1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: April 4, 1998
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Commission file number: 0-20328
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AMTROL INC.
(exact name of registrant as specified in its charter)
Rhode Island 05-0246955
- --------------------- ---------------------------
1400 Division Road, West Warwick, RI 02893-1008
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(Address of principal executive offices)
Registrant's telephone number, including area code: (401) 884-6300
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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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
100 shares of Common stock $.01 par value
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as of April 4, 1998
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FORM 10-Q FOR THE QUARTER ENDED APRIL 4, 1998
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets -
April 4, 1998 and December 31, 1997 1
Consolidated Statements of Operations -
For the Quarters Ended April 4, 1998 and April 5, 1997 2
Consolidated Statement of Shareholders' Equity -
For the Quarter Ended April 4, 1998 3
Consolidated Statements of Cash Flows -
For the Quarters Ended April 4, 1998 and April 5, 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION
Signatures 15
3
AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
ASSETS
APRIL 4, DECEMBER 31,
1998 1997
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,412 $ 544
Accounts receivable, less allowance for doubtful accounts 35,169 30,180
Inventories 28,730 31,285
Prepaid income taxes 2,440 2,495
Prepaid expenses and other 1,812 1,412
Assets held for sale 1,533 1,533
-------- --------
Total current assets 71,096 67,449
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 48,657 45,687
OTHER ASSETS:
Goodwill 168,702 169,784
Financing costs 7,501 7,762
Deferred income taxes 419 419
Other 1,271 1,899
-------- --------
177,893 179,864
-------- --------
$297,646 $293,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,167 $ 3,498
Notes payable to banks 5,942 4,397
Accounts payable 23,035 15,718
Accrued expenses 9,529 15,779
Accrued interest 4,195 608
Accrued income taxes 3,037 3,073
-------- --------
Total current liabilities 48,905 43,073
-------- --------
LONG TERM DEBT, LESS CURRENT MATURITIES 184,474 184,164
-------- --------
OTHER NONCURRENT LIABILITIES 6,310 6,659
-------- --------
SHAREHOLDERS' EQUITY:
Common stock $.01 par value- Authorized-1,000 shares
Issued-100 shares -- --
Additional paid-in capital 69,326 69,326
Retained deficit (10,896) (9,937)
Accumulated other comprehensive loss (473) (285)
-------- --------
Total shareholders' equity 57,957 59,104
-------- --------
$297,646 $293,000
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
(1)
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS)
QUARTER ENDED
------------------------------
APRIL 4, APRIL 5,
1998 1997
-------------- --------------
NET SALES $48,416 $45,035
COST OF GOODS SOLD 36,774 33,359
------- -------
GROSS PROFIT 11,642 11,676
OPERATING EXPENSES
Selling, general and administrative 6,431 6,418
Amortization of Goodwill 1,096 938
------- -------
Income from operations 4,115 4,320
OTHER INCOME (EXPENSE):
Interest expense (5,199) (4,529)
Interest income 32 234
License and distributorship fees 30 50
Other, net 201 173
------- -------
(Loss) income before provision
for income taxes (821) 248
PROVISION FOR INCOME TAXES 138 588
------- -------
NET LOSS ($959) ($340)
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
(2)
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS)
Accumulated
Additional Other
Common Paid - in Retained Comprehensive
Stock Capital Deficit Loss
------------- ------------- -------------- -----------------
BALANCE, December 31, 1997 - $69,326 ($9,937) ($285)
Net Loss - - (959) -
Currency Translation Adjustment - - - (188)
============= ============= ============== =================
BALANCE, April 4, 1998 - $69,326 ($10,896) ($473)
============= ============= ============== =================
The accompanying notes are an integral part of these consolidated
financial statements.
(3)
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AMTROL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
QUARTER ENDED
----------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($959) ($340)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities -
Depreciation 1,608 1,423
Amortization 1,383 1,160
Provision for losses on accounts receivable 56 61
Loss on sale of fixed assets -- 2
Changes in operating assets and liabilities 1,968 (5,524)
------- -------
Net cash provided by (used in) operating
activities 4,056 (3,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 28
Capital expenditures (4,944) (2,180)
------- -------
Net cash used in investing activities (4,944) (2,152)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (3,805) (149)
Issuance of debt 5,565 --
------- -------
Net cash provided by (used in) financing
activities 1,760 (149)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 872 (5,519)
Effect of exchange rate changes on cash and cash equivalents (4) --
CASH AND CASH EQUIVALENTS, beginning of period 544 6,383
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,412 $ 864
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
(4)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly,
in accordance with generally accepted accounting principles, the Company's
financial position, results of operations and cash flows for the interim
periods presented. Such adjustments consisted of only normal recurring
items. The results of operations for the interim periods shown in this
report are not necessarily indicative of results for any future interim
period or for the entire year. These consolidated financial statements do
not include all disclosures associated with annual financial statements and
accordingly should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10K.
2. 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.
3. SIGNIFICANT ACCOUNTING POLICIES
GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
assets acquired in connection with the 1996 acquisition of the Company by
affiliates of the Cypress Group L.L.C. (approximately $147 million) and the
1997 acquisition of Petroleo Mecanica Alfa, S.A. ("Alfa") (approximately
$22 million) and is included in other assets. Goodwill is being amortized
over 40 years.
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets
and are amortized over the life of the related debt using the effective
interest method. Amortization of deferred financing costs is included in
interest expense.
(5)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'd.)
(UNAUDITED)
4. INVENTORIES
Inventories are stated at the lower of cost or market and were as follows:
April 4, 1998 December 31, 1997
------------- -----------------
(in thousands)
Raw Materials and Work in Process $14,269 $13,670
Finished Goods 14,461 17,615
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$28,730 $31,285
======= =======
Inventories valued under the last-in, first-out (LIFO) cost method
comprised approximately 61.1% of the April 4, 1998 totals and 68.2% of the
December 31, 1997 totals.
5. LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
In connection with the acquisition of the Company by affiliates of the
Cypress Group L.L.C., the Company entered into a Bank Credit Agreement in
November 1996, amended in June and December 1997 (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 $65.0 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 $45.0 million (collectively, the Term
Loans). In addition, 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, which is payable semi-annually on each June 30 and December 31,
and commenced on June 30, 1997.
Under the terms of both the Agreement and the Note indenture, AMTROL is
required to comply with certain financial covenants and restrictions with
which AMTROL was in compliance at April 4, 1998.
6. PROVISION FOR INCOME TAXES
The effective income tax rates used in the interim financial statements are
estimates of the full year's rates. The difference for 1998 between the
provision computed using the statutory U.S. federal income tax rate and the
provision for income taxes in the accompanying consolidated financial
statements is primarily the result of goodwill amortization.
(6)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'd.)
(UNAUDITED)
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of this Statement had no impact on the
Company's net loss or shareholders' equity. Statement 130 requires certain
items which previously had been reported separately in shareholders' equity
to be included in other comprehensive income. For the Company, the only
such item was the foreign currency cumulative translation adjustment. Prior
year financial statements have been reclassified to conform to the
requirements of Statement 130.
For the quarters ended April 4, 1998 and April 5, 1997, the total
comprehensive loss, which was comprised of the net loss and the foreign
currency translation adjustment, amounted to $1,147 and $340, respectively.
8. SALE OF ASSETS
In May 1997, the Company sold all of the assets, subject to substantially
all liabilities, of its American Granby Inc. subsidiary. Accordingly, the
results of American Granby are included in the accompanying consolidated
statements of operations for the first quarter of 1997. Net sales and
operating income included in the accompanying consolidated statement of
operations for the quarter ended April 5, 1997 approximated $4.6 million
and $0.0 million, respectively.
In May 1997, the Company sold its Peru, Indiana production facility and the
related pump business. AMTROL transferred certain production activities
performed in Peru to the Company's West Warwick, RI facility. The Company
believes that the operational efficiencies gained through production
consolidation will offset lost contribution from the pump business.
The Company utilized the net proceeds of the sales of approximately $6.0
million to fund seasonal working capital demands and to fund a portion of
the Alfa Acquisition (see Note 9).
(7)
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AMTROL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'd.)
(UNAUDITED)
9. ACQUISITION
On June 30, 1997, the Company acquired all the outstanding capital shares
of Petroleo Mecanica Alfa, S.A. ("Alfa"), a corporation organized under the
laws of Portugal, for $25.5 million (United States Dollars) plus assumed
debt of $8.7 million (the "Acquisition"). Alfa is a leading designer and
manufacturer of reusable steel cylinders used for the storage and
transportation of heating and refrigerant gases and maintains a production
facility in Guimaraes, Portugal. Alfa provides AMTROL with a significant
low cost manufacturing base from which to serve Europe and the Far East.
AMTROL assumed immediate management control of Alfa and, accordingly, the
operating results and financial position of Alfa are included in the
consolidated results of operations and consolidated balance sheets of
AMTROL from July 1, 1997. The operating results of Alfa included in first
quarter 1998 net sales and operating income in the accompanying financial
statements amounted to $11.2 million and $1.5 million, respectively.
(8)
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AMTROL INC. AND SUBSIDIARIES
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such statements involve risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward-looking
statements. Among other things, expectations for upcoming periods are based on
assumptions which management believes to be reasonable at this time, including
assumptions concerning the volume and product mix of sales. Moreover, there can
be no assurances when initiatives undertaken by the Company to rationalize its
manufacturing operations and improve plant productivity will be successful.
Other significant potential risks and uncertainties include the following: risks
associated with indebtedness; uncertainties of its acquisition strategy,
including the successful integration of the Alfa Acquisition; high level of
competition in the Company's markets; importance and costs of product
innovation; risks associated with international operations; product liability
exposure and the risk of adverse effects of economic and regulatory conditions
on sales; and risks associated with environmental matters.
(9)
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AMTROL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
the Company's net sales represented by certain income and expense items in the
Company's Consolidated Statements of Operations.
FOR THE QUARTER ENDED
-----------------------
APRIL 4, APRIL 5,
1998 1997
-------- --------
Net sales 100.0% 100.0%
Cost of goods sold 76.0 74.1
----- -----
Gross profit 24.0 25.9
Selling, general and
administrative expenses 13.3 14.3
Amortization of goodwill 2.2 2.0
----- -----
Income from operations 8.5 9.6
Interest expense (10.7) (10.1)
Interest income 0.1 0.5
Other income, net 0.4 0.5
----- -----
(Loss) income before provision
for income taxes (1.7) 0.5
Provision for income taxes 0.3 1.3
===== =====
Net loss (2.0)% (0.8)%
===== =====
Results for the quarter were impacted by: (i) the divestiture of the American
Granby accessory business in May 1997 (see Note 8) as 1998 does not include
sales and income from the accessory business which are included in the
comparable period in 1997; and (ii) the acquisition of Alfa on June 30, 1997
(see Note 9) as sales and income from this subsidiary are included in the
quarter ended April 4, 1998, but were not included in the comparable period in
1997.
Net sales for the first quarter increased $3.4 million or 7.5% compared to the
same period in 1997. The quarter-to-quarter comparison was favorably impacted by
the acquisition of Alfa. The impact of this acquisition was partially offset by
the sale of American Granby, as well as the sale of the Company's pump business
in Peru, Indiana. Excluding the impact of these transactions, first quarter 1998
sales would have declined approximately 8%. Sales of plumbing and heating
products decreased approximately 9.8% while sales of water systems decreased
3.7%. The unseasonably warm winter negatively impacted sales of products to the
plumbing and heating industry while the wet weather delayed the installation of
new water wells. In addition, sales of hot water maker products were adversely
impacted by a manufacturing process problem which has since been corrected.
(10)
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AMTROL INC. AND SUBSIDIARIES
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RESULTS OF OPERATIONS (CONT'd.)
The Company closed its Nashville, Tennessee production facility in December 1997
and relocated production of certain products to its West Warwick, R.I. facility
in the first quarter of 1998. The Company's ability to supply certain products,
primarily large vessel water systems, was disrupted during the relocation which
contributed to lower water systems sales this year.
The gross profit for the first quarter of 1998 was essentially unchanged from
the first quarter of 1997. The gross margin percentage decreased to 24.0% in
1998 from 25.9% in 1997. The inclusion of the operating results of the Alfa
subsidiary in the consolidated results for the quarter deflated the margin
percentage as the margins generated on reusable steel gas cylinders produced at
this facility are lower than many other Amtrol products. Excluding the results
of the new Alfa subsidiary, the margin percentage for the first quarter would
have been 25.3%. While the Company believes it has successfully maintained
market volume and position in the chemical container business, competitive
pricing actions as well as the movement of chemical container customers towards
long-term single source contracts, have negatively affected margins.
Selling, General and Administrative expenses which approximated $6.4 million
were relatively unchanged from the first quarter of 1997 and, as a percentage of
net sales, declined to 13.3% in 1998 from 14.3% in 1997. The inclusion of Alfa
in 1998 but not 1997 was substantially offset by the inclusion of American
Granby in 1997 but not 1998.
Earnings before interest expense, taxes, depreciation and amortization (EBITDA)
approximated $7.1 million in both the 1998 and 1997 first quarters.
Goodwill amortization expense of $1.1 million for the first quarter of 1998
increased approximately $0.2 million over the first quarter of 1997, and
interest expense of $5.2 million for the first quarter increased $0.7 million
over the comparable 1997 period. The increase in amortization expense and
interest expense primarily relates to the acquisition and financing of Alfa.
The net loss for the first quarter was $1.0 million, an increase of
approximately $0.6 million over the first quarter 1997 net loss.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital at April 4, 1998 was $22.2 million and the ratio of current
assets to current liabilities was 1.45 to 1.0. This compares with working
capital of $24.4 million and a current ratio of 1.57 to 1.0 at December 31,
1997.
The Company's accounts receivable increased $5.0 million since December 31,
1997, reflecting seasonal demand, while inventory declined approximately $2.6.
Year-end 1997 inventory levels, particularly water systems, were temporarily
increased at the end of 1997 in order to help mitigate disruption of supply to
customers during relocation of its Nashville water systems production lines to
its West Warwick, R.I. facility. The relocation was substantially complete by
the end of the first quarter. Accounts payable and accrued expenses combined
increased from the previous year-end by approximately $1.1 million primarily due
to the timing of payments.
(11)
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AMTROL INC. AND SUBSIDIARIES
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LIQUIDITY AND CAPITAL RESOURCES (CONT'd.)
The Company's cash balance increased $0.9 million to $1.4 million as compared to
the end of 1997. During the quarter ended April 4, 1998, operating activities
provided cash of $4.0 million. During this same period, the Company invested
$4.9 million, net, in machinery and equipment and increased net borrowings by
$1.8 million.
The Company's total capital expenditures for 1998 are projected to approximate
$10.0 million. The projection reflects planned capital investments at the Alfa
facility intended to improve productivity at that location.
In connection with the acquisition of the Company by affiliates of the Cypress
Group, L.L.C. on November 13, 1996, the Company became party to the Bank Credit
Agreement. The Bank Credit Agreement, amended in June and December 1997,
provides for $65.0 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, November 13, 1996, with quarterly amortization payments during
the term of such loans. The remainder ($45.0 million) of the Term Loans (the
"Tranche B Term Loans") will mature seven and one-half years after the effective
date, 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 reduce by $5.0 million in the fourth year and
$10.0 million in the fifth year after the effective date. The Revolving Credit
Facility will mature five and one-half years after the effective date. The Bank
Credit Agreement is secured by substantially all assets of the Company and its
subsidiaries.
Also in connection with the acquisition of the Company, 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 which is payable
semi-annually on each June 30 and December 31 commencing on June 30, 1997. 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 Bank Credit Facility and the Indenture contain various affirmative and
negative covenants and restrictions. The Company was in compliance with all such
covenants at April 4, 1998.
The Company intends to fund its future working capital expenditures and debt
service requirements through cash flows generated from operations, borrowings
under the revolving credit facility (the "Revolving Credit Facility") provided
under the Bank Credit Agreement and through the use of available cash balances
($1.4 million at April 4, 1998).
(12)
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AMTROL INC. AND SUBSIDIARIES
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LIQUIDITY AND CAPITAL RESOURCES (CONT'd.)
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
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
(13)
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AMTROL INC. AND SUBSIDIARIES
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports or exhibits on form 8-K were filed during the period covered by this
report.
(14)
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AMTROL INC. AND SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMTROL INC.
Date: May 18, 1998 By: /s/ John P. Cashman
--------------------------------- -----------------------------
John P. Cashman
Chairman, President and
Chief Executive Officer
Date: May 18, 1998 By: /s/ Edward J. Cooney
--------------------------------- -----------------------------
Edward J. Cooney
Senior Vice President
Chief Financial Officer
(15)