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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, 1996
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 8, 1997, the aggregate market value of the Registrant's voting stock
held by non-affiliates was none.
As of March 27, 1997, 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 65 hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
AMTROL Inc ("AMTROL" or the "Company"), is a leading designer,
manufacturer and marketer of water flow and 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 non-returnable pressure-rated cylinders used primarily to store,
transport and dispense refrigerant gases. Many of these products are based
on a technology originated and developed by the Company, which uses a
pre-pressurized vessel with an internal diaphragm to handle fluids under
pressure.
The Company believes that its leading market positions in its key product
categories are attributable to the strength of AMTROL's brand names and
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 sales and earnings stability over the past five years, even
during periods of weak domestic economic activity.
AMTROL's brand names are among the most widely known in its markets. For
example, the Company's key hot water expansion control product, the
Extrol, is so widely recognized that customers frequently refer to any hot
water expansion control as an "Extrol." Other well-known brand names of
the Company include Well-X-Trol, Therm-X-Trol, Hot Water Maker and
CHAMPION. The Company also believes that it is the recognized technology
leader in virtually all of its core product lines. In many of the
Company's major product lines, AMTROL's products are considered the
industry standard, a key marketing advantage, because of their recognized
quality and reliability.
The Company's strong reputation and brand recognition ensure that nearly
every significant wholesaler carries at least one AMTROL product. This
facilitates new product introduction, effectively "pulling" the Company's
new products through its distribution system. AMTROL also offers a broad
range of products, including over 100 models of well water accumulators.
This broad product offering allows AMTROL's customers to consolidate their
suppliers and to purchase and manage inventory more efficiently. These
factors have established the Company's products as a preferred brand and
allow the Company to realize premium pricing on most of its branded
products. During its 50-year history, the Company has built a strong
franchise with wholesalers and OEMs, resulting in a broad distribution
network serving more than 5,000 customers throughout North
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America. In addition, the Company has recently refocused its efforts to
better serve the DIY market, a rapidly growing channel of distribution,
primarily through private label arrangements with Lowe's Companies,
Menards, Cotter & Company (True Value) and Ace Hardware.
In 1996, approximately 13% of the Company's net sales were derived from
international markets, and the Company is expanding internationally,
especially in the fast growing Asia/Pacific region. The Company recently
opened a new manufacturing facility in Singapore and intends to introduce
several new products which the Company believes will be well received in
international markets.
On August 28, 1996, as a result of a five-month public auction process
conducted with the assistance of AMTROL's legal and financial advisers,
AMTROL entered into a merger agreement (the "Merger Agreement") with
AMTROL Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, AMTROL
Acquisition, Inc. ("Acquisition"), providing for the merger of AMTROL with
Acquisition, with AMTROL continuing as the surviving corporation (the
"Surviving Corporation"). The Merger Agreement was approved at a special
meeting of shareholders of AMTROL held on November 12, 1996, and
Acquisition was merged with and into AMTROL on November 13, 1996 (the
"Merger"). Under the terms of the Merger Agreement, each outstanding share
of common stock of AMTROL, par value $.01 per share ("AMTROL Common
Stock") was converted into the right to receive $28.25 in cash, without
interest, and all outstanding options to acquire AMTROL Common Stock
(other than options exchanged for options for Holdings common stock as
described under Item 11) were canceled in exchange for cash in an amount
equal to the excess of $28.25 over the per share exercise price of the
canceled options, multiplied by the number of shares subject to the
option. Each share of common stock of Acquisition was converted into and
exchanged into one share of common stock of the Surviving Corporation,
with the result that AMTROL became a wholly-owned subsidiary of Holdings,
a Delaware corporation controlled by The Cypress Group L.L.C. ("Cypress").
The aggregate consideration paid pursuant to the Merger, including amounts
payable to holders of outstanding options for AMTROL Common Stock, was
approximately $218.9 million (the "Merger Consideration"). The Merger
Consideration, and transaction fees and related expenses of $13.8 million,
were financed by an equity contribution of $69.3 million (including the
exchange of options) and the proceeds from the issuance of $115 million of
Senior Subordinated Notes due 2006 and $45 million in borrowings under a
Bank Credit Agreement, as described under Item 7, "Management's Discussion
and Analysis of Results of Operations and Financial Condition".
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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. The Company's principal
executive offices are located at 1400 Division Road, West Warwick, Rhode
Island 02893 (telephone number: (401) 884-6300).
NEW MANAGEMENT AND BUSINESS STRATEGY
Upon the Merger, Mr. John P. (Jack) Cashman became the Chairman, Chief
Executive Officer and President of the Company. Mr. Cashman has over 30
years of general industrial management experience in the filtration,
minerals, building products and pharmaceutical industries, most
recently as Chairman and Co-Chief Executive Officer of R.P. Scherer
Corporation, which position he resigned in March 1996. Mr. Cashman has
worked closely with key members of AMTROL's management to develop a new
strategic plan. To implement this new strategic plan, a new streamlined
management structure has been put in place.
Since the beginning of the fourth quarter of 1996, the Company has been
executing the new strategic plan, which is designed to immediately reduce
costs and capitalize on AMTROL's position as a technological and market
leader. The new strategic plan consists of the following key elements: (i)
reduce operating expenses, (ii) enhance sales and profitability of core
product offerings, (iii) introduce new products and (iv) grow
internationally.
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 cost cutting 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 new business strategy and
to achieve the estimated cost savings, the availability and cost of raw
materials, changes in government regulation or enforcement policies,
particularly related to refrigerant gases, 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, and general economic, financial and business conditions, both
domestically and internationally.
REDUCE OPERATING EXPENSES
The Company has initiated a series of actions designed to immediately
reduce operating expenses and to establish new managerial and
organizational accountability. Actions already implemented or announced
are expected to generate approximately $9.4 million
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of permanent annual cost savings by the end of 1997 (see table below).
These actions have resulted in related one-time costs of approximately
$2.3 million of severance and other expenses and $2.3 million in
connection with the writedown of certain assets related to the
discontinuation of the 4BA product line. The cost savings estimates
described herein are forward-looking statements based on management
budgets. Realization of these savings depends upon the effectiveness and
timing of the planned actions and there can be no assurance that such
cost savings can be achieved.
TOTAL
ESTIMATED PERMANENT
ACTIONS IMPLEMENTED OR ANNOUNCED ANNUALIZED SAVINGS
(IN MILLIONS)
Reduce corporate overhead expenses $ 4.5
Continue to rationalize manufacturing facilities 3.0
Reduce manufacturing costs 1.9
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Total $ 9.4
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REDUCE CORPORATE OVERHEAD EXPENSES. The Company believes that significant
and immediate cost savings can be realized from restructuring its general
and administrative staff and consolidating its three autonomous strategic
business units to eliminate redundant and unnecessary functions. These
actions have been substantially completed and the Company expects to
realize permanent annual cost savings aggregating approximately $4.5
million, including non-personnel expense reductions commencing in 1997. As
a result of the headcount reductions undertaken in 1996, the number of
persons employed at corporate headquarters as of December 31, 1996 has
decreased by approximately 15% since January 1, 1996. The Company
estimates that one-time costs related to these measures will total
approximately $2.3 million, which has been reserved for on its
consolidated balance sheet as part of purchase accounting in connection
with the Merger.
CONTINUE TO RATIONALIZE MANUFACTURING FACILITIES. Since September 1995,
the Company has closed two manufacturing facilities and relocated their
production to remaining facilities. As a result of these plant
consolidations, 125 salaried and non-salaried positions have been
eliminated. The Company also discontinued its unprofitable 4BA reusable
pressure-rated cylinder business in the fourth quarter of 1996 as part of
its cost reduction initiatives. The Company recently introduced a new
reusable pressure-rated cylinder which serves the same growing market as
the 4BA product line, but has lower manufacturing costs. These actions are
expected to generate permanent annual manufacturing cost savings of
approximately $3.0 million. The Company recorded a $3.8 million charge to
operating expense in 1995 in connection with the two plant closures. The
discontinuation of the 4BA reusable pressure-rated cylinder business will
result in a $2.0 million writedown of certain assets, which has been
reserved for on the Company's consolidated balance sheet as part of
purchase accounting in connection with the Merger.
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In addition, as part of its ongoing efforts to rationalize its
manufacturing operations, the Company intends to close its Peru, Indiana
facility, to relocate production of certain products to other facilities
and to outsource the production of other products. The Company anticipates
that this plant closure will be completed in the second quarter of 1997
and estimates the costs associated with this action will approximate
$500,000, which amount has been reserved for on the Company's consolidated
balance sheet. As part of its implementation of its growth strategy, the
Company is also exploring the possible sale of its American Granby Inc.
subsidiary, which has little strategic overlap with AMTROL's core water
systems and HVAC product lines. The Company continually evaluates its
manufacturing capacity to identify opportunities to further reduce
manufacturing costs by maximizing production at lower cost facilities and
reducing or eliminating production at higher cost facilities.
REDUCE MANUFACTURING COSTS. The Company intends to reduce labor costs
through automating certain labor-intensive manufacturing processes and
redesigning existing product lines. For example, the Company is currently
automating its small vessel manufacturing line in its West Warwick, Rhode
Island facility. These projects are expected to generate approximately
$1.9 million in permanent annual cost savings by the end of 1997. The
Company has identified and intends to implement several other
manufacturing improvement projects which are expected to yield additional
annual savings by the end of 1998.
ENHANCE SALES AND PROFITABILITY OF CORE PRODUCT OFFERINGS
The Company intends to implement a series of initiatives to reinvigorate
sales growth and increase profitability of its core product offerings. To
accomplish this, the Company will seek agreements with major pump and
boiler OEMs to incorporate AMTROL products into complete systems solutions
and will modify current products to enhance appearance, facilitate
installation or meet the requirements of specific domestic and
international markets. The Company will also expand its efforts to educate
customers about the benefits of AMTROL products. These actions are
expected to increase demand for AMTROL's core products and allow AMTROL to
continue to realize premium pricing and achieve a more favorable product
mix, especially in international markets.
INTRODUCE NEW PRODUCTS
The Company intends to use new product introductions to pursue
international growth, broaden existing product lines and focus on
attractive niche market segments within the broader water systems and HVAC
markets. AMTROL is a technological leader and historically has
successfully identified trends in the market and capitalized on these
trends by introducing new products. For example, in recognition of demand
for an energy efficient alternative to conventional potable water heaters,
AMTROL successfully developed and introduced the Hot Water Maker line of
indirect-fired water heaters. Similarly, AMTROL was able to apply its
pressure regulating technology to develop the Therm-X-Trol, a product
designed to facilitate compliance with increasingly stringent
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requirements for backflow prevention systems. As a result of the Company's
increased focus on research and development, AMTROL has developed several
new products designed to meet the demands of both the domestic and
international markets. For example, the Company is currently field testing
a potable water heater that efficiently utilizes the thermal waste energy
produced by air conditioning units. New products expected to be introduced
in 1997 include a small pressure boosting system for International
markets, a composite reverse osmosis vessel for both the domestic and
International markets and an indirect-fired water heater designed for use
with European wall-hung boiler units.
EXPAND INTERNATIONALLY
As a result of the Company's strong brand names, broad product offerings
and core water systems expertise, AMTROL is well positioned to capitalize
on growing global demand for enhanced water pressure control and improved
water quality and refrigerant systems. The Company believes that
establishing local manufacturing and distribution facilities in
international markets is critical to the Company's ability to build strong
customer relationships, understand local product preferences and be price
competitive while maintaining appropriate profit margins. In order to
achieve the Company's goal of increasing its international presence, the
Company has been pursuing and intends to continue to selectively pursue
joint ventures, OEM alliances and acquisitions. The Company will focus its
international expansion on the target markets of the Asia/Pacific region
and Europe and, to a lesser extent, Latin America/Mexico.
ASIA/PACIFIC. In the developing economies of the Asia/Pacific region,
rapid economic growth and the emergence of a middle class has spurred
demand in many markets served by AMTROL products. For example, economic
development and the commercial building boom underway in Asia are fueling
demand for air conditioning and refrigeration equipment which in turn
increases demand for refrigerant gas pressure-rated cylinders. New
commercial high-rise structures also require potable water pressure
boosting systems and expansion control products for chilled-water air
conditioning systems. In addition, as Asian consumers achieve higher
living standards, they are demanding residential water pressure boosting
and water treatment systems because municipal water supplies often lack
the pressure required to operate modern appliances such as dishwashers or
washing machines and fail to meet acceptable standards for clean and safe
water. Consequently, this region represents a large potential market for
the Company's pressure-rated cylinders for refrigerant gases, water
control systems and water treatment products. To better serve these
markets, AMTROL has increased the number of distributors in this region
from 12 to 45 over the past two years and commenced manufacturing at its
Singapore facility in October 1996.
EUROPE. In Europe, the large hydronic heating market (believed by the
Company to be ten times the size of the U.S. market) and the general lack
of adequate water pressure in municipal systems represent excellent
opportunities for the Company in light of its core products expertise. The
Company's brand names are already well recognized in Europe.
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The Company plans to apply its technical expertise to the special needs of
the European market. For example, the Company is currently in general
discussions with leading European OEMs for developing an indirect-fired
water heater designed for use with European wall-hung boiler units. The
Company plans to accelerate European growth through selective
acquisitions, strategic joint ventures or distribution agreements.
LATIN AMERICA/MEXICO. Because the market dynamics in emerging Latin
American and Mexican economies are comparable to those of the Asia/Pacific
region, the Company intends to pursue a similar strategy to accelerate
growth. AMTROL has taken preliminary steps towards increasing its presence
by initiating a licensing program with local distributors and pump
manufacturers to build and sell water pressure boosters utilizing AMTROL's
accumulators. The Company intends to establish local sales, distribution
and service capability in this region, which will enable the Company to
better service its existing customers and provide a base for new business.
PRODUCTS AND MARKETS
The Extrol, the first product to utilize the technology developed by
AMTROL for handling fluid under pressure in hydronic heating systems,
redefined the standards for controlling the expansion of water in these
systems. Older systems consisted simply of a vessel containing air,
resulting in excessive pressure, less efficiency 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 water systems products and
HVAC products.
WATER SYSTEMS PRODUCTS
AMTROL's net sales of its water systems products accounted for
approximately $96.3 million (or 56.4%) of the Company's total net sales in
1996. These products consist primarily of water accumulators and related
accessories for residential and commercial well water systems and systems
and components 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 and CHAMPION, as well as under several 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 unnecessary on/off cycling. A typical well
water system consists of a submersible or jet pump located in the well
water that is attached to an AMTROL pre-pressurized vessel.
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The pre-pressurized vessel is connected to the plumbing system in order to
provide water on demand at a constant pressure. As the water level and
pressure in the vessel lowers, the diaphragm flexes, which in turn causes
the pump to cycle on until a sufficient level of water pressure is
achieved in the system. The Company also provides a complete line of water
systems accessories.
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 purify or
treat residential municipal-supplied and well water. The Company also
manufactures and markets products that address the need to boost water
pressure in many domestic and international locations where the available
pressure is not adequate.
HVAC PRODUCTS
AMTROL's net sales to selected sectors of the HVAC market, which include
net sales of products such as expansion accumulators, water heaters and
pressure-rated cylinders for refrigerant gases, accounted for
approximately $74.5 million (or 43.6%) of the Company's total net sales in
1996. 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, with the most significant difference being variations
required by design codes to meet the higher operating pressures of larger
systems. AMTROL's pressure-rated cylinders for refrigerant gases are used
in the storage, transport and dispensing of gases used in air conditioning
and refrigeration systems.
EXTROLS. Extrol expansion accumulators, the first AMTROL product line to
incorporate the Company's diaphragm technology for handling fluid under
pressure, are used in conjunction with hydronic heating systems, which
provide heat by circulating hot water through baseboard piping and
radiators. The Extrol product eliminates the corrosive effects of oxygen
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 resulting from excessive or deficient water pressure in the
system.
THERM-X-TROLS. Therm-X-Trols 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
approximately 90% 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
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alternatives are relief valves, which permit water to drain inside the
building, and thermal expansion accumulators, such as the Therm-X-Trol,
which capture the water. Therm-X-Trol satisfies these code requirements,
as well as the codes of cities that specifically require a thermal
expansion accumulator. Additionally, the two 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 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. 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 by generating hot water 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. Hot Water Makers are
sold for use in both commercial and residential applications. In addition
to selling products under its own brand name, AMTROL is presently pursuing
an OEM partnership strategy in this business whereby the Company supplies
hydronic products manufacturers with private branded indirect-fired water
heaters.
REFRIGERANT CYLINDERS. AMTROL is one of two significant manufacturers of
non-returnable pressure-rated cylinders used in the storage, transport and
dispensing of refrigerant gases for air conditioning and refrigeration
systems. These gases include chlorofluorocarbons ("CFC's") and
hydrochlorofluorocarbons ("HCFC's"), as well as newly developed
alternative refrigerants designed to mimic the desirable characteristics
of CFC's and HCFC's. The Montreal Protocol on Substances that deplete the
Ozone Layer (to which 140 countries are signatories) required the phase
out of CFC production by the end of 1995 and established an HCFC
consumption limit beginning January 1, 1996, with a complete phase out of
HCFC's by 2030. The United States has accelerated the HCFC phase out,
requiring the phase out of certain HCFC's by 2003, others by 2020 and the
remainder by 2030. During the past three years, these regulatory phase
outs and consumption limits on CFC's and HCFC's have created disruptions
in the market and have resulted in uneven and less predictable demand for
the Company's pressure-rated cylinders. These conditions may continue
during the transition to new alternative refrigerant gases until the
aftermarket service demand for the new alternative refrigerant gases grows
to previous CFC levels. However, the Company believes that the increasing
use of refrigeration and air conditioning in developing nations will
generate increased international sales of refrigerant gas cylinders.
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DISTRIBUTION AND MARKETING
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
40 independent firms that represent multiple manufacturers, arranging
sales on a commission basis, as well as approximately 20 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 DIY market segment through a separate sales force and
marketing division to better service this rapidly growing segment. AMTROL
has private label arrangements with Lowe's Companies, Menards, Cotter &
Company (True Value) 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. During 1996, over 2,000
customers and contractors attended technical programs at the Company's
Education Center.
AMTROL's major customers for reusable refrigerant gas cylinders are
wholesale distributors who sell the products to service providers and
refrigerant recovery equipment manufacturers. Non-returnable refrigerant
pressure-rated cylinders are also sold to major chemical companies, which
produce and package refrigerant gases, and to independent contractors that
purchase bulk refrigerants and fill the cylinders.
No single customer represented more than 5% of the Company's net sales in
1996.
INTERNATIONAL SALES
Sales in geographic regions outside of the United States and Canada,
primarily Western Europe, Asia and Mexico, accounted for 13.0%, 13.2% and
12.6% of the Company's total net sales in fiscal years 1994, 1995 and
1996, respectively. The majority of these sales were refrigerant gas
pressure-rated cylinders sold into Europe. In 1995, AMTROL believes that
its international business was adversely affected by depressed economic
conditions in Mexico and Europe.
Historically, the Company's international expansion efforts were hampered
by the lack of an international manufacturing presence and competitively
priced AMTROL products suitable for use in international markets. To
address these issues, the Company recently commenced manufacturing
activities at its Singapore facility and has developed new products and
modified existing products for use in specific international markets. The
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Singapore facility will enable AMTROL to better service its existing
customers and will provide a base for new business in the Asia/Pacific
region. The local manufacturing presence will allow the Company to more
effectively compete in the Asia/Pacific region. The Singapore facility
commenced manufacturing non-returnable pressure-rated cylinders in October
1996. The plans to focus on international expansion as a key part of its
strategy. See "--New Management and Business Strategy--Expand
Internationally."
Over the last two years, AMTROL has opened international sales offices in
Hong Kong and Singapore and plans to establish a sales office in Europe in
1997. In addition to these initiatives, AMTROL is building its own
distribution networks in the Asia/Pacific region and Latin America/Mexico.
To further penetrate European markets, AMTROL is selectively pursuing
acquisitions and distribution, OEM and manufacturing alliances.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
The Company manufactures water systems and HVAC products using components
produced in its own facilities, as well as those of outside suppliers. To
assure quality in its product lines and to enable the Company to respond
quickly to changing market demands, AMTROL manufactures most critical
components in its own facilities. The Company has a "Continuous
Improvement Program" for quality control directed at producing higher
yields, lower controllable costs per unit, higher order fill rates, better
on-time delivery and decreased warranty claims. AMTROL believes it has
developed substantial manufacturing expertise related to its technology
and its expertise in high quality, low cost manufacturing. This expertise,
combined with its extensive knowledge of the manufacturing tolerances
required to handle fluids under pressure, provides a competitive
advantage. Principal manufacturing processes include thin-wall steel deep
drawing, welding and rubber injection molding.
The Company's engineering and development efforts are focused on
developing new products and processes, adapting existing products for new
applications and improving the performance, quality and manufacturing cost
of its products.
Due to significant productivity gains achieved at its principal
manufacturing facilities, decisions were made to close two production
facilities which were no longer necessary. The Company's Plano, Texas
plant ceased operations in September 1995 and the Rogers, Arkansas plant
ceased operations in April 1996. Certain equipment from the Plano, Texas
plant was refurbished and redeployed in the company's new Singapore
manufacturing facility.
In addition to its ongoing facilities rationalization program, AMTROL has
implemented a significant capital improvement program with the intention
of further reducing manufacturing costs. During 1996, the Company spent
$10.9 million on capital expenditures. Most significantly, the Company has
spent approximately $2.4 million to automate the small diameter vessel
production line in West Warwick, Rhode Island, and $2.1 million in
conjunction with the opening of its Singapore facility.
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AMTROL's three principal export manufacturing facilities 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 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. In 1995, the Company experienced
increased raw material costs, particularly steel and corrugated paper,
which it was unable to offset and, as a result, its gross margin was
adversely impacted. During 1996, the Company has experienced reductions in
raw material prices offsetting many of the increases experienced in the
prior year. 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 are related to economic activity generally and
sales of certain of its products are seasonal, its 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 that are important to its
business, the Company believes that its position in its markets depends
primarily on factors such as manufacturing expertise, technological
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 licenses certain of its technology
to manufacturers in the Asia/Pacific region.
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 material to its business: the AMTROL(R) name, Well-X-Trol(R),
Therm-X-Trol(R), Extrol(R), Hot Water Maker(R) and CHAMPION(R).
13
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COMPETITION
Although the Company experiences substantial competition from a limited
number of competitors in each of its markets, the Company believes that it
is a market leader in its core products. 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. No single company competes
with AMTROL over a significant number of its product lines. As the Company
expands into international markets, it may experience competition from
local companies.
EMPLOYEES
As of December 31, 1996, the Company had approximately 915 employees, none
of whom were represented by collective bargaining units. 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 certain of the Company's
operations have been named a party in government enforcement and private
actions associated with hazardous waste sites (including several sites
under the federal Comprehensive Environmental Response, Compensation and
Liability Act, known as "Superfund") and, in several matters, have been
identified as being potentially responsible for a share of cleanup costs
associated with such sites. Based upon the Company's experience in such
matters, the amount of hazardous waste shipped to such sites attributable
to the Company and the status of settlement proceedings, the Company
estimates that its share of the aggregate cleanup costs for all of these
sites will not be material. In addition, the Company is in the process of
remediating contaminants discovered at its Plano, Texas facility, but does
not anticipate that the costs associated with such remediation will be
material. There can be no assurance that such liability arising from, for
example, contamination at facilities the Company (or an entity or business
the Company has acquired or disposed of) currently owns or operates or
formerly owned or operated, or locations at which wastes 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.
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15
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.
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
All AMTROL Product Lines, Education Center
Nashville, TN 121,600 Manufacturing Water Systems Products and
Pressure-rated Cylinders
Peru, IN 60,600 Manufacturing Pumps, HVAC Products and
Accessories (Residential and Commercial)
Baltimore, MD 37,000 Manufacturing Metal Stampings
Liverpool, NY(a) 68,000 Distribution of Water Systems Products and
Accessories for Irrigation, Pools/ Spas, HVAC
Lithonia, GA(a) 30,000 Distribution of Water Systems Products and
Accessories for Irrigation, Pools/ Spas, HVAC
Paducah, KY 46,300 Manufacturing Pressure-rated Cylinders
Ashland, OH(a) 37,000 Manufacturing Water Treatment/Filtration Products
Mansfield, OH(a) 45,000 Distribution Center for Do-It-Yourself Market
Singapore(a) 30,000 Manufacturing Pressure-rated Cylinders;
Sales Office for Southeastern Asia
Hong Kong(a) 600 Sales Office for Northern Asia
Antwerp, Belgium(b) -- Distribution
Kitchener, Ontario(a) 18,400 Distribution
Plano, TX 40,000 Held for Sale
------
TOTAL 804,500
=======
(a) Leased facilities
(b) The distribution center in Antwerp operates under a lease for space on an
as-needed basis.
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AMTROL believes that its properties and equipment are generally 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 arising in the normal course of business. The Company is not
a party to any pending legal proceeding the resolution of which
management believes will have a material adverse effect on the
Company's results of operations or financial condition or to any
pending legal proceedings other than ordinary, routine litigation
incidental to its business. See "Item 1, Business--Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
On November 12, 1996 the Company held a Special Meeting of
Shareholders. Set forth below are the results of each matter voted
upon at the Special Meeting:
PROPOSAL 1. Amendment to Articles of Incorporation. To consider and
vote upon a proposal to adopt an Amendment to the Amended and
Restated Articles of Incorporation of the Company (the "Articles")
which would amend Article Sixth, Section D of the Articles, in
contemplation of the Merger, to exclude the Merger from the
definition of "business combination" in order that the Merger need
only be approved by holders of a majority of the outstanding AMTROL
Common Stock.
For Against Abstentions
--- ------- -----------
6,327,038 8,868 31,300
PROPOSAL 2. The Merger. To consider and vote upon a proposal to
approve the Merger Agreement, dated as of August 28, 1996 (the
"Merger Agreement"), by and among AMTROL, Holdings and Acquisition,
pursuant to which, among other matters, Acquisition will merge with
and into AMTROL (the "Merger") and each share of AMTROL Common
Stock, will be converted into the right to receive $28.25 in cash,
without interest thereon.
For Against Abstentions
--- ------- -----------
6,347,586 1,668 17,952
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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".
Prior to the Merger, AMTROL Common Stock was traded on The Nasdaq
Stock Market's National Market ("Nasdaq National Market") under the
symbol "AMTL". The following table sets forth the high and low
prices per share of AMTROL Common Stock on the Nasdaq National
Market with respect to each quarterly period since January 1, 1995
through the effective date of the Merger.
High Low
---- ---
Fiscal 1995
Quarter ended April 1, 1995 17 3/4 14 3/4
Quarter ended July 1, 1995 20 5/16 15 3/4
Quarter ended September 30, 1995 19 3/8 15 3/4
Quarter ended December 31, 1995 18 14 1/2
Fiscal 1996
Quarter ended March 30, 1996 18 1/2 14 1/4
Quarter ended June 29, 1996 24 1/4 16 1/2
Quarter ended September 28, 1996 27 3/4 19 1/2
Quarter ended December 31, 1996 28 3/8 27 1/2
(through November 12, 1996)
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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, 1996
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 Financial
Condition and Results of Operations" and with the Consolidated Financial
Statements of the Company, including the related notes thereto, appearing
elsewhere in this Prospectus.
---------------------PREDECESSOR COMPANY---------------------
SUCCESSER
PERIOD COMPANY
ENDED PERIOD ENDED
YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
(In Thousands, except ratio data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 148,462 $ 164,295 $ 173,472 $172,454 $ 152,193 $ 18,628
Cost of goods sold 103,521 116,180 123,184 124,303 110,582 15,108(e)
--------- --------- --------- -------- --------- --------
Gross profit 44,941 48,115 50,288 48,151 41,611 3,520
Selling, general and
administrative expenses 28,731 29,099 30,402 29,943 25,796 3,508
Amortization of goodwill -- -- -- -- -- 313
Plant closing charges -- -- -- 3,825 -- --
Capitalized in-process research
and development -- -- -- -- -- 1,000
--------- --------- --------- -------- --------- --------
Income (loss) from operations 16,210 19,016 19,886 14,383 15,815 (1,301)
Interest income (expense), net (2,677) (805) (7) 60 53 (2,224)
License and distributorship fees 283 254 254 258 181 25
Other income (expense), net (534) (141) (179) 65 (175) (99)
--------- --------- --------- -------- --------- --------
Income (loss) before
provision for income taxes
and extraordinary item 13,282 18,324 19,954 14,766 15,874 (3,599)
Provision (benefit) for income taxes 5,090 7,149 7,683 5,681 6,152 (1,310)
--------- --------- --------- -------- --------- --------
Income (loss) before
extraordinary item 8,192 11,175 12,271 9,085 9,722 (2,289)
Extraordinary item -- (911)(a) -- -- -- --
--------- --------- --------- -------- --------- --------
Net income (loss) $ 8,192 $ 10,264 $ 12,271 $ 9,085 $ 9,722 $ (2,289)
========= ========= ========= ======== ========= ========
OTHER DATA:
Depreciation and amortization $ 4,349 $ 4,520 $ 4,330 $ 4,673 $ 4,586 $ 598
Capital expenditures 2,849 7,382 4,902 5,492 9,260 1,662
EBITDA(b) 20,842 23,790 24,470 23,139 20,582 (678)
Ratio of earnings to fixed 5.3x 16.3x 38.0x 41.5x 42.6x --
charges(c)
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 20,833 $ 28,454 $ 37,293 $ 43,303 $ 41,778 $ 35,143
Total assets 74,499 82,612 91,634 93,909 96,280 255,193
Long-term debt, less current
installments 29,676 3,333(d) 2,381 -- -- 159,175
Shareholders' equity 16,656 53,017(d) 64,174 70,206 73,783 67,037
(a) Reflects an extraordinary loss of $1.5 million ($.9 million net of tax
benefits) in 1993 from the early extinguishment of debt.
(b) 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.
(c) For purposes of this computation, earnings represent net income before
extraordinary item, income taxes, plant closing charges and fixed charges.
Fixed charges consist of interest expense, capitalized interest, the
interest component of operating leases and amortization of deferred
financing costs. The earnings for the period ended December 31, 1996 are
inadequate to cover fixed charges by $3.6 million.
(d) The Company completed an initial public offering in 1993 of its common
stock and used the net proceeds to reduce its indebtedness.
(e) Reflects a $1.0 million charge related to the upward revision of the
Company's workers' compensation reserve estimate.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company included
elsewhere herein.
OVERVIEW
In connection with the acquisition of the Company by affiliates of
Cypress, management has developed and begun to execute a new
strategic plan to immediately reduce costs and capitalize on
AMTROL's position as a technological and market leader. The
Company's future results of operations will depend in a large part
on management's ability to implement this strategy. See Item 1,
"Business--New Management and Business Strategy."
AMTROL's principal markets are highly replacement-oriented with 60
to 70% of the Company's core business coming from replacement sales.
The installed base of AMTROL's products in these core markets,
combined with their stable nature, provide the Company with a
consistent and predictable base business. Although generally stable,
sales are affected by weather, as well as general economic activity.
The Company monitors well water pump sales, existing home sales and
boiler shipments in order to gauge activity in its markets. Although
sales of certain of AMTROL's product lines are seasonal in nature,
its overall business is not seasonal to any significant extent, as
seasonal variations of individual product lines tend to offset each
other.
As a result of the Merger, the Company will have a higher level of
depreciation and amortization and interest expense.
NET SALES. Net sales of the Company's water systems products
accounted for approximately 56.4% of the Company's total net sales
in 1996, with the balance represented by sales to the HVAC market.
Over the past three years, the percentage of water systems net sales
to total net sales has been fairly constant.
AMTROL's well water accumulators, marketed under the brand names
Well-X-Trol and CHAMPION, account for over half of the Company's
total water systems net sales and generally carry higher gross
profit margins than other product sales. These pre-pressurized
vessels are distributed through a network of pump specialty and
plumbing and heating wholesalers and the DIY retail network. The
market is experiencing a modest shift in the channels of
distribution from wholesalers to DIY retailers, which generally
carry slightly lower selling prices. Sales of water system
accumulators are generally correlated to shipments of well water
pumps.
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20
The Company's HVAC products include indirect-fired water heaters and
water expansion accumulators for hydronic heating systems and
non-returnable pressure-rated cylinders for refrigerant gas.
AMTROL's plumbing and heating sales outside of North America are
currently not significant. AMTROL believes it has opportunities to
increase its sales in Europe, currently the world's largest hydronic
heating market, as well as emerging markets in Northern Asia through
a combination of planned new products and joint ventures.
Therm-X-Trol product sales combined with planned new product
introductions will provide growth opportunities in the plumbing and
heating product group.
The market for refrigerant gas pressure-rated cylinders is
seasonable in nature, with roughly 60% of annual sales coming in the
first six months of the year as producers build inventory in
preparation for air conditioner use in the summer season. An
unseasonably hot spring and early summer favorably impact unit
volume demand. AMTROL and Worthington Industries are the major
manufacturers of non-returnable refrigerant cylinders for a world
market dominated by a few major customers. The Company expects that
rapidly increasing demand for air conditioning and refrigerant
products in the Asia/Pacific region will generate sales growth.
COST OF GOODS SOLD. The principal elements comprising the Company's
cost of goods sold are raw materials, labor and manufacturing
overhead. The major raw materials used by the Company in its
production process are steel, corrugated paper, plastic resins and
synthetic rubber. Significant increases in raw material prices can
adversely impact margins if the Company is unable to pass on such
increases to its customers. The Company has an infrastructure of
capital equipment, buildings and related support costs and,
accordingly, decreases in volume can have a significant adverse
effect on margins. Cost of goods sold can also be significantly
affected by changes in product mix.
Since the fourth quarter of 1995, the Company has significantly
reduced its manufacturing cost base. The Company reduced its
workforce by approximately 15%, or 125 people, by closing its Plano,
Texas facility in September 1995 and its Rogers, Arkansas facility
in April 1996. Production previously performed in these facilities
was transferred to other existing production plants. In the fourth
quarter of 1995 and the first half of 1996, the Company experienced
certain inefficiencies and additional costs assimilating the
production into the remaining plants. Historically, the Company's
labor rate increases have been generally in line with inflation, but
the Company is moving away from a straight cost of living increase
to a pay-for-performance merit system.
20
21
During 1996, the Company began to make increased capital investments
to enhance production capabilities, eliminate production bottlenecks
and improve production yield. As a result, plant efficiencies are
expected to improve in 1997 and in the future as this program
continues. In addition, to better service and reduce distribution
costs in its growing customer base in the Asia/Pacific region, the
Company recently opened a production facility in Singapore. This
facility initially will manufacture non-returnable pressure-rated
cylinders.
In 1994, the Company introduced the "4BA" reusable pressure-rated
cylinder product line to service the anticipated expanding
reclamation and refrigerant recovery market. As a result of lower
than expected demand, competitive pricing, and a high cost
manufacturing process, the 4BA product line's cost of goods sold
exceeded its net sales in 1994, 1995 and 1996, adversely impacting
the Company's gross profits in those periods. The Company
discontinued this product line in the fourth quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During 1994, the
Company reorganized its sales force and consolidated multiple
product lines under one sales organization. This program resulted in
reduced selling expenses in 1995. Generally, selling expenses will
increase proportionally to increases in net sales.
In 1994, to better position itself for future growth, the Company
increased its spending on engineering and development. Additionally,
in 1994, the Company organized itself into three separate business
units: water systems, plumbing and heating systems and chemical
containers. As a result of these actions, the Company experienced
increased operating expenses, primarily due to higher staffing
levels necessary to support the new organizational structure. As
part of the Company's new business strategy, the three separate
business units have been consolidated into one, which will result in
annual expense savings of approximately $600,000. The Company began
realizing the benefits of this consolidation during the fourth
quarter of 1996. During 1995, AMTROL continued to increase its
investment in engineering and development. To support its planned
expansion in international markets, the Company began to increase
its investment in staff and marketing in 1995 and this continued in
1996, resulting in increased operating expenses.
PLANT CLOSING CHARGES. In 1995, the Company recorded a $3.8 million
charge to operating expenses for severance and other costs in
anticipation of the closures of the Plano, Texas and Rogers,
Arkansas plants.
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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,
----------------------------------
1994 1995 1996
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 71.0 72.1 73.6
------ ------ ------
Gross profit 29.0 27.9
26.4
Selling, general and administrative expense 17.6 17.4
17.9
Plant closing charges -- 2.2 --
------ ------ ------
Income from operations 11.4 8.3 8.5
Interest income (expense), net -- .1 (1.3)
Other income, net .1 .2 --
------ ------ ------
Income before provision for income taxes
and extraordinary item 11.5 8.6 7.2
Provision for income taxes 4.4 3.3 2.8
------ ------ ------
Income before extraordinary item 7.1% 5.3% 4.4%
====== ====== ======
Composition of net sales for the Company's water systems and HVAC
products for the periods indicated is listed below:
Year Ended December 31,
-----------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Net Sales
Water Systems $ 98.2 56.6% $ 96.4 55.9% $ 96.3 56.4%
HVAC 75.3 43.4 76.1 44.1 74.5 43.6
------- ----- ------- ----- ------- -----
Total $ 173.5 100.0% $ 172.5 100.0% $ 170.8 100.0%
======= ===== ======= ===== ======= =====
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1995.
The consolidated financial statements of the Company for the periods
prior to November 13, 1996 have been prepared on the historical cost
basis. The Merger has been accounted for as a purchase transaction.
The consolidated balance sheet of the Company at December 31, 1996
reflects allocation of the Merger Consideration and related costs to
the assets acquired and thus is not comparable with the historical
balance sheets presented for prior periods. Operating results
subsequent to the Merger are comparable to prior periods, with the
exception of cost of sales (due to the $ 1.0 million charge related
to the upward revision of the workers' compensation reserve
estimate),
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depreciation expense, amortization of intangible assets and
capitalized in-process research and development and interest
expense. The net impact of changes in depreciation and amortization
on operating income for the seven weeks ended December 31, 1996 was
a reduction of $1.5 million.
NET SALES. Net sales decreased $1.7 million (or 1.0%) in 1996 to
$170.8 million from $172.5 million in 1995. This decrease was
primarily attributable to weak domestic demand for refrigerant
pressure-rated cylinders partially offset by increased sales of
residential plumbing and heating products due to stronger demand in
the new and replacement hydronic heating market. Net sales
attributable to the Company's water systems products were virtually
flat in 1996 at $96.3 million as increased sales of water well
accumulators were offset by decreased sales of water treatment
products. Net sales attributable to the Company's HVAC products
decreased $1.6 million (or 2.1%) to $74.5 million in 1996, primarily
due to a decrease in sales of refrigerant pressure-rated cylinders
resulting from a pre-buy of domestic non-returnable cylinders in
1995, offset by increased sales of the Company's core HVAC products.
The decline in domestic sales of non-returnable pressure-rated
cylinders also reflects the continued transition from CFC's to new
alternative refrigerant gases which is expected to continue until
the after-market service demand for new refrigerant gases grows to
previous CFC levels.
COST OF GOODS SOLD. Cost of goods sold increased $1.4 million (or
1.1%) in 1996 to $125.7 million from $124.3 million in 1995 and
included a $1.0 million upward revision of estimates for worker
compensation reserves. As a percentage of net sales, cost of goods
sold increased in 1996 to 73.6% as compared to 72.1% in 1995. This
increase was due primarily to the workers' compensation charge as
well as inefficiencies associated with assimilating production
requirements of the two manufacturing facilities closed during the
prior fifteen months, and the cost of production interruptions
associated with inclement weather.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $.7 million (or 2.3%) in 1996 to
$30.6 million from $29.9 million in 1995. As a percentage of net
sales, selling, general and administrative expenses increased in
1996 to 17.9% as compared to 17.4% in 1995. This increase was due to
a purchase accounting related charge related to capitalized
in-process research and development of $1.0 million, offset in part
by reduced administrative expenses associated with the Chairman's
office. Excluding charges for goodwill amortization and capitalized
in-process research and development, selling, general and
administrative expenses decreased $.6 million (or 2.1%) in 1996 to
$29.3 million or 17.2%.
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INCOME FROM OPERATIONS. For the reasons set forth above, income from
operations increased $.1 million in 1996 to $14.5 million from $14.4
million (after plant closing charges of $3.8 million) in 1995.
Excluding the effects of goodwill amortization and capitalized
in-process research and development in 1996 and the plant closing
charges in 1995, income from operations decreased $2.4 million in
1996 to $15.8 million from $18.2 million in 1995. This decrease was
primarily due to the lower gross profit percentage.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased $2.2
million in 1996 from 1995 due to borrowing costs related to the
financing of the Merger.
INCOME TAXES. Income tax expenses decreased $.8 million in 1996
as compared to 1995.
NET INCOME. Net income decreased $1.7 million (or 18.7%) in 1996 to
$7.4 million from $9.1 million (including plant closing charges (net
of tax benefit) of $1.9 million) in 1995.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1994
NET SALES. Net Sales decreased $1.0 million (or .6%) in 1995 to
$172.5 million from $173.5 million in 1994. This decrease was
primarily attributable to a decline in the sales of certain water
systems accessories and a softness in the residential plumbing and
heating market. Net sales attributable to the Company's water
systems products decreased $1.8 million (or 1.8%) in 1995 to $96.4
million from $98.2 million in 1994, primarily due to the elimination
of certain lower margin water systems accessory product offerings
partially offset by increased sales of water system accumulators.
Net sales attributable to the Company's HVAC products increased $.8
million (or 1.1%) in 1995 to $76.1 million from $75.3 million in
1994, principally due to increased sales of Therm-X-Trols,
commercial and industrial heating products and certain refrigerant
cylinder products; these increases were partially offset by a
decrease in sales of residential plumbing and heating products,
primarily due to weak domestic demand for new and replacement
hydronic heating systems resulting from a relatively warm winter in
1995. In addition, international sales in 1995 were adversely
affected by depressed economic conditions in Mexico and Europe.
COST OF GOODS SOLD. Cost of goods sold increased $1.1 million (or
.9%) in 1995 to $124.3 million from $123.2 million in 1994. This
increase was due to increased raw material costs. As a percentage of
net sales, cost of goods sold increased in 1995 to 72.1% as compared
to 71.0% in 1994. This increase was due to the poor performance of
the 4BA reusable pressure-rated cylinder product line as well as
increased raw material costs that the Company was unable to offset.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $.5 million (or 1.6%) in 1995 to
$29.9 million from $30.4 million in 1994. This decrease in expenses
was primarily due to a reduction in selling expenses resulting from
a reorganization of the Company's sales force and consolidation of
multiple lines of business partially offset by increased investment
in engineering, research and development expenses. As a percentage
of net sales, selling, general and administrative expenses decreased
slightly in 1995 to 17.4% as compared to 17.6% in 1994.
INCOME FROM OPERATIONS. Income from operations decreased $5.5
million (or 27.6% in 1995 to $14.4 million from $19.9 million 1994.
This decrease was primarily due to plant closing charges of $3.8
million incurred in 1995 and reduced gross profits.
INTEREST INCOME (EXPENSE), NET. Net interest income increased
$67,000 in 1995 to $60,000 from net interest expense of $7,000 in
1994.
INCOME TAXES. Income tax expenses decreased $2.0 million (or
26.0%) in 1995 to $5.7 million from $7.7 million in 1994.
NET INCOME BEFORE EXTRAORDINARY ITEM. For the reasons set forth
above, net income before extraordinary item decreased $3.2 million
(or 26.0%) in 1995 to $9.1 million from $12.3 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $11.4 million for 1996, representing
a decrease of $.5 million as compared to $11.9 million for 1995.
Cash was utilized during the latest period to fund capital
expenditures, ordinary dividends and a special dividend of $5.5
million, which represented the proceeds from the sale of the
Company's Rogers, Arkansas manufacturing facility, expected proceeds
from the sale of the Company's Plano, Texas facility and proceeds
from life insurance policies. The Company's cash flows from
operating activities were approximately $10.7 million, $11.9 million
and $11.4 million for the years ended December 31, 1994, 1995 and
1996, respectively.
In connection with the Merger, AMTROL issued $115.0 million of
Senior Subordinated Notes due 2006 (the "Notes") issued under an
Indenture dated as of November 13, 1996. 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
25
26
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 may
use the net cash proceeds of one or more public 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 Indenture contains affirmative and
negative covenants and restrictions similar to those required under
the terms of the Bank Credit Agreement discussed below. As of
December 31, 1996, AMTROL is in compliance with the various
covenants of the Indenture.
The Company intends to fund its future working capital, capital
expenditures and debt service requirements through cash flows
generated from operations (including the results of significantly
reduced operating expenses) and borrowings under the revolving
credit facility (the "Revolving Credit Facility") of the Bank Credit
Facility. Upon consummation of the Merger on November 13, 1996, the
Company became party to the Bank Credit Facility. The Bank Credit
Facility consists of $45.0 million of senior term loans (the "Term
Loans") and a $30.0 million Revolving Credit Facility. A portion
($20.0 million) of the Term Loans (the "Tranche A Term Loans") will
mature five and one-half years after the effective date of the
Merger, with quarterly amortization payments during the term of such
loans. The remainder ($25.0 million) of the Term Loans (the "Tranche
B Term Loans") will mature seven and one-half years after the
effective date of the Merger, 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 in the fourth year and $10.0 million in the fifth year after
the effective date of the Merger. The Revolving Credit Facility will
mature five and one-half years after the effective date of the
Merger. The Bank Credit Facility is secured by substantially all
assets of the Company and its subsidiaries.
Capital expenditures were $4.9 million, $5.5 million and $10.9
million in the years ended December 31, 1994, 1995 and 1996,
respectively. These expenditures related primarily to ongoing
maintenance and upgrading of the Company's manufacturing technology
and, in 1996, included capital expenditures related to the
establishment of the Company's Singapore facility. Total capital
expenditures are expected to be $7.0 million in 1997 and 1998.
26
27
In the years ended December 31, 1994, 1995 and 1996, cash flows used
in financing activities (excluding the Merger) were approximately
$2.1 million, $6.4 million and $6.5 million, respectively. In each
period, such cash flows were used primarily to pay cash dividends,
make net repayments of borrowings and to repurchase the Company's
common stock.
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.
INFLATION
The Company believes that inflation did not have a material effect
on its results of operations or financial condition during 1994.
However, in 1995, the Company experienced increased raw material
costs, particularly steel and corrugated paper. During 1996, the
Company has experienced reductions in raw material prices,
offsetting many of the increases experienced in the prior year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The index to financial statements is included on page 40 of this
report.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
28
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 following the
Merger:
NAME AGE POSITION
---- --- --------
John P. Cashman 56 Chairman of the Board, Chief
Executive Officer and President
Samuel L. Daniels 48 Executive Vice President and Director
Clifford A. Peterson 61 Senior Vice President-Operations &
Technology and Director
Edward J. Cooney 49 Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary
Mary C. Richmond 46 Vice President - Corporate
Development
David P. Spalding 42 Director
James A. Stern 46 Director
Anthony D. Tutrone 32 Director
John P. ("Jack") Cashman became Chairman of the Board, Chief Executive
Officer and President upon the Merger. Mr. Cashman has over 30 years of
general industrial management experience in the filtration, minerals,
building products and pharmaceutical industries. 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. Prior to R.P. Scherer, Mr.
Cashman had an extensive career at Johns-Manville Corporation as the
President of Manville International, President of Manville Canada Inc. and
Senior Vice President of Manville Corporation, as well as numerous other
positions in general management, marketing and operations.
Samuel L. Daniels, Executive Vice President has been with the Company since 1987
and became a director upon the Merger. From 1993 to 1996, Mr. Daniels served as
Vice President-Water Systems. From 1991 to 1993, he served as General Manager of
all AMTROL subsidiaries, and from 1989 to 1991, he was General Manager of the
Company's Clayton Mark subsidiary He originally joined the Company in 1987 as
Vice President of Marketing for Clayton Mark Inc. Prior to joining the Company,
he was Vice President of Mueller Pump.
28
29
Clifford A. Peterson, Senior Vice President-Operations & Technology, joined the
Company in July 1995 as Vice President of Technology and became a director upon
the Merger. Mr. Peterson served as Executive Vice President and Chief Operating
Officer from February to September 1996. From 1989 to 1994, he was Vice
President-General Manager of the Production Mail Division of Pitney Bowes Inc.
Prior to that, he served as Vice President-Operations of the Dictaphone
Corporation.
Edward J. Cooney, Senior Vice President, Chief Financial Officer and Treasurer,
joined the Company in 1978, serving as Chief Financial Officer since 1991, as
Senior Vice President-Operations from 1988 to 1991, as Vice President from 1985
to 1988 and as Treasurer since 1982. Prior to joining the Company, Mr. Cooney
was associated for nine years with Arthur Andersen LLP, independent public
accountants.
Mary C. Richmond, Vice President-Corporate Development, joined the Company in
December 1995 as Director of Business Development. From November 1993 to
December 1995 she was retained by the Company as an Acquisitions Consultant.
From 1981 to 1993 she was Director, Mergers and Acquisitions of Textron Inc.
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. from February 1991. Previously, he
held the position of Senior Vice President of Lehman Brothers Inc. from
September 1988 to February 1991. From April 1987 to September 1988, he was
Senior Vice President of General Electric Capital Corporation Corporate
Finance Group, Inc. Prior to 1987 he was a Vice President of The First
National Bank of Chicago,. Mr. Spalding is also a director of Lear
Corporation.
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. He also, at various
times, served as head of Lehman's High Yield and Primary Capital Markets
Groups, and was co-head of Investment Banking. In addition, Mr. Stern was a
member of the firm's Operating Committee. Mr. Stern is a director of Noel
Group, Inc., Lear Corporation, Cinemark USA, Inc., R.P. Scherer and K&F
Industries, Inc.
Anthony D. Tutrone became a director of the Company upon the Merger. Mr.
Tutrone has been a Principal of Cypress since its formation in April 1994.
Prior to joining Cypress, he was a member of the Merchant Banking Group of
Lehman Brothers, Inc. from 1986 to 1994, except from 1990 to 1992 when he
attended Harvard Business School.
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30
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Prior to the Merger, AMTROL Common Stock was registered pursuant to Section 12
of the Securities Exchange Act of 1934 as amended (the "Exchange Act"). Section
16(a) of the Exchange Act requires the Company's officers, directors and persons
who beneficially own more than ten percent of a registered class of the
Company's equity securities to file reports of securities ownership and changes
in such ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent beneficial owners also are required by
rules promulgated by the Securities and Exchange Commission to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon a
review of the copies of such forms furnished to the Company, or written
representations from the reporting persons, the Company believes that during
1996 its officers, directors and greater than ten-percent beneficial owners
complied with all applicable Section 16(a) filing requirements.
On November 13, 1996, pursuant to Rule 12h-3 under the Exchange Act, AMTROL
filed with the Securities and Exchange Commission a certification on Form 15,
suspending its obligations under Section 15(d) to file reports required by
Section 13(a) of the Exchange Act with respect to AMTROL Common Stock, and
terminating the registration of AMTROL Common Stock under Section 12(g) of the
Exchange Act. Accordingly, officers, directors and greater than ten-percent
beneficial owners are no longer required to file reports under Section 16(a) of
the Exchange Act.
30
31
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by
the Company to those individuals who served as its Chief Executive
Officer at any time during 1996, each of its four most highly
compensated executive officers who earned more than $100,000 in
salary and bonus in 1996 and were employed by the Company on
December 31, 1996 and each of two individuals who would have been
one of the four most highly compensated executive officers but for
the fact that they were no longer employed by the Company on
December 31, 1996, in each case, for services rendered in all
capacities to the Company during 1996:
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM
---------
ANNUAL COMPENSATION
------ ------------
COMPENSATION(b) AWARDS
--------------- ------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(A) BONUS OPTIONS/SARS COMPENSATION(c)
- --------------------------- ---- --------- ----- ------------ ---------------
Chester H. Kirk* 1996 $ 83,076 0 0 $690,191(d)
Chairman and CEO 1995 530,000 $184,700 40,000 21,611
1994 507,500 239,200 40,000 17,487
John P. Cashman* 1996 0 0 -- --
Chairman, President and 1995 -- -- -- --
CEO 1994 -- -- -- --
Kenneth L. Kirk 1996 252,192 0 0 20,216
Chairman (e) 1995 274,500 57,800 15,000 16,458
1994 265,000 88,700 15,000 16,371
Samuel L. Daniels 1996 149,192 39,600 20,000 8,395
Executive Vice 1995 129,000 27,500 10,000 6,285
President(f) 1994 120,043 40,680 10,000 7,945
Clifford A. Peterson 1996 159,521 44,010 15,000 8,682
Senior Vice 1995 115,731 31,500 10,000 718
President-Operations & 1994 36,500 -- -- --
Technology (g)
Edward J. Cooney 1996 169,329 44,010 12,000 8,795
Senior Vice President- 1995 162,500 34,200 10,000 8,792
Chief Financial Officer 1994 160,000 49,600 10,000 8,877
Mary C. Richmond 1996 110,569 40,000 5,000 1,271
Vice President-Corporate 1995 62,460 -- 5,000 --
Development 1994 25,704 -- -- --
David P. Whittingham 1996 147,500 23,660 12,000 257,430(h)
Senior Vice President- 1995 162,500 34,200 10,000 8,501
International Sales(h) 1994 155,000 49,600 10,000 8,607
31
32
* Mr. C. Kirk died on February 15, 1996. Mr. Cashman assumed the
positions of Chairman, President and CEO on November 13, 1996, upon
consummation of the Merger.
(a) Includes portion of salary deferred under the Company's 401(k) Plan.
(b) Any prerequisites 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).
(c) Amounts paid in 1996 include the Company's contributions under the
Company's 401(k) Plan in the amount of $3,942 for Mr. C. Kirk, $7,623
each for Messrs. K. Kirk, Cooney and Daniels, $5,373 for Mr. Peterson
and $2,250 for Mr. Whittingham and premiums paid by the Company with
respect to term life insurance purchased for such executive officers
and not made available generally to salaried employees in the following
amounts: Mr. C. Kirk ($1,760), Mr. K. Kirk ($12,593), Mr. Cooney
($1,172), Mr. Daniels ($772), Mr. Peterson ($3,309), Mr. Whittingham
($770) and Ms. Richmond ($1,271).
(d) Includes, in addition to amounts described in footnote (c) above, a lump
sum cash death benefit of $656,000 paid to Mr. Kirk's surviving spouse and
the value of Mr. Kirk's Company owned car ($28,489) which was transferred
to his surviving spouse.
(e) Mr. K. Kirk served as Chairman from February 21, 1996 until his
resignation on November 13, 1996 in connection with the Merger. Prior
thereto, he served as Executive Vice President.
(f) Mr. Daniels was elected Executive Vice President on October 7, 1996, in
contemplation of the Merger. Prior thereto he served as Vice
President-Water Systems.
(g) Mr. Peterson was elected Senior Vice President Operations & Technology
on October 7, 1996 in contemplation of the Merger. Prior thereto he
served as Executive Vice President and Chief Operating Officer. Mr.
Peterson joined the Company in July 1995 as Vice President of
Technology.
(h) Mr. Whittingham's employment terminated on October 4, 1996. Includes, in
addition to amounts described in footnote (c) above, $210,900 severance,
$9,750 for unused vacation pay, $16,680, representing the value of Company
owned car transferred to Mr. Whittingham, and $16,900 for outplacement
services related to his termination of employment.
32
33
OPTION PLANS
The following table sets forth, for the named executive officers,
information regarding stock options granted during 1996 pursuant to the
Company's 1992 Stock Plan. The 1992 Stock Plan was terminated immediately
prior to the Merger. No stock options were granted to Messrs. C. Kirk,
Cashman, Beretta or K. Kirk in 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS/ VALUE AS ASSUMED
SECURITIES SARS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS/ EMPLOYEES EXERCISE OR TEN YEARS(b)
SARS IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED(a) YEAR ($/Sh) DATE 5%($) 10%($)
- ---- ---------- ---- ------ ---- ----- ------
Samuel L. Daniels 20,000 14.7% $ 15.00 2/21/2006 $188,600 $478,200
Clifford A. Peterson 15,000 11.0% 15.00 2/21/2006 141,450 358,650
Edward J. Cooney 12,000 8.8% 15.00 2/21/2006 113,160 286,920
Mary C. Richmond 5,000 3.7% 15.00 2/21/2006 47,150 119,550
David P. Whittingham 12,000 8.8% 15.00 2/21/2006 113,160 286,920
(a) All of these options were exercisable in four equal annual installments
commencing on February 21, 1997, subject to acceleration on a change of
control. Accordingly, all options became exercisable upon the Merger. See,
table under "Aggregate Option/SAR Exercises in Last Fiscal Year and
Year-End Option/SAR Values". Options granted to Messrs. Daniels, Cooney
and Whittingham were non-qualified; options granted to Mr. Peterson and
Ms. Richmond were incentive stock options. The options terminate three
months after termination of employment, other than for death or
disability. A portion of these options were exchanged for options to
acquire Holdings common stock. See, "Ten Year Options/SAR Repricings".
(b) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. They are
calculated by multiplying the number of options granted by the difference
between a future hypothetical stock price and the option exercise price
and are shown pursuant to rules of the Securities and Exchange Commission.
They assume the value of the Company's Common Stock appreciates 5% or 10%
each year, compounded annually, for ten years. They are not intended to
forecast possible future appreciation, if any, of such stock price or to
establish a present value for the options. In connection with the Merger,
all options were either canceled in exchange for the difference between
the per share Merger Consideration and the option exercise price or
exchanged for options to acquire Holdings common stock.
33
34
Immediately prior to the Merger, all outstanding options (other than
options exchanged for options exercisable for Holdings common stock, as
described below) were canceled and the holder received cash equal to the
excess of $28.25 over the per share exercise price of such option,
multiplied by the number of shares of AMTROL Common Stock then subject to
the option. The following table sets forth the amounts received by the
named executives during 1996, in connection with the Merger. No options
were exercised by the named executives during 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES
NUMBER OF
SECURITIES
UNDERLYING
NUMBER OF UNEXERCISED
SECURITIES OPTION/SARS
UNDERLYING AT FISCAL VALUE OF UNEXERCISED
OPTIONS/SARS VALUE YEAR END IN-THE-MONEY
NAME EXERCISED (a) REALIZED($)(a) 1996 (b) OPTIONS/SAR($)(c)
- ---- ------------- -------------- -------- ---------------------
Chester H. Kirk 130,000 $1,560,000 0
John P. Cashman 0 0 0 0
David Beretta 75,000 871,875 0 0
Kenneth L. Kirk 46,000 548,563 0 0
Samuel L. Daniels 29,597 393,334 4662 200,036
Clifford A. Peterson 0 0 7062 316,250
Edward J. Cooney 55,398 838,639 2839 100,003
Mary C. Richmond 8,774 16,273 2478 109,977
David P. Whittingham 49,500 634,225 0 0
- ----------------------
(a) Share and dollar numbers represent cash payments received in the Merger in
exchange for cancellation of options for AMTROL Common Stock.
(b) Immediately prior to the Merger, Messrs. Daniels, Peterson, and Cooney and
Ms. Richmond exchanged options exercisable for AMTROL Common Stock for
options exercisable for Holdings common stock ("Amended Options") based on
a conversation ratio of .2825 share of Holdings common stock for each
share of AMTROL Common Stock subject to the option. Represents number of
shares of Holdings Common Stock subject to Amended Options received in the
exchange. All Amended Options are fully exercisable.
(c) Based on the purchase price of Holdings common stock issued in connection
with the Merger less the exercise price of the Amended Options.
34
35
Immediately prior to the Merger, each of the following individuals
exchanged options exercisable for AMTROL Common Stock for Amended Options
exercisable for Holdings common stock, as follows:
TEN-YEAR OPTION/SAR REPRICINGS
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK AT REMAINING
OPTIONS/SARS TIME OF NEW AT DATE OF
REPRICED OR REPRICING OR EXERCISE REPRICING OR
NAME DATE(a) AMENDED (#)(b) AMENDMENT(c) PRICE($)(d) AMENDMENT
- ---- ------- -------------- ------------ ----------- ---------
Samuel L. Daniels 11/13/96 2825 $100.00 $57.965 7/21/2004
1837 100.00 55.75 2/12/2005
Clifford A. 11/13/96 2825 100.00 58.41 9/1/2005
Peterson 4237 100.00 53.10 2/21/2006
Edward J. Cooney 11/13/96 2825 100.00 64.82 4/21/2004
14 100.00 55.75 2/12/2005
Mary C. Richmond 11/13/96 1412 100.00 57.52 12/1/2005
1066 100.00 53.10 2/21/2006
- --------------------------
(a) Effective date of Merger.
(b) Represents shares underlying Amended Options exercisable for Holdings
common stock received in exchange for options exercisable for AMTROL
Common Stock based on a conversion ratio of .2825.
(c) Represents purchase price of Holdings common stock issued in connection
with the Merger.
(d) Exercise price for Amended Options was established by dividing the
exercise price of the exchanged option by the conversion ratio (i.e.,
.2825).
35
36
SUPPLEMENTAL RETIREMENT PLANS
The Company maintains two Supplemental Retirement Plans:
Supplemental Retirement Plan I which covers Mr. K. Kirk and
Supplemental Retirement Plan II which covers Mr. Cooney and two
former officers. Under Supplemental Retirement Plan I, Mr. K.
Kirk is entitled to receive an annual benefit of $150,000 per
year for 15 years following his retirement. Mr. Kirk retired on
November 13, 1996, in connection with the Merger, and in January
1997, 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
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 has entered into employment agreements (each referred to
individually as an "Agreement" and collectively as the
"Agreements"), with Messrs. Daniels, Peterson and Cooney to secure
their continued employment with the Company. The Agreements provide
for annual base salary of $240,000 for Mr. Daniels, $200,000 for Mr.
Peterson and $180,000 for Mr. Cooney, subject to adjustments
annually commencing in January 1998. 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 with Good
Reason by the executive, such executive is entitled to receive a
monthly amount, for 24 months after termination, equal to
one-twelfth of the executive's annual average salary for the prior
24 months and the pro rata portion of any bonus or incentive
compensation otherwise payable for the fiscal period in which such
termination occurs, as well as maintenance for 24 months of all
life, disability, medical and health insurance benefits to which the
executive was entitled immediately prior to termination. The
Agreements also prohibit 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.
36
37
In addition, under separate Management Stockholder's Agreements
between Holdings and Messrs. Cashman, Daniels, Peterson, and Cooney
and Ms. Richmond 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 until such condition no longer exists. The
repurchase price is $100 if the repurchase occurs prior to November
13, 1999, and the market price of the Holdings common stock
thereafter. If an executive's employment is terminated for Cause by
the Company or without 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 without 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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38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As a result of the Merger, 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 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 certain executive officers and (iii) all directors and
executive officers of the Company as a group. Unless otherwise
indicated below, the persons and entities named in the table have
sole voting investment power with respect to all shares beneficially
owned.
NUMBER OF SHARES OF
NAME AND ADDRESS OF BENEFICIAL OWNER HOLDINGS COMMON STOCK PERCENTAGE
------------------------------------ --------------------- ----------
Cypress Merchant Banking Partners 637,957 90.7%
L.P. (a)
c/o The Cypress Group L.L.C.
65 East 55th Street, 19th Floor
New York, NY 10022
Cypress Offshore Partners L.P. (a) 33,043 4.7%
c/o The Cypress Group L.L.C.
65 East 55th Street, 19th Floor
New York, NY 10022
John P. Cashman 15,000 2.1%
Samuel L. Daniels(b) 4,662 *
Clifford A. Peterson(b) 7.062 1.0%
Edward J. Cooney(b) 2,839 *
Mary C. Richmond(b) 2,478 *
David P. Spalding(a) -- --
James A. Stern(a) -- --
Anthony P. Tutrone(a) -- --
All directors and executive 32,041 4.6%
officers as a group (consisting of
8 persons)
------------------------
* Less than 1%.
(a) Cypress Merchant Banking Partners L.P. and Cypress Offshore
Partners L.P. are affiliates of The Cypress Group L.L.C. Messrs.
Spalding, Stern and Tutrone 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
Registrant."
(b) Immediately prior to the Merger, each of these individuals
exchanged options exercisable for AMTROL Common Stock for options
exercisable for Holdings common stock. All shares shown to be
beneficially owned by these individuals represent shares issuable
upon exercise of such options. See, Item 11, "Executive
Compensation".
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39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Beretta served as President of the Company from 1991 until his
retirement on May 31, 1996. Mr. Beretta's services were provided
pursuant to a Consulting Agreement between the Company and Executive
Consulting, Inc., of which Mr. Beretta was the sole shareholder.
During 1996, the Company paid Executive Consulting, Inc. $141,665 as
consideration for Mr. Beretta's services. In addition, the Company
paid Mr. Beretta a lump sum cash benefit of $262,000 upon his
retirement. The payment was made in recognition of his many years of
valuable service to the Company.
On October 28, 1988, the Company loaned $150,000 to Mr. K. Kirk
under a demand promissory note, bearing interest at the prime rate,
the entire amount of which was repaid in December 1996.
Stephen J. Carlotti, who served as a director of the Company and
Vice Chairman of the Board from February 21, 1996 until the Merger
on November 13, 1996, received a consulting fee of $530,431 pursuant
to a Consulting Agreement with AMTROL dated as of June 20, 1996 (the
"Consulting Agreement"). Mr. Carlotti was retained to lead and
supervise the activities associated with the Company's engagement of
Smith Barney Inc. to explore strategic alternatives and to assist
with day-to-day management. The consulting fee was paid on the date
of the Merger and was equal to 0.5375% of the amount by which the
aggregate amount of consideration paid to holders of AMTROL Common
Stock pursuant to the Merger exceeded $111,620,730. Mr. Carlotti is
a partner of the law firm of Hinckley, Allen & Snyder ("Hinckley
Allen"), legal counsel to AMTROL. Pursuant to Hinckley Allen's
partnership agreement, any amounts paid to Mr. Carlotti under the
Consulting Agreement or with respect to the options he received as a
director were paid to Hinckley Allen.
Upon consummation of the Merger, Acquisition paid Cypress Advisors
L.P. ("Advisors"), an affiliate of Cypress, $2,000,000 plus
out-of-pocket expenses for Advisors' services with respect to the
negotiation and execution of the Merger Agreement and consummation
of the Merger, negotiation and execution of the Bank Credit
Agreement and the issuance and sale of the Notes.
39
40
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
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 41
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996
(SUCCESSOR) AND 1995 (PREDECESSOR) 43
CONSOLIDATED STATEMENTS OF OPERTIONS FOR THE PERIODS ENDED DECEMBER 31,
1996 (SUCCESSOR) AND NOVEMBER 12, 1996 AND
FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 (PREDECESSOR) 44
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE PERIODS ENDED
DECEMBER 31, 1996 (SUCCESSOR) AND NOVEMBER 12,
1996 AND FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 (PREDECESSOR) 45
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS
ENDED DECEMBER 31, 1996 (SUCCESSOR) AND NOVEMBER 12, 1996
AND FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 (PREDECESSOR) 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47
(A) (2) FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE
PERIODS ENDED DECEMBER 31, 1996 (SUCCESSOR) AND NOVEMBER 12, 1996
AND FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994 (PREDECESSOR) 63
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
40
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AMTROL Inc.:
We have audited the accompanying balance sheet of AMTROL Inc. (the Successor),
(a Rhode Island corporation and wholly owned subsidiary of AMTROL Holdings,
Inc.), as of December 31, 1996, and the related statements of operations,
shareholders' equity and cash flows for the period then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about wehther 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. as of December 31,
1996, and the results of its operations and its cash flows for the period then
ended, in conformity with generally accepted accounting principles.
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.
Boston, Massachusetts
March 6, 1997
41
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AMTROL Inc.:
We have audited the accompanying consolidated balance sheet of AMTROL Inc. (the
Predecessor), (a Rhode Island corporation), and subsidiaries as of December 31,
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1995 and period ended November 12, 1996. 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 generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1995, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1995 and for the
period ended November 12, 1996, in conformity with generally accepted accounting
principles.
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.
Boston, Massachusetts
March 6, 1997
42
43
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
DECEMBER 31,
1995 1996
(Predecessor (Successor
Company) Company)
CURRENT ASSETS:
Cash and cash equivalents $ 9,078 $ 6,383
Accounts receivable, less allowance for doubtful accounts of $1,055 and $990 in
1996 and 1995, respectively 24,108 21,861
Inventories 21,315 24,783
Income tax refund receivable -- 2,000
Prepaid income taxes 2,793 1,734
Prepaid expenses and other 462 691
Assets held for sale 3,736 1,500
--------- ---------
Total current assets 61,492 58,952
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,796 4,153
Buildings and improvements 11,107 8,081
Machinery and equipment 51,031 20,048
Furniture and fixtures 2,935 907
Construction-in-progress and other 1,104 4,277
--------- ---------
67,973 37,466
Less-accumulated depreciation and amortization 40,040 577
--------- ---------
27,933 36,889
--------- ---------
OTHER ASSETS:
Goodwill 501 147,756
Debt financing costs -- 8,387
Cash surrender value of officers' life insurance 3,156 1,614
Other 827 1,285
--------- ---------
4,484 159,042
--------- ---------
$ 93,909 $ 254,883
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ -- $ 825
Accounts payable 6,526 5,794
Accrued expenses 11,070 14,472
Accrued interest 34 2,232
Accrued income taxes 559 582
--------- ---------
Total current liabilities 18,189 23,905
--------- ---------
OTHER NONCURRENT LIABILITIES 4,903 4,544
--------- ---------
DEFERRED INCOME TAXES 611 222
--------- ---------
LONG-TERM DEBT, LESS CURRENT INSTALLMENTS -- 159,175
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock $.01 par value- Authorized-1,000 shares
Issued-7,641,398 shares in 1995 76 --
Common stock $.01 par value- Authorized-1,000 shares
Issued-100 shares in 1996 -- --
Additional paid-in capital 29,083 69,326
Retained earnings 44,313 (2,289)
Treasury stock, at cost-213,200 shares in 1995 (3,226) --
--------- ---------
Total shareholders' equity 70,206 67,037
--------- ---------
$ 93,909 $ 254,883
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
43
44
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
--------------PREDECESSOR COMPANY------------- SUCCESSOR COMPANY
YEARS ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 12 DECEMBER 31,
1994 1995 1996 1996
NET SALES $ 173,472 $ 172,454 $ 152,193 $ 18,628
COST OF GOODS SOLD 123,184 124,303 110,582 15,108
--------- --------- --------- --------
Gross profit 50,288 48,151 41,611 3,520
OPERATING EXPENSES:
Selling 15,561 15,171 14,236 1,997
General and administrative 14,841 14,772 11,560 1,511
Plant closing charges -- 3,825 -- --
Amortization of Goodwill -- -- -- 313
Capitalized in-process research
and development -- -- -- 1,000
--------- --------- --------- --------
Income (loss) from operations 19,886 14,383 15,815 (1,301)
OTHER INCOME (EXPENSE):
Interest expense (276) (195) (151) (2,263)
Interest income 269 255 204 39
License and distributorship fees 254 258 181 25
Other, net (179) 65 (175) (99)
--------- --------- --------- --------
Income (loss) before provision for
income taxes 19,954 14,766 15,874 (3,599)
PROVISION (BENEFIT) FOR INCOME TAXES 7,683 5,681 6,152 (1,310)
--------- --------- --------- --------
NET INCOME (LOSS) $ 12,271 $ 9,085 $ 9,722 $ (2,289)
========= ========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
44
45
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands)
TREASURY STOCK
ADDITIONAL
COMMON PAID-IN RETAINED NUMBER OF
STOCK CAPITAL EARNINGS SHARES COST
PREDECESSOR COMPANY
BALANCE, DECEMBER 31, 1993 $75 $26,976 $ 25,966 -- $ --
Net income -- -- 12,271 -- --
Dividend -- -- (1,509) -- --
Exercise of stock options 1 1,137 -- 67 1,007
Repurchase of common stock -- -- -- -- --
Amortization of deferred compensation -- 204 -- -- --
Tax effect of disqualifying
dispositions on stock options -- 60 -- -- --
--- ------- -------- ---- ------
BALANCE, DECEMBER 31, 1994 $76 $28,377 $ 36,728 67 $1,007
Net income -- -- 9,085 -- --
Dividend -- -- (1,500) -- --
Exercise of stock options -- 598 -- --
Repurchase of common stock -- -- -- 146 2,259
Tax effect of disqualifying
dispositions on stock options -- 108 -- -- --
--- ------- -------- ---- ------
BALANCE, DECEMBER 31, 1995 $76 $29,083 $ 44,313 213 $3,266
Net income -- -- 9,722 -- --
Dividend -- -- (6,694) -- --
Exercise of stock options -- 191 -- -- --
Repurchase of common stock -- -- -- 1 15
--- ------- -------- ---- ------
BALANCE, NOVEMBER 12, 1996 $76 $29,274 $ 47,714 214 $3,281
=== ======= ======== ==== ======
SUCCESSOR COMPANY
Net loss -- -- (2,289) -- --
Issuance of common stock in connection
with Merger, net -- 69,326 -- -- --
--- ------- -------- ---- ------
BALANCE, DECEMBER 31, 1996 $-- $69,236 $ (2,289) -- $ --
=== ======= ======== ==== ======
The accompanying notes are an integral part of these consolidated financial
statements.
45
46
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
--------------PREDECESSOR COMPANY----------- SUCCESSOR COMPANY
YEARS ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, NOVEMBER 12, DECEMBER 31
1994 1995 1996 1996
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 12,271 $ 9,085 $ 9,722 $ (2,289)
-------- -------- -------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization 4,330 4,673 4,586 598
Writedown of assets held for sale to
realizable value -- 980 -- --
Provision for losses on accounts receivable 206 93 172 91
Loss (gain) on sale of fixed assets 12 83 92 (106)
Captialized in-process research and development
-- -- -- 1,000
Changes in assets and liabilities-
(Increase) decrease in assets-
Accounts receivable, net (4,798) (532) (1,215) 3,199
Income tax refund receivable -- -- -- (2,000)
Inventory (866) (498) (3,573) 2,633
Prepaid income taxes (100) (685) 1,090 (31)
Prepaid expenses and other 1,027 (152) (834) 605
Cash surrender value of officers' life
insurance (191) (132) 1,411 131
Other assets (8) (602) (520) 331
Increase (decrease) in liabilities-
Accounts payable (1,865) 369 2,443 (3,175)
Accrued expenses 783 918 (2,590) 142
Accrued income taxes 567 (795) 600 (363)
Other noncurrent liabilities (39) (965) (283) (65)
Deferred income taxes (629) 48 (389) --
-------- -------- -------- ---------
(1,571) 2,803 990 2,990
-------- -------- -------- ---------
Net cash provided by operating activities
10,700 11,888 10,712 701
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Merger -- -- -- (218,200)
Proceeds from sale of property, plant and
equipment 119 30 1,991 9
Capital expenditures (4,902) (5,492) (9,260) (1,662)
-------- -------- -------- ---------
Net cash used in investing activities (4,783) (5,462) (7,269) (216,547)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (1,509) (1,500) (6,694) --
Repayment of long-term debt (1,952) (4,948) (3,500) --
Issuance of long-term debt 1,000 1,615 3,500 --
Proceeds from sale of notes -- -- -- 115,000
Proceeds from term loan -- -- -- 45,000
Payment of transaction financing costs -- -- -- (13,100)
Issuance of common stock in connection with
Merger -- -- -- 69,326
Issuance of common stock - exercise
of stock options 1,137 598 191 --
Repurchase of treasury stock (1,007) (2,259) (15) --
Tax effect of disqualifying dispositions of
incentive stock options 60 108 -- --
Tax effect on restricted stock 147 -- -- --
-------- -------- -------- ---------
Net cash (used in) provided by financing
activities (2,124) (6,386) (6,518) 216,226
-------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,793 40 (3,075) 380
CASH AND CASH EQUIVALENTS, beginning
of period 5,245 9,038 9,078 6,003
-------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 9,038 $ 9,078 $ 6,003 $ 6,383
======== ======== ======== =========
CASH PAID FOR-
Interest $ 351 $ 126 $ 132 $ --
======== ======== ======== =========
Income taxes $ 6,936 $ 7,083 $ 4,286 $ --
======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
46
47
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(1) BASIS OF PRESENTATION
For periods prior to November 13, 1996, the accompanying financial
statements represent the consolidated results and financial position of
AMTROL Inc. and Subsidiaries (the Predecessor). On November 13, 1996,
immediately after the close of business on November 12, 1996, the
Predecessor merged with AMTROL Acquisition, Inc., a wholly-owned
subsidiary of AMTROL Holdings, Inc., a Delaware corporation organized by
The Cypress Group L.L.C. as more fully described in Note 3 (the Merger).
Financial statements for periods subsequent to November 12, 1996
represent the consolidated financial statements of AMTROL Inc. and
Subsidiaries (the Successor) after giving effect to the Merger.
References to the Company refer to the Predecessor prior to the Merger
and the Successor post-Merger.
(2) ORGANIZATION AND OPERATIONS
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.
(3) MERGER AND FINANCING
AMTROL Acquisition Inc. ("Acquisition") and AMTROL Holdings, Inc.
("Holdings") were formed by The Cypress Group L.L.C. ("Cypress)" in 1996
to effect the acquisition of all of the outstanding common stock of the
Predecessor through the Merger of Acquisition with and into the
Successor. Upon consummation of the Merger on November 13, 1996 all of
the outstanding common stock of Acquisition was converted into common
stock of the Successor and the Successor became a wholly-owned subsidiary
of Holdings. The Successor, as the surviving entity, continues to be
named AMTROL Inc. Holdings has no other material assets, liabilities or
operations other than those that result from its ownership of the common
stock of the Successor.
47
48
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(3) MERGER AND FINANCING (continued)
The total financing related to the Merger was $232.7 million (including
transaction fees and expenses of $13.8 million). A summary of the Merger
is as follows (in millions):
Borrowing under notes $ 115.0
Equity contribution 69.3
Borrowings under term loans 45.0
Existing cash 3.4
-----------
$ 232.7
===========
The Merger has been accounted for as a purchase transaction effective as
of November 13, 1996, in accordance with Accounting Principles Board
Opinion No. 16, Business Combinations, and EITF Issue No. 88-16, Basis in
Leveraged Buyout Transactions and, accordingly, the consolidated
financial statements for the periods subsequent to November 12, 1996
reflect the purchase price, including transaction costs, allocated to
tangible and intangible assets acquired and liabilities assumed, based on
their estimated fair values as of November 12, 1996, which may be revised
at a later date. The excess of the purchase price over the fair value of
net assets acquired has been allocated to goodwill.
The purchase price and preliminary allocation is summarized as follows
(in millions):
Cash paid to shareholders for common stock $ 210.3
Cash paid for stock options 7.9
Management stock option rollover .7
-----------
Total 218.9
Direct acquisition costs 5.3
-----------
Total consideration and direct acquisition costs 224.2
Predecessor historical cost of net assets acquired 73.2
-----------
Excess of consideration paid over predecessor historical cost 151.0
Financing related expenses 8.5
-----------
Net adjustment 159.5
-----------
48
49
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(3) MERGER AND FINANCING (continued)
Allocation of net adjustment-
Inventories $ 2.1
Income tax refund receivable 2.8
Property, plant and equipment, net 2.7
Intangible assets 1.0
Deferred financing 8.5
Liabilities and other (5.2)
Goodwill 147.6
-----------
Total $ 159.5
===========
The $1.0 million related to intangible assets represents the allocation
of purchase price to capitalizable in-process research and development
and was expensed in the period ended December 31, 1996.
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of AMTROL Inc. and its wholly owned subsidiaries (the "Company"). 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 ended on Saturday of the thirteenth week of the quarter.
49
50
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Depreciable Property and Equipment
The Company provides for depreciation by charges to income (computed on
the straight-line method) in amounts estimated to amortize 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. Goodwill (net of accumulated amortization)
at December 31, 1995 and December 31, 1996 is approximately $.5 million
and $147.8 million, respectively. 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
50
51
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill (Continued)
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 projected
discounted future cash flows using a discount rate reflecting the Company's
average cost of funds. At December 31, 1996, no such impairment of assets
was indicated.
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, 1996.
Engineering and Development Expenses
All costs for engineering and development, which amounted to approximately
$.8 million, $.9 million, $.8 million and $.1 million for fiscal 1994 and
1995 and the periods ended November 12 and December 31, 1996, respectively,
are charged to general and administrative expense as incurred.
Income Taxes
The Company utilizes an asset and liability approach to determine income
tax liabilities in accordance with SFAS No. 109. The standard recognizes
tax assets and liabilities for the cumulative effect of all temporary
differences between financial statement carrying amounts and the tax basis
of assets and liabilities. The standard also requires the adjustment of
deferred tax liabilities or assets for an enacted change in tax laws or
rates.
51
52
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1995 and 1996, the Company has
accrued $2.7 million and $3.6 million, respectively, for such volume
allowances. These amounts are included in accrued expenses in the
accompanying consolidated balance sheets.
International Sales
In fiscal 1994, 1995 and the periods ended November 12 and December 31,
1996, net sales to customers in various geographic areas outside the United
States and Canada, primarily Mexico, Western Europe and Asia, amounted to
$22.9 million, $22.6 million, $19.7 million and $1.9 million, respectively.
Reclassification
Certain prior year balances have been reclassified to conform with the
current year presentation.
(5) COMMON STOCK TRANSACTIONS
During December 1994, the Board of Directors authorized a program to
purchase up to 500,000 shares of the Company's common stock. Through
November 12, 1996, the Company had purchased 214,200 shares at an
approximate cost of $3.3 million.
52
53
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(6) INVENTORIES
Inventories were as follows at December 31 (in thousands):
DECEMBER 31,
1995 1996
PREDECESSOR SUCCESSOR
COMPANY COMPANY
Raw materials and work in $ 10,388 $ 9,429
process
Finished goods 10,927 15,354
---------- ----------
$ 21,315 $ 24,783
========== ==========
Inventories valued under the last-in, first-out (LIFO) cost method
comprised approximately 57.0% of the 1995 totals and 60.5% of the 1996
totals. If the first-in, first-out (FIFO) cost method of inventory
accounting had been used, inventories would have been approximately $2.3
million higher than reported at December 31, 1995. In connection with the
acquisition, the existing LIFO reserve of approximately $1.7 million was
eliminated and finished goods were adjusted to fair market value less
normal selling costs.
(7) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
Long-term debt consisted of the following at December 31 (in thousands):
1995 1996
PREDECESSOR SUCCESSOR
COMPANY COMPANY
Revolving credit facility $ - $ -
Tranche A Term Loan - 20,000
Tranche B Term Loan - 25,000
Senior subordinated notes, due 2006, 10.625% - 115,000
---------- ----------
- 160,000
Less - Current portion of long-term debt - 825
---------- ----------
Total $ - $ 159,175
========== ==========
53
54
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(7) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS (Continued)
Revolving Credit and Term Loans
In November 1996, the Company entered into a Bank Credit Agreement (the
Agreement) that provides for secured borrowings from a syndicate of lenders
consisting of (i) a five and one-half year revolving credit facility
providing for up to $30 million in revolving loans, $5.0 million of which
may be used for letters of credit (the Revolving Credit Facility) and (ii)
a term loan facility providing for $45.0 million in term loans, consisting
of a five and one-half year Tranche A Term Loan of $20.0 million and a
seven and one half year Tranche B Term Loan for $25.0 million
(collectively, the Term Loans).
The Revolving Credit Facility includes a $20.0 million sublimit which is
available to finance permitted acquisitions. At December 31, 1996, there
were no borrowings outstanding on the Revolving Credit Facility. During the
period from November 13, 1996 to December 31, 1996, the Company did not
borrow under the Revolving Credit Facility.
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 .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 .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.
Tranche A Term Loans amortize on a quarterly basis over the term of the
loans. The Tranche B Term Loans have nominal quarterly amortization prior
to the maturity of the Tranche A Term Loans, and will amortize remaining
amounts on a quarterly basis thereafter. The commitments under the
Revolving Credit Facility and the acquisition sublimit will each reduce by
$5.0 million in the fourth year and $10.0 million in the fifth year after
the date of the Merger. The Revolving Credit Facility will mature five and
one-half years after the date of the Merger. In addition, the Agreement
provides for mandatory prepayments, subject to certain exceptions, of the
Term Loans with the net proceeds of certain asset sales, with the net
proceeds of certain debt and equity issuances and from a portion of the
Company's excess cash flow.
54
55
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(7) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS (Continued)
Revolving Credit and Term Loans (Continued)
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 .50% per annum. The fee is 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 12, 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 EBITDA level, 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.
In connection with the Merger, the Company issued $115.0 million of Senior
Subordinated Notes due in 2006 (the "Notes"). The Notes are unsecured
obligations of the Company. 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 the Company on or after December
31, 2001. The Notes will be subject to redemption at the option of the
Company, 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 may 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, each Note holder has the
right to require the Company to repurchase such holder's Notes at a
purchase price of 110% of the principle amount plus accrued interest.
55
56
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(7) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS (Continued)
Revolving Credit and Term Loans (Continued)
The Note Indenture contains certain affirmative and negative covenants and
restrictions. As of December 31, 1996, the Company is in compliance with
the various covenants of the Note Indenture.
(8) INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
SUCCESSOR
----------PREDECESSOR COMPANY----------- COMPANY
PERIOD ENDED PERIOD ENDED
YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31,
1994 1995 1996 1996
Current:
Federal $ 7,351 $ 5,798 $ 5,233 $(1,376)
State 1,150 586 258 (23)
------- ------- ------- -------
8,501 6,384 5,491 (1,399)
Deferred:
Federal (712) (591) 622 82
State (106) (112) 39 7
------- ------- ------- -------
(818) (703) 661 89
------- ------- ------- -------
$ 7,683 $ 5,681 $ 6,152 $(1,310)
======= ======= ======= =======
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.
56
57
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(8) INCOME TAXES (Continued)
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 benefits.
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1996 are as follows (in thousands) :
1995 1996
PREDECESSOR SUCCESSOR
COMPANY COMPANY
PREPAID INCOME TAXES:
Warranty reserves - current $ 167 $ 145
Allowance for doubtful accounts 265 351
Plant closing reserve 1,035 -
Reserves not currently deductible 389 218
Accrued vacation 307 278
UNICAP adjustment 238 253
Other 392 489
---------- ----------
$ 2,793 1,734
========== ==========
57
58
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(8) INCOME TAXES (Continued)
1995 1996
PREDECESSOR SUCCESSOR
COMPANY COMPANY
(in thousands)
DEFERRED INCOME TAXES:
Accelerated depreciation $ 1,370 $ 1,265
Safe harbor leases 801 492
Warranty reserves - long-term (753) (781)
Deferred compensation and (761) (724)
restricted stock plan
Other (46) (30)
------- -------
$ 611 $ 222
======= =======
(9) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 401(k) plan covering substantially
all of its employees. Under the Plan, eligible employees are permitted to
contribute up to 10% 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 $.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 $.2 million of wages. Company contributions to the
401(k) plan totaled approximately $1.2 million in 1994, $1.1 million in
1995 and $.9 million and $.1 million for the periods ending November 12 and
December 31, 1996, respectively.
(10) LEASE COMMITMENTS
The Company leases certain plant facilities and equipment. Total rental
expenses charged to operations amounted to approximately $.8 million in
fiscal 1994 and 1995 and $1.0 million and $.2 million, respectively, for
the periods ended November 12 and December 31, 1996. Minimum rental
commitments under all non-cancelable operating leases are as follows (in
thousands):
1997 $ 1,469
1998 1,288
1999 634
2000 370
2001 129
----------
$ 3,890
==========
Certain of the leases provide for renewal options.
58
59
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(11) COMMITMENTS AND CONTINGENCIES
Compensation Plans
The Company maintains a supplemental pension program for certain officers
which provides pre-retirement death and retirement benefits in addition to
the benefits in the defined contribution 401(k) plan. The retirement
benefits are being accrued currently by charges to income over the
officers' expected employment periods. Compensation expense under this
program totaled approximately $.1 million in 1994, 1995 and 1996.
The Company maintains the Profitability Rewards In Recognition of Dedicated
Employees Bonus Plan (the "PRIDE Bonus Plan") for the purpose of providing
non-executive employees with an annual year-end cash bonus based on the
profitability of the Company during such year. All employees of AMTROL Inc.
at year end, and employees who have retired, died or become disabled during
the calendar year, are eligible for a bonus award under the PRIDE Bonus
Plan. The total amount to be awarded under the PRIDE Bonus Plan each year
is determined by the Board of Directors. Awards are allocated to eligible
employees on the basis of years of service and compensation.
Other Commitments and Contingencies
At December 31, 1996, the Revolving Credit Facility contains a sublimit to
support the issuance of letters of credit in the amount of $5.0 million
with approximately $.7 million outstanding. The Company is self-insured for
worker's compensation claims in the State of Rhode Island. The State of
Rhode Island requires the Company to post a $.7 million standby letter of
credit.
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.
The Company has received three "Notice Letters" from the Environmental
Protection Agency ("EPA") stating that it is one of several potential
responsible parties pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, and that it will be required to share in
the cost of cleaning up the sites identified by the EPA. The Company's
degree of responsibility, if any, is not presently determinable in all
cases; however, management is of the opinion that these will not have a
material adverse effect on the accompanying consolidated financial
statements.
59
60
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(12) STOCK PLANS
During 1992, the Company established the 1992 Stock Plan, which provided
for awards covering a maximum of 800,000 shares of common stock to be
granted to directors, officers and certain key employees of the Company in
the form of (i) incentive stock options within the meaning of Section 422
of the Internal Revenue Code, (ii) non-qualified stock options, (iii)
shares of common stock subject to specified restrictions, (iv) restricted
units that entitle the holder thereof to receive one share of common stock
(or equivalent cash payments) for each unit in increments during a
restricted period, (v) stock appreciation rights accompanying options or
granted separately, or (vi) limited stock appreciation rights accompanying
options. Options granted in 1994, 1995 and 1996 were exercisable in four
equal annual installments generally commencing one year from grant and have
terms of ten years.
In 1994, the shareholders approved the AMTROL Inc. Non-Employee Director
Compensation Plan (the Director Plan). The Director Plan provided for
annual automatic grants of options to purchase common stock up to a maximum
of 2,000 shares annually to each director. On April 22, 1994 options were
granted to purchase 10,000 shares of common stock at $19.00 per share, the
price on the grant date, and because exercisable in three equal
installments on October 22, 1994, April 22, 1995 and April 22, 1996. On
April 21, 1995, options were granted to purchase 7,873 shares of common
stock at $18.25 per share, the price on the grant date, and became
exercisable in three equal installments on October 21, 1995, April 21, 1996
and April 21, 1997. On February 21, 1996, options were granted to purchase
2,000 shares of common stock at $15.00 per share, the price on the grant
date, and became exercisable in three equal installments on August 21,
1996, February 21, 1997 and February 21, 1998. On June 19, 1996, options
were granted to purchase 6,728 shares of common stock at $19.5 per share,
the price on the grant date, and became exercisable in three equal
installments on December 19, 1996 and June 19, 1997 and June 19, 1998. All
options under the Director Plan have a term of ten years.
A disqualifying disposition occurs when shares acquired by the exercise of
incentive stock options are sold within one year. Because of the tax
deduction received for disqualifying dispositions, the Company has recorded
a related tax benefit of $.1 million, respectively, in additional paid-in
capital for fiscal 1994 and 1995.
60
61
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(12) STOCK PLANS (Continued)
The following is a summary of option activity in the Company's stock plans
through November 12, 1996:
NUMBER OF
OPTIONS PRICE RANGE
Options outstanding, December 31, 1993: 403,681 $3.45 - $15.00
Granted 172,500 16.38 - 19.00
Exercised (121,227) 3.45 - 15.00
Forfeited (12,875) 11.55 - 15.00
--------- --------------
Options outstanding, December 31, 1994: 442,079 7.00 - 19.00
Granted 192,973 15.75 - 18.25
Exercised (57,025) 7.00 - 15.00
Forfeited (31,721) 15.00 - 18.31
--------- --------------
Options outstanding, December 31, 1995: 546,306 7.00 - 19.00
Granted 155,028 15.00 - 19.25
Exercised (17,247) 7.00 - 19.00
Forfeited (5,089) 15.00 - 16.38
Canceled - -
--------- --------------
Options outstanding, November 12, 1996 678,998 $7.00 - $19.25
========= ==============
The 1992 Stock Plan and the Director Plan were terminated effective
immediately prior to the Merger. In addition, all outstanding options
(other than options for 60,327 shares of AMTROL common stock which were
exchanged for options exercisable for Holdings common stock) were canceled
and the holder received, upon consummation of the Merger, cash equal to the
excess of $28.25 over the per share exercise price of such option,
multiplied by the number of shares of AMTROL common stock then subject to
the option.
(13) OTHER INCOME AND EXPENSE
In September 1995, the Company ceased operations at its Plano, Texas
facility. In December 1995, the Company decided to close its Rogers,
Arkansas plant. Production at this facility ceased in April 1996. Programs
to raise productivity in other facilities and free-up production capacity
have made these plant consolidations possible. As a result of these plant
closings, all jobs at these locations have been eliminated resulting in a
worldwide workforce reduction of approximately 150 jobs.
61
62
AMTROL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Continued)
(13) OTHER INCOME AND EXPENSE (Continued)
The Company recorded a $3.8 million charge to operating expense in 1995 for
severance and other costs in connection with the closures. Included in this
charge is an amount of $2.0 million for accrued termination benefits of
which approximately $.7 million had been paid at December 31, 1995 (for the
facility's) and the balance of which was substantially spent in 1996. The
Rogers, Arkansas facility was sold in April 1996. Included in current
assets as "Assets Held for Sale" is an amount of $3.7 million in 1995 and
$1.5 million in 1996 (for one facility) representing the estimated net
market value of the land and buildings for these two facilities which the
Company was or is holding for sale as of the end of the respective fiscal
years.
62
63
AMTROL INC.
ITEM 14(a)(2) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In Thousands)
BALANCE AT BALANCE AT
BEGINNING END OF
CONSOLIDATED OF PERIOD PROVISION RECOVERIES WRITE-OFFS PERIOD
PREDECESSOR
Year Ended December 31, 1994
Allowance for doubtful accounts $ 980 $206 $25 $(117) $ 1,094
Year Ended December 31, 1995
Allowance for doubtful accounts 1,094 93 2 (199) 990
Period Ended November 12, 1996
Allowance for doubtful accounts 990 172 21 (108) 1,075
SUCCESSOR
Period Ended December 31, 1996
Allowance for doubtful accounts 1,075 91 4 (115) 1,055
63
64
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 27th day of March 1997.
AMTROL Inc.
By: /s/ Edward J. Cooney
----------------------------------
Edward J. Cooney
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
--------- ----- ----
Chairman of the Board, President March 27, 1997
- --------------------------- and Chief Executive Officer (principal
John P. Cashman executive officer) and Director
/s/ Samuel L. Daniels Executive Vice President and Director March 27, 1997
- ---------------------------
Samuel L. Daniels
/s/ Clifford A. Peterson Senior Vice President and Director March 27,1997
- ---------------------------
Clifford A. Peterson
/s/ Edward J. Cooney Senior Vice President, Chief Financial March 27, 1997
- --------------------------- Officer and Treasurer (principal
Edward J. Cooney financial and accounting officer)
/s/ David P. Spalding Director March 27, 1997
- ---------------------------
David P. Spalding
Director March 27, 1997
- ---------------------------
James A. Stern
/s/ Anthony D. Tutrone Director March 27, 1997
- ---------------------------
Anthony D. Tutrone
64
65
EXHIBIT INDEX
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).
10.2 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).*
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).*
10.7 Employment Agreement dated January 19, 1997 by and between AMTROL Inc.
and Samuel L. Daniels. *
65
66
10.8 Employment Agreement dated January 19, 1997 by and between AMTROL Inc.
and Clifford A. Peterson. *
10.9 Employment Agreement dated January 19, 1997 by and between AMTROL Inc.
and Edward J. Cooney. *
12 Computation of ratio of earnings to fixed charges.
21 Subsidiaries of AMTROL Inc.
- -------------------
* Management contract or compensatory plan or arrangement.
66