other than inventory in the ordinary course of business and other than transactions which do not exceed $500,000 individually. For the purposes of this definition, the term "Asset Sale" shall not include (x) any disposition of properties or assets of the Company or any Subsidiary of the Company that is governed under and complies with the requirements set forth in Section 5.1, (y) any transfer of property or assets that constitutes an Investment and complies with Section 4.14 or (z) sales of receivables not a part of a sale of the business from which they arose.
"Asset Sale Offer" has the meaning ascribed to such term under Section 4.12(b)(ii).
"Asset Sale Payment Date" has the meaning ascribed to such term under Section 4.12(c).
1
"Bankruptcy Law" means Title 11 of the U.S. Code or any similar federal or state law for the relief of debtors.
"Board of Directors" means, with respect to any Person, the Board of Directors of such Person or, except as used in the definition of "Change of Control," any committee of such Board of Directors authorized to act for it hereunder.
"Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification and delivered to the Trustee.
"Business Day" means any day other than a Saturday, a Sunday or any day on which banking institutions in New York City are not required to be open.
"Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in, or other equivalent (however designated and whether voting or non-voting) ownership interests (including, without limitation, partnership interests) of such Person, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights, warrants or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purposes of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time (i) any evidence of Indebtedness with a maturity of one year or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided the full faith and credit of the United States of America is pledged in support thereof); (ii) certificates of deposit or acceptances with a maturity of 180 days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $500,000,000; (iii) commercial paper with a maturity of 180 days or less issued by a corporation (except an Affiliate of the Company) organized under the laws of any state of the United States or the District of Columbia and rated at least A-i by Standard & Poor's Corporation or at least P-l by Moody's Investors Service, Inc.; and (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; provided, however, that the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency.
"Change of Control" means (a) all or substantially all of the assets of the Company are sold, leased, exchanged or otherwise transferred to any Person or entity or group of Persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than an Affiliate of the Company, (b) the Company or the Parent is merged or consolidated with or into another corporation (other than a merger or consolidation of the Company with or into the Parent) with the effect that the existing equity holders hold less than 50% of the combined voting power of the then outstanding securities of the surviving corporation of such merger or the corporation resulting from such consolidation ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors, (c) if at any time after the Company or the Parent has publicly traded equity securities, a majority of the Board of Directors of the Company or the Parent shall be replaced, over a two-year period, from the directors who constituted the Board of Directors of the Company or
2
the Parent at the beginning of such period, and such replacement shall not have been approved by the Board of Directors of the Company or the Parent as constituted at the beginning of such period, or (d) a Person or Group of Persons (other than a Permitted Holder or Group of Persons constituting Permitted Holders) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, directly or indirectly, the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of the securities of the Company or the Parent representing 50% or more of the combined voting power of the then outstanding securities of the Company or the Parent ordinarily (and apart from rights arising under special circumstances) having the right to vote in the election of directors.
"Change of Control Date" has the meaning ascribed to such term in Section 4.15.
"Change of Control Offer" has the meaning ascribed to such term in Section 4.15.
"Change of Control Payment Date" has the meaning ascribed to such term under Section 4.15.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock.
"Company" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and, thereafter, means such successor.
"Consolidated Interest Expense" means, with respect to any Person for any period, the aggregate of the interest expense (without deduction for interest income) of such Person and its Subsidiaries for such period, on a consolidated basis, as determined in accordance with GAAP, and including (a) all amortization of original issue discount; (b) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Subsidiaries during such period; (C) the net cash costs or benefits under all Interest Rate Protection Obligations (including amortization of fees); and (d) the interest portion of any deferred-payment obligations for such period.
"Consolidated Net Income" means, for any period the aggregate of the net income (or loss) of the Company and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that (a) the net income of any Person in which the Company or any Subsidiary of the Company has a joint interest with a third party (which interest does not cause the net income of such Person to be consolidated into the net income of the Company in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions paid to the Company or the Subsidiary of the Company, (b) the net income of any Subsidiary of the Company that is subject to any restriction or limitation on the payment of dividends or the making of other distributions shall be excluded to the extent of such restriction or limitation, (c)(i) the net income of any Person combined with the Company or a Subsidiary of the Company in a pooling of interests transaction for any period prior to the date of such acquisition and (ii) any net gain (but not loss) resulting from an Asset Sale by the Company or any of its Subsidiaries other than in the ordinary course of business shall be excluded, and (d) extraordinary gains and losses (and any related tax effects) and any one-time increase or decrease to net income which is required to be recorded because of the adoption of new accounting policies, practices or standards required by GAAP shall be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date of determination, the consolidated equity represented by the shares of such Person's Capital Stock (other than Disqualified Stock) at such date, as determined on a consolidated basis in accordance with GAAP.
"Consolidated Total Assets" means, with respect to any Person at any date of determination, the aggregate amount of assets of such Person and its Subsidiaries at such date (less applicable
3
depreciation, amortization and other valuation reserves) as determined on a consolidated basis in accordance with GAAP and as set forth or reflected in the Person's most recent consolidated balance sheet.
"covenant defeasance" has the meaning ascribed to such term in Section 8.2(c).
"Credit Agreement" means the Amended and Restated Credit Agreement, dated as of February 1996, among the Company, the financial institutions party thereto, The Bank of Nova Scotia and Bank Bumiputra Malaysia Berhard, New York Branch, as Managing Agents, and The Bank of Nova Scotia, as Administrative Agent, as the same may at any time be amended, amended and restated, supplemented or otherwise modified, including any refinancing, refunding, replacement or extension thereof and whether by the same or any other lender or groups of lenders.
"Custodian" has the meaning provided in Section 6.1(b).
"Default" means any event that is, or after notice or passage of time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the Maturity Date.
"Dollar" or "$" means lawful currency of the United States of America.
"EBITDA" means, for a period ending at the close of any fiscal quarter, the sum of: (a) Consolidated Net Income for such period, plus (b) to the extent deducted in determining Consolidated Net Income, the sum of all expenses of the Company and its Subsidiaries, on a consolidated basis, in accordance with GAAP for such period in respect of (i) depreciation, (ii) amortization including, without limitation, amortization of capitalized debt issuance costs and goodwill, (iii) Consolidated Interest Expense, (iv) Federal, state and foreign income taxes and (v) any non-cash charges related to compensation.
4
"EBITDA Coverage Ratio" means the ratio of (a) EBITDA for the four fiscal quarters immediately preceding the date of the transaction or other circumstances giving rise to the need to calculate the EBITDA Coverage Ratio (the "Transaction Date") to (b) Consolidated Interest Expense calculated on a pro forma basis for such four fiscal quarters. For purposes of this definition, if the Transaction Date occurs prior to the date on which the Company's consolidated financial statements for the four full fiscal quarters subsequent to the Issue Date are first available, "EBITDA" and the items referred to in the preceding clause (b) shall be calculated, in the case of the Company, after giving effect on a pro forma basis as if the Securities outstanding on the Transaction Date were issued on the first day of such four full fiscal quarter period and the assets and liabilities of the Company as of the Transaction Date had been contributed to or assumed by the Company on such first day. In addition to and without limitation of the foregoing, for purposes of this definition, "EBITDA" and the items referred to in the preceding -clause (b) shall be calculated after giving effect on a pro forma basis for the period of such calculation to (i) the incurrence of any Indebtedness of such Person or any of its Subsidiaries at any time during the period (the "Reference Period") (A) commencing on the first day of the four full fiscal quarter period for which financial statements are available that precedes the Transaction Date and (B) ending on and including the Transaction Date, including, without limitation, the incurrence of the Indebtedness giving rise to the need to make such calculation, as if such incurrence occurred on the first day of the Reference Period; provided that if such Person or any of its Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the above clause shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or Subsidiary had directly incurred such guaranteed Indebtedness and (ii) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company or any of its Subsidiaries (including any Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring Acquired Indebtedness) occurring during the Reference Period (it being expressly understood that such calculation shall also give effect on a pro forma basis to any increase or decrease in Consolidated Net Income attributable to such Asset Sale or Asset Acquisition, as if such Asset Sale or Asset Acquisition occurred on the first day of the Reference Period) and any retirement of Indebtedness in connection with such Asset Sales, as if such Asset Sale or Asset Acquisition and/or retirement occurred on the first day of the Reference Period. Furthermore, in calculating the denominator (but not the numerator) of this "EBITDA Coverage Ratio," (1) interest on Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to accrue at a fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate based upon a factor of a prime or similar rate shall be' deemed to have been in effect; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Rate Protection Obligations, shall be deemed to accrue at the rate - annum resulting after giving effect to the operation of such agreements.
"Event of Default" has the meaning provided in Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" or "fair value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction. Fair Market Value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution delivered to the Trustee.
"Foreign Exchange Agreements" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect against fluctuations in currency values.
5
"Foreign Subsidiary" means any Subsidiary of the Company which is organized under the laws of a jurisdiction other than the United States of America or any State thereof and more than 80% of the sales, earnings or assets (determined in accordance with GAAP) of which are located or derived from operations located in jurisdictions outside the United States of America.
"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are applicable as of the date of determination.
"Holder" or "Securityholder" means the Person in whose name a Security is registered on the Registrar's books.
"incur" means, with respect to any Indebtedness, to directly or indirectly create, incur, assume, issue, guarantee or in any manner become liable for or with respect to the payment of any such Indebtedness, and the terms "incurred," incurrence" and "incurring" shall have meanings correlative to the foregoing.
"Indebtedness" means, with respect to any Person, (i) any liability, contingent or otherwise, of such Person (A) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof) or (B) evidenced by a note, debenture or similar instrument or letter of credit (including a purchase money obligation or other obligation relating to the deferred purchase price of property); (ii) any liability of others of the kind described in the preceding clause (i) which the Person has guaranteed or which is otherwise its legal liability; (iii)any obligation secured by a Lien to which the property or assets of such Person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such Person's legal liability; (iv) all Capitalized Lease Obligations; and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii) and (iv).
"Indenture" means this Indenture as amended or supplemented from time to time pursuant to the terms hereof.
"Independent Financial Advisor" means an accounting, appraisal or investment banking firm of nationally recognized standing that is, in the good faith judgment of the Board of Directors of the Company as evidenced by a Board Resolution, qualified to perform the task for which such firm has been engaged and is disinterested and independent with respect to the Company and its Affiliates.
"interest," when used with respect to any Security, means the amount of all interest accruing on such Security, including all interest accruing subsequent to the occurrence of any events specified in Sections 6.1(a) (vi) and (vii) or which would have accrued but for any such event.
"Interest Payment Date," when used with respect to any Security, means the stated maturity of an installment of interest specified in such Security.
"Interest Rate," when used with respect to any Security, means the rate per annum specified in such Security as the rate of interest accruing on the principal amount of such Security.
"Interest Rate Protection Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include without limitation, interest rate swaps, caps, floors, collars and similar agreements.
6
"Investment" has the meaning provided in Section 4.14.
"Issue Date" means the date on which the Securities are first issued by the Company.
"legal defeasance" has the meaning ascribed to such term in Section 8.2(b).
"Legal Holiday" means any day other than a Business Day.
"Lien" means, with respect to any Person, any mortgage, deed of trust, pledge, lien, lease, encumbrance, charge - or adverse claim affecting title or resulting in an encumbrance against real or personal (tangible or intangible) property or any interest therein of such Person, or a security interest of any kind (including, without limitation, any conditional sale - or other title retention agreement, any lease in the nature thereof, any option, right of first refusal or other similar agreement to sell, in each case securing obligations of such Person, and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statute or statutes) of any jurisdiction other than to reflect ownership by a third party of property leased to such Person or any of its Subsidiaries under a lease that is not in the nature of a conditional sale or title retention agreement).
"Material Subsidiary" means a Subsidiary of the Company which would constitute a "significant subsidiary" of the Company within the meaning of Regulation S-x of the Commission.
"Maturity Date" means, when used with respect to any Security, the date specified in such Security as the fixed date on which the principal of such Security is due and payable.
"Net Asset Sale Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations with respect to Indebtedness are financed or sold with recourse to the Company or any of its Subsidiaries) net of (i) brokerage commissions and other reasonable fees and expenses (including fees and expenses of counsel and investment bankers) incurred in connection with such Asset Sale; (ii) provisions for all taxes payable as a result of such Asset Sale; (iii) payments made to retire Indebtedness secured by the assets subject to such Asset Sale to the extent required pursuant to the terms of such Indebtedness; and (iv) appropriate amounts to be provided by the Company or any of its Subsidiaries, as the case may be, as a reserve, in accordance with generally accepted accounting principles, against any liabilities associated with such Asset Sale and retained by the Company or any of its Subsidiaries, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the Company, the aggregate net proceeds received by the Company, after payment of expenses, commissions and the like incurred in connection therewith, whether such proceeds are in cash or in property (valued at the Fair Market Value thereof, as determined in good faith by the Board of Directors of the Company, at the time of receipt) and (b) in the case of any exchange, exercise, conversion or surrender of outstanding securities of any kind of the Company for or into shares of Capital Stock (other than Disqualified Stock) of the Company, the net book value of such outstanding securities on the date of such exchange, exercise, conversion or surrender (plus any additional amount required to be paid by the holder to the Company upon such exchange, exercise, conversion or surrender, less any and all payments made to the holders, - on account of fractional shares and less all expenses incurred by the Company in connection therewith).
"Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such Person.
7
"Officers' Certificate" means, with respect to any Person, a certificate signed by two Officers or by an Officer and either an Assistant Treasurer or an Assistant Secretary of such Person complying with the requirements of this Indenture.
"Opinion of Counsel" means a written opinion from legal counsel who and which is acceptable to the Trustee complying with the requirements of this Indenture. Such legal counsel shall be outside counsel and not an employee of or in-house counsel to the Company.
"Paying Agent" has the meaning provided in Section 2.3.
"Parent" means AAF-McQuay Group, Inc.
"Permitted Holder" means the Parent and O.Y.L. Industries Berhad and its Affiliates.
"Person" means any individual, corporation, partnership, Joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights to any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation.
"principal" of a debt security means the principal amount of the security plus, when appropriate, the premium, if any, on the security.
"Promissory Note" means the $11,500,000 Promissory Note due May 2, 1999 issued by the Company.
"Registrar" has the meaning provided in Section 2.3.
"Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on Capital Stock of the Company or any payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company, (iii) the making of any principal payment on, or the purchase, defeasance, repurchase, redemption or other acquisition or retirement for value, prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, of any Indebtedness existing on the Issue Date which is subordinated in right of payment to the Securities (other than Indebtedness acquired in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition); and (iv) the making of any Investment other than an Investment permitted under clauses (i) through (vi) of Section 4.14.
8
"Securities" means the 8 7/8% Senior Notes Due 2003 of the Company issued, authenticated and delivered under this Indenture, as amended or supplemented from time to time pursuant to the terms of this Indenture.
"Subsidiary" means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company or (ii) any other Person (other than a corporation) in which the Company, a Subsidiary of the Company or the Company and a Subsidiary of the Company, directly or indirectly, at the date of determination thereof, has at least a majority ownership interest.
"surviving entity" has the meaning ascribed to such term in Section 5.1(a).
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code §§ 77aaa-77bbbb) as in effect on the date of this Indenture, except as required by Section 9.3 hereof.
"Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the (provisions of this Indenture and thereafter means such successor.
"Trust Officer" means an officer or assistant officer of the Trustee assigned to the Corporate Trust Department performing corporate trust work or any successor to such department or, in the case of a successor trustee, an officer assigned to the department, division or group performing the corporate trust work of such successor.
"U.S. Government Obligations" has the meaning provided in Section 8.1(a).
"Wholly-Owned Subsidiary" means any Subsidiary of the Company, 100% of the Capital Stock of which (other than shares of Capital Stock representing any directors' qualifying shares or investments by foreign nationals mandated by applicable law) is owned by the Company, by a Wholly-Owned Subsidiary of the Company or by the Company and a Wholly-Owned Subsidiary of the Company.
"Working Capital Indebtedness" means Indebtedness of the Company and Indebtedness of its Subsidiaries under any agreement, instrument, facility or arrangement (including the revolving credit portion of the Credit Agreement) that is intended to provide working capital financing (including any asset securitization facility involving the sale of accounts receivable) in the ordinary course of business, including any refinancing, refunding or replacement thereof.
SECTION 1.2 Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision shall be deemed incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings:
(a) "Commission" means the SEC;
(b) "indenture securities" means the Securities;
(c) "indenture security holder" means a Securityholder;
(d) "indenture to be qualified" means this Indenture;
(e) "indenture trustee" or "institutional trustee" means the Trustee; and
(f) "obligor" on the indenture securities means the Company or any other obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule and not otherwise defined herein have the meanings so assigned to them therein.
9
SECTION 1.3 Rules of Construction.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) "or" is exclusive;
(c) words in the singular include the plural, and words in the plural include the singular;
(d) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision; and
(e) unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect on the Issue Date.
ARTICLE II
THE SECURITIES
SECTION 2.1 Designation; Form and Dating.
The Securities and the Trustee's certificates of authentication with respect thereto shall be substantially in the form set forth in Exhibit A annexed hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, rule, usage or agreement to which the Company is subject. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are expressly made, a part of this Indenture.
SECTION 2.2 Execution and Authentication.
Two Officers shall execute the Securities on behalf of the Company by either manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security or at any time thereafter, the Security shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. Such signature shall be conclusive evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue in an aggregate principal amount at maturity not to exceed $125,000,000, upon receipt of an Officers' Certificate signed by two Officers directing the Trustee to authenticate the Securities and certifying that all conditions precedent to the issuance of the Securities contained herein have been complied with. The aggregate principal amount of Securities outstanding at any time may not exceed $125,000,000, except as provided in Section 2.7.
The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. Such authenticating agent shall have the same rights as the Trustee in any dealings hereunder with the Company or with any of the Company's Affiliates.
The Securities shall be issuable only in registered form without coupons. Securities shall be issued in denominations of $1,000 and integral multiples thereof.
SECTION 2.3 Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in the City of New York, State of New York) where Securities may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency (which shall be located in
10
the Borough of Manhattan, City of New York, State of New York), which may be an office or agency of the Trustee, the Registrar or co-Registrar, where Securities may be presented for payment (the "Paying Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture maybe served. The Registrar shall. keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes-any additional paying agent. Neither the Company nor any Affiliate thereof may act as Paying Agent.
The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall promptly notify the Trustee in writing of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 7.7.
The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Securities. The Registrar or Paying Agent may resign upon 30 days' written notice to the Company.
SECTION 2.4 Paying Agent To Hold Money in Trust.
Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of, or interest on, the Securities (whether such money has been paid to it by the Company or any other obligor on the Securities), and the Company and the Paying Agent shall promptly notify the Trustee in writing of any default by the Company (or any other obligor on the Securities) in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Company at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default specified in Section 6.l(a)(i) or (ii), upon written request to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee.
SECTION 2.5 Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of the Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least five Business Days before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Securityholders.
SECTION 2.6 Transfer and Exchange.
When Securities are presented to the Registrar or a co-Registrar with a request from the Holder of such Securities to register the transfer or to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided that every Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorneys duly authorized in writing. To permit registrations of transfers and exchanges, the Company shall issue and execute and the Trustee shall authenticate new Securities evidencing such transfer or exchange at the Registrar's request. No service charge shall be made to the Securityholder for any registration of transfer or exchange. The Company may require from the Securityholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer
11
or exchange, but this provision shall not apply to any transfer or exchange pursuant to Section 2.10, 3.6, 4.12, 4.15 or 9.5 (in which events the Company will be responsible for the payment of such taxes).
SECTION 2.7 Replacement Securities.
If a mutilated Security is surrendered to the Registrar or the Trustee or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Holder of such Security furnishes to the Company and to the Trustee evidence reasonably acceptable to them of the ownership and the destruction, loss or theft of such Security. If required by the Trustee or the Company, an indemnity bond shall be posted, sufficient in the judgment of both to protect the Company, the Trustee or any Paying Agent from any loss that any of them may suffer if such Security is replaced. The Company may charge such Holder for the Company's expenses in replacing such Security and the Trustee may charge the Company for the Trustee's expenses in replacing such Security. Every replacement Security shall constitute an additional obligation of the Company.
SECTION 2.8 Outstanding Securities.
The Securities outstanding at any time are all Securities that have been authenticated by the Trustee except for (a) those cancelled by it, (b) those delivered to it for cancellation, (c) to the extent set forth in Sections 8.1 and 8.2, on or after the date on which the conditions set forth in Section 8.1 or 8.2 have been satisfied, those Securities theretofore authenticated and delivered by the Trustee hereunder and (d) those described in this Section 2.8 as not outstanding. A Security does not cease to be outstanding during any period that the Company or one of its Affiliates holds the Security.
If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser in whose hands such Security is a legal, valid and binding obligation of the Company.
If the Paying Agent holds, in its capacity as such, on any Maturity Date, money sufficient to pay all accrued interest and principal with respect to such Securities payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue.
SECTION 2.9 Treasury Securities.
In determining whether the Holders of the required principal amount of Securities have concurred in any declaration of acceleration or notice of default or direction, waiver or consent or any amendment, modification or other change to this Indenture, Securities owned by the Company or an Affiliate of the Company shall be disregarded as though they were not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent or any amendment, modification or other change to this Indenture, only Securities that the Trustee actually knows are so owned shall be so disregarded.
SECTION 2.10 Temporary Securities.
Until definitive Securities are prepared and ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until such exchange, temporary Securities shall be entitled to the same rights, benefits and privileges as definitive Securities.
12
The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall dispose of cancelled Securities in accordance with its normal procedures unless the Company directs the Trustee in writing to return such Securities to the Company, and, if so disposed, and upon the written request of the Company, shall deliver a certificate of disposition thereof to the Company. The Company may not reissue or resell, or issue new Securities to replace, Securities that the Company has redeemed or paid, or that have been delivered to the Trustee for cancellation.
SECTION 2.12 Defaulted Interest.
If the Company defaults on a payment of interest on the Securities, it shall pay the defaulted interest, plus (to the extent permitted by law) any interest payable on the defaulted interest, in accordance with the terms hereof, to the Persons who are Securityholders on a subsequent special record date, which date shall not be less than 10 days prior to the payment date for such defaulted interest. The Company shall fix such special record date and payment date in a manner satisfactory to the Trustee. At least 15 days before such special record date, the Company shall mail to each Securityholder of such series, with a copy to the Trustee, a notice that states the special record date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid.
SECTION 2.13 CUSIP Number.
The Company in issuing the Securities may use a "CUSIP" number, and if so, such CUSIP number shall be included in notices of exchange as a convenience to Holders; provided, however, that any such notice shall state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities; and provided, further, that failure to use CUSIP numbers in any notice of exchange shall not affect the validity or sufficiency of such notice. The Company will promptly notify the Trustee of any change in the CUSIP number.
SECTION 2.14 Deposit of Moneys.
By 11:00 a.m., New York City time, on each Interest Payment Date, Maturity Date and each other date on which payment is due pursuant to this Indenture, the Company shall have deposited with the Paying Agent in immediately available funds legal currency of the United States sufficient to make cash payments, if any, due on such Interest Payment Date or Maturity Date or other payment date, as the case may be, in order to permit the Paying Agent to remit payment to the Holders on such date.
ARTICLE III
REDEMPTION
SECTION 3.1 No Redemption.
The Company may not redeem the Securities, in whole or in part, at any time.
ARTICLE IV
COVENANTS
SECTION 4.1 Payment of Securities.
The Company shall pay, the principal of and interest on the Securities on the dates and in the manner provided in the Securities and this Indenture.
13
An installment of principal or -interest shall be considered paid on the date due if the Trustee-or the Paying Agent holds on such date immediately available funds designated for and sufficient to pay such installment.
The Company shall pay interest on overdue principal and (to the extent permitted by law) on overdue installments of interest at a rate equal to 8 7/8% per annum.
SECTION 4.2 Maintenance of Office or Agency.
The Company shall maintain in the Borough of Manhattan, the City of New York, an office or agency (which may be an office or agency of the Trustee, Registrar or co-Registrar), where' Securities may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 10.2.
The Company may also from time-to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
The Company hereby initially designates the corporate trust office of the Trustee set forth in Section 10.2 as an agency of the Company in accordance with Section 2.3.
SECTION 4.3 Corporate Existence.
Subject to Article V, the Company shall do or cause to be done, at its own cost and expense, all things necessary to, and will cause each of its Subsidiaries to, preserve and keep in full force and effect the corporate or partnership existence and rights (charter and statutory), licenses and/or franchises of the Company and each of its Subsidiaries; provided, however, that the Company or any of its Subsidiaries shall not be required to preserve any such rights, licenses or franchises if the Board of Directors of the Company shall reasonably determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or such Subsidiary and the loss thereof is not adverse in any material respect to the Holders.
SECTION 4.4 Payment of Taxes and Other Claims.
The Company shall, and shall cause each of its Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon its or its Subsidiaries' income, profits or property and (b) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon its property; ~ vided, however, that neither the Company nor any of its Subsidiaries shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate negotiations or proceedings and for which disputed amounts adequate reserves have been made in accordance with GAAP.
SECTION 4.5 Maintenance of Properties; Insurance; Books and Records; Compliance with Law.
(a) The Company shall, and shall cause each of its Subsidiaries to, at all times cause all properties used or useful in the conduct of its business taken as a whole to be maintained and kept in good
14
condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment, and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereto.
(b) The Company shall, and shall cause each of its Subsidiaries to, keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Company and each-of its Subsidiaries, in accordance with GAAP consistently applied to the Company and each of its Subsidiaries, taken as a whole.
(c) The Company shall, and shall cause each of its Subsidiaries to, comply with all statutes, laws, ordinances, or government rules and regulations to which it is subject, noncompliance with which would materially adversely affect the business, prospects, earnings, properties, assets or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole.
SECTION 4.6 Compliance Certificates.
(a) The Company shall deliver to the Trustee, within 45 days after the end of each of the first three quarters of the Company's fiscal year, and within 90 days after the end of such fiscal year, an Officers' Certificate of the Company stating (i) that a review of the activities of the Company during the preceding fiscal quarter or year, as the case may be, has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and (ii) that, to the best knowledge of each Officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which such Officers may have knowledge, their status and what act-ion the Company is taking or proposes to take with respect thereto).
(b) So long as (and to the extent) not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the annual financial statements delivered pursuant to Section 4.7 shall be accompanied by a written statement of the Company's independent public accountants that in connection with their audit of such annual financial statements nothing has come to their attention that would lead them to believe that the Company has violated any provisions of this Indenture which relate to accounting matters or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking-or -proposes to take with respect thereto.
SECTION 4.7 Reports.
Whether or not required by the rules and regulations of the Commission, so long as any of the Securities are outstanding, the Company shall file with the Commission and with the Trustee and mail or cause to be mailed to the Holders, within 15 days after it files them with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the fore-going as the Commission may by rules and regulations prescribe)which the Company would be required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company was subject to such Sections. Such financial information shall include annual reports containing consolidated financial statements and notes thereto, together with an opinion thereon expressed by an independent public accounting firm and managements discussion and analysis of financial condition and results of operations as well as quarterly reports containing unaudited condensed consolidated financial statements and managements discussion and analysis of financial
15
condition and results of operations for each of the first three quarters of each fiscal year. In addition, all such -information shall be made available to- securities analysts and prospective investors upon request. The Company also shall comply with the other provisions of TIA § 314(a).
SECTION 4.8 Further Assurance to the Trustee.
The Company shall, upon request of the Trustee, execute and deliver such further instruments and do such further acts as may reasonably be necessary or proper to carry out more effectively the provisions of this Indenture.
SECTION 4.9 Limitation on Additional Indebtedness.
The Company shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or issue, directly or indirectly, or guarantee or in any other manner become, directly or indirectly, liable for, or with respect to, the payment of any Indebtedness (including Acquired Indebtedness), except for the following (each of which shall be given independent effect):
(a) Indebtedness under the Securities and this Indenture;
(b) Indebtedness of the Company outstanding under the term loan portion of the Credit Agreement in a principal amount not to exceed at any one time outstanding $75,000,000, less any amount mandatorily repaid under such term loan portion (other than by virtue of the excess cash flow sweep provisions of Section 3.1.1(g) thereof as in effect on the Issue Date);
(c) Indebtedness of the Company and its Subsidiaries existing on the Issue Date and not repaid out of the proceeds of the issuance and sale of the Securities;
(d) Indebtedness of the Company or any of its Subsidiaries if, at the time of incurrence and after giving effect thereto, the Company's EBITDA Coverage Ratio on a pro forma basis for its last four completed fiscal quarters, taken as a whole, and assuming such Indebtedness had been incurred on the first day of such four quarter period, would have been at least 2.20 to 1;
(e) Indebtedness of the Company or any of its Subsidiaries, not to exceed $10,000,000 in aggregate principal amount at any one time outstanding, incurred to finance the acquisition of Capital Stock, properties or assets, including Capitalized Lease Obligations and purchase money Indebtedness, including any refinancing, refunding or replacement thereof;
(f) Working Capital Indebtedness of the Company and its Subsidiaries in a principal amount not to exceed the sum of (x) 85% of the net book value of accounts receivable and (y) 65% of the net book value of inventories, in each case calculated on a consolidated basis for the Company and its Subsidiaries in accordance with GAAP;
(g) Indebtedness of the Company and its Subsidiaries in respect of Interest Rate Protection Obligations or Foreign Exchange Agreements incurred in the ordinary course of business; provided that with respect to Interest Rate Protection Obligations, the notional principal amount of such Indebtedness does not exceed, at the time of the incurrence of such Indebtedness,the principal amount of Indebtedness to which such Interest Rate Protection Obligations relate; and
(h) any replacements, renewals, refinancings and extensions of Indebtedness incurred under clauses (a), (c) and (d) above; provided that any such replacement, renewal, refinancing and extension (x) shall not provide for any mandatory redemption, amortization or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in the Indebtedness being replaced, renewed, refinanced or extended; and (y) shall not exceed the principal amount (plus accrued interest and prepayment premiums, if any) of the Indebtedness being replaced, renewed, refinanced or extended.
16
Indebtedness shall be deemed to have been incurred by the survivor of a merger, at the time of such merger, and with respect to an acquired Subsidiary, at the time of such acquisition.
SECTION 4.10 Limitation on Liens.
The Company shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind upon any of its property or assets now owned or hereafter acquired, unless the Securities also are equally and ratably secured by such Lien, except for the following:
(a) Liens existing on the Issue Date;
(b) Liens securing Indebtedness under the Credit Agreement;
(c) Liens securing Indebtedness which is incurred to refinance or replace Indebtedness which has been secured by a Lien permitted under the Indenture and is permitted to be refinanced or replaced under the Indenture; provided that such Liens do not extend to or cover any property or assets of the Company or any of its Subsidiaries not securing the Indebtedness so refinanced or replaced;
(d) Liens arising by reason of (i) any attachment, judgment, decree or order of any court, so long as such lien is being contested in good faith and is either adequately bonded or execution thereon has been stayed pending appeal or review, and any appropriate legal proceedings which may have been duly initiated for the review of such attachment, judgment, decree or order shall not have been finally terminated or -the period within which such proceedings may be initiated shall not have expired; (ii) taxes, assessments or governmental charges not yet delinquent or which are being contested in good faith; (iii) security for payment of workers' compensation or other insurance; (iv) security for the performance of tenders, bids, leases and contracts (other than contracts for the payment of money); (v) deposits to secure public or statutory obligations or in lieu of surety or appeal bonds or to secure permitted contracts for the purchase or sale of any currency entered into in the ordinary course of business; (vi) operation of law in favor of carriers, warehousemen, landlords, mechanics, materialmen, laborers, employees or suppliers, incurred in the ordinary course of business for sums which are not yet delinquent or are being contested in good faith by negotiations or by appropriate proceedings which suspend the collection thereof; (vii) security for surety or appeal bonds; and (viii) easements, rights-of-way, zoning and similar covenants and restrictions and other similar encumbrances or title defects which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries;
e) Liens to secure Indebtedness incurred to finance the acquisition of assets or property acquired in the ordinary course of business after the Issue Date; provided that (i) the aggregate principal amount of Indebtedness secured by such Liens shall not exceed the lesser of cost or Fair Market Value of the assets or property so acquired (measured on the date of acquisition of the assets or property), (ii) the Indebtedness secured by such Liens shall have otherwise been permitted to be incurred under the Indenture, and (iii) such Liens shall not encumber any other assets or property of the Company or any of its Subsidiaries other than the property or assets so acquired and shall attach to such assets or property within 30 days of the acquisition of such assets or property;
f) Liens on the Capital Stock, assets or property of a Subsidiary of the Company existing at the time such Subsidiary became a Subsidiary of the Company (and not incurred as a result of or in anticipation of such Subsidiary becoming a Subsidiary of the Company); provided that such Liens do not extend -to or cover any Capital Stock, property or assets of the Company or any of its other Subsidiaries (other than the Capital Stock, property or assets so acquired);
17
g) Liens securing Capitalized Lease Obligations upon any property acquired by the Company or any of its Subsidiaries after the Issue Date which is acquired by such entity in the ordinary course of business and which Liens secure solely the lease rental of such property or Indebtedness incurred solely for the purpose of financing the lease of such property (but only to the extent that the Indebtedness secured by such Liens shall otherwise be permitted under the covenants set forth in the Indenture);
(h) any interest or title of a lessor or sublessor, or any Lien in favor of a landlord, arising under any real or personal property lease under which the Company or any of its Subsidiaries is a lessee, sublessee or subtenant (other than any interest or title or any Lien securing any Capitalized Lease Obligation) which do not interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries and which are made on customary and usual terms applicable to similar properties;
(i) Liens securing Indebtedness of the Company and its Subsidiaries pursuant to Interest Rate Protection Obligations or Foreign Exchange Agreements;
(j) Liens on the accounts receivable (or interests therein) and inventories of the Company and its Subsidiaries securing or otherwise supporting Working Capital Indebtedness;
(k) Liens on assets of J&E Hall, a Subsidiary of the Company, securing Indebtedness of such Subsidiary; and
(l) other Liens securing Indebtedness or other obligations of the Company or any Subsidiary of the Company not in excess of 5% of the Consolidated Total Assets of the Company.
SECTION 4.11 Limitation on Restricted Payments.
The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the aggregate of all Restricted Payments declared or made after the Issue Date does not exceed the sum of (1) 50% of the Company's cumulative Consolidated Net Income (or in the-event such Consolidated Net Income shall be a deficit, minus 100% of such deficit) from the Issue Date and (2) 100% of the aggregate Net Proceeds and the Fair Market Value of marketable securities and property received by the Company (other than from a Subsidiary of the Company) from the issue or sale, after the Issue Date, of Capital Stock (other than Disqualified Stock) of the Company or any Indebtedness or other securities of the Company convertible into or exercisable or exchangeable for Capital Stock (other than Disqualified Stock) of the Company which has been so converted or exercised or exchanged, as the case may be; and
18
(c) at the time of and after giving effect to such Restricted Payment, the Company could incur at least $1.00 of additional Indebtedness pursuant to clause (d) of Section 4.9.
For purposes of determining under clause (b) above the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property, other than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit (i) the payment of any dividend or distribution within 60 days after the date of declaration thereof, if at such date of declaration such payment would comply with the provisions of the Indenture, (ii) the retirement of any shares of Capital Stock of the Company or Indebtedness of the Company existing on the Issue Date that is subordinated in right of payment to the Securities by conversion into, or by an exchange for, shares of Capital Stock (other than Disqualified Capital Stock) of the Company, or out of the Net Proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of Capital Stock (other than Disqualified Stock) of the Company and (iii) the redemption or retirement of Indebtedness of the Company existing on the Issue Date that is subordinated in right of payment to the Securities in exchange for, or out of the Net Proceeds of a substantially concurrent sale (other than to a Subsidiary of the Company), of Indebtedness of the Company that is contractually subordinated in right of payment to the Securities and that is permitted to be incurred in accordance with Section 4.9.
In determining the amount of Restricted Payments permissible under clause (b) above, amounts expended pursuant to clauses (i) and (ii) above shall be included as Restricted Payments.
SECTION 4.12 Disposition of Proceeds of Asset Sales.
The Company shall not, and shall not permit any of its Subsidiaries to, make, directly or indirectly, any Asset Sale unless:
(a) the Company or such Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of (which shall be as determined in good faith by the Company's or such Subsidiary's Board of Directors); and
(b) either (i) the net proceeds therefrom consist of at least 85% cash or Cash Equivalents (with Indebtedness of the Company or its Subsidiaries assumed by the purchaser being counted as cash for such purposes if the Company and its Subsidiaries are released from any and all liability therefor) or ii) after giving effect to such Asset Sale, the Company and its Subsidiaries hold in the aggregate no more than $5,000,000 of net proceeds (other than cash and Cash Equivalents) received from Asset Sales.
If the Company or any Subsidiary of the Company engages in any Asset Sales, the Company shall either:
(i) within 180 days of such Asset Sale, use the Net Asset Sale Proceeds to (A) permanently repay Indebtedness under the term loan portion of the Credit Agreement, (B) repay Indebtedness under the revolving loan portion of the Credit Agreement and effect a permanent reduction in the availability thereunder and/or (C) commit to invest or invest the Net Asset. Sale Proceeds and, within 270 days of such Asset Sale, apply the Net Asset Sale Proceeds to acquire, construct or reinvest in properties and assets to be used in the business of the Company and its Subsidiaries; or
(ii) use the remaining Net Asset Sale Proceeds to make an offer to purchase (the "Asset Sale Offer"), ratably, from all holders of Securities up to a maximum principal amount of the Securities that may be purchased out of such proceeds at a purchase price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to, but not including, the payment date relating to such Asset Sale (the "Asset Sale Payment Date");
19
provided that the Company may defer the Asset Sale Offer until there is an aggregate unitized amount of Net Asset Sale Proceeds equal to or in excess of $5,000,000 resulting from one or more Asset Sales (at which time, the entire unitized Net Asset Sale Proceeds amount, and not just the amount in excess of $5,000,000, shall be applied as required pursuant to this paragraph to make an Asset Sale Offer).
In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Subsidiaries as an entirety to a Person in a transaction permitted under Section 5.1 below, the surviving entity shall be deemed to have sold the properties and assets of the Company and its Subsidiaries not so transferred for purposes of this Section 4.12, and shall comply with the Asset Sale provisions of this Indenture with respect to such deemed sale as if it were an Asset Sale. The Fair Market Value of such properties and assets of the Company and its Subsidiaries deemed to be sold shall be deemed to be Net Asset Sale Proceeds for purposes of the Asset Sale provisions of this Indenture.
(c) The Company shall provide the Trustee with notice of any Asset Sale Offer at least 30 days before any notice of any Asset Sale Offer is mailed to Holders of the Securities (unless shorter notice is acceptable to the Trustee). Such notice shall be accompanied by an Officers' Certificate of the Company setting forth (i) a statement to the effect that the Company or a Subsidiary of the Company has made an Asset Sale and (ii) the aggregate principal amount of Securities offered to be purchased and the basis of calculation in determining such aggregate principal amount. Notice of an Asset Sale Offer shall be mailed by the Company to all Holders of Securities not less than 30 days nor more than 60 days before the Asset Sale Payment Date at their last registered address with a copy to the Trustee and the Paying Agent. The Asset Sale Offer shall remain open from the time of mailing for at least 20 Business Days and until at least 5:00 p.m., New York City time, on the Asset Sale Payment Date. The notice, which shall govern the terms of the Asset Sale Offer, shall include such disclosures as are required by law and shall state:
(i) that the Asset Sale Offer is being made pursuant to this Section 4.12;
(ii) the purchase price (including the amount of accrued interest, if any) for each Security and the Asset Sale Payment Date;
(iii) that any Security not tendered or accepted for payment will continue to accrue interest in accordance with the terms thereof;
(iv) that, unless the Company defaults on making the payment, any Security accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest on and after the Asset Sale Payment Date;
(v) that Holders electing to have Securities purchased pursuant to an Asset Sale Offer will be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Asset Sale Payment Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent;
(vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Asset Sale Payment Date, a tested telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities the Holder delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing its election to have such Securities purchased;
(vii) that if Securities in a principal amount in excess of the aggregate principal amount which the Company has offered to purchase are tendered pursuant to the Asset Sale Offer,
20
the Company shall purchase Securities on a pro rata basis among the Securities tendered (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples of $1,000 shall be acquired);
(viii) that Holders whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; and
(ix) the instructions that Holders must follow in order to tender their Securities.
On the Asset Sale Payment Date, the Company shall (i) accept for payment, on a pro rata basis among-the Securities (subject to adjustment as contemplated by clause (vii) above), or portions thereof tendered pursuant to the Asset Sale Offer and (ii) deliver to the Paying Agent the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security, surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. To the extent an Asset Sale Offer is not fully subscribed to by the Holders, the Company may retain any unitized portion of the Net Asset Sale Proceeds.
The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to the Asset Sale Offer.
(d) No transaction or action otherwise permitted under this Section 4.12 shall occur until the Trustee shall have received an Officers'. Certificate and an Opinion of Counsel as to (i) the Company's compliance with this Section 4.12 and (ii) the fulfillment of all conditions precedent to such transaction or action.
SECTION 4.13 Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit any of its Subsidiaries to, conduct any business or enter into any transactions or series of transactions with or for the benefit of any of its Affiliates (each, an "Affiliate Transaction"), except in good faith and on terms that are, in the aggregate, no less favorable to the Company or such Subsidiary, as the case may be, than those that could have been obtained in a comparable transaction on an arms-length basis from a Person who is not such an Affiliate. All Affiliate Transactions (and each series of related Affiliate Transactions which are part of a common plan) involving aggregate payments or other market value in excess of $3,000,000, shall be approved unanimously by the Board of Directors of the Company, such approval to be evidenced by a Board Resolution stating that such directors have, in good faith, determined that such transaction or related transactions comply with the foregoing provision; and if the Company or any Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions which are part of a common plan) involving aggregate payments or other market value in excess of $5,000,000, the Company or such Subsidiary shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or related transactions from an Independent Financial Advisor and file the same with the Trustee; provided that this sentence shall not be applicable with respect to sales or purchases of products or services by the Company to or from its Affiliates in the ordinary course of business on terms similar to those that could have been obtained in a comparable transaction on an arms-length basis from a Person who is not such an Affiliate. Notwithstanding the foregoing, the restrictions set forth in this covenant shall not apply to (i) customary directors' fees and (ii) consulting fees or transactions by and among the Company and its Wholly-Owned Subsidiaries.
21
SECTION 4.14 Limitation on Investments, Loans and Advances.
The Company shall not, and shall not permit any of its Subsidiaries to, make any capital contributions, advances or loans to, or investments in (including by way of guarantee) or purchases of Capital Stock or other securities of any other Person (collectively, "Investments"), except: (i) Investments by the Company in or to any Wholly-Owned Subsidiary of the Company and Investments in or to the Company or a WhollyOwned Subsidiary of the Company by any Subsidiary of the Company; provided that such Investments made after the Issue Date (net of any return or repayment of such Investments) by the Company in or to any Wholly-Owned Subsidiary do not exceed, individually or in the aggregate, 5% of the Consolidated Total Assets of the Company at the time such Investment is made; (ii) Investments represented by accounts receivable created or acquired in the ordinary course of business; (iii) advances or loans to employees in the ordinary course of business; (iv) Investments in joint ventures, partnerships or Persons that are not Wholly-Owned Subsidiaries of the Company; provided that such Investments made after the Issue Date (net of any return or repayment of such Investments) do not exceed, individually or in the aggregate, 5% of the Consolidated Total Assets of the Company at the time such Investment is made; (v) Investments in Cash Equivalents; (vi) Investments by the Company in any Person which is merged or consolidated with or into the Company immediately following such Investment; and (vii) Investments permitted to be made pursuant to Section 4.11.
SECTION 4.15 Change of Control.
In the event of a Change of Control (the date of such occurrence, the "Change of Control Date"), the Company shall notify the holders of Securities in writing of such occurrence and shall make an offer to purchase (the "Change of Control Offer"), on a-Business Day (the "Change of Control Payment Date") not later than 60 days following the Change of Control Date, all Securities then outstanding at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the Change of Control Payment Date.
Notice of a Change of Control Offer shall be mailed by the Company not less than 30 days nor more than 45 days before the Change of Control Payment Date to the holders of Securities at their last registered addresses with a copy to the Trustee and the Paying Agent. The Change of Control Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the Change of Control Payment Date. The notice, which shall govern the terms of the Change of Control Offer, shall include such disclosures as are required by law and shall -state:
(a) that a Change of Control Offer is being made pursuant to this Section 4.15 and that all Securities will be accepted for payment;
(b) the purchase price (including the amount of accrued interest, if any) for each Security and the Change of Control Payment Date;
(c) that any Security not tendered for payment will continue to accrue interest in accordance with the terms thereof;
(d) that, unless the Company defaults on making the payment, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date;
(e) that Holders electing to have Securities purchased pursuant to a Change of Control Offer will be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Payment Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent;
22
(f) that Holders of Securities will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Change of Control Payment Date, a tested telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities the Holder delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing its election to have such Securities purchased;
(g) that Holders whose Securities are purchased only in part will be issued Securities equal in principal amount to the unpurchased portion of the Securities surrendered;
(h) the instructions that Holders must follow in order to tender their Securities; and
(i) the circumstances and relevant facts regarding such Change of Control (including, but not limited to, to the extent available to the Company, information with respect to pro forma historical financial information after giving effect to such Change of Control, information regarding the Persons acquiring control and such Persons' business plans going forward).
On the Change of Control Payment Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to the Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof.
The Company shall comply, to the. extent applicable, with the requirements of Section 14(e) of the Exchange Act, and any other securities laws or regulations in connection with the repurchase of Securities pursuant to a Change of Control Offer.
SECTION 4.16 Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.
The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective or enter into any agreement with any Person that would cause any consensual encumbrance or restriction of any kind on the ability of any Subsidiary of the Company to (a) pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits owned by the Company or any Subsidiary of the Company, (b) make any loans or advances, or pay any Indebtedness owed, to the Company or any Subsidiary of the Company or (c) transfer any of its properties or assets to the Company or any Subsidiary of the Company, except for such encumbrances or restrictions existing under or contemplated by or by reason of (i) the Securities and this Indenture, (ii) any restrictions existing under or contemplated by agreements in effect-on -the Issue Date (including the Credit Agreement) and restrictions created in the future with respect to Indebtedness of Foreign Subsidiaries of the Company so long as such restrictions are not materially less favorable to the holders of the Securities than those in effect on the Issue Date, (iii) any restrictions, with respect to a Subsidiary of the Company that is not a Subsidiary of the Company on the Issue Date, in existence at the time such Person becomes a Subsidiary of the Company (but not created as a result of or in anticipation of such Person becoming a Subsidiary of the Company), (iv) in the case of clause (c) above, restrictions on the transfer of assets subject to any Lien permitted by this Indenture imposed by the holder of such Lien, and (v) any restrictions existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (i), (ii), (iii) or (iv) above; provided that the terms and conditions of any such restrictions referred to in this clause (v) are not materially
23
less favorable to the holders of the Securities than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced.
SECTION 4.17 Conflicting Agreements.
The Company shall not, and shall not permit any of its Subsidiaries to, enter into any agreement or instrument that by its terms expressly prohibits the Company from making any payments on or in respect of the Securities in accordance with the terms thereof and of this Indenture, as in effect from time to time, except as expressly permitted by this Indenture.
SECTION 4.18 Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent permitted by law) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent permitted by law) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of -every such, power as though no such law had been en-acted.
SECTION 4.19 Limitation on Amendments to Certain Agreements.
The Company shall not, and shall not permit any of its Subsidiaries to, permit or consent to, any amendment, supplement, modification, alteration or waiver of any of the terms and provisions of the charter of the Company or any of its Subsidiaries in any manner or to any extent that would be adverse in any material respect to the interests of the Holders of the Securities or of the Trustee or which would constitute a default under this Indenture.
SECTION 4.20 Insurance.
The Company shall maintain, and shall cause its Subsidiaries to maintain, insurance with responsible carriers against such risks and in such amounts, and with such deductibles, retentions, self-insured amounts and co-insurance provisions, as are customarily carried by similar businesses of similar size, including property and casualty loss, workers' compensation and interruption of business insurance.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1 When Company May Merge, Etc.
The Company shall not consolidate with or merge with or into or sell, assign, convey, lease or transfer all or substantially all of its properties and assets as an entirety to any Person or group or affiliated Persons in a single transaction or through a series of transactions, unless at the time and after giving effect thereto:
(a) the Company shall be the continuing Person or the resulting, surviving or transferee Person (the "surviving entity") shall be a corporation or partnership organized and existing under the laws of the United States or any State thereof or the District of Columbia;
24
(b) the surviving entity shall expressly assume, by a supplemental indenture executed and -delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, all of the-obligations of the Company under the -Securities and this Indenture;
(c) immediately before and immediately after giving effect to such transaction or series of transactions (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;
(d) the Company or the surviving entity, as the case may be, shall immediately after giving effect to such transaction or series of transactions (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions) have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately before giving effect to such transaction or series of transactions;
(e) immediately before and immediately after giving effect to such transaction or series of transactions, the Company or the surviving entity, as the case may be, could incur $1.00 of additional-Indebtedness - pursuant to clause (d) of Section 4.19; and
(f) the Company or the surviving entity, as the case may be, shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such -consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction or series of transactions, such supplemental indenture, complies with the applicable provisions of this Indenture and that all conditions precedent in this Indenture relating to the transaction or series of transactions have been satisfied.
SECTION 5.2 Successor Entity Substituted.
Upon any consolidation, merger or any transfer of all or substantially all of the assets of the Company in accordance with Section 5.1, the surviving entity formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such surviving entity had been named as the Company herein.
ARTICLE VI
DEFAULT AND REMEDIES
SECTION 6.1 Events of Default.
(a) An "Event of Default" occurs if:
(i) the Company defaults in the payment of any interest on the Securities when it becomes due and continuance of such default for a period of 30 days; or
(ii) the Company defaults in the payment of the principal of, or premium, if any, on the Securities when due; or
(iii) the Company defaults in the performance of, or breaches, any covenant in the Indenture (other than with respect to defaults specified in clause (i) or (ii) above), and continuance of such default or breach (other than with respect to any default or breach under Sections 4.15 or 5.1) for a period of 30 days after written notice to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the outstanding Securities; or
(iv) other than with respect to the Promissory Note, failure by the Company, or any of its Subsidiaries (a) to make any principal payment when due with respect to any other
25
Indebtedness under one or more classes or issues of indebtedness in an aggregate principal amount of $5,000,000 or more; or (b) to perform any term, covenant, condition, or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5,000,000 or more, which failure, in the case of this clause (b), results in an acceleration of the maturity thereof; or
(v) one or more judgments, orders or decrees for the payment of money in excess of $5,000,000, either individually or in an-aggregate- amount, shall be entered against the Company -or any of its Subsidiaries or any of their respective properties and shall not be discharged and there shall have been a period of 60 days during which a stay of enforcement of such judgment or order, by reason of pending appeal or otherwise, shall not be in effect; or
(vi) the Company or any of its Material Subsidiaries pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding,
(B) consents to the entry of an order for relief against it in an involuntary case or proceeding,
(C) consents to the appointment of a Custodian of it or for all or substantially all of its property,
(D) makes a general assignment for the benefit of its creditors or
(E) shall generally not pay its debts when such debts become due or shall admit in writing its inability to pay its debts generally; or
(vii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any of its Material Subsidiaries in an involuntary case or proceeding,
(B) appoints a Custodian of the Company or any of its Material Subsidiaries for all or substantially all of its properties, or
(C) orders the liquidation of the Company or any of its Material Subsidiaries,
and in each case the-order-or decree-remains unstayed and in effect for- 60 days; -p~-~, however, that if the entry of -such order or- decree is appealed and dismissed on appeal then the Event of Default hereunder by reason of the entry of such order or decree shall be deemed to have been cured.
(b) For purposes of this Section 6.1, the term "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official charged with maintaining possession or control over property for one or more creditors.
(c) Subject to the provisions of Sections 7.1 and 7.2, the Trustee shall not be charged with knowledge of any Event of Default unless written notice thereof shall have been given to a Trust Officer at the corporate trust office of the Trustee by the Company or any other Person.
SECTION 6.2 Acceleration.
If an Event of Default (other than an Event of Default specified in Section 6.1(a) (vi) or (vii) above with respect to the Company) occurs and is continuing, the Holders of at least 25% in aggregate principal amount of the outstanding Securities may, by written notice to the Company and the Trustee, and the Trustee upon the written request of the Holders of not less than 25% in aggregate principal amount of the outstanding Securities shall declare the principal of, premium, if any, and
26
accrued interest on all the Securities to be due and payable immediately. Upon any such declaration such amounts shall -become due and payable immediately. If an Event of Default specified in Section 6.1(a) (vi) or (vii) with respect to the Company occurs and is continuing, then the principal of, premium, if any, and accrued interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder.
After a declaration of acceleration, the Holders of a majority in aggregate principal amount of outstanding Securities may, by written notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default have been cured or waived, other than the non-payment of principal of, premium, if any, and accrued interest on the Securities that has become due solely as a result of such acceleration and if the rescission of acceleration would not conflict with any judgment or decree. No such. rescission shall affect any subsequent default or impair any -right consequent thereto.
SECTION 6.3 Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture.
All rights of action and claims under this Indenture or the Securities may be enforced by the Trustee even if the Trustee does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law.
SECTION 6.4 Waiver of Past Default.
Subject to Sections 6.7 and 9.2, the Holders of at least a majority in principal amount of-the outstanding Securities, by written notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default specified in Section 6.l(a)(i) or (ii) or in respect of any provision hereof which cannot be modified or amended-without the consent of the Holder so affected pursuant to Section 9.2. When a Default or Event of Default is so waived, it shall be deemed cured and to cease to exist.
SECTION 6.5 Control by Majority.
The Holders of at least a majority in principal amount of the outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on it; provided, however, that the Trustee may refuse to follow any direction that (i) conflicts with law or this Indenture, (ii) the Trustee determines may be unduly prejudicial to the rights of another Securityholder, or (iii) may involve the Trustee in personal liability unless the Trustee has indemnification reasonably satisfactory to it against any loss or expense caused by-its following such direction; and provided, further, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction.
SECTION 6.6 Limitation on Suits.
A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless:
(a) the Holder gives to the Trustee written notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the outstanding Securities make a written request to the Trustee to pursue a remedy;
27
(c) such Holder or Holders offer and, if requested, provide to the Trustee indemnity reasonably satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 15 days after receipt of the request and the offer and, if requested, provision of indemnity; and
(e) during such 15-day period the Holders of a majority in principal amount of the outstanding Securities do not give the Trustee a direction inconsistent with the request.
The foregoing limitations shall not apply to a suit instituted by a Holder for the enforcement of the payment of principal of, premium, if any, or accrued interest on such Security on or after the respective due dates set forth in such Security.
A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over such other Securityholder.
SECTION.6.7 Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and interest on a Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after -such -respective dates, is absolute and unconditional and-shall not be impaired or affected without the consent of such -Holder.
SECTION 6.8 Collection Suit by Trustee.
If an Event of Default specified in Section 6.l(a)(i) or (ii) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the Interest Rate, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.9 Trustee May File Proofs of Claim.
The Trustee shall be entitled and empowered to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Securityholders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceedings is hereby authorized by each Securityholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable-compensation, expenses, disbursements and advances of the Trustee, its agent and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.
28
If the Trustee collects any money pursuant to this Article VI, it shall pay out such money in the following order:
First: to the Trustee for-amounts due under Section 7.7 or elsewhere in this Indenture;
Second: to Holders for interest accrued on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest;
Third: to Holders for principal amounts owing under the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal; and
Fourth: to the Company.
The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 6.10.
SECTION 6.11 Undertaking for Costs.
In any suit for the enforcement of any right or remedy under -this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable -costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in aggregate principal amount of the outstanding Securities.
ARTICLE VII
TRUSTEE
SECTION 7.1 Duties of Trustee.
(a) If an Event of Default known to the Trustee has occurred and is continuing, the Trustee shall, other than with respect to any action taken by the Trustee as directed by a majority in aggregate principal amount of the outstanding Securities in accordance with Section 6.5 hereof, exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default actually known to the Trustee:
(i) The Trustee need perform only those duties as are specifically set forth in this Indenture and no others.
(ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine such certificates and opinions to determine whether or not they conform to the requirements of this Indenture.
(c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
(i) This paragraph does not limit the effect of paragraph (b) of this Section 7.1.
29
(ii) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.
(iii) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.2, 6.4 or 6.5.
(iv) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.1.
(e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Except as otherwise provided for in Section 7.1(f) below, money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
(f) The Trustee may refuse to perform any duty or exercise any right or power unless it is provided adequate funds to enable it to do so and it receives indemnity reasonably satisfactory to it against any loss, liability, fee or expense.
SECTION 7.2 Rights of Trustee.
(a) The Trustee may conclusively rely and shall be protected in acting or refraining -from acting upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, -notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney upon reasonable request during normal business hours.
(b) Before the Trustee acts or refrains from acting with respect to any matter contemplated by this Indenture or the Securities, it may require an Officers' Certificate or an Opinion of Counsel, or both, which shall conform to the provisions of Sections 10.4 and 10.5. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion.
(c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent (other than the negligence or willful misconduct -of an agent who is an employee of the Trustee) appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized or within its rights or powers, provided that the Trustee's conduct does not constitute negligence or bad faith.
(e) The Trustee may consult with counsel and the advice or opinion of such counsel as to matters of law shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel.
30
SECTION 7.3 Individual Rights of Trustee.
The Trustee in its individual capacity or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its -Subsidiaries and Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11.
SECTION 7.4 Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, and it shall not be accountable for the Company' s use of the proceeds from the issuance of the Securities, and it shall not be responsible for any statement of the Company in this Indenture or any document issued in connection with the sale of Securities or any statement in the Securities other than the Trustee's certificate of authentication.
SECTION 7.5 Notice of Defaults.
If a Default or an Event of Default with respect to the Securities occurs and is continuing and is known to the Trustee, the Trustee shall mail to each Securityholder notice of the Default or Event of Default within 90 days after the occurrence thereof. Except in the case of a Default or an Event of Default in payment of principal of or interest on any Security, the Trustee may withhold the notice to the Securityholders if a committee of its Trust Officers in good faith determines that withholding the notice is in the interest of Securityholders.
SECTION 7.6 Reports by Trustee to Holders.
To the extent required by TIA S 313(a), within 60 days after May 15 of each year commencing with 1996 and for as long as there are Securities outstanding hereunder, the Trustee shall mail to each Securityholder the Company's brief report dated as of such date that complies with TIA § 313(a). The Trustee also shall comply with TIA S 313(b) and TIA § 313(c) and (d). A copy of such report at the time of its mailing to Securityholders shall be filed with the SEC, if required, and each stock exchange, if any, on which the Securities are listed.
The Company shall promptly notify the Trustee in writing if the Securities become listed on any stock exchange, and the Trustee shall comply with TIA § 313(d).
SECTION 7.7 Compensation and Indemnity.
The Company shall pay to the Trustee, the Paying Agent and the Registrar from time to time reasonable compensation for their respective services rendered hereunder. The Trustee's, the Paying Agent's and the Registrar's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee, the Paying Agent and the Registrar upon request for all reasonable out-of-pocket-disbursements, expenses and advances incurred or made by each of them in addition to the compensation for their respective services. Such expenses shall include the reasonable compensation, out-of-pocket disbursements and expenses of the Trustee's, the Paying Agent's and the Registrar's agents and counsel.
The Company shall indemnify the Trustee, the Paying Agent and the Registrar for, and hold each of them harmless against, any claim, demand, expense (including but not limited to attorneys' fees and expenses), loss or liability incurred by each of them arising out of or in connection with the administration of this Indenture and their respective duties hereunder including the costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of their respective powers or duties hereunder. Each of the Trustee, the Paying Agent and the Registrar shall notify the Company promptly of any claim asserted against it for which it may seek indemnity. However, failure by the Trustee, the Paying Agent or the Registrar to so notify the Company shall not relieve the Company of its obligations hereunder. The Company need not reimburse any
31
expense or indemnify against any loss or liability incurred by the Trustee, the Paying Agent or the Registrar through the Trustee's, the Paying Agent's or the Registrar's, as the case may be, own willful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section 7.7, each of the Trustee, the Paying Agent and the Registrar shall have a lien prior to the Securities on all money or property held or collected by it, in its capacity as Trustee, Paying Agent or Registrar, as the case may be, except money or property held in trust to pay principal of or interest on particular Securities.
When any of the Trustee, the Paying Agent and the Registrar incurs expenses or renders services after an Event of Default specified in Section 6.l(a)(vi) or (vii) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law.
SECTION 7.8 Replacement of Trustee.
The Trustee may resign at any time by so notifying the Company in writing, such resignation to be effective upon the appointment-of a successor Trustee. The Holders of a majority in aggregate principal amount of the outstanding Securities may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the Company's consent, which consent shall not be unreasonably withheld. The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged a bankrupt or an insolvent;
(c) a receiver or other public officer takes charge of the Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of the Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee (subject to the lien provided in Section 7.7), the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Securityholder.
If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 25% in aggregate principal amount of the outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may petition any -court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring Trustee.
SECTION 7.9 Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business -to, another corporation or national banking association, the resulting, surviving
32
or transferee corporation or national banking association without any further act shall be the successor Trustee provided such corporation shall be otherwise qualified and eligible under this Article VII.
SECTION 7.10 Eligibility; Disgualification.
This Indenture shall always have a Trustee who satisfies the requirements of TIA § 310(a)(l) and (2). The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA § 310(b); provided, however, that there shall be excluded from the operation of TIA § 310(b)(l) any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding if the requirements for such exclusion set forth in TIA § 310(b)(l) are met. The provisions of TIA § 310 shall apply to the Company, as obligor of the Securities.
SECTION 7.11 Preferential Collection ofClaims Against Company.
The Trustee shall comply with TIA § 311(a), excluding any creditor relationship listed in TIA § 311(b). A Trustee who has resigned or been removed shall be subject to TIA § 311(a) to the extent indicated therein. The provisions of TIA § 311 shall apply to the Company, as obligor on the Securities.
ARTICLE VIII
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.1 Termination of Company's Obligations.
The Company may terminate its obligations under the Securities and this Indenture, except those obligations referred to in the penultimate paragraph of this Section 8.1, if all Securities previously authenticated and delivered (other than destroyed, lost or stolen Securities which have been replaced or paid) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder, or if:
(a) the Company shall have irrevocably deposited or caused to be deposited with the Trustee or a trustee satisfactory to the Trustee, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds in trust solely for the benefit of the Holders for that purpose, money or direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which guarantee or -obligation the full faith and credit of the United States is pledged ("U.S. Government Obligations") maturing as to principal and interest in such amounts and at such times as are sufficient without consideration of any reinvestment of such interest, to pay principal of and interest on the outstanding Securities to maturity; provided that the Trustee shall have been irrevocably instructed in writing to apply such money or the proceeds of such U.S. Government Obligations to the payment of said principal and interest with respect to the Securities; and
(b) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent providing for the termination of the Company's obligation under the Securities and this Indenture have been complied with.
33
Notwithstanding the foregoing paragraph, the Company's obligations in Sections 2.5, 2.6, 2.7, 2.8, 4.1, 4.2, 7.7, 7.8, 8.4 and 8.5 shall survive until the Securities are no longer outstanding. After the Securities are no longer outstanding, the Company's obligations in Sections 7.7, 8.4 and 8.5 shall survive.
After such delivery or irrevocable deposit the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified above.
SECTION 8.2 Legal Defeasance and Covenant Defeasance.
(a) The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either paragraph (b) or paragraph (c) below be applied to the outstanding Securities upon compliance with the conditions set forth in paragraph (d).
(b) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (b), the Company shall be deemed to have been released and discharged from its obligations with respect to the outstanding Securities on the date the conditions set forth below are satisfied (hereinafter, "legal defeasance"). For this purpose, such legal defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness; represented by the outstanding Securities, which shall thereafter be deemed to be "outstanding" only for the purposes of paragraph (e) below and the other Sections of and matters under this Indenture referred to in (i) and (ii) and (iv) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the-following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of outstanding Securities to receive solely from the trust fund described in paragraph (d) below and as more fully set forth in such paragraph, payments in respect of the principal of and interest on such Securities when such payments are due, (ii) the Company's obligations with respect to such Securities under Sections 2.6, 2.7 and 4.2, and, with respect to the Trustee, under Section 7.7, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (iv) this Section 8.2. Subject to compliance with this Section 8.2, the Company may exercise its option under this paragraph (b) notwithstanding the prior exercise of its option under paragraph (c) below with respect to the Securities.
(c) Upon the Company's exercise under paragraph (a) of the option applicable to this paragraph (c), the Company shall be released and discharged from its obligations under any covenant contained in Article V and in Sections 4.4 through 4.8 and Sections 49 through 4.16 with respect to the outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be deemed to be not "outstanding" for the purpose of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby.
(d) The following shall be the conditions to application of either paragraph (b) or paragraph (c) above to the outstanding Securities:
(i) the Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10 who shall agree to comply with the
34
provisions of this Section 8.2 applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal of and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge principal of and interest on the outstanding-Securities on the Maturity Date of such principal or installment of principal or interest in accordance with the terms of this Indenture and of such Securities; provided, however, that the Trustee (or other qualifying trustee) shall have received an irrevocable written order from the Company instructing the Trustee (or other qualifying trustee) to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities;
(ii) no Default or Event of Default or event which with notice or lapse of time or both would become a Default or an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as Sections 6.l(a)(vi) and (vii) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until -the expiration -of such period);
(iii) such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default or Event of Default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound;
(iv) in the case of an election under paragraph (b) above, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such legal defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred;
(v) in the case of an election under paragraph (c) above, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred;
(vi) in the case of an election under either paragraph (b) or (c) above, an Opinion of Counsel to the effect that, (x) the trust funds will not be subject to any rights of any other holders of Indebtedness of the Company, and (y) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable Bankruptcy Law; provided, however, that if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, no opinion needs to be given as to the effect of such laws on the trust funds except the following: (A) assuming such trust funds remained in the Trustee's possession prior to such court ruling to the extent not paid to Holders of Securities, the Trustee will hold, for the benefit of the Holders of Securities, a valid and enforceable security interest in such trust funds that is not avoidable in bankruptcy or otherwise, subject only to principles of equitable subordination., (B) the Holders of Securities' will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used, and (C) no property, rights in
35
property or other interests granted to the Trustee or the Holders of Securities in exchange for or with respect to any of such funds will be subject to any prior rights of any other Person, subject only to prior Liens granted under Section 364 of Title 11 of the U.S. Bankruptcy Code (or any section of any other Bankruptcy Law having the same effect), but still subject to the foregoing clause (B);
(vii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that (A) all conditions precedent provided for relating to either the legal defeasance under paragraph (b) above or the covenant defeasance under paragraph (c) above, as the case may be, have been complied with and (B) if any other Indebtedness of the Company shall then be outstanding or committed, such legal defeasance or covenant defeasance will not violate the provisions of the agreements or instruments evidencing such Indebtedness;
(viii) the Company shall have delivered to the Trustee an Officers' Certificate stating its intention to effect a defeasance pursuant to the provisions of this Article VII at least three Business Days' prior to such defeasance; and
(ix) the Company shall have paid or duly provided for payment under terms mutually satisfactory to the Company and the Trustee all amounts then due to the Trustee pursuant to Section 7.7.
(e) All money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this paragraph (e), the "Trustee") pursuant to paragraph (d) above in respect of the outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal and interest, but such money need not be segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to paragraph (d) above or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Securities.
Anything in this Section 8.2 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request, in writing, by the Company any money or U.S. Government Obligations held by it as provided in paragraph (d) above which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent legal defeasance or covenant defeasance.
SECTION 8.3 Application of Trust Money.
The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Sections 8.1 and 8.2, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of and interest on the Securities.
36
SECTION 8.4 Repayment to Company.
Subject to Sections 7.7, 8.1 and 8.2, the Trustee shall promptly pay to the Company upon receipt -by the Trustee of an Officers' Certificate, any excess money, determined in accordance with Sections 8.2(d)(i) and (e), held by it at any time. The Trustee and the Paying Agent shall pay to the Company upon receipt by the Trustee or the Paying Agent, as the case may be, of an Officers' Certificate, any money held by it for the payment of principal or interest that remains unclaimed for two years; provided, however, that the Trustee and the Paying Agent before being required to make any payment may, but need not, at the expense of the Company cause to be published once in a newspaper of general circulation in The City of New York or mail to each Holder entitled to such money notice that such money remains unclaimed and that after a date specified therein, which shall be at least 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company Securityholders entitled to money must look solely to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee or Paying Agent with respect to such money shall thereupon cease.
SECTION 8.5 Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Indenture by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then and only then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had been made pursuant to this Indenture until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with this Indenture; provided, however, that if the Company has made any payment of interest on or. principal of any Securities because of the reinstatement of their obligations, the Company shall be subrogated to the rights of the holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1 Without Consent of Holders.
The Company, when authorized by a Board Resolution, and the Trustee may amend, waive or supplement this Indenture or the Securities without notice to -or consent of any Securityholder:
(a) to cure any ambiguity, defect or inconsistency, provided that such amendment or supplement does not materially adversely affect the rights of any Holder;
(b) to provide for uncertificated Securities in addition to or in place of certificated Securities;
(c) to comply with any requirements of the Commission under the TIA;
(d) to evidence the succession in accordance with Article V hereof of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities;
(e) to evidence and provide for the acceptance of appointment hereunder by a separate or successor Trustee with respect to the Securities; or
(f) to make any change that does not adversely affect the rights of any Holder.
37
SECTION 9.2 With Consent of Holders.
Subject to Section 6.7 and the provisions of this Section 9.2, the Company and the Trustee may amend or supplement this Indenture or the Securities with the written consent of the Holders of at least a majority in aggregate principal amount of the Securities then outstanding. Subject to Section 6.7 and the provisions of this Section 9.2, the Holders of at least a majority in aggregate principal amount of the outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any other Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 6.4, may not:
(a) reduce the amount of Securities the Holders of which must consent to an amendment, supplement or waiver or consent to take any action under any provision of this Indenture or the Securities;
(b) reduce the rate of, change the method of calculation of, or extend the time for, payment of interest on any Security;
(c) reduce the principal amount outstanding of or extend the fixed maturity of any Security or alter the redemption provisions with respect thereto;
(d) waive a default in the payment, of the principal of, interest on, or an offer to purchase required hereunder with respect to, any Security, including pursuant to a Change of Control Offer or an Asset Sale Offer;
(e) change the currency in which any Security or any premium or the accrued interest thereon is payable;
(f) adversely affect the ranking of the Securities;
(g) impair the right to institute suit for the enforcement of any payment on or with respect to the Securities; or
(h) modify this Section 9.2 or Section 6.4.
It shall not be necessary for the consent of the Holders under this Section 9.2 to approve the particular form of any proposed amendment, supplement or. waiver, but it shall be sufficient if such consent - approves the substance thereof.
After an amendment, supplement or waiver under this Section 9.2 becomes effective, the Company shall mail to the Holders affected thereby a. notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver.
SECTION 9.3 Compliance with Trust Indenture Act.
Every amendment to or supplement of this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.4 Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and -every subsequent Holder of that Security or portion of that Security that -evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security. Such revocation shall be effective only if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective.
38
Notwithstanding the above, nothing in this paragraph shall impair the right of any Securityholder under § 316(b) of the TIA.
The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the second and third sentences of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. Such consent shall be effective only for actions taken within 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder, unless it makes a change described in any of clauses (a) through (h) of Section 9.2; if it makes such a change, the amendment, supplement or waiver shall bind every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security.
SECTION 9.5 Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a Security, the Trustee shall (in accordance with the specific written direction of the Company) request the Holder of the Security to deliver it to the Trustee. The Trustee shall (in accordance with the specific written direction of the Company) place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or issue a new Security shall not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6 Trustee To Sign Amendments, Etc.
The Trustee shall sign any amendment, supplement or waiver authorized pursuant to this Article IX if the amendment, supplement or waiver does not adversely affect the rights, duties or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing any amendment, supplement or waiver, the Trustee shall be entitled to receive, if requested, an indemnity satisfactory to it in its sole discretion and to receive, and shall be fully protected in relying upon, an Officers' Certificate and/or an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article IX is authorized or permitted by this Indenture. The Company may not sign an amendment until its Board of Directors approves it.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control.
39
Any notice or communication shall be sufficiently given if in writing and delivered in Person or mailed by firstclass mail addressed as follows:
(a) | if to the Company: | |
AAF-McQuay Inc. Legg Mason Tower, Suite 2800 111 South Calvert Street Baltimore, Maryland 21202 Attention: Chief Financial Officer |
||
(b) |
if to the Trustee: |
|
IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Corporate Trust Department |
The Company or-the Trustee by-notice to the other may designate in writing additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Security-holder, including any notice delivered in connection with TIA § 310(b), TIA § 313(c), TIA § 314(a) and TIA § 315(b), shall be mailed to such Securityholder, first-class postage prepaid, at its address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. Except for a notice to the Trustee, which is deemed given only when received, if a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.
SECTION 10.3 Communications by Holders with Other Holders.
Securityholders may communicate pursuant to TIA § 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and any other Person shall have the protection of TIA § 312(c).
SECTION 10.4 Certificate and Opinion of Counsel as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any action under this Indenture or the Securities, the Company shall furnish to the Trustee at the request of the Trustee (a) an Officers' Certificate in form and substance satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture or the Securities, as the case may be, relating to the proposed action have been complied with, (b) an Opinion of Counsel in form and substance satisfactory to the Trustee stating that, in the opinion of counsel, all such conditions have been complied with and (c) where applicable, a certificate or opinion by an independent certified public accountant satisfactory to the Trustee that complies with TIA § 314(c).
SECTION 10.5 Statements Required in Certificate and Opinion of Counsel.
Each certificate and Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include:
(a) a statement that the Person making such certificate has read such covenant or condition;
40
(b) a brief statement as to the nature and scope of the examination or investigation upon which the statements contained in such certificate are based;
(c) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable such person to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with.
SECTION 10.6 Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules in accordance with the Trustee's customary practices for action by or at a meeting of Securityholders. The Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 10.7 Legal Holidays.
If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period.
SECTION 10.8 GOVERNING LAW.
THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVER]~I THIS INDENTURE AND THE SECURITIES WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
SECTION 10.9 No Recourse Against Others.
A trustee, director, officer, employee, stockholder or beneficiary, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability.
SECTION 10.10 Successors.
All agreements of the Company in this Indenture and the Securities shall bind its respective successor. All agreements of the Trustee in this Indenture shall bind its successor.
SECTION 10.11 Duplicate Originals.
The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
SECTION 10.12 Separability.
In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the -remaining provisions shall not in any way be affected or impaired thereby, and a Holder shall have no claim therefor against any party hereto.
SECTION 10.13 Table of Contents, Headings, Etc. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, and are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.
41
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above.
AAF-McQUAY INC. | ||||||
By: |
/s/ Michael J. Christopher |
|||||
Name: | Michael J. Christopher | |||||
Title: | Chief Financial Officer | |||||
IBJ SCHRODER BANK & TRUST COMPANY, as Trustee |
||||||
By: |
/s/ Nancy R. Besse' |
|||||
Name: | Nancy R. Besse' | |||||
Title: | Vice President |
42
Exhibit A
AAF-McQUAY INC.
No. [ ] | CUSIP No. [ ] |
8 7/8% SENIOR NOTE DUE 2003
AAF-McQUAY INC. promises to pay to or registered assigns the principal sum of Dollars on February 15, 2003.
Interest Payment Date: February 15 and August 15
Record Dates: February 1 and August 1
AAF-McQUAY INC. | ||||
By: |
||||
Chief Executive Officer |
||||
By: |
||||
Chief Financial Officer |
Dated:
Certificate of Authentication
This is one of the 8 7/8% Senior Notes Due 2003 referred to in within-mentioned Indenture.
IBJ SCHRODER BANK & TRUST COMPANY, As Trustee |
||||
By: |
||||
Authorized Signatory |
(REVERSE
OF SECURITY)
AAF-McQUAY INC.
8 7/8% SENIOR NOTE DUE 2003
1. Interest. AAF-McQUAY INC., a Delaware corporation (the "Company"), promises to pay, until the principal hereof is paid or made available for-payment, interest on the principal amount set forth on the front of this Senior Note at a rate of 8 7/8% per annum. Interest on -the Senior Notes will accrue from and including the most recent date to which interest has been paid or, if no interest has been paid, from and including February 14, 1996 to but excluding the date on which interest is paid. Interest shall be payable in arrears on February 15 and August 15, commencing August 15, 1996. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Company shall pay interest on overdue principal and on overdue interest (to the full extent permitted by law) at a rate of 8 7/8% per annum.
2. Method of Payment. The Company will pay interest on the Senior Notes (except defaulted interest) to the Persons who are the registered Holders of Senior Notes at the close of business on the February 1 or August 1 next preceding the interest payment -date. Holders must surrender Senior Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Interest may be paid by wire transfer or check mailed to the person entitled thereto as shown on the Registrar for the Senior Notes.
3. Paying Agent and Registrar. Initially, IBJ Schroder Bank & Trust Company (the "Trustee") will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to Securityholders. Neither the Company nor any of its Subsidiaries may act as Paying Agent, Registrar or co-1~egistrar.
4. Indenture. The Company issued the Senior Notes under an Indenture, dated as of February 14, 1996 (the "Indenture") between the Company and the Trustee. This Senior Note is one of an issue of Senior Notes of the Company issued, or to be issued, under the Indenture. The terms of the Senior Notes include those stated in this Note, the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code §§ 77aaa-77bbbb), as amended from time to time. The Senior Notes are subject to all such-terms, and Holders are referred to the Indenture and such Act for a statement of them. Capitalized and certain other terms used herein and not otherwise defined have the meanings set forth in the Indenture. The Senior Notes are unsecured obligations of the Company limited in aggregate principal amount to $100,000,000.
The Indenture limits, among other things, the incurrence of Indebtedness by the Company-and its Subsidiaries; the creation of Liens by the Company and its Subsidiaries; purchases, redemptions, and other acquisitions or retirements of Capital: Stock of the Company and its Subsidiaries; transactions by the Company>and its Subsidiaries with their respective Affiliates; and the ability of the Company or any of its Subsidiaries to merge with or into another entity. The limitations are -subject to a. number of important qualifications and exceptions. The Company must report to the Trustee quarterly on compliance with the limitations contained in the Indenture.
5. Offers To Purchase. Sections 4.12 and 4.15 of the Indenture provide that after an Asset Sale or upon the occurrence of a Change of Control, and subject to further limitations contained therein, the Company shall make an offer to purchase Senior Notes in accordance with the -procedures set forth in the Indenture.
6. Denominations, Transfer, Exchange. The Senior Notes are issued in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange Senior Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay to it any taxes and fees required by law or permitted by the Indenture.
7. Persons Deemed Owners. The registered Holder of a Senior Note may be treated as the owner of it for all purposes.
8. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment as general creditors unless an "abandoned property" law designates another Person.
9. Amendment, Supplement, Waiver. The Company and the Trustee may, without the consent of the Holders of any outstanding Senior-Notes, amend, waive or supplement the Indenture or the Senior Notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or making any change that does not adversely affect the rights of any Holder. Other amendments and modifications of the Indenture or the Senior Notes may be made by the Company and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the-outstanding Senior Notes, subject to certain exceptions requiring the consent of the Holders of the particular Senior Notes to be affected.
10. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the Senior Notes and the Indenture and the transaction complies with the terms of Article V of the Indenture, the predecessor corporation will be released from those obligations.
11. Defaults and Remedies. Events of Default are set forth in the Indenture. Subject to certain limitations in the Indenture, if an Event of Default (other than an Event of Default specified in Section 6.1(a) (vi) or (vii) of the Indenture) occurs with respect to. the Company and is continuing, then the Holders of not less than 25% in aggregate principal :amount of the outstanding Senior Notes may, and the Trustee upon the written request of the Holders of not less than 25% in aggregate principal amount of the outstanding Senior Notes shall, declare the principal of and interest on all of the Senior Notes to be due and payable immediately. If an Event of Default specified in Section 6.l(a)(vi) or (vii) of the Indenture occurs with respect to the Company and is continuing, the principal of and interest on all of the Senior Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. Holders may not enforce the Indenture or the Senior Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Senior Notes. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Senior Notes may direct the Trustee in writing in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests.
12. Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates as if it were not Trustee.
13. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Senior Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or-their creation. Each Holder by accepting a Senior Note waives- and releases all such liability. The waiver and release are part of the consideration for the issue of the Senior Notes.
14. Discharge. The Company's obligations pursuant to the Indenture will be discharged, except for obligations pursuant to certain sections thereof, subject to the terms of the Indenture, upon the payment of all the Senior Notes or upon the irrevocable deposit with the Trustee of money or U.S. Government Obligations sufficient to pay when due principal of and interest on the Senior Notes to maturity.
15. Authentication. This Senior Note shall not be valid until the Trustee signs the certificate of authentication on the front of this Senior Note.
16. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM ( = tenants in common), TEN ENT ( = tenants by the entireties), JT TEN ( = joint tenants with right of survivorship and not as tenants in common), CUST ( = Custodian), and U/G/M/A ( = Uniform Gifts to Minors Act).
The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to:
AAF-McQuay Inc.
Legg Mason Tower, Suite 2800
111 South Calvert Street
Baltimore, MD 21202
Attention:Chief Financial Officer
Exhibit 10.11
THIRD AMENDMENT TO REVOLVING CREDIT,
TERM LOAN AND SECURITY AGREEMENT
This THIRD AMENDMENT TO REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT (this "Amendment") is made and entered into this 26th day of June, 2001 and is effective as of April 1, 2001, by and among AAF-MCQUAY INC., a Delaware corporation "Borrower"); the various financial institutions listed on the signature pages hereof and their respective successors and permitted assigns which become "Lenders"; and PNC BANK, NATIONAL ASSOCIATION, a national association ("PNC"), as collateral and administrative agent for Lenders (PNC, together with its successors in such capacity, the "Agent").
Recitals:
Agent, Lenders and Borrower are parties to a certain Revolving Credit, Term Loan and Security Agreement dated September 30, 1999 (as at any time amended, the "Credit Agreement") pursuant to which Lenders have made certain revolving credit and term loans to Borrower.
The parties desire to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good and valuable consideration, the receipt and sufficiency of which are hereby severally acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1. Definitions. All capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such terms in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is hereby amended as follows:
"Applicable Margin" shall mean a percentage equal to 1.75% with respect to Revolving Advances that are Eurodollar Rate Loans, 0.00% with respect to Revolving Advances that are Domestic Rate Loans, 2.00% with respect to any portion of the Term Loan made or outstanding as Eurodollar Rate Loans, and 0.00% with respect to any portion of the Term Loan made or outstanding as Domestic Rate Loans; provided that, commencing July 1, 2001,
the Applicable Margin shall be increased or (if no Default or Event of Default exists) decreased, based on the Fixed Charge Coverage Ratio, as follows:
Fixed Charge Coverage Ratio |
Revolving Advances that are made or outstanding as Domestic Rate Loans |
Applicable Margin For Revolving Advances that are made or outstanding as Eurodollar Rate Loans |
Portion of Term Loan made or outstanding as Domestic Rate Loans |
Portion of Term Loan made or outstanding as Eurodollar Rate Loans |
|||||
---|---|---|---|---|---|---|---|---|---|
Greater than 1.00:1.00 and less than 1.10:100 | 0.25 | % | 2.50 | % | 0.50 | % | 2.75 | % | |
Greater than or equal to 1.10:1.00 and less than 1.25:1.00 | 0.00 | % | 2.25 | % | 0.25 | % | 2.50 | % | |
Greater than or equal to 1.25:1.00 and less than 1.50:1.00 | 0.00 | % | 2.00 | % | 0.00 | % | 2.25 | % | |
Greater than or equal to 1.50:1.00 and less than 1.75:1.00 | 0.00 | % | 1.75 | % | 0.00 | % | 2.00 | % | |
Greater than or equal to 1.75:1.00 | 0.00 | % | 1.50 | % | 0.00 | % | 1.75 | % |
The Applicable Margin shall be subject to reduction or increase, as applicable and as set forth in the table above, on a quarterly basis according to the performance of Borrower as measured by the Fixed Charge Coverage Ratio for the immediately preceding four (4) Fiscal Quarters of Borrower. Except as set forth in the last sentence hereof, any such increase or reduction in the Applicable Margin provided for herein shall be effective three (3) Business Days after receipt by Agent of the applicable financial statements and corresponding Compliance Certificate. If the financial statements and the Compliance Certificate of Borrower setting forth the Fixed Charge Coverage Ratio are not received by Agent by the date required pursuant to Section 9.8 hereof, the Applicable Margin shall be determined as if the Fixed Charge Coverage Ratio was greater than 1.00:1.00 and less than 1.10:1.00 until such time as such financial statements and Compliance Certificate are received and any Event of Default resulting from a failure timely to deliver such financial statements or Compliance Certificate is waived in writing by Agent and Lenders; provided, however, that nothing herein shall be deemed to prevent Agent and Lenders from charging interest at the Default Rate for so long as an Event of Default exists. For the final Fiscal Quarter of any Fiscal Year of Borrower, Borrower may provide the unaudited financial statements of Borrower, subject only to year-end adjustments, for the purpose of determining the Applicable Margin; provided, however, that if, upon delivery of the annual audited financial statements required to be submitted by Borrower to Agent pursuant to Section 9.7 hereof, Borrower has not met the criteria for reduction of the Applicable Margin pursuant to the terms hereinabove for the final Fiscal Quarter of the Fiscal Year of Borrower then ended, then (a) such Applicable Margin reduction shall be terminated and, effective on the first day of the month following receipt by Agent of such audited financial statements, the Applicable Margin shall be the Applicable Margin that would have been in effect if such reduction had not been implemented based upon the unaudited financial statements of Borrower for the final Fiscal Quarter of the Fiscal Year of Borrower then ended, and (b) Borrower shall pay to Agent, for the benefit of the Lenders, on the first day of the month following receipt by Agent of such audited financial statements, an amount equal to the difference between the amount of interest that would have been paid on the principal amount of the Obligations using the Applicable Margin determined based upon such audited financial statements and the amount of interest actually paid during
2
the period in which the reduction of the Applicable Margin was in effect based upon the unaudited financial statements for the final Fiscal Quarter of the Fiscal Year of Borrower then ended.
6.7 Consolidated Total Assets. Maintain, at all times, Consolidated Total Assets of at least $600,000,000.
13.1 Term. This Agreement shall become effective on the date hereof and shall continue in full force and effect until February 1, 2003 (the "Term"), unless sooner terminated as herein provided.
3. Public Notes. Notwithstanding the provisions of the Credit Agreement prohibiting the Borrower from repurchasing any more than $20,000,000 of outstanding Public Notes, Borrower has requested that Agent and Lenders consent to Borrower's repurchase of up to an aggregate principal amount of $35,000,000 of outstanding Public Notes. Agent and Lenders hereby consent to Borrower's repurchase of up to an aggregate principal amount of $35,000,000 of outstanding Public Notes, upon satisfaction of each of the following conditions as of the time of each such repurchase: (a) Lenders have not accelerated the maturity or demanded payment of the Obligations under the Credit Agreement, whether or not Borrower has received notice of such acceleration or demand for payment, (b) each such repurchase is at no time violative of the Indenture, the Public Notes, or any of the other agreements, instruments and documents executed in respect of the transactions contemplated by the Indenture, (c) the funds used to repurchase the Public Notes (i) do not constitute proceeds of "Indebtedness" as such term is defined in the Indenture, (ii) are not proceeds of Advances made by Lenders under the Credit Agreement, and (iii) are received by Borrower either (W) as dividends from one or more Subsidiaries, (X) as repayments of Permitted Investments previously made by Borrower in one or more Subsidiaries, (Y) as the proceeds of loans to Borrower from one or more Subsidiaries provided that such loans are permitted under both the Credit Agreement and the Indenture, or (Z) as the proceeds from the sale of Borrower's Singapore Subsidiary, and (d) Borrower shall give Agent notice at least three (3) Business Days in advance of each proposed repurchase of Public Notes, with such notice specifying the date of the proposed repurchase, the principal amount of Public Notes being repurchased, and the price to be paid by Borrower to repurchase such Public Notes.
4. Ratification and Reaffirmation. Borrower hereby ratifies and reaffirms the Obligations, each of the Loan Documents and all of Borrower's covenants, duties, indebtedness and liabilities under the Loan Documents.
5. Acknowledgments and Stipulations. Borrower acknowledges and stipulates that the Credit Agreement and the other Loan Documents executed by Borrower are legal, valid and binding obligations of Borrower that are enforceable against Borrower in accordance with the terms thereof; all of the Obligations are owing and payable without defense, offset or counterclaim (and to the extent there exists any such defense, offset or counterclaim on the date hereof, the same is hereby waived by Borrower); the security interests and liens granted by Borrower in favor of Lender are duly perfected, first priority security interests and liens; the unpaid principal amount of the Revolving A Advances on and as of the opening of business on June 25, 2001, totaled $59,478,686.58; the unpaid principal amount of the Revolving B Advances on and as of the opening of business on June 26, 2001, totaled $0.00; and the unpaid principal amount of the Term Loan on and as of the opening of business on June 25, 2001, totaled $17,500,000.
6. Representations and Warranties. Borrower represents and warrants to Agent and Lenders, to induce Agent and Lenders to enter into this Amendment, that no Default or Event of Default exists on the date hereof; the execution, delivery and performance of this Amendment have been duly authorized
3
by all requisite corporate action on the part of Borrower and this Amendment has been duly executed and delivered by Borrower; and all of the representations and warranties made by Borrower in the Credit Agreement are true and correct on and as of the date hereof.
7. Breach of Amendment. This Amendment shall be part of the Credit Agreement and a breach of any of any representation, warranty or covenant herein shall constitute an Event of Default.
8. Expenses of Agent and Lenders. Borrower agrees to pay, on demand, all reasonable costs and expenses incurred by Agent and Lenders in connection with the preparation, negotiation and execution of this Amendment and any other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Agent's legal counsel and any taxes or expenses associated with or incurred in connection with any instrument or agreement referred to herein or contemplated hereby.
9. Effectiveness; Governing Law. This Amendment shall be effective upon acceptance by Agent and Lenders (notice of which acceptance is hereby waived), whereupon the same shall be governed by and construed in accordance with the internal laws of the State of New York.
10. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
11. No Novation, etc. Except as otherwise expressly provided in this Amendment, nothing herein shall be deemed to amend or modify any provision of the Credit Agreement or any of the other Loan Documents, each of which shall remain in full force and effect. This Amendment is not intended to be, nor shall it be construed to create, a novation or accord and satisfaction, and the Credit Agreement as herein modified shall continue in full force and effect.
12. Counterparts; Telecopied Signatures. This Amendment may be executed in any number of counterparts and by different parties to this Amendment on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto.
13. Further Assurances. Borrower agrees to take such further actions as Agent and Lenders shall reasonably request from time to time in connection herewith to evidence or give effect to the amendments set forth herein or any of the transactions contemplated hereby.
14. Section Titles. Section titles and references used in this Amendment shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto.
15. Release of Claims. To induce Agent and Lenders to enter into this Amendment, Borrower hereby releases, acquits and forever discharges Agent and each Lender, and all their respective officers, directors, agents, employees, successors and assigns of Lender, from any and all liabilities, claims, demands, actions or causes of action of any kind or nature (if there be any), whether absolute or contingent, disputed or undisputed, at law or in equity, or known or unknown, that Borrower now has or ever had against Agent and each Lender arising under or in connection with any of the Loan Documents or otherwise. Borrower represents and warrants to Agent and Lenders that Borrower has not transferred or assigned to any Person any claim that Borrower ever had or claimed to have against Agent or any Lender.
[Amendment continues on the following page]
4
16. Waiver of Jury Trial. To the fullest extent permitted by Applicable Law, the parties hereto each hereby waives the right to trial by jury in any action, suit, counterclaim or proceeding arising out of or related to this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed under seal, and delivered by their respective duly authorized officers on the date first written above.
ATTEST: | AAF-MCQUAY INC. ("Borrower") |
|||||||||
/s/ Paul M. Heim |
By: |
/s/ Ronald J. Pederson |
||||||||
Name: | Paul M. Heim |
Name: | Ronald J. Pederson |
|||||||
Title: | Assistant Secretary |
Title: | Treasurer |
|||||||
[CORPORATE SEAL] |
||||||||||
PNC BANK, NATIONAL ASSOCIATION, as a Lender and as Agent | ||||||||||
By: |
/s/ Manual R. Borges |
|||||||||
Name: | Manual R. Borges |
|||||||||
Title: | Assistant Vice President |
|||||||||
BANK OF AMERICA, N.A., as a Lender |
||||||||||
By: |
/s/ Mark Herdman |
|||||||||
Name: | Mark Herdman |
|||||||||
Title: | Vice President |
|||||||||
FIRSTAR BANK, N.A., as a Lender |
||||||||||
By: |
/s/ Ann Marie Krych |
|||||||||
Name: | Ann Marie Krych |
|||||||||
Title: | Assistant Vice President |
5
FLEET CAPITAL CORPORATION, as a Lender | ||||||||||
By: |
/s/ William P. Dyer II |
|||||||||
Name: | William P. Dyer II |
|||||||||
Title: | Vice-President |
6
BANK ONE, MICHIGAN, as a Lender | ||||||||||
By: |
/s/ Steven M. Kuhn |
|||||||||
Name: | Steven M. Kuhn |
|||||||||
Title: | Vice President |
7
Exhibit 21
AAF-MCQUAY INC.
SUBSIDIARIES AND AFFILIATES
AMG Holdings B.V. (The Netherlands) | * McQuay Szanyó Klimatechnika Kft. (Hungary) | |
AMG Holdings N.V. (The Netherlands) | * AAF Saudi Arabia Limited (Saudi Arabia) | |
AAF-McQuay Group Inc. (Delaware) | * Kirloskar AAF Ltd. (India) | |
AAF-McQuay Inc. (Delaware) | * Kirloskar-McQuay Pvt. Ltd. (India) | |
AAF-McQuay Holdings Inc. (Texas) | * Equipos McQuay, S.A. de C.V. (Mexico) | |
AAF-McQuay International Inc. (Delaware) | * Janitrol de Mexico, S.A. de C.V. (Mexico) | |
AAF-McQuay Canada Inc. (Canada) | * Aerofil Filtracion de Aire C.V. (Venezuela) | |
AAF-McQuay Export Inc. (Barbados) | * McQuay Caribe, Inc. (Puerto Rico) | |
American Air Filter Company, Inc. (Delaware) | * American Air Filter Sdn Bhd (Malaysia) | |
McQuay-Perfex Export Co. (Minnesota) | * McQuay Mediterranean LLC (Delaware) | |
McQuay-TPC Corp. (Delaware) | ||
AAF-McQuay Netherlands B.V. (The Netherlands) | ||
AAF-International B.V. (The Netherlands) | ||
AAF Luftreinigungssysteme Gesellschaft m.b.H (Austria) | ||
AAF-SA (Belgium) | ||
AAF-SA (France) | ||
AAF-McQuay Holding France (France) | ||
AAF-McQuay France (France) | ||
AAF-Lufttechnik GmbH (Germany) | ||
Beth Lufttechnik GmbH (Germany) | ||
AAF Environmental Control E.P.E. (Greece) | ||
AAF S.r.l. (Italy) | ||
AAF Italia S.r.l., f/k/a McQuay Europa S.r.l. (Italy) | ||
McQuay Italia S.p.A. (Italy) | ||
AAF, S.A. (Spain) | ||
AAF McQuay UK Limited (United Kingdom) | ||
AAF-Limited (United Kingdom) | ||
McQuay (UK) Limited (United Kingdom) | ||
Air Filters Limited (United Kingdom) | ||
J & E Hall Limited (United Kingdom) | ||
Coulstock & Place Engineering Co. Limited (United Kingdom) | ||
Balmsound Limited (United Kingdom) | ||
AAF Hava Filtreleri ve Ticaret A.S. (Turkey) | ||
AAF Asia Pte Limited (Singapore) | ||
AAF, S. de R.L. de C.V. (Mexico) | ||
Purificacion de Aire Venezolana, C.A. (Venezuela) | ||
American Air Filter Brasil Ltda.(Brazil) | ||
McQuay - Ar Condicionado Brasil Ltda (Brazil) | ||
McQuay Latin America, L.C. (Florida) | ||
McQuay de Venezuela C.A. (Venezuela) | ||
McQuay España S.A. (Spain) | ||
* McQuay New York, LLC (New York) | ||
* AAF-McQuay L.L.C. (United Arab Emirates - Dubai) | ||
* McQuayService S.r.l. (Italy) | ||
* McQuay Beirut (Offshore), Inc. S.A.L. (Lebanon) | ||
* TriState HVAC Equipment, LLP (Pennsylvania) | ||
* McQuay of Georgia LLP (Georgia) | ||
* McQuay Southeast Service, LLC (Georgia) | ||
* McQuay Southeast Supply, LLC (Georgia) | ||
* Applied Control Systems, LLC (Georgia) | ||
* AF Technology, Ltd., formerly AAF Korea Company, Ltd. (Korea) | ||
* McQuay Hellas Air-Conditioning and Refrigeration SA (Greece) |
EXHIBIT 24
AAF-McQuay Inc.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned Directors of AAF-McQuay Inc. hereby constitutes and appoints Ho Nyuk Choy, Bruce D. Krueger and either of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in any of said agents and attorneys-in-fact, to sign for the undersigned in their respective names as Directors of AAF-McQuay Inc., the Annual Report on Form 10-K, and any and all further amendments to said Report, hereby ratifying and confirming all acts taken by any such agent and attorney-in-fact, as herein authorized.
Dated: September 26, 2001
/s/ Quek Leng Chan Quek Leng Chan |
/s/ Ho Nyuk Choy Ho Nyuk Choy |
|
/s/ Kwek Leng San Kwek Leng San |
/s/ Liu Wan Min Liu Wan Min |