1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the Transition period from to
COMMISSION FILE NUMBER 0-20328
AMTROL INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RHODE ISLAND 05-0246955
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1400 DIVISION ROAD, WEST WARWICK, RI 02893
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (401) 884-6300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 30, 2000, the aggregate market value of the Registrant's voting
stock held by non-affiliates was none.
As of March 30, 2000, 100 shares of Common Stock $0.01 par value, of the
Registrant were outstanding.
Documents Incorporated by Reference: NONE
The Exhibit Index for this document appears on page 53 hereof.
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PART I
ITEM 1. BUSINESS
BACKGROUND
AMTROL Inc., together with its subsidiaries ("AMTROL" or the
"Company"), is a leading designer, manufacturer and marketer of
expansion and pressure control products used in the water systems
markets and selected sectors of the HVAC market. The Company's
principal products include well water accumulators, hot water expansion
controls, water treatment products, indirect-fired water heaters, and
returnable and non-returnable pressure-rated cylinders used primarily
to store, transport and dispense refrigerant, heating and cooking
gases. Many of these products are based on a technology originated and
developed by AMTROL, which is based on a pre-pressurized vessel with an
internal diaphragm to handle fluids under pressure.
The Company was incorporated in Rhode Island in 1973, and is the
successor to all of the assets and liabilities of a predecessor Rhode
Island corporation which was incorporated in 1946. On November 12,
1996, as a result of a merger agreement with AMTROL Holdings Inc. and
its wholly owned subsidiary AMTROL Acquisition Inc. (i.e., the
"Merger"), AMTROL became a wholly-owned subsidiary of AMTROL Holdings
Inc., a Delaware corporation controlled by The Cypress Group L.L.C.
("Cypress"). AMTROL's principal executive offices are located at 1400
Division Road, West Warwick, Rhode Island 02893 (telephone number:
(401) 884-6300).
OVERVIEW
AMTROL is a leading North American manufacturer of its key product
categories and a prominent participant in certain European, Middle
Eastern and Asian cylinder markets. The Company's market prominence is
attributable to the strength of AMTROL's brand names and the Company's
product breadth, quality and innovation, as well as its marketing,
distribution and manufacturing expertise. In addition, AMTROL's
principal markets are highly replacement-oriented, with 60% to 70% of
the Company's core business coming from replacement sales. These
factors, combined with the Company's large installed base of products,
have enabled AMTROL to demonstrate generally stable sales and earnings,
even during periods of weak domestic economic activity. However, sales
can be affected by extreme weather conditions, as well as significant
changes in economic circumstances.
AMTROL's brand names are among the most widely known in its markets.
For example, the Company's EXTROL(R) is widely recognized by customers
as the leading hot water expansion control tank. Other well-known brand
names of the Company include Well-X-Trol(R), Therm-X-Trol(R), Hot Water
Maker(R), CHAMPION(TM) and Water Worker(R). The Company also believes
that it is a recognized technology leader in virtually all of its core
product lines. In fact, many of the Company's major product lines,
AMTROL's products are considered the industry standard, a key marketing
advantage.
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During its 50-year history, the Company has built a strong partnership
with wholesalers, resulting in a broad distribution network serving
approximately 2,000 customers throughout North America. The Company's
strong reputation and brand recognition ensure that nearly every
significant plumbing, pump specialty and HVAC wholesaler carries at
least one line of AMTROL products. This facilitates new product
introduction, effectively "pulling" the Company's new products through
its distribution system. AMTROL also offers a broad range of products.
This broad product offering allows AMTROL's customers to consolidate
their suppliers and to purchase and manage inventory more efficiently.
These factors and the Company's quality reputation have established the
Company's products as a preferred brand and allow the Company to
realize premium pricing on most of its premium branded products. In
addition, the Company continues to increase its sales to the retail
market, a rapidly growing channel of distribution, primarily through
private label arrangements with Lowe's Companies, Menards, Tru*Serv
Corporation and Ace Hardware.
AMTROL-ALFA Metalomecanica S.A. ("ALFA"), located in Guimaraes,
Portugal, is Europe's largest manufacturer of reusable steel gas
cylinders and supplies Europe, the Middle East and Africa, as well as
the Far East, with containers for storing cooking, heating and
refrigerant gases. ALFA also produces non-returnable gas cylinders
supplied to European and Asian customers. ALFA provides the Company
with the potential for a low-cost international manufacturing base for
all of AMTROL's products and is an important source of supply for the
Company's international customers.
AMTROL-NOVA (formally "NOVA Wassererwarmer GmbH", "NOVA") located in
Donaueschingen, Germany, manufactures high-end residential and
commercial water heaters which are marketed primarily in Germany,
Switzerland and Austria. NOVA provides AMTROL with expanded
manufacturing and distribution capabilities in central Europe, in
addition to the opportunity to offer many of AMTROL's complementary
hydronic heating and water systems products in the European market. It
also provides the Company with greater product diversification and the
ability to penetrate certain markets in the United States in which it
currently has a limited presence.
Including ALFA and NOVA, approximately 38.6% of the Company's net sales
in 1999 were derived from international markets, compared to 36.2% in
1998.
PRODUCTS AND MARKETS
The EXTROL(R), the first product to utilize technology developed by
AMTROL for handling fluid under pressure, redefined the standards for
controlling the expansion of water in hydronic heating systems. Earlier
systems consisted simply of a vessel containing air, resulting in
excessive pressure and excessive corrosion. AMTROL developed a
technology which uses a flexible diaphragm inside a pre-pressurized
vessel to maintain the separation of air and water in the vessel, and
has applied this technology in both HVAC products and water systems
products.
HVAC PRODUCTS
AMTROL's sales to selected sectors of the HVAC market, which include
sales of products such as expansion accumulators, water heaters and
pressure-rated cylinders for
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heating and refrigerant gases, accounted for approximately 62% of the
Company's total sales in 1999. AMTROL's residential HVAC products
include expansion vessels for heated water, potable water heaters and
other accessories used in residential HVAC systems. AMTROL's commercial
HVAC products are substantially identical in function to those used in
residential applications, but may be modified as a result of design
codes and the higher operating pressures of larger systems. AMTROL's
pressure-rated cylinders for refrigerant gases are used mainly in the
storage, transportation and dispensing of gases used principally in air
conditioning and refrigeration systems. In addition, the AMTROL-ALFA
facility produces returnable pressure-rated cylinders for storing gas
used in residential and commercial heating and cooking applications.
EXTROLS(R). EXTROL(R) expansion accumulators are used in conjunction
with hydronic heating systems, which provide heat by circulating hot
water through baseboard piping and radiators. The EXTROL(R) product
controls pressure in the heating system and eliminates problems related
to hot water expansion by allowing the volume of water to increase as
the temperature of the water increases within a closed system,
preventing operating problems.
THERM-X-TROLS(R). Therm-X-Trols(R) accumulate expanded hot water
escaping from potable water heaters that has been prevented from
flowing back into the public water supply by backflow prevention
devices. In response to the Clean Water Act of 1984, certain
jurisdictions established local codes to require owners of commercial
and residential buildings to install backflow prevention devices in
order to prevent the contamination of the public water supply. Local
codes adopted by organizations that set standards for most of the
United States also require a separate device to handle the expanded
water prevented from flowing back into the public water supply. The
principal alternatives are relief valves, which permit water to drain
inside the building, and thermal expansion accumulators, such as the
Therm-X-Trol(R), which capture the water. Therm-X-Trol(R) satisfies
these code requirements, as well as the codes of certain localities
that specifically require a thermal expansion accumulator.
Additionally, two of the largest domestic water heater manufacturers
will void their warranties if thermal expansion accumulators are not
used in conjunction with their products where backflow prevention
devices are installed.
INDIRECT-FIRED WATER HEATERS. In response to market demands for both an
abundant supply of hot water and energy conservation, AMTROL has
developed a line of indirect-fired residential and commercial water
heaters, which it manufactures and distributes under the brand name Hot
Water Maker(R). Used in conjunction with a new or existing boiler
installed to heat living and work areas, these water heaters offer an
alternative to conventional gas and electric potable water heaters and
tankless coils. Hot water is generated through the use of heat
exchangers and circulators which circulate heated water from the boiler
through a coil in the core of the water heater's reservoir. The Hot
Water Maker(R) is sold for use in both commercial and residential
applications. The Company has recently introduced a new line of a large
capacity stainless steel Hot Water Makers(R) designed for light
commercial applications and residential customers who require large
amounts of hot water and rapid recovery time. The acquisition of NOVA,
which specializes in water heating products for a wide range of
applications from very small residential units up to 10,000 liter
commercial units, provides the Company with greater
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product diversification and the ability to penetrate certain markets in
which it currently has a limited presence.
PRESSURE-RATED CYLINDERS. The Company's ALFA subsidiary, located in
Portugal, produces and distributes reusable liquid propane gas ("LPG")
cylinders and reusable and non-returnable refrigerant cylinders. It is
the largest producers of reusable steel gas cylinders in Europe.
Reusable LPG cylinders are typically purchased by major gas companies
or their distributors who fill the cylinders for customers who use the
gas for heating and cooking in residential and commercial applications.
In 1998, the Company transferred to ALFA the non-returnable cylinder
production line previously located in Singapore and began supplying its
European and Asian non-returnable gas cylinder customers from ALFA.
AMTROL, together with ALFA, is one of the world's two largest
manufacturers of non-returnable pressure-rated cylinders used in the
storage, transport and dispensing of refrigerant gases for air
conditioning and refrigeration systems. In 1999, the Company
established a new subsidiary in Poland which refurbishes returnable gas
cylinders for the Polish market.
WATER SYSTEMS PRODUCTS
AMTROL's sales of its water systems products accounted for
approximately 38% of the Company's total net sales in 1999. These
products consist primarily of water accumulators for residential and
commercial well water systems and products for residential water
softening and purification.
WELL WATER SYSTEMS. AMTROL produces and sells well water accumulators
for both residential and commercial applications under the brand names
Well-X-Trol(R) and CHAMPION(TM), as well as under several other brands
and private label programs. Virtually all of the water accumulators
sold by the Company incorporate an internally mounted rubber diaphragm
that seals an air charge and allows pressure to increase as water fills
the plastic lined vessel. This design serves to control pressure while
maintaining the separation of air and water in the vessel, thereby
eliminating water logging (absorption of air into water) as well as
reducing wear on switches, pump motors and other system components
caused by more frequent on/off cycling. A typical well water system
consists of a submersible or jet pump located in the well that pumps
water to an AMTROL pre-pressurized vessel.
The pre-pressurized vessel is connected to the plumbing system in order
to provide water on demand within a specific range of pressure as
controlled by a pressure switch. As the water level and pressure in the
vessel decreases, the diaphragm relaxes and the pressure switch causes
the pump to cycle on until a certain pressure is achieved in the
system.
WATER TREATMENT/FILTRATION PRODUCTS. AMTROL offers a range of products
to meet increasing global demand for improved water quality and water
pressure. AMTROL manufactures and markets water softeners, reverse
osmosis accumulators and other related systems that may be utilized to
improve the quality of both municipal-supplied and well water. The
Company also manufactures and markets products that address the need to
boost water pressure where available pressure is not adequate.
DISTRIBUTION AND MARKETING
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AMTROL's principal channel of distribution is plumbing, heating and
pump specialty wholesalers. The Company maintains its presence in the
United States and Canadian wholesale markets through a network of
approximately 45 independent firms that represent multiple
manufacturers, arranging sales on a commission basis, as well as
approximately 10 salaried direct sales professionals. To service its
customers with greater efficiency, the Company has streamlined its
representative network and, through consolidation of multiple lines of
business, has brought a broader range of products to its wholesalers.
The Company also provides certain of its products to the rapidly
growing retail market segment through a separate sales force. AMTROL's
principal customers in this segment include Lowe's Companies, Menards,
Tru*Serv Corporation and Ace Hardware.
At its Education Center, which is an integral part of the Company's
marketing organization, and at Company-sponsored seminars throughout
the United States and selected international locations, AMTROL provides
education and training to wholesalers, contractors and engineers,
independent sales representatives and their employees to assist them in
understanding the technical aspects of their respective customers'
requirements and AMTROL's product lines. By educating customers about
the benefits of AMTROL's products, the Company's products are
effectively "pulled" through its distribution system.
Non-returnable refrigerant pressure-rated cylinders are sold to major
chemical companies, which produce and package refrigerant gases, and to
independent contractors that purchase bulk refrigerants and fill the
cylinders. AMTROL's major customers for reusable refrigerant gas
cylinders are wholesale distributors who sell the products to service
providers and refrigerant recovery equipment manufacturers. ALFA's
major customers for reusable LPG cylinders are the major European gas
companies or their distributors.
With the exception of one cylinder customer to whom sales were
approximately 6.9% of total sales, no individual customer represented
more than 5% of the Company's net sales in 1999.
INTERNATIONAL SALES
Sales in geographic regions outside of the United States and Canada,
primarily Mexico, Asia and Western Europe, accounted for 22.3%, 36.2%
and 38.6% of the Company's total net sales in fiscal years 1997, 1998
and 1999 respectively. The significant increase in foreign sales was
driven largely by the 1997 acquisition of ALFA and the 1998 acquisition
of NOVA. In addition, over the last three years AMTROL has opened
international sales offices in Asia and Europe and has built
distribution networks in the Asia/Pacific region and Latin
America/Mexico.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
AMTROL manufactures its water system and HVAC products primarily at its
own facilities. Many of its products depend on the Company's expertise
in pressure vessel construction. AMTROL takes advantage of the material
economies and precision inherent in deep-draw stamping technology to
manufacture products of superior performance and life.
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The Company has significantly reduced its manufacturing cost base in
recent years by closing less efficient plants or plants with redundant,
excess capacity. Production at the closed facilities has been
transferred to other existing production plants with the anticipated
effect of lowering the Company's total cost structure and increasing
the absorption of fixed manufacturing overhead through higher
production volume at the remaining plants.
AMTROL's production system is based on proven world class manufacturing
practices, and all components of this platform receive continuous
updating and review for effectiveness. Principal building blocks of the
AMTROL production system include a visual factory philosophy, waste
elimination through the Kaizen process improvement methodology, a
formal corrective action response system, mistake-proofing and
automatic source inspection, formal variation reduction processes,
total preventive maintenance and the promotion of one-piece flow.
Increasing proficiency in these manufacturing practices by the
organization produced dramatic results in 1999. As a result, the
Company is increasing its investment in personnel devoted to the
development, implementation and mastery of quality lean manufacturing
practices, in an effort to continue the rate of operational improvement
observed in 1999.
AMTROL's three principal North American manufacturing facilities and
its Guimaraes, Portugal facility hold ISO 9001 Certification, the most
complete certification in the ISO 9000 Series from the International
Organization for Standardization ("ISO"). ISO certification requires
periodic audits of AMTROL's systems for product design, development,
production, installation and servicing, and has become the
international standard of quality required for manufacturers serving
the European Economic Community, Southeast Asia, the Middle East and
Latin America.
Raw material suppliers generally offer commodities used by the Company,
such as steel, synthetic rubber, corrugated paper and plastic resins,
to all manufacturers on substantially similar terms. Significant
increases in raw material prices can adversely impact margins if the
Company is unable to pass on such increases to its customers.
Manufacturers of component parts also generally offer their products to
others on substantially similar terms. Although certain components are
only available from a limited number of manufacturers, the Company
anticipates that it will be able to purchase all of the components it
requires without disruption. The Company believes that its
relationships with its suppliers are good.
SEASONALITY; BACKLOG
Although AMTROL's sales fluctuate with general economic activity, the
effect of significant economic volatility is mitigated by the fact that
many of AMTROL's markets are highly replacement-oriented. While sales
of certain of its products are seasonal in nature, AMTROL's overall
business is not seasonal to any significant extent. Due to the
generally short lead time in orders, the Company historically has not
carried any material backlog.
PATENTS, TRADEMARKS AND LICENSES
While the Company owns a number of patents, the Company believes that
its position in its markets depends primarily on factors such as
manufacturing expertise, technological
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leadership, superior service and quality and strong brand name
recognition, rather than on patent protection. The Company believes
that foreign and domestic competitors have been unable to match the
quality of AMTROL's branded products.
The Company also has a number of registered and unregistered trademarks
for its products. The Company believes the following registered
trademarks, which appear on its products and are widely recognized in
its markets, are important to its business: Well-X-Trol(R),
Therm-X-Trol(R), EXTROL(R), Hot Water Maker(R), CHAMPION(TM) and Water
Worker(R).
COMPETITION
The Company is experiencing increasing competition from a number of
competitors in each of its markets. The principal means of competition
in the water systems products and HVAC markets are technology, quality,
service and price. AMTROL brand name products generally compete on the
basis of technology, quality, service and product line breadth and
generally do not compete on the basis of price.
EMPLOYEES
As of December 31, 1999, the Company had approximately 722 employees in
the United States, none of whom were represented by collective
bargaining units. There are 1,134 employees abroad, some of whom are
represented by unions. AMTROL considers relations with its employees to
be good.
ENVIRONMENTAL MATTERS
Some of the Company's operations generate waste materials that may give
rise to liability under environmental laws. Some risk of environmental
and other damage is inherent in these operations, and in the past,
certain of the Company's operations have been named a party in private
actions associated with hazardous waste sites. Based upon the Company's
experience in matters that have been resolved and the amount of
hazardous waste shipped to off-site disposal facilities by the Company,
the Company believes that any share of costs attributable to it will
not be material. There can be no assurance that any liability arising
from, for example, contamination at facilities the Company (or an
entity or business the Company has acquired or disposed of) owns or
operates or formerly owned or operated, or locations at which waste or
contaminants generated by the Company (or an entity or business the
Company has acquired or disposed of) have been disposed of, will not
arise or be asserted against the Company or entities for which the
Company may be responsible in a manner that could materially and
adversely affect the Company.
The Company monitors and reviews its procedures and policies for
compliance with environmental laws. Based upon the Company's experience
to date, the Company operates in substantial compliance with
environmental laws, and the cost of compliance with existing
regulations is not expected to have a material adverse effect on the
Company's results of operations, financial condition or competitive
position. However, future events, such as changes in existing laws and
regulations or enforcement policies, may give rise to additional
compliance costs which could have a material adverse effect on the
Company's results of operations, financial condition or competitive
position.
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ITEM 2. PROPERTIES
The following table sets forth information regarding the Company's principal
properties each of which is owned by the Company unless otherwise indicated:
LOCATION SQUARE FOOTAGE PRINCIPAL USE
- -------- -------------- -------------
(approximate)
West Warwick, RI 270,000 Corporate Headquarters, Manufacturing,
Education Center
Guimaraes, Portugal 196,000 Manufacturing
North Kingstown, RI (a) 206,000 Distribution Center
Donaueschingen, Germany 70,000 Manufacturing and distribution
Paducah, KY 46,300 Manufacturing
Mansfield, OH (a) 45,000 Manufacturing and Distribution Center
Baltimore, MD 37,000 Manufacturing
Swarzedz, Poland (a) 29,000 Manufacturing
Kitchener, Ontario(a) 18,400 Sales Office and Distribution
Singapore (a) 600 Sales Office
England (a) 400 Sales Office
--------
TOTAL 918,700
(a) Leased facilities
AMTROL believes that its properties and equipment generally are well maintained,
in good operating condition and adequate for its present needs. The Company
regularly evaluates its manufacturing requirements and believes that it has
sufficient capacity to meet its current and anticipated needs. The inability to
renew any short-term real property lease would not have a material adverse
effect on AMTROL's results of operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in legal actions. These
include commercial disputes, agency proceedings and product liability and other
claims. Management believes that none of the pending legal actions will have a
material adverse effect on the Company's results of operations or its financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the Common Stock of the Company is owned by Holdings; thus, no
trading market exists for such stock. Similarly, all of the common
stock of Holdings is held by affiliates of Cypress and certain officers
of the Company, and no trading market exists for such stock. See Item
12, "Security Ownership of Certain Beneficial Owners and Management".
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for and as of each of
the years and periods in the five-calendar-year period ended December 31, 1999
have been derived from the Consolidated Financial Statements of the Company,
including the related notes thereto, which have been audited by Arthur Andersen
LLP, independent certified public accountants. The selected consolidated balance
sheet data for November 12, 1996 have been derived from unaudited consolidated
financial statements of the Company which, in the opinion of management, include
all adjustments (consisting only of normal recurring items) necessary for a fair
and consistent presentation of such data. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Results of
Operations and of Financial Condition" and with the Consolidated Financial
Statements of the Company, including the related notes thereto, appearing
elsewhere in this Annual Report.
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------ ----------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
PERIOD PERIOD
YEAR ENDED ENDED ENDED
DECEMBER 31, NOVEMBER DECEMBER
1995 12, 1996 31,1996(b) 1997 1998 1999
------------- --------- ------------ --------- ---------- ----------
(In thousands)
Statement of Operations Data:
Net sales $ 172,454 $ 152,193 $ 18,628 $ 176,432 $ 202,142 $ 212,177
Cost of goods sold 124,303 110,582 16,809 131,180 158,607 154,741
Provision for abnormal warranty costs . -- -- -- -- 4,500 --
--------- --------- --------- --------- --------- ---------
Total cost of goods sold 124,303 110,582 16,809 131,180 163,107 154,741
Gross profit 48,151 41,611 1,819 45,252 39,035 57,436
Selling, general and
administrative expenses 29,943 25,796 3,508 25,723 27,827 28,492
Plant closing and reorganization costs 3,825 -- -- 5,500 4,450 --
Management restructuring -- -- -- -- 3,693 --
Amortization of goodwill -- -- 313 3,995 4,446 4,463
Other operating expenses -- -- 1,000 -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from operations 14,383 15,815 (3,002) 10,034 (1,381) 24,481
Interest (expense) income, net 60 53 (2,224) (18,256) (20,344) (19,083)
License and distributorship fees 258 181 25 245 242 234
Other income (expense), net 65 (175) (99) 299 1,384 353
--------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes 14,766 15,874 (5,300) (7,678) (20,099) 5,985
Provision (benefit) for income taxes .. 5,681 6,152 (1,956) (30) (6,728) 4,125
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 9,085 $ 9,722 $ (3,344) $ (7,648) $ (13,371) $ 1,860
========= ========= ========= ========= ========= =========
Other Data:
Depreciation and amortization $ 4,673 $ 4,586 $ 598 $ 11,541 $ 13,147 $ 14,003
Capital expenditures 5,492 9,260 1,662 8,489 9,858 5,798
EBITDA (a) 23,139 20,582 (2,379) 26,887 12,454 38,346
Balance sheet data (at period end):
Working capital $ 43,303 $ 41,778 $ 33,346 $ 22,675 $ 6,642 $ 5,885
Total assets 93,909 96,280 253,828 291,945 300,667 281,745
Long-term debt, less current maturities -- -- 159,175 184,164 173,023 163,385
Shareholders' equity 70,206 75,783 65,982 58,049 65,948 65,303
(a) EBITDA represents income (loss) from operations before plant closing
charges, plus depreciation and amortization and license and
distributorship fees. EBITDA is presented because it is a widely
accepted indicator of a company's ability to incur and service
indebtedness. EBITDA (subject to certain adjustments) will be used to
determine compliance with certain covenants in the Indenture. EBITDA,
however, should not be considered as an alternative to net income, as a
measure of the Company's operating results, or as an alternative to
cash flow as a measure of liquidity.
(b) Adjusted to reflect a change in the method of determining inventory
cost from the LIFO method to the FIFO method.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The discussion in this section should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere
herein.
This Annual Report includes "forward-looking statements" within the
meaning of the securities laws. All statements other than statements of
historical facts included in this Annual Report regarding the Company's
financial position and strategic plans are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from such
expectations include, but are not limited to, the Company's ability to
successfully implement its business strategy, the availability and cost
of raw materials, changes in government regulation or enforcement
policies, particularly related to refrigerant gases and building and
energy efficiency requirements, development of competing technologies,
acceptance of the Company's existing and planned new products in
international markets, competition in the Company's markets, the rate
of growth of developing economies and demand for the Company's
products, the ability of the Company and its vendors to successfully
implement their year 2000 compliance initiatives, the ultimate cost of
future warranties claims, whether it succeeds in acquiring new
businesses, and general economic, financial and business conditions,
both domestically and internationally.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included in the
Company's statement of operations:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------ ------ ------
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 74.4 80.7 72.9
------ ------ ------
Gross Profit 25.6 19.3 27.1
Selling, General and Administrative Expenses 14.6 13.8 13.4
Plant Closing and Reorganization Costs 3.1 2.2 --
Management Restructuring -- 1.8 --
Amortization of Goodwill 2.3 2.2 2.1
------ ------ ------
Income (Loss) from Operations 5.6 (0.7) 11.6
Interest Expense (10.3) (10.2) (9.1)
Other Income, net 0.4 1.0 0.4
------ ------ ------
Income (Loss) before Provision (Benefit)
for Income Taxes (4.3) (9.9) 2.9
Provision (Benefit) for Income Taxes -- (3.3) 1.9
------ ------ ------
Net Income (Loss) (4.3)% (6.6)% 1.0 %
====== ====== ======
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The comparability of results for the above years is impacted by certain
acquisitions and disposals, plant closings, restructuring and
reorganization, and commencement of new operations. Where possible, the
impact of these items on particular areas of operating results has been
explained in the remainder of this section.
The percentage of sales comprised by the Company's water systems and
HVAC products for the periods indicated is listed below:
1997 1998 1999
---- ---- ----
HVAC 53.8% 60.5% 61.6%
Water Systems 46.2% 39.5% 38.4%
----- ----- -----
Gross Sales 100.0% 100.0% 100.0%
===== ===== =====
The increase in the HVAC percentage of total sales in 1998 is due to
the inclusion of NOVA sales since June 8, 1998 and a full year of ALFA
sales.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998.
NET SALES. Net sales in 1999 increased $10.0 million or 5.0% to $212.1
million from $202.1 million in 1998. This increase was partly the
result of the inclusion of Nova, acquired in June 1998, for a full year
in 1999, and to the commencement of operations in Poland in the second
quarter of 1999. Excluding NOVA and Poland, net sales in 1999 would
have increased $3.2 million or 2.0%. North American sales increased
3.0%, adjusted for certain markets transferred to ALFA in 1999. Sales
of water systems increased 1.8% and HVAC sales increased 4.4%. ALFA
sales in 1999, adjusted for transferred markets, were even with 1998.
However, the weaker Escudo in 1999 as compared to 1998 deflated U.S.
dollar reported ALFA sales by approximately $2.7 million. In local
currency, ALFA's sales increased approximately 4.5%.
GROSS PROFIT. Gross profit increased $18.4 million in 1999 to $57.4
million from $39.0 million in 1998. As a percentage of sales, gross
profit in 1999 increased to 27.1% from 19.3% in 1998. The comparison of
gross profit from 1999 to 1998 is impacted by the acquisition of NOVA
and the commencement of operations in Poland. Excluding Nova and
Poland, gross profit would have increased $18.2 million and the gross
margin would have increased 9 percentage points to 28.3%. Several
factors contributed to the margin increase, including net higher
selling prices, lower outgoing freight costs, lower scrap costs and
significantly improved labor productivity. Scrap and productivity
improvements were the result of the expansion of worldclass
manufacturing practices and on-going capital investments in all of
AMTROL's manufacturing locations. Lower materials costs, particularly
lower steel costs in Europe, contributed to higher 1999 margins. Cost
of sales in 1998 included an abnormal warranty charge of $4.5 million
and incremental manufacturing inefficiencies associated with a plant
relocation of $3.3 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.6 million (or 2.2%) in 1999 to
$28.4 million from $27.8 million in 1998. Without NOVA and Poland, SG&A
would have been essentially the same in both years, although 1999
administrative expenses included higher management incentive
compensation of approximately $2.4 million. Incentive compensation in
1999 was based entirely on earnings performance.
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Part of the Company's strategic focus has been to reduce operating
costs. As a result, selling, general and administrative expenses as a
percentage of sales have decreased from 17.8% in 1996 to 13.4% in 1999.
A significant portion of the cost decrease has been achieved through
personnel reductions associated with the elimination of redundant and
unnecessary functions. Position eliminations at the Company's corporate
headquarters have resulted in an approximate 25% headcount reduction
since 1996. The Company will continue to rationalize operating costs to
take advantage of improved information systems and technology.
INCOME (LOSS) FROM OPERATIONS. Income from operations increased $25.9
million to $24.5 million in 1999 from ($1.4 million) in 1998. Operating
income in 1998 included certain non-recurring charges relating to plant
closures, management reorganization and restructuring of approximately
$17.4 million.
EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA in 1999 was $38.3 million compared to $12.5 million in
1998, an increase of $25.8 million or 206%.
INTEREST INCOME (EXPENSE), NET. Net interest expense decreased $1.3
million in 1999 from 1998 due to lower debt levels resulting from
improved cash collection efforts of customer accounts.
INCOME TAXES. Income tax expense increased $10.8 million in 1999 as
compared to 1998.
NET INCOME (LOSS). The net income in 1999 of $1.9 million compares to a
net loss in 1998 of $13.4 million, an absolute change of $15.3 million.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997.
NET SALES. Net sales increased $25.7 million or 14.6% in 1998 to $202.1
million from $176.4 million in 1997. This increase is mainly
attributable to the full year inclusion of ALFA and the addition of
NOVA in June 1998, both of which are partially offset by the sale in
1997 of American Granby. Net 1998 sales in North America, adjusted for
certain markets transferred to ALFA in 1998 and the sale of American
Granby in 1997, were essentially even with 1997. Water systems sales
recovered in the last half of 1998 after being lower earlier in the
year due to production disruptions caused by unanticipated delays in
relocating water system production from Nashville to West Warwick,
Rhode Island.
GROSS PROFIT. Gross profit declined $6.2 million in 1998 to $39.0
million from $45.2 million in 1997. As noted earlier in this section,
the comparison of gross profit from 1998 to 1997 is impacted by the
acquisitions of ALFA and NOVA and the 1997 disposition of American
Granby. Excluding these acquisitions and disposition, gross profit
would have decreased $9.9 million primarily due to: (i) special
warranty charges recorded in 1998 and (ii) manufacturing inefficiencies
associated with relocating production of large water systems. The
Company recorded abnormal warranty costs of $4.5 million relating
primarily to a product manufactured in 1995/1996. The
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circumstances creating the abnormal warranty costs have been corrected
but the Company has experienced higher than normal warranty claims for
these products sold in previous periods. Furthermore, the Company
incurred increased production costs of approximately $3.3 million
resulting from difficulties in achieving efficient production levels on
the production lines relocated to West Warwick from Nashville.
Increased production costs include higher labor, maintenance and scrap,
as well as factory overhead. The Company believes that incremental
manufacturing inefficiencies associated with the relocation of the
Nashville production were essentially eliminated by the end of 1998.
As a percentage of sales, gross profit in 1998 decreased to 19.3% from
25.6% in 1997. Without the acquisitions and disposition, warranty
charges and manufacturing inefficiencies, the 1998 gross profit
percentage would have been approximately even with 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.1 million or 8.2% in 1998 to $27.8
million from $25.7 million in 1997. As a percentage of sales, SG&A
expenses were 13.8% in 1998 compared to 14.6% in 1997. As noted earlier
in this section, the comparison of 1998 to 1997 is impacted by the
acquisitions of ALFA and NOVA and the 1997 disposition of American
Granby. Also, SG&A includes $0.4 million of expenses incurred in 1998
relating to an acquisition which was not completed and consulting costs
of $0.9 million relating to outside consultants engaged to help
facilitate and execute certain restructuring and reorganization
activities. Without ALFA and NOVA, the cost of the failed acquisition
and additional consulting charges, SG&A would have decreased $2.4
million or 9.8%.
PLANT CLOSING AND REORGANIZATION COSTS. The Company transferred certain
production lines from its Nashville facility to its West Warwick, Rhode
Island facility in December 1997. In connection with the relocation,
the Company incurred incremental plant closing costs in 1998 of $4.5
million resulting from unexpected retrofitting and reconditioning
required for the relocated equipment, damage to equipment during
shipment, and delays in preparing the Nashville building for sale. This
amount has been reflected in the accompanying financial statements.
MANAGEMENT RESTRUCTURING. The Company, in connection with certain
restructuring and reorganization activities, discontinued certain
product lines and took a number of actions to reduce the number of
variations offered on many of its products, thereby reducing inventory
levels. Certain members of senior management have left the Company in
connection with these restructuring activities. The unrecoverable cost
of discontinued inventory and the cost of programs to reduce the number
of product offerings, combined with the cost of post employment
benefits for departing executives, aggregates $3.7 million and has been
reflected in the accompanying financial statements.
INCOME (LOSS) FROM OPERATIONS. For the reasons set forth above,
income/(loss) from operations decreased $11.4 million to ($1.4) million
in 1998 from $10.0 million in 1997. As noted earlier in this section,
the comparison of 1998 to 1997 is impacted by the recent acquisitions
of ALFA and NOVA and the 1997 disposition of American Granby, as well
as the plant closing and reorganization costs, management restructuring
and abnormal warranty costs. Excluding the effects of these items,
income from operations would have increased approximately $4.5 million.
15
16
EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA in 1998 approximated $12.5 million, a decrease of
$14.4 million compared to 1997. Excluding the impact of plant closing
and reorganization costs, management restructuring and abnormal
warranty costs, EBITDA would have approximated $29.8 million in 1998.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased $2.1
million in 1998 from 1997 due to higher debt levels earlier in 1998,
the inclusion of a full year of ALFA in 1998 and the inclusion of NOVA
for seven months in 1998.
INCOME TAXES. Income tax benefit increased $6.7 million in 1998 as
compared to 1997.
NET INCOME. The net loss in 1998 of $13.4 million compares to a net
loss of $7.6 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operating activities were approximately
$3.7 million, $1.5 million and $21.7 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
The Company's cash balance decreased $0.4 million at December 31, 1999
to $.7 million from $1.1 million in 1998. Although the Company has
available up to $30 million from its revolving credit facility to meet
short-term working capital needs, it uses its excess cash to keep
borrowing under the revolver to a minimum. There were no borrowings
against the revolver at December 31, 1999. However, amounts available
under the revolver approximated $28.9 million due to outstanding
letters of credit totaling $1.1 million at December 31, 1999.
The Company's operating capital (defined as accounts receivable and
inventory, less accounts payable) decreased approximately $2.0 from
$32.1 million at December 31, 1998 to $30.1 million at December 31,
1999.
Accounts receivable increased $1.4 million at December 31, 1999 to
$30.0 million from $28.9 million at December 31, 1998, or 4.8%. The
increase in accounts receivable is consistent with increase in sales.
Additionally, the Company did not experience any significant overall
changes in credit terms, credit utilization or delinquency in accounts
receivable in 1999.
The Company's inventories decreased $2.0 million at December 31, 1999
to $22.3 million from $24.3 million in 1998, or 8.1%. The decrease is
consistent with the Company's efforts to eliminate redundant, low
volume products and maintain optimum levels of high volume products.
Capital expenditures were $8.5 million, $9.9 million and $5.8 million
in the years ended December 31, 1997, 1998 and 1999, respectively.
Approximately $3.4 million of the 1999 expenditures related primarily
to ongoing maintenance and upgrading of the
16
17
Company's manufacturing technology at its production facilities. In
addition, approximately $2.2 million was expended in 1999 to enhance
and complete the implementation of the Company's Enterprise Resource
Planning System ("ERP") and an additional $.2 million was expended for
other information technology investments. Total capital expenditures
are expected to be approximately $7.5 million in 2000.
The Company has obtained financing under a Bank Credit Facility (the
"Facility") which, at December 31, 1999, consists of $51.0 million of
senior term loans (the "Term Loans") and a $30.0 million revolving
credit facility (the "Revolving Credit Facility"). A portion ($7.2
million) of the Term Loans (the "Tranche A Term Loans") will mature on
May 13, 2002, with quarterly amortization payments during the term of
such loans. The remainder ($43.8 million) of the Term Loans (the
"Tranche B Term Loans") will mature on May 13, 2004, with nominal
quarterly amortization prior to the maturity of the Tranche A Term
Loans and with the remaining amounts amortizing on a quarterly basis
thereafter. The Revolving Credit Facility includes a sublimit providing
for up to $20.0 million of availability on a revolving credit basis to
finance permitted acquisitions. The commitments under the Revolving
Credit Facility and the acquisition sublimit will each reduce by $5.0
million on November 13, 2000 and $10.0 million on November 13, 2001.
The Revolving Credit Facility will mature on May 13, 2002. The Bank
Credit Facility is secured by substantially all assets of the Company
and its domestic subsidiaries.
In November 1996 AMTROL issued, under an Indenture, $115.0 million of
Senior Subordinated Notes due 2006 (the "Notes"). The Notes are
unsecured obligations of AMTROL. The Notes bear interest at a rate of
10.625% per annum and are payable semi-annually on each June 30 and
December 31 commencing on June 30, 1997. The Notes are redeemable at
the option of AMTROL on or after December 31, 2001. From and after
December 31, 2001, the Notes will be subject to redemption at the
option of AMTROL, in whole or in part, at various redemption prices,
declining from 105.313% of the principal amount to par on and after
December 31, 2003. Upon a "Change of Control" (as defined in the
Indenture), each Note holder has the right to require the Company to
repurchase such holder's Notes at a purchase price of 101% of the
principal amount plus accrued interest. The Indenture contains certain
affirmative and negative covenants and restrictions. As of December 31,
1999, AMTROL is in compliance with the various covenants of the
Indenture.
The significant increase in EBITDA and cash flow from operations in
1999 enabled AMTROL to repay approximately $18.6 million in borrowings
in 1999.
The Company intends to fund its future working capital, capital
expenditures and debt service requirements through cash flows generated
from operations and borrowings under the Revolving Credit Facility
(described above). Management believes that cash generated from
operations, together with borrowings available under the Revolving
Credit Facility, will be sufficient to meet the Company's working
capital and capital expenditure needs in the foreseeable future. The
Company may consider other options available to it in connection with
funding future working capital and capital expenditure needs, including
the issuance of additional debt and equity securities.
AMTROL will continue to selectively pursue strategic acquisitions, such
as the acquisitions of AMTROL ALFA and AMTROL NOVA. The Company
believes that
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18
strategic acquisitions, both domestic and international, provide an
effective means of increasing or establishing a market presence in
targeted markets and an efficient method of identifying and introducing
new products and technologies in markets where it already has a strong
presence. The Company also believes that establishing local
manufacturing and distribution facilities in international markets
significantly enhances its ability to build strong customer
relationships, understand local product preferences and to be price
competitive.
INFLATION
The Company believes that inflation does not have a material effect on
its results of operations or financial condition. To insulate against
fluctuating prices, the Company has negotiated annual contracts with
suppliers of certain key raw materials (primarily steel) for a
significant percentage of its expected usage through 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements not yet implemented by
the Company which will materially impact the Company's financial
position or results of operations.
YEAR 2000 DISCLOSURE
The year 2000 issue arose out of the fact that many computer programs
were written using two digits to identify the applicable year rather
than four digits. It was feared that computer programs with
date-sensitive software or equipment with embedded date-sensitive
technology might misinterpret a two-digit code; for example, "00,"
entered in a date-field for the year "2000," might be wrongly
interpreted as the year "1900." This error could result in system or
equipment failures or miscalculations and disruptions of operations. As
of March 30, 2000, the Company had not experienced any significant
disruption as a result of the Year 2000 issue.
The Company completed all Year 2000 remediation and readiness
procedures in 1999, as part of the implementation process related to a
new Enterprise Resource Planning System ("ERP"). The ERP provides the
Company with a wide-range of operational and administrative
efficiencies and supports a significant portion of the Company's North
American operations. The cost to resolve the Year 2000 issue cannot be
distinguished from the overall cost of the ERP which approximated $5.0
million as of the end of 1999. Of this amount, approximately $2.1
million was spent during 1999. Costs to remediate Year 2000 exposures
other than costs incurred in connection with the ERP are not material.
As part of the Company's remediation and readiness procedures mentioned
above, the Company assessed the Year 2000 risks related to significant
relationships with its critical third-party suppliers and customers.
Despite these efforts, the Company can provide no assurance that all
supplier and customer Year 2000 compliance plans were successfully
completed in a timely manner, although it is not currently aware of any
problems which would significantly impact its operations.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk related to foreign currency
exchange rates and changes in interest rates, but the impact on 1999
and the expected impact on 2000 operating results is not material. The
Company currently does not use financial or other derivative
instruments to hedge its foreign currency exposures, which relate
primarily to its operations in Portugal and Germany. A significant
portion of its Portuguese revenues are denominated in the Euro, and
when translated into U.S. dollars, can result in higher or lower
earnings due to currency fluctuations. Similarly, its German operations
are primarily denominated in German Marks which, when translated into
U.S. dollars, can cause an increase or decrease in earnings from
currency fluctuations. For both operations, a 10% fluctuation in the
exchange rate between these foreign currencies and the U.S. dollar
would have less than a 2% impact on expected 2000 EBITDA, individually.
The Company believes that its cash flow exposure resulting from its net
foreign currency denominated asset positions in both Portugal and
Germany is not material.
The rate of interest on borrowings under the Company's Bank Credit
Agreement is variable and ranges from: (i) a base rate which is equal
to the higher of the federal funds rate plus .5% or the bank's prime
lending rate plus an applicable spread of .75% to 2.0% to (ii) a
Eurodollar rate plus an applicable spread of from 1.75% to 3.0% (in
both cases based on the type of loan and the Company's leverage ratio
at the time). The Company has the option of selecting the interest
period (one, two, three, six, nine or twelve months) for Eurodollar
based loans. The following table summarizes the interest rates in
effect for the various facilities under the Company's Bank Credit
Agreement as of December 31, 1999 (in thousands):
2000
------------------------
1st Qtr 2nd Qtr.
Tranche A $ 6,762 $ 6,344
Applicable interest rate 8.63% 8.63%
Tranche B $ 43,663 $ 43,245
Applicable interest rate 9.13% 9.13%
The interest rate has not been determined for any amounts due under the
Bank Credit Agreement beyond the second quarter of 2000. The Company
has entered into an interest rate swap agreement to limit a portion of
its exposure to fluctuating interest rates. Under the agreement, the
Company will pay or receive the difference between the floating three
month LIBOR rate and a fixed LIBOR rate, applied to a notional amount
of $15 million. The fixed LIBOR rate is 5.75% in 2000 and 5.85%
thereafter until maturity of the agreement on June 30, 2004. The
Company's $115 million of Senior Subordinated Debentures are not
subject to interest rate risk since the rate of interest on these
securities is fixed until maturity in 2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
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20
The index to financial statements is included on page 29 of this report.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding each of the
directors and executive officers of the Company:
NAME AGE POSITION
---- --- --------
John P. Cashman 59 Chairman of the Board
Albert D. Indelicato 49 President, Chief Executive Officer and Director
Edward J. Cooney 52 Executive Vice President Sales
Thomas Sturiale 63 President North America
Larry T. Guillemette 44 Executive Vice President, Marketing and Business
Development
Christopher A. Laus 41 Vice President Operations
Donald W. Reilly 41 Vice President, Chief Financial Officer and Treasurer
Phillip W. Colantonio 49 Vice President Human Resources and Administration
Patricia Pickrel 49 Secretary and General Counsel
Andrew M. Massimilla 58 Director
David P. Spalding 45 Director
James A. Stern 49 Director
Anthony D. Tutrone 35 Director
John P. ("Jack") Cashman became Chairman of the Board upon the Merger and served
also as Chief Executive Officer and President until Mr. Indelicato joined the
Company in July 1998. From 1989 until March 1996, Mr. Cashman served as Chairman
and Co-Chief Executive Officer of R. P. Scherer Corporation ("R. P. Scherer").
Mr. Cashman joined R. P. Scherer concurrent with that company's leveraged buyout
in 1989.
Albert D. Indelicato, President and Chief Executive Officer, joined the Company
in July 1998. From 1996 to 1998, he was President of Litorale Holdings, Inc., a
consulting firm specializing in acquisitions. From 1970 to 1996, Mr. Indelicato
served in various managerial capacities of
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Power Control Technologies and its predecessor companies, including most
recently as Chief Executive Officer and Director.
Edward J. Cooney, Executive Vice President Sales, joined the Company in 1978.
Mr. Cooney served as Chief Financial Officer from 1991 to 1998 and as Treasurer
from 1982 to 1998, as Senior Vice President-Operations from 1988 to 1991, and as
Vice President from 1985 to 1988.
Thomas Sturiale, President North America, joined the Company in 1998. From
1992-1998, he was President of Neles-Jamesbury, Inc. From April 1998 to June
1999, he was the Executive Vice President-Operations and Technology.
Donald W. Reilly, Vice President, Chief Financial Officer, and Treasurer, joined
the Company in 1997 serving as Vice President-Finance from 1997 to 1998. From
May 1992 to October 1997, he was Director of Finance and Corporate Controller of
the A. T. Cross Company.
Phillip W. Colantonio, Vice President Human Resources and Administration,
joined the Company in January 1999. Previously, Mr. Colantonio was the sole
proprietor of a consulting services firm providing consulting services to
various businesses.
Patricia A. Pickrel, Secretary and General Counsel, joined the company as
counsel in 1998 and became secretary in 1999. Previously, Ms. Pickrel was
engaged in the private practice of law.
Larry T. Guillemette, Executive Vice President-Marketing and Business
Development, joined the Company in 1998. From 1991 to 1998, Mr. Guillemette was
President and Chief Executive Officer of Balcrank Products, Inc.
Andrew M. Massimilla became a director of the Company in June 1998. Mr.
Massimilla has been the sole proprietor of a consulting firm providing
management consulting services to various businesses since 1991.
David P. Spalding became a director of the Company upon the Merger. Mr. Spalding
has been Vice Chairman of Cypress since its formation in April 1994. Prior to
joining Cypress, he was Managing Director in the Merchant Banking Group of
Lehman Brothers Inc. since February 1991. Mr. Spalding is also a director of
Lear Corporation, William Scotsman, Inc., and Frank's Nursery & Craft, Inc.
James A. Stern became a director of the Company upon the Merger. Mr. Stern has
been Chairman of Cypress since its formation in April 1994. Prior to joining
Cypress, Mr. Stern spent his entire career with Lehman Brothers Inc., most
recently as head of the Merchant Banking Group. Mr. Stern is a director of Lear
Corporation, Cinemark USA, Inc, Wesco International Inc. and Frank's Nursery &
Craft, Inc.
Anthony D. Tutrone became a director of the Company upon the Merger. Mr. Tutrone
is a managing director of Cypress and has been a member of the firm since its
formation in April 1994. Prior to joining Cypress, he was a member of the
Merchant Banking Group of Lehman Brothers, Inc. Mr. Tutrone is also a director
of Wesco International Inc.
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COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Not applicable
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the Company
to its Chief Executive Officer and the four other most highly compensated
executive officers who earned more than $100,000 in salary and bonus in 1999 in
each case for services rendered in all capacities to the Company during the
three year period ended December 31, 1999:
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SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
-------------
AWARDS
ANNUAL -------------
COMPENSATION (a) SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (b) BONUS OPTIONS/SARS COMPENSATION (c)
--------------------------- ---- ---------- ----- ------------- -----------------
Albert D. Indelicato (g) 1999 $300,000 $300,000 30,500 (d) $ 1,698
President and Chief Executive Officer 1998 132,692 130,000 -- 1,406
1997 -- -- -- --
John P. Cashman 1999 223,295 180,877 -- 15,137
Chairman (d) 1998 453,200 -- -- 15,215
1997 440,000 49,720 44,796 (e) 17,000
Edward J. Cooney 1999 185,400 162,040 -- 3,565
Executive Vice President- 1998 185,400 10,000 -- 3,940
Sales 1997 180,000 20,340 6,838 (f) 8,862
Thomas Sturiale (g) 1999 175,385 152,950 11,000 (d) 4,835
President North America 1998 113,336 25,000 -- --
1997 -- -- -- --
Donald W. Reilly 1999 147,500 126,730 11,000 (d) 2,550
Vice President 1998 134,615 25,000 1,483
Chief Financial Officer and Treasurer 1997 22,500 20,000 47
(a) Any prequisites or other personal benefits received from the Company by
any of the named executives were substantially less than the reporting
thresholds established by the Securities and Exchange Commission (the
lesser of $50,000 or 10% of the individual's cash compensation).
(b) Includes portion of salary deferred under the Company's 401(k) Plan.
(c) Amounts paid in 1999 include the Company's contributions under the
Company's 401(k) Plan in the amount of $1,038, $15,137, $2,500, $2,157
and $2,155 for Messrs. Indelicato, Cashman, Cooney, Sturiale and
Reilly, respectively, and premiums paid by the Company with respect to
term life insurance purchased for such executive officers in the amount
of $660, $1,065, $2,678 and $395 for Messrs. Indelicato, Cooney,
Sturiale and Reilly, respectively.
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(d) These are non-qualified options to purchase common stock of Holdings,
the parent corporation of AMTROL. One half of such options are time
based and vest immediately. The remaining half of such options are
performance based and vest based upon annual and cumulative
performance. Options vest upon a public offering or sale of Holdings,
AMTROL or substantially all of the assets of AMTROL (a "Triggering
Event").
(e) These are non-qualified options to purchase common stock of Holdings,
the parent corporation of AMTROL. These options are immediately
exercisable. Shares purchased under the options are subject to
repurchase by Holdings at the exercise price upon certain
circumstances. Options for 22,398 shares are released from restrictions
based upon continued employment, with 7,454 shares released immediately
and 14,944 shares released in 32 equal monthly installments through
August 2000. As of December 31, 1999, share options released from
restrictions amounted to 18,662. As of December 31, 1999, vested
incentive stock options amounted to 1,999. Options for 22,398 shares
are released from restrictions based upon relative achievement of
management's business plan for fiscal years 1997 through 2001. One-half
of such performance-based options are released from restriction based
upon annual performance and one-half based upon cumulative performance.
Restrictions lapse upon a Triggering Event.
(f) These represent options to purchase common stock of Holdings. One-half
(3,419 shares) of these options are incentive stock options which vest
1,000 shares in December 1997, 218 shares in January 1998 and the
balance in 31 equal monthly installments of 71 shares through August
2000. One-half (3,419 shares) of these options are non qualified stock
options which are immediately exercisable, provided that purchased
shares are subject to repurchase by Holdings at the exercise price
until such shares vest based upon relative achievement of management's
business plan for fiscal years 1997 through 2001. One-half of such
performance based options vest based upon annual performance and
one-half based upon cumulative performance. Options vest and
restrictions lapse upon a Triggering Event.
(g) Mr. Indelicato joined the Company in July 1998 and Mr. Sturiale in
April 1998
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OPTION PLANS
The following table sets forth certain information regarding currently
outstanding options held by the named executive officers as of December 31,
1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUES
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
NUMBER OF OPTION/SARS AT
SECURITIES FISCAL YEAR END VALUE OF
UNDERLYING 1999 (a) UNEXERCISED
NAME OPTIONS/SARS VALUE EXERCISABLE/ IN-THE-MONEY
EXERCISED REALIZED($) UNEXERCISABLE OPTIONS/SAR($)(b)
--------- ----------- ------------- -----------------
John P. Cashman 0 0 44,796/0 0/0
Phillip W. Colantonio 0 0 0/5,000 0/0
Edward J. Cooney 0 0 8,257/1,420 100,003/0
Albert D. Indelicato 0 0 0/30,500 0/0
Christopher Laus 0 0 0/5,000 0/0
Larry T. Guillemette 0 0 0/11,000 0/0
Andrew M. Massimilla 0 0 0/22,039 0/0
Donald W. Reilly 0 0 0/11,000 0/0
Thomas Sturiale 0 0 0/11,000 0/0
(a) Immediately prior to the Merger, Mr. Cooney exchanged options
exercisable for AMTROL common stock for options exercisable for
Holdings common stock ("Amended Options") based on a conversion ratio
of .2825 share of Holdings common stock for each share of AMTROL common
stock subject to the option. Includes 2,839 shares of Holdings common
stock subject to Amended Options received by Mr. Cooney in the
exchange. The Amended Options are fully exercisable.
(b) Based on the market value of $100 per share (determined by the Holdings
Board of Directors to be the purchase price of Holdings common stock
issued in connection with the Merger) less the exercise price of the
options.
SUPPLEMENTAL RETIREMENT PLANS
The Company maintains two Supplemental Retirement Plans: Supplemental
Retirement Plan I which covers a former officer and director and
Supplemental Retirement Plan II which covers Mr. Cooney and two former
officers. Under Supplemental Retirement Plan I, the former officer is
entitled to receive an annual benefit of $150,000 per year for 15 years
following his retirement. In January 1997, he began to receive the
annual benefit in equal quarterly installments. Mr. Cooney is entitled
to receive an annual benefit of $50,000 per year for a period of 15
years upon retirement on or after age 62. The retirement benefit is
forfeited in its entirety if he terminates employment or dies prior to
age 62. The Company has purchased a split-dollar life insurance policy
on Mr. Cooney to provide a death benefit not to exceed $300,000. If his
employment is terminated prior to
26
27
retirement he may purchase the policy from the Company. In the event a
participant in either Supplemental Retirement Plan dies after
retirement, his beneficiary will receive any remaining benefits which
such participant was entitled to receive at the time of his death.
EMPLOYMENT AGREEMENTS AND OTHER TRANSACTIONS
The Company, either directly or through its subsidiaries, has entered
into employment agreements (each referred to individually as an
"Agreement" and collectively as the "Agreements"), with Messrs. Cooney,
Indelicato and Reilly to secure their continued employment with the
Company. The Agreements provide for an annual base salary, subject to
annual adjustments. In addition, the executives are entitled to
participate in incentive compensation plans and all employee benefit
arrangements generally appropriate to such executive's
responsibilities. In the event the executive's employment is terminated
without cause by the Company or, for Mr. Cooney, with Good Reason by
the executive, such executive after termination is entitled to:
continuation of monthly salary, including the pro rata portion of any
bonus or other incentive compensation otherwise payable for the fiscal
period in which such termination occurs, and maintenance of all life,
disability, medical and health insurance benefits to which the
executive was entitled immediately prior to termination. The duration
of such benefits is 24 months, 18 months and 15 months for Messrs.
Cooney, Indelicato and Reilly, respectively. In the case of Mr. Cooney,
the Agreement also prohibits the executive, for a period of two years
after the termination of his employment, from directly or indirectly,
advising, assisting or being connected with any enterprise which
competes with the Company.
In addition, under separate Management Stockholder's Agreements between
Holdings and Messrs. Cashman and Cooney if, prior to a public offering
of the common stock of Holdings, the executive dies or becomes disabled
while employed by the Company or following normal retirement or the
executive's employment is terminated without Cause by the Company or
with Good Reason by the executive (as such terms are defined in the
agreements), the executive has the right to require Holdings to
purchase all or any portion of Holdings common stock then held by the
executive at the repurchase price specified in the agreement and to pay
the executive the amount by which the repurchase price exceeds the
exercise price of any options then held by the executive. If there
exists and is continuing an event of default on the part of the Company
under any loan guarantee or other agreement under which the Company has
borrowed money or such repurchase would result in an event of default,
the Company shall not be obligated to repurchase any of the common
stock. The repurchase price is the market price of the Holdings common
stock. If an executive's employment is terminated for Cause by the
Company or with Good Reason by the executive, Holdings has the right to
purchase all, but not less than all, Holdings common stock then held by
the executive at a price equal to the lesser of $100 or the market
price of the Holdings common stock, provided that if the executive's
employment is terminated by the executive with Good Reason following a
public offering, the repurchase price is the market price of the
Holdings common stock. If Holdings exercises its repurchase right it
must also pay the executive an amount equal to the excess of the
repurchase price over the exercise price of any options held by the
executive in cancellation of such options. Good Reason includes certain
significant changes in the nature of the executive's employment
including certain reductions in compensation and changes in
responsibilities and powers.
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28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company is a direct, wholly owned subsidiary of Holdings. The
following table sets forth information with respect to the beneficial
ownership of Holdings common stock or preferred stock as of March 15 by
(i) each person known to the Company to beneficially own more than 5%
of Holdings' outstanding common stock, (ii) each of the Company's
directors and named executive officers and (iii) all directors and
executive officers of the Company as a group. Each share of Holdings
preferred stock is convertible at any time into one share of Holdings
common stock. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and investment power with
respect to all shares beneficially owned.
COMMON STOCK PREFERRED STOCK
----------------------- ------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF TOTAL SHARES OF TOTAL
------------------------------------ ------- -------- ------ --------
Cypress Merchant Banking Partners L.P. (a) 733,033 91.6% 95,076 92.8%
c/o The Cypress Group L.L.C
65 East 55th Street, 28th Floor
New York, NY 10022
Cypress Offshore Partners L.P. (a) 37,967 4.8% 4, 924 4.8%
c/o The Cypress Group L.L.C
65 East 55th Street, 28th Floor
New York, NY 10022
John P. Cashman(c) 62,032 7.3% 2,235 2.2%
Phillip W. Colantonio (d) 5,500 .7%
Edward J. Cooney(b)(c) 9,572 1.2% 250 0.2%
Larry Guillemette (d) 12,000 1.5% -- --
Albert D. Indelicato (d) 33,750 4.1% -- --
Christopher Laus(d) 6,050 .8% -- --
Andrew Massimilla (d) 22,039 2.7% -- --
Donald W. Reilly(d) 11,600 1.4% -- --
David P. Spalding(a) -- -- -- --
James A. Stern(a) -- -- -- --
Thomas Sturiale (d) 12,500 1.5% -- --
Anthony D. Tutrone -- -- -- --
All directors and executive officers as a 175,043 18.4% 4,924 4.8%
group (consisting of 12 persons)
(a) Cypress Merchant Banking Partners L.P. and Cypress Offshore
Partners L.P. are affiliates of The Cypress Group L.L.C.
Messrs. Spalding and Stern are executives of The Cypress Group
L.L.C. and may be deemed to share beneficial ownership of the
shares shown as beneficially owned by such Cypress entities.
Each of such individuals disclaims beneficial ownership of
such shares. See Item 10, "Directors and Executive Officers of
the Company."
(b) Immediately prior to the Merger, Mr. Cooney exchanged options
exercisable for AMTROL Common Stock for options exercisable
for Holdings common stock. Includes 2,839 shares of common
stock issuable upon exercise of such options by Mr. Cooney.
See Item 11, "Executive Compensation".
(c) Includes 44,796 and 9,322 shares of Common Stock issuable upon
exercise of options granted to Messrs. Cashman and Cooney,
respectively, which will become exercisable within 60 days.
See Item 11, "Executive Compensation".
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29
(d) Includes 11,000, 30,500, 21,039, and 11,000 shares of Common
Stock issuable upon exercise of options granted to Messrs.
Guillemette, Indelicato, Massimilla, and Sturiale,
respectively, which will become exercisable within 60 days.
See Item 11, "Executive Compensation".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A director of the Company, Mr. Massimilla, provides management
consulting services to the Company for which he is paid by the Cypress
Group L.L.C. The Company reimburses Cypress for its payments to Mr.
Masimilla. During 1999, the amount of such payments was $183,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE & REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements are included in a separate section
of this Report commencing on the page numbers specified below:
PAGE
----
Report of Independent Public Accountants 31
Consolidated Balance Sheets as of December 31, 1998 and 1999 32
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 1997, 1998 and 1999 33
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1998 and 1999 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 35
Notes to Consolidated Financial Statements 36
29
30
(a) (2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves for the
years ended December 31, 1997, 1998 and 1999 51
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) (3) EXHIBITS
See List of Exhibits
(b) REPORTS FILED ON FORM 8-K
None
30
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO AMTROL INC.:
We have audited the accompanying consolidated balance sheets of AMTROL Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity and cash
flows for the years ended December 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMTROL Inc. and subsidiaries as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financials statements taken as a whole. The financial statement
schedule listed in item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 23, 2000
31
32
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
DECEMBER 31,
1998 1999
--------- ---------
Current Assets:
Cash and cash equivalents $ 1,088 $ 674
Accounts receivable, less allowance for doubtful accounts of
$1,594 and $1,188 in 1998 and 1999, respectively 28,938 30,340
Inventories 24,319 22,346
Tax refund receivable 930 788
Prepaid income taxes 2,271 1,390
Prepaid expenses and other 2,311 887
Assets held for sale 572 --
--------- ---------
Total current assets 60,429 56,425
--------- ---------
Property, Plant and Equipment, at cost
Land 6,186 5,765
Buildings and improvements 13,530 12,718
Machinery and equipment 40,537 42,708
Furniture and fixtures 1,098 1,175
Construction-in-progress and other 6,567 6,903
--------- ---------
67,918 69,269
Less: accumulated depreciation and amortization 14,590 22,169
--------- ---------
53,328 47,100
--------- ---------
Other Assets:
Goodwill 171,166 166,520
Deferred financing costs 6,770 5,704
Deferred income taxes 8,205 5,092
Other 769 904
--------- ---------
186,910 178,220
--------- ---------
$ 300,667 $ 281,745
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 4,043 $ 4,935
Notes payable to banks 10,660 790
Accounts payable 21,193 22,535
Accrued expenses 14,242 15,804
Accrued interest 777 789
Accrued income taxes 2,872 2,571
--------- ---------
Total current liabilities 53,787 47,424
--------- ---------
Other Noncurrent Liabilities 7,909 5,633
Long-Term Debt, less current maturities 173,023 163,385
Commitments and Contingencies -- --
Shareholders' Equity
Capital stock $.01 par value - authorized 1,000 shares,
100 shares issued -- --
Additional paid-in capital 89,823 90,156
Retained deficit (24,363) (22,503)
Accumulated other comprehensive income (loss) 488 (2,350)
--------- ---------
Total shareholders' equity 65,948 65,303
--------- ---------
$ 300,667 $ 281,745
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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33
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEAR ENDED DECEMBER 31
-----------------------------------------------
1997 1998 1999
--------- --------- ---------
Net Sales $ 176,432 $ 202,142 $ 212,177
Cost of goods sold 131,180 158,607 154,741
Provision for abnormal warranty costs -- 4,500 --
--------- --------- ---------
Total Cost of Goods Sold 131,180 163,107 154,741
Gross Profit 45,252 39,035 57,436
Operating Expenses:
Selling 13,175 11,951 11,130
General and administrative 12,548 15,876 17,362
Plant closing and reorganization costs 5,500 4,450 --
Management restructuring -- 3,693 --
Amortization of goodwill 3,995 4,446 4,463
--------- --------- ---------
Income (loss) from operations 10,034 (1,381) 24,481
Other Income (Expense):
Interest expense (18,684) (20,554) (19,224)
Interest income 428 210 141
License and distributorship fees 245 242 234
Other, net 299 1,384 353
--------- --------- ---------
(Loss) income before (benefit)
provision for income taxes (7,678) (20,099) 5,985
(Benefit) Provision for Income Taxes (30) (6,728) 4,125
--------- --------- ---------
Net (Loss) Income $ (7,648) $ (13,371) $ 1,860
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1998 1999
-------- -------- --------
Net (Loss) Income $ (7,648) $(13,371) $ 1,860
Foreign currency translation adjustments (285) 773 (2,838)
-------- -------- --------
Comprehensive Loss $ (7,933) $(12,598) $ (978)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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34
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
ADDITIONAL OTHER
CAPITAL PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL DEFICIT (LOSS) INCOME
------- -------- --------- -------------
Balance, December 31, 1996 $-- $ 69,326 $ (3,344) $ --
Net loss -- -- (7,648) --
Currency translation adjustment -- -- -- (285)
--- -------- -------- --------
Balance, December 31, 1997 -- 69,326 (10,992) (285)
Capital contribution -- 20,497 -- --
Net loss -- -- (13,371) --
Currency translation adjustment -- -- -- 773
--- -------- -------- --------
Balance, December 31, 1998 -- 89,823 (24,363) 488
Capital contribution -- 333 -- --
Net income -- -- 1,860 --
Currency translation adjustment -- -- -- (2,838)
--- -------- -------- --------
Balance, December 31, 1999 $-- $ 90,156 $(22,503) $ (2,350)
=== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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35
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31
--------------------------------------------
1997 1998 1999
-------- -------- --------
Cash Flows Provided by Operating Activities:
Net (loss) income $ (7,648) $(13,371) $ 1,860
Adjustments to reconcile net (loss) income to net cash
provided by operating activities -
Depreciation 6,384 7,554 8,369
Amortization 5,157 5,593 5,634
Provision for losses on accounts receivable 370 526 --
Loss on sale of fixed assets 2 -- 107
Non-cash charges -- 10,077 --
Changes in operating assets and liabilities:
Accounts receivable, net (2,376) 2,753 (3,213)
Tax refund receivable 2,581 (566) 14
Inventory (1,474) 4,696 492
Prepaid income taxes (761) 224 881
Prepaid expenses and other current assets (331) (135) 1,400
Other assets (838) (3,963) (567)
Accounts payable 4,547 3,661 3,009
Accrued expenses and other current liabilities (1,152) (5,838) 2,263
Other noncurrent liabilities (71) (2,575) (1,643)
Deferred income taxes (641) (7,140) 3,113
-------- -------- --------
Net cash provided by operating activities 3,749 1,496 21,719
-------- -------- --------
Cash Flows Used in Investing Activities:
Acquisition of Alfa (25,500) -- --
Acquisition of NOVA, net of cash acquired -- (5,855) --
Proceeds from sale of property, plant and equipment 681 2,025 895
Capital expenditures (8,489) (9,858) (5,798)
-------- -------- --------
Net cash used in investing activities (33,308) (13,688) (4,903)
-------- -------- --------
Cash Flows Provided by (Used in) Financing Activities:
Repayment of long term debt (5,367) (52,872) (25,074)
Issuance of long term debt 29,150 40,600 16,800
Repayment of short term debt -- (16,476) (17,988)
Issuance of short term debt -- 20,959 8,790
Capital contribution -- 20,497 333
-------- -------- --------
Net cash provided by (used in) financing activities 23,783 12,708 (17,139)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (5,776) 516 (323)
Effect of exchange rate changes on cash and cash equivalents (63) 28 (91)
Cash and Cash Equivalents, beginning of period 6,383 544 1,088
-------- -------- --------
Cash and Cash Equivalents, end of period $ 544 $ 1,088 $ 674
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
35
36
(1) BASIS OF PRESENTATION
AMTROL Inc., a Rhode Island corporation, and its wholly-owned
subsidiaries (collectively referred to herein as "the Company"), designs,
manufactures and markets products used principally in flow control,
storage, heating and other treatment of fluids in the water systems
market and selected sectors of the heating, ventilating and air
conditioning ("HVAC") market. The Company offers a broad product line of
quality fluid handling products and services marketed under widely
recognized brand names.
The Company is a wholly-owned subsidiary of AMTROL Holdings, Inc.
("Holdings"), a Delaware corporation formed by The Cypress Group L.L.C.
in 1996 to effect the acquisition of all of the outstanding common stock
of the Company. Holdings has no other material assets, liabilities or
operations other than those that result from its ownership of the common
stock of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of AMTROL Inc. and its wholly owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FISCAL YEAR
The Company uses a calendar fiscal year and four quarterly interim
periods ending on Saturday of the thirteenth week of the quarter.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment of its products to
customers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments
that are readily convertible into cash with an original maturity to the
Company of three months or less.
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37
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIABLE PROPERTY AND EQUIPMENT
Property, plant, and equipment are stated on the basis of cost. The
Company provides for depreciation by charges to income (computed on the
straight-line method) in amounts estimated to depreciate the cost of
properties over their estimated useful lives which generally fall within
the following ranges:
Building and improvements 10-40 years
Machinery and equipment 3-12 years
Furniture and fixtures 5-20 years
Other 3-10 years
Leasehold improvements are amortized over the life of the lease or the
estimated useful life of the improvement, whichever is shorter.
Interest costs, during the construction period, on borrowings used to
finance construction of buildings and related property are included in
the cost of the constructed property.
INVENTORIES
The Company's inventories are stated at the lower of cost or market
including material, labor and manufacturing overhead (see Note 6).
GOODWILL
The excess of purchase price over the fair value of net assets acquired
is allocated to goodwill and is included in other assets. Goodwill is
being amortized over 40 years. The Company accounts for long-lived and
intangible assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The Company continually reviews its intangible assets for events or
changes in circumstances which might indicate the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
the assets by determining whether the amortization of such intangibles
over their remaining lives can be recovered through projected
undiscounted future cash flows. The amount of impairment, if any, is
measured based on the fair value of the impaired asset. At December 31,
1999, no such impairment of assets was indicated.
37
38
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, the Company has determined the estimated fair value of its
financial instruments using appropriate market information and valuation
methodologies. Considerable judgment is required to develop the estimates
of fair value; thus, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The
Company's financial instruments consist of cash, accounts receivable,
accounts payable, senior subordinated notes and bank debt. The carrying
value of these assets and liabilities is a reasonable estimate of their
fair market value at December 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES
All costs for research and development, which amounted to approximately
$1.3 million, $0.9 million, and $1.1 million for the years ended December
31, 1997, 1998 and 1999, respectively, are charged to general and
administrative expenses as incurred.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to manage interest rate
cost and the risks associated with changing interest rates. The
differential to be paid or received is accrued as interest rates change
and is recognized in interest expense over the life of the contract. The
counter-party to the interest rate swap agreements is a major financial
institution. Credit loss from counter-party non-performance is not
anticipated.
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other
assets and amortized over the life of the related debt using the
effective interest method. Amortization of deferred financing costs is
included in interest expense.
ACCRUED EXPENSES
Certain customers are allowed a rebate if agreed upon sales targets are
achieved for a given year. At December 31, 1998 and 1999, the Company has
accrued $3.2 million and $3.8 million, respectively, for such volume
allowances. These amounts are included in accrued expenses in the
accompanying consolidated balance sheets.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. operations have been translated into
United States Dollars at the year-end rate of exchange, shareholders'
equity at historical rates, and revenues and expenses at the average
exchange rates prevailing during the year. The cumulative effect of the
resulting translation is reflected as a separate component of
shareholders' equity.
38
39
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company accounts for employee stock options in accordance with SFAS
No. 123, Accounting for Stock Based Compensation. As permitted under SFAS
No. 123, the Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees to account for its stock option
plans.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities- Deferral of the Effective Date of
SFAS No. 133- an Amendment of SFAS No. 133 issued in June 1999, is
effective for fiscal quarters of all fiscal years beginning after June
15, 2000. A company may implement SFAS No. 133 as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June
16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively.
SFAS No. 133, as amended by SFAS No. 137, must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantially modified
after either January 1, 1998 or January 1, 1999, as selected by the
Company.
SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet
as either an asset or a liability measured at its fair value. SFAS No.
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge
accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on
the consolidated financial statements and has not determined the timing
of or method of the adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
39
40
(3) ACQUISITIONS
On June 30, 1997, the Company entered into a Promissory Agreement and a
Complementary Document to the Promissory Agreement (collectively, the
"Purchase Agreements") to acquire all the outstanding capital shares of
Petroleo Mecanica ALFA, S.A., a corporation organized under the laws of
Portugal ("ALFA"), for $25.5 million (United States Dollars) plus assumed
debt of $8.7 million. The Company assumed immediate management control of
ALFA and, accordingly, the operating results and financial position of
ALFA are included in the Company's consolidated results of operations and
consolidated balance sheets from July 1, 1997. The Company paid $20
million of the purchase price on June 30, 1997 from borrowings available
under its revolving credit facility and paid the remaining $5.5 million
upon final closure of the transaction in December 1997. The Company's
1997 income from operations includes $1.9 million relating to the
operations of ALFA subsequent to July 1, 1997. The following represents
pro forma net sales and net loss as though the acquisition of ALFA
occurred as of January 1, 1997 (in thousands): Net sales $192,068, net
loss $8,600. ALFA's name was changed to AMTROL-ALFA, Metalomecanica S.A.
following the acquisition.
On June 9, 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany for approximately $6.0 million (United
States Dollars) plus assumed debt of $2.0 million. NOVA manufactures
high-end residential and commercial water heaters that are marketed
primarily in Germany, Switzerland and Austria. This acquisition provides
AMTROL with expanded manufacturing and distribution capabilities in
central Europe, in addition to the opportunity to offer many of AMTROL's
complementary hydronic heating and water systems products in the European
market. AMTROL assumed immediate management control of NOVA and,
accordingly, the operating results and financial position of NOVA are
included in the consolidated results of operations and consolidated
balance sheets of AMTROL from the acquisition date. The Company's 1998
income from operations include approximately $0.4 million relating to the
operations of NOVA. The following represents pro forma net sales and net
income as though the acquisition of NOVA occurred as of January 1, 1998
(in thousands): Net sales $207,861, net loss $13,277.
(4) DIVESTITURES
In May 1997, the Company sold all of the assets, subject to substantially
all liabilities, of its American Granby Inc. subsidiary. Accordingly, the
results of American Granby included in the accompanying consolidated
statements of operations are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
---------- ---------- ------
Net Sales $7,576 $-- $--
Operating Income $ 23 $-- $--
Also in May 1997, the Company sold its Peru, Indiana production facility
and the related pump business. AMTROL transferred certain production
activities performed in Peru to the Company's West Warwick, Rhode Island
facility.
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The Company utilized the net proceeds of the sales of approximately $6.0
million to fund seasonal working capital demands as well as the
acquisition of ALFA (see Note 3).
(5) PLANT CLOSINGS, REORGANIZATION AND RESTRUCTURING CHARGES
In September 1997, the Company ceased operations of its Singapore
production facility and transferred production of its non-returnable
chemical containers to its ALFA facility in Guimaraes, Portugal. The
Company closed its Nashville, Tennessee production facility in December
1997 and transferred certain production lines to its West Warwick, Rhode
Island facility. The Company's 1997 results include a pretax charge to
operating expense of $5.5 million in connection with these plant
closures. Costs involved in closing the Nashville facility and starting
production in West Warwick were higher than anticipated due to unexpected
retrofitting and reconditioning required for the relocated equipment,
damage to equipment during shipment, and delays in preparing the
Nashville building for sale. The Company recorded charges in 1998
relating to the incremental costs associated with the Nashville closure
and production relocation approximating $7.8 million (including $3.3
million of production inefficiencies included in cost of goods sold). In
addition, the Company recorded management restructuring charges of $3.7
million in connection with the discontinuation and reduction of certain
product lines and a reorganization of its management group.
The Company experienced an unusually high level of warranty claims for a
particular product manufactured in 1995-1996, the cause of which has
since been corrected. Actions taken by the Company to mitigate the level
of returns for products manufactured during that time period did not
reduce the return rate to the extent expected. Accordingly, the Company
recorded an additional loss provision in the second quarter of 1998 of
$4.5 million for abnormal warranty costs relating to this product.
(6) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consists of the following at December 31 (in thousands):
1998 1999
------- -------
Raw materials and work in process $14,346 $11,689
Finished goods 9,973 10,657
------- -------
$24,319 $22,346
======= =======
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(7) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
Long-term debt consisted of the following at December 31 (in thousands):
1998 1999
-------- --------
Revolving credit facility $ 3,000 $ --
Tranche A Term Loan 10,200 7,180
Tranche B Term Loan 44,237 43,777
Senior subordinated notes, due 2006, 10.625% 115,000 115,000
Other 4,629 2,363
-------- --------
177,066 168,320
Less: Current maturities of long-term debt 4,043 4,935
-------- --------
$173,023 $163,385
======== ========
Long-term debt repayable in each of the next five years is as follows (in
thousands):
2000 $ 4,935
2001 3,597
2002 11,136
2003 20,800
2004 12,602
Thereafter 115,250
----------
$ 168,320
==========
REVOLVING CREDIT AND TERM LOANS
The Company is party to a Bank Credit Agreement (the "Agreement"), which
provides for secured borrowings from a syndicate of lenders. The
Agreement was amended on July 31, 1998 to allow for the early repayment
of a portion of the principal outstanding and to modify certain covenants
to be more in line with the Company's business plans. The Agreement, as
amended, provides for senior term loans (the "Term Loans") and a
Revolving Credit Facility. In connection with the amendment to the
Agreement, the Company repaid $20.5 million on August 3, 1998. A portion
($7.2 million) of the Term Loans (the "Tranche A Term Loans") will mature
on May 13, 2002, with quarterly amortization payments during the term of
such loans. As a result of the August 3, 1998 repayment, no further
amortization payments on Tranche A term loans were required in 1998. The
remainder ($43.8 million) of the Term Loans (the "Tranche B Term Loans")
will mature on May 13, 2004, with nominal quarterly amortization prior to
the maturity of the Tranche A Term Loans and with the remaining amounts
amortizing on a quarterly basis thereafter. The Revolving Credit Facility
of $30.0 million includes a sublimit providing for up to $20.0 million of
availability on a revolving credit basis to finance permitted
acquisitions. The highest amount outstanding during 1999 was $9.2
million. The commitments under the Revolving Credit Facility and the
acquisition sublimit will reduce by $5.0 million on November 13, 2000 and
$10.0 million on November 13, 2001. The
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Revolving Credit Facility will mature on May 13, 2002. The Agreement
is secured by substantially all of the assets of the Company and its
domestic subsidiaries.
The loans under the Agreement bear interest, at the Company's option, at
either (A) a "base rate" equal to the higher of (i) the federal funds
rate plus 0.5% or (ii) the bank's prime lending rate plus (x) in the case
of Tranche A Term Loans and loans under the Revolving Credit Facility, an
applicable spread ranging from 0.75% to 1.50% (determined based on the
Company's leverage ratio) or (y) in the case of Tranche B Term Loans,
2.00%; or (B) a 'Eurodollar rate" plus (x) in the case of Tranche A Term
Loans and loans under the Revolving Credit Facility, an applicable spread
ranging from 1.75% to 2.50% (determined based on the Company's leverage
ratio), or (y) in the case of Tranche B Term Loans, 3.00%. Swingline
Loans may only be "base rate" loans.
The Revolving Credit Facility also requires the Company to pay a
commitment fee on the average daily aggregate unutilized portion of the
Revolving Credit Facility at a rate of 0.5% per annum, payable quarterly
in arrears, as well as a commission on trade and standby letters of
credit of 1.25% per annum of the amount to be drawn under the Agreement.
Amounts outstanding under the Revolving Credit Facility are due on May
13, 2002.
The Agreement contains a number of covenants that, among other things,
restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guaranty obligations, repay
other indebtedness or amend other debt instruments, pay dividends, create
liens on assets, enter into leases, make investments, make acquisitions,
engage in mergers or consolidations, make capital expenditures, engage in
certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. In addition, the Agreement requires
compliance with certain financial covenants, including requiring the
Company to maintain a minimum level of earnings before income taxes,
depreciation and amortization (i.e., "EBITDA"), a minimum ratio of EBITDA
to interest expense and a maximum ratio of Indebtedness to EBITDA, in
each case tested at the end of each fiscal quarter of the Company.
The Company's obligations under the Agreement are guaranteed by Holdings
and each direct and indirect domestic subsidiary of the Company. The
Company's obligations under the Agreement are secured by substantially
all assets of the Company and its subsidiaries.
The company has entered into interest rate swap agreements which have
effectively converted $15.0 million of floating rate borrowings to fixed
borrowings through June 2004. The agreements are contracts to
periodically exchange floating interest rate payments for fixed rate
payments over the life of the agreements and are used to manage the
Company's interest rate exposure.
SENIOR SUBORDINATED NOTES
The Company issued $115.0 million of Senior Subordinated Notes due 2006
(the "Notes"). The Notes are unsecured obligations of AMTROL. The Notes
bear interest at a rate of 10.625% per annum which is payable
semi-annually on each June 30 and December 31 commencing on June 30,
1997.
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The Notes are redeemable at the option of the Company on or after
December 31, 2001. The Notes will be subject to redemption, in whole or
in part, at various redemption prices, declining from 105.313% of the
principal amount to par on and after December 31, 2003. In addition, on
or prior to December 31, 1999, the Company had the option to use the net
cash proceeds of one or more equity offerings to redeem up to 35% of the
aggregate principal amount of the Notes originally issued at a redemption
price of 110.625% of the principal amount thereof plus accrued interest
to the date of redemption. Upon a "Change of Control" (as defined in the
Indenture), each Note holder has the right to require the Company to
repurchase such holder's Notes at a purchase price of 101% of the
principal amount plus accrued interest. The fair value of these Notes at
December 31, 1999 approximated their face value.
The Note Indenture contains certain affirmative and negative covenants
and restrictions.
As of December 31, 1999, the Company was in compliance with the various
covenants of the Agreement and the Notes.
OTHER LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
Other long-term debt represents borrowings assumed by the Company in
connection with the 1997 acquisition of ALFA and 1998 acquisition of
NOVA. The ALFA debt is denominated in Escudos and includes the equivalent
of approximately $1.7 million of loans payable to the Industrial
Development Fund of Portugal as well as several local Portuguese banks.
The loans amortize in roughly equal installments through 2000 and accrue
interest at LIBOR plus a premium ranging from 1.25% to 1.5%, adjusted
quarterly or semi-annually. The loans are secured by substantially all
property and equipment owned by ALFA. ALFA also has available revolving
credit facilities with local banks providing for short-term working
capital loans of up to the equivalent of approximately $7.5 million.
Borrowings under these agreements accrue interest at LIBOR plus a premium
ranging from 0.375% to 1.375%. The balance outstanding at December 31,
1999 was approximately $0.01 million. The highest amount outstanding
under these facilities in 1999 was approximately $7.0 million. In
Escudos, the total outstanding long term debt and notes payable to banks
amounted to 335,156,000 at December 31, 1999. The NOVA long-term debt is
denominated in Deutsche Marks and includes the equivalent of
approximately $1.3 million of loans payable to two local German banks.
These loans amortize in roughly equal installments through 2002 and
accrue interest at rates ranging from 6.0% to 6.5%. The loans are secured
by substantially all real property and certain equipment owned by NOVA.
NOVA also has available revolving credit facilities with a local bank
providing for short-term working capital loans of up to the equivalent of
approximately $1.9 million. Borrowings under the agreement accrue
interest at prevailing market rates which averaged approximately 6.25%
during the period ended December 31, 1999. The balance outstanding at
December 31, 1999 was approximately $0.8 million. The highest amount
outstanding under the facility in 1999 was approximately $1.3 million. In
Deutsche Marks, the amount of long term debt outstanding amounted to
1,347,240 at December 31, 1999.
Cash paid for interest amounted to approximately $19.2 million, $19.0
million, and $18.1 million for the years ended December 31, 1997, 1998
and 1999, respectively.
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(8) INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
---- ---- ----
Current:
Federal $ -- $ -- $ 60
State -- -- --
Foreign 714 188 1,000
------ ------ ------
714 188 1,060
Deferred:
Federal (625) (5,854) 2,581
State (119) (1,062) 484
------ ------ ------
(744) (6,916) 3,065
------ ------ ------
$ (30) $(6,728) $4,125
====== ====== ======
The deferred income tax provision resulted primarily from temporary
differences due to the use of accelerated depreciation for income tax
purposes and straight-line depreciation for financial statement purposes,
temporary differences related to deferred compensation and the reversal
of temporary differences related to safe-harbor lease transactions that
had previously transferred tax benefits to the Company.
The difference between a provision computed using the respective
statutory U.S. federal income tax rate and the provision for income taxes
in the accompanying consolidated financial statements is primarily the
result of state taxes, net of federal benefit.
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Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1999 are as follows (in thousands):
1998 1999
------- -------
Prepaid Income Taxes:
Warranty reserves - current $ 96 $ 92
Allowance for doubtful accounts 411 324
Plant closing reserve 302 (62)
Accrued vacation 122 99
UNICAP adjustment 285 227
Accrued management restructuring 405 710
Other 650 --
------- -------
$ 2,271 $ 1,390
======= =======
1998 1999
------- -------
Deferred Income Taxes:
Net operating loss carryforward $ 7,533 $ 5,640
Accelerated depreciation (2,847) (2,718)
Safe harbor leases (65) --
Warranty reserves - long-term 1,683 1,148
Deferred compensation and restricted stock plan 700 643
LIFO revaluation 646 250
Other 555 129
------- -------
$ 8,205 $ 5,092
======= =======
The difference between the Company's effective income tax rate and the
federal statutory income tax rate primarily results from state income
tax, net of federal tax benefit, and non-deductible goodwill
amortization.
Cash paid for income taxes amounted to $0, $0, and $0.3 million for the
years ended December 31, 1997, 1998 and 1999, respectively. At December
31, 1999, the company had net operating loss carryforwards of
approximately $15.0 million expiring in 2011 through 2018.
(9) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 401(k) plan covering substantially
all of its domestic employees. Under the Plan, eligible employees are
permitted to contribute up to 15% of gross pay, not to exceed the maximum
allowed under the Internal Revenue Code. The Company matches each
employee contribution up to 6% of gross pay at a rate of $0.25 per $1 of
employee contribution. The Company also contributes 3% of each employee's
gross pay up to the Social Security taxable wage base and 4% of amounts
in excess of that level up to approximately $0.2 million of wages.
Company contributions to the 401(k) plan
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totaled approximately $1.1 million, $1.0 million and $0.8 million for the
years ended December 31, 1997, 1998 and 1999, respectively.
(10) LEASE COMMITMENTS
The Company leases certain plant facilities and equipment. Total rental
expenses charged to operations approximated $1.5 million, $1.9 million
and $1.4 million for the years ended December 31, 1997, 1998 and 1999,
respectively. Minimum rental commitments under all non-cancelable
operating leases are as follows (in thousands):
2000 $1,052
2001 765
2002 494
2003 44
2004 25
------
$2,380
======
Certain of the leases provide for renewal options.
(11) COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Revolving Credit Facility contains a sublimit
to support the issuance of letters of credit in the amount of $5.0
million. At December 31, 1999, letters of credit outstanding amounted to
$1.1 million.
The Company is involved in various legal proceedings which, in the
opinion of management, will not result in a material adverse effect on
its financial condition or results of operations.
(12) STOCK PLANS
Certain key employees and directors have been granted options to purchase
common shares of the Company's parent, AMTROL Holdings Inc, under the
AMTROL Holdings 1997 Incentive Stock Plan. As of December 31, 1999,
options to purchase 168,173 shares under the 1997 Plan were outstanding.
The outstanding options include 25,817 non-qualified options which are
exercisable immediately provided that purchased shares are subject to
repurchase by Holdings at the exercise price until such shares vest based
on relative achievement of management's business plan for fiscal years
1997 through 2001. An additional 22,398 non-qualified options are also
immediately exercisable but are subject to repurchase by Holdings, in
monthly diminishing amounts, if the holder terminates employment before
August 2000. Options amounting for 3,419 shares are incentive stock
options of which 2,851 are vested at December 31, 1999 and the remainder
are released from restrictions ratably through August 2000. The remaining
116,539 options are non-qualified options issued in 1999 none of which
are exercisable.
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The Company applies APB opinion No. 25 to account for its stock option
plans. Accordingly, pursuant to the terms of the 1997 Holdings Incentive
Stock Plan, no compensation cost related to the issuance of stock options
has been recognized in the Company's financial statements. However, if
the Company had determined compensation cost for options under the
provisions of SFAS No. 123, the Company's net loss in 1997 would have
increased by approximately $0.6 million. In 1998, adjustments to
compensation expense associated with the options issued in 1997 would
have approximated $.1 million as a result of forfeitures by certain
individuals who left the Company. In 1999, the company's net income would
have decreased approximately $1.0 million. The fair value of the options
granted in 1997 and 1999 were estimated using the Black-Scholes option
pricing model. The following key assumptions were used to value the
options granted: volatility, 0; weighted average risk free rate, 5.00%;
average expected life, 3 years. The weighted average fair value per share
of the stock options granted in 1997 and 1999 amounted to $13.92. It
should be noted that the option pricing model used was designed to value
readily tradeable stock options with relatively short lives. The options
granted are not tradeable. However, management believes that the
assumptions used and the model applied to value the awards yield a
reasonable estimate of the fair value of the options grants under the
circumstances.
In connection with the merger of AMTROL Acquisition Inc. into AMTROL
Holdings Inc., through which AMTROL Inc. became a wholly owned subsidiary
of AMTROL Holdings, certain holders of options to purchase shares of the
common stock of AMTROL Inc. exchanged such options for Amended Options to
purchase an aggregate of 17,041 shares of Holdings common stock with
weighted average exercise price of $57.38 per share. All such options are
immediately exercisable. No options from any source were exercised in
1997, 1998 or 1999.
(13) BUSINESS SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, in 1998. AMTROL's reportable segments
are delineated geographically. The segments are managed separately
because of their different product offerings, markets served,
manufacturing processes and cost structures. As the Company rationalizes
its manufacturing capacity and manages its markets, the frequency of
overlap of products and markets between segments has increased.
The Company's North American segment operates manufacturing facilities in
Rhode Island, Kentucky, Maryland and Ohio, and operates a distribution
facility in Ontario, Canada. This segment manufactures and markets
products used principally in flow control, storage, heating, and other
treatment of fluids in the water system and HVAC markets. These products
are marketed throughout the world but primarily in North America, Western
Europe, Asia and Mexico.
The Company's European segment includes the Company's facilities in
Guimaraes, Portugal, Donaueschingen, Germany and Swarzedz, Poland. The
Guimaraes facility manufactures returnable and non-returnable steel gas
cylinders for storing cooking, heating and refrigerant gases which are
marketed throughout Europe, the Middle East and Africa, as well as the
Far East, with sales of approximately $17.8 million, $49.6 million, and
$54.1 million for the periods ended December 31, 1997, 1998, and 1999,
respectively. The
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Donaueschingen facility manufactures and distributes residential and
commercial water heaters which are marketed primarily in Switzerland,
Austria and Germany with sales of approximately $8.7 million and $12.1
million for the periods ended December 31, 1998 and 1999, respectively.
The facility in Swarzedz refurbishes gas cylinders with sales of
approximately $3.4 million for the period ended December 31, 1999.
The primary criteria by which financial performance is evaluated and
resources are allocated include revenues and operating income. The
following is a summary of key financial data by segment:
1997 1998 1999
--------- --------- ---------
Sales to external customers
North America $ 158,627 $ 143,817 $ 142,622
Europe 17,805 58,325 69,555
--------- --------- ---------
Consolidated $ 176,432 $ 202,142 $ 212,177
========= ========= =========
INCOME FROM OPERATIONS
North America $ 8,127 $ (4,801) $ 17,665
Europe 1,907 3,420 6,816
--------- --------- ---------
Consolidated $ 10,034 $ (1,381) $ 24,481
========= ========= =========
DEPRECIATION AND AMORTIZATION
North America $ 10,396 $ 10,143 $ 10,315
Europe 1,145 3,004 3,688
--------- --------- ---------
Consolidated $ 11,541 $ 13,147 $ 14,003
========= ========= =========
EBITDA
North America $ 23,639 $ 4,889 $ 29,130
Europe 3,248 7,565 9,216
--------- --------- ---------
Consolidated $ 26,887 $ 12,454 $ 38,346
========= ========= =========
CAPITAL EXPENDITURES
North America $ 6,437 $ 7,807 $ 4,571
Europe 2,052 2,051 1,227
--------- --------- ---------
Consolidated $ 8,489 $ 9,858 $ 5,798
========= ========= =========
IDENTIFIABLE ASSETS
North America $ 178,926 $ 173,590 $ 170,979
Europe 36,545 49,359 42,641
--------- --------- ---------
Consolidated $ 215,471 $ 222,949 $ 213,620
========= ========= =========
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"EBITDA" is earnings (net income/loss) before interest, taxes,
depreciation and amortization, which amounts are as disclosed in the
statement of operations. Operating income for the North America business
segment above is reduced by goodwill amortization for each year
presented. The following table summarizes sales by product
classification:
1997 1998 1999
------ ------ ------
HVAC 53.8% 60.5% 61.6%
Water Systems 46.2% 39.5% 38.4%
------ ------ ------
Consolidated 100.0% 100.0% 100.0%
====== ====== ======
The percentages above exclude sales by the American Granby subsidiary
which was sold by the Company in 1997.
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ITEM 14(a)(2) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT
BEGINNING OF ADJUSTMENTS/ BALANCE AT END
CONSOLIDATED PERIOD PROVISION RECOVERIES WRITE-OFFS OF PERIOD
- ------------------------------------ ------------ --------- ---------- ------------ --------------
Year ended December 31, 1997
Allowance for doubtful accounts 1,055 370 3 (340) 1,088
Year ended December 31, 1998
Allowance for doubtful accounts 1,088 526 42 (62) 1,594
Year ended December 31, 1999
Allowance for doubtful accounts 1,594 -- -- (406) 1,188
* Includes $135 related to the disposition of the Company's American Granby
subsidiary in May 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 5(d) 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 West Warwick, Rhode
Island, on the 30th day of March 2000.
AMTROL Inc.
By: /s/ Donald W. Reilly
-----------------------------
Donald W. Reilly
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
--------- ----- ----
/s/ John P. Cashman Chairman of the Board March 30, 2000
- ----------------------------------------
John P. Cashman
/s/ Albert D. Indelicato President, Chief Executive Officer March 30, 2000
- ---------------------------------------- and Director
Albert D. Indelicato
/s/ Donald W. Reilly Vice President, Chief Financial Officer, March 30, 2000
- ---------------------------------------- and Treasurer (principal
Donald W. Reilly financial officer)
/s/ Andrew M. Massimilla Director March 30, 2000
- ----------------------------------------
Andrew M. Massimilla
/s/ David P. Spalding Director March 30, 2000
- ----------------------------------------
David P. Spalding
/s/ James A. Stern Director March 30, 2000
- ----------------------------------------
James A. Stern
/s/ Anthony D. Tutrone Director March 30, 2000
- ----------------------------------------
Anthony D. Tutrone
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EXHIBIT # DOCUMENT DESCRIPTION
3.1 Restated Articles of Incorporation of AMTROL Inc. (incorporated
by reference from the Company's Registration Statement on Form
S-4, Registration No. 333-18075, declared effective by the
Securities and Exchange Commission on January 2, 1997).
3.2 Bylaws of AMTROL Inc. (incorporated by reference from the
Company's Registration Statement on Form S-4, Registration No.
333-18075, declared effective by the Securities and Exchange
Commission on January 2, 1997).
4.1 Indenture, dated as of November 1, 1996 between AMTROL
Acquisition, Inc. and The Bank of New York (incorporated by
reference from the Company's Registration Statement on Form S-4,
Registration No. 333-18075, declared effective by the Securities
and Exchange Commission on January 2, 1997).
4.2 Form of 10-5/8% Senior Subordinated Notes due 2006 (included in
Exhibit 4.1) (incorporated by reference from the Company's
Registration Statement on Form S-4, Registration No. 333-18075,
declared effective by the Securities and Exchange Commission on
January 2, 1997).
4.3 First Supplemental Indenture, dated as of November 13, 1996,
between AMTROL Inc. and The Bank of New York (incorporated by
reference from the Company's Registration Statement on Form S-4,
Registration No. 333-18075, declared effective by the Securities
and Exchange Commission on January 2, 1997).
10.1 Credit Agreement, dated as of November 13, 1996, among AMTROL
Acquisition, Inc. and AMTROL Holdings, Inc., various lending
institutions party thereto, Morgan Stanley Senior Funding, Inc.
as documentation agent, and Bankers Trust Company, as
administrative agent (incorporated by reference from the
Company's Registration Statement on Form S-4, Registration No.
333-18075, declared effective by the Securities and Exchange
Commission on January 2, 1997).
10.1.1 First Amendment to Credit Agreement, dated as of June 24, 1997
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 5, 1997).
10.1.2 Second Amendment to Credit Agreement, dated as of December 12,
1997 (incorporated by reference to Exhibit 7(c) in the Company's
Current Report on Form 8-K dated December 22, 1997).
10.1.3 Third amendment to the Credit Agreement dated as of June 24, 1998
(incorporated by reference to the Company's Quarterly report on
Form 10-Q for the quarter ended July 4, 1998).
10.1.4 Fourth amendment to the Credit Agreement dated as of July 13,
1998 (incorporated by reference to the Company's Quarterly report
on Form 10-Q for the third quarter ended October 3, 1998).
10.2 AMTROL Inc. Pension Plan and Trust (incorporated by reference
from the Company's Registration Statement on Form S-1,
Registration No. 33-48413, declared effective by the Commission
on March 18, 1993).*
10.3 Amendments to AMTROL Inc. Pension Plan and Trust (incorporated by
reference from the Company's Registration Statement on Form S-1,
Registration No. 33-48413, declared effective by the Securities
and Exchange Commission on March 18, 1993).*
10.4 AMTROL Inc. Executive Cash Bonus Plan (incorporated by reference
from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).*
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10.5 AMTROL Inc. Supplemental Retirement Plan II (incorporated by
reference from the Company's Registration Statement on Form S-1,
Registration No. 33-48413, declared effective by the Commission
on March 18, 1993).*
10.6 First Amendment to AMTROL Inc. Supplemental Retirement Plan II
(incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).*
10.8 Employment Agreement dated June 22, 1998 by and between AMTROL
Inc. and Donald W. Reilly. (incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).*
10.9 Employment Agreement dated January 19, 1997 by and between AMTROL
Inc. and Edward J. Cooney. (incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1996).*
10.10 Employment Agreement dated June 24, 1998 by and between AMTROL
Inc. and Albert D. Indelicato (incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).*
10.11 AMTROL Holdings Inc. 1997 Incentive Stock Plan dated December 16,
1997.* (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
18 Preferability letter regarding change in accounting policy from
LIFO to FIFO (incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998).*
21 Subsidiaries of AMTROL Inc.
27 Financial Data Schedule
* Management contract or compensatory plan arrangement.
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