-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O177Gutmx50sjRaKK1mqd/jDvepiVo2zuLOm8poOsPZSJQv/me1hFlO/MmPIMZMW 6NamUiRsYmq5hyCh04MREw== 0000914120-97-000009.txt : 19970918 0000914120-97-000009.hdr.sgml : 19970918 ACCESSION NUMBER: 0000914120-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970916 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATTS INDUSTRIES INC CENTRAL INDEX KEY: 0000795403 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 042916536 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11499 FILM NUMBER: 97681066 BUSINESS ADDRESS: STREET 1: 815 CHESTNUT ST CITY: NORTH ANDOVER STATE: MA ZIP: 01845 BUSINESS PHONE: 5086881811 MAIL ADDRESS: STREET 1: 815 CHESTNUT STREET STREET 2: 815 CHESTNUT STREET CITY: NORTH ANDOVER STATE: MA ZIP: 01845 10-K 1 WATTS INDUSTRIES, INC. ANNUAL REPORT 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 June 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-14787 WATTS INDUSTRIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Delaware 04-2916536 (State of incorporation) (I.R.S. Employer Identification No.) 815 Chestnut Street, North Andover, MA 01845 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 688-1811 Securities registered pursuant to Section 12(b) of the Act: CLASS A COMMON STOCK, PAR VALUE $.10 PER SHARE Name of exchange on which registered: New York Stock Exchange 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. [ ] Aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant on August 12, 1997 was $402,994,121. As of August 12, 1997, 15,836,460 shares of Class A Common Stock, $.10 par value, and 11,199,127 shares of Class B Common Stock, $.10 par value, of the Registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE - ----------------------------------- Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held on October 21, 1997, are incorporated by reference into Part III of this Report. PART I Item 1. BUSINESS. --------- GENERAL - ------- Watts Industries, Inc., (the "Company") designs, manufactures and sells an extensive line of valves for the plumbing and heating, water quality, industrial, and oil and gas industries. Watts has focused on the valve industry since its inception in 1874, when it was founded to design and produce steam regulators for New England textile mills. Today, the Company is a leading manufacturer and supplier of plumbing and heating and water quality valve products, which account for approximately two-thirds of its sales. The Company's growth strategy emphasizes internal development of new valve products and entry into new markets for specialized valves and related products through diversification of its existing business and strategic acquisitions in related business areas, both domestically and abroad. The Company was incorporated in Delaware in 1985. The Company's product lines include safety relief valves, regulators, thermostatic mixing valves, ball valves and flow control valves for water service primarily in residential and commercial environments, and metal and plastic water supply/drainage products including valves, tubular brass products, faucets, drains, sink strainers, compression and flare fittings, and plastic tubing and braided metal hose connectors for residential construction and home repair and remodeling; backflow preventers for preventing contamination of potable water caused by reverse flow within water supply lines and fire protection equipment; steam regulators and control devices for industrial, HVAC and naval/marine applications; ball valves, cryogenic valves, pneumatic and electric actuators, relief valves, check valves and butterfly valves for industrial applications; and floating and trunnion ball valves, oil field check valves, and large ball valves for the oil and gas industry. Within a majority of the product lines the Company manufactures and markets, the Company believes that it has the broadest product line in terms of the distinct designs, sizes and configurations of its valves. Products representing a majority of the Company's sales have been approved under regulatory standards incorporated into state and municipal plumbing and heating, building and fire protection codes, and similar approvals from oil and gas industry standards agencies and from various agencies in the European market have been obtained. The Company has consistently advocated the development and enforcement of performance and safety standards, and is currently planning new investments and implementing additional procedures as part of its commitment to meet these standards. The Company maintains quality control and testing procedures at each of its manufacturing facilities in order to produce products in compliance with code requirements. Additionally, a majority of the Company's manufacturing subsidiaries have either acquired or are working to acquire ISO 9000, 9001 or 9002 certification from the International Organization for Standardization (ISO). On September 4, 1996 the Company divested itself of its Municipal Water Group, which includes Henry Pratt Company ("Pratt"), James Jones Company ("Jones"), and Edward Barber & Co. Ltd. ("Barber"), pursuant to a Stock Purchase Agreement dated June 19, 1996. On September 5, 1996, a wholly owned subsidiary of the Company acquired Consolidated Precision Corporation ("CPC") located in Riviera Beach, Florida. CPC manufactures control valves, manual and actuated shutoff valves, cryogenic filters, valve manifolds, and bayonet fittings for the cryogenic, ultra high purity, and industrial gas markets. The sales of CPC for the twelve month period ended May 31, 1996 were approximately $2,500,000. On January 3, 1997, a wholly owned subsidiary of the Company acquired Ames Company, Inc. ("Ames") located in Woodland, California. Ames manufactures UL/FM backflow prevention valves for use in fire protection equipment and automatic control valves to control the pressure and flow of water and other fluids. Ames had sales of approximately $27,000,000 for the twelve month period ended December 31, 1996. In June of 1997, the Company sold its vitreous china and faucet business to a joint venture in which it has a 49% minority interest. In fiscal 1997, sales of these products amounted to approximately $15,000,000. Since the Company will use the equity method to account for its investment in the joint venture, these sales will not be included in its consolidated net sales in the future. The Company relies primarily on commissioned representative organizations, most of whom maintain a consigned inventory of the Company's products, to market its product lines. These organizations, which accounted for approximately 70% of the Company's net sales in the fiscal year ended June 30, 1997, sell primarily to plumbing and heating wholesalers, DIY Market accounts, and steam, industrial, oil and gas distributors for resale to end users in the United States and abroad. The Company sells metal and plastic water supply/drainage products including valves, tubular brass products, faucets, drains, sink strainers, compression and flare fittings, plastic tubing and braided metal hose connectors for the residential construction and home repair and remodeling industries through do-it-yourself plumbing retailers, national catalog distribution companies, hardware stores, building material outlets and retail home center chains ("DIY Markets") and through the Company's existing plumbing and heating wholesalers. The industrial product line is sold to domestic process industries through distributors and to aerospace and aircraft industries through special distributors and manufacturers' representatives, and the oil and gas product line is sold to domestic oil and gas industries through stocking supply stores and internationally through commissioned agents. The Company also sells products directly to certain large original equipment manufacturers (OEM's) and private label accounts. The Company also maintains direct and indirect sales channels for water valves, steam valves, relief valves, shut-off valves, check valves, butterfly valves, ball valves and flow meters to the power generation, maritime, heating, ventilation and air-conditioning, irrigation, fire protection, and refrigeration industries and utilities. The Company believes that sales to the residential construction and to the oil and gas markets may be subject to cyclical variations to a greater extent than its other targeted markets. However, because the Company sells into different geographic areas, and to large and diverse customers, any potential adverse effects from any cyclical variations tend to be mitigated. No assurance can be given that the Company will be protected from a broad downturn in the economy. There was no single customer which accounted for more than 10% of sales in the fiscal year ended June 30, 1997. The Company has a fully integrated and highly automated manufacturing capability including foundry operations, machining operations, injection molding and assembly. The Company's foundry operations include metal pouring systems and automatic core making, mold making and pouring capabilities. The Company's machining operations feature computer-controlled machine tools, high-speed chucking machines and automatic screw machines for machining bronze, brass, iron and steel components. See "Properties" below. The Company has invested heavily in recent years to expand its manufacturing base and to ensure the availability of the most efficient and productive equipment. Capital expenditures were $29,742,000, $31,080,000, and $27,980,000 for fiscal 1997, 1996, and 1995, respectively. Depreciation and amortization for such periods were $20,828,000, $21,574,000, and $20,345,000, respectively. Five significant raw materials used in the Company's production processes are bronze ingot, brass rod, cast iron, carbon steel and stainless steel. While the Company historically has not experienced significant difficulties in obtaining these commodities in quantities sufficient for its operations, there have been significant changes in their prices. The Company's gross profit margins are adversely affected to the extent that the selling prices of its products do not increase proportionately with increases in the costs of bronze ingot, brass rod, cast iron, carbon steel and stainless steel. Any significant unanticipated increase or decrease in the prices of these commodities could materially affect the Company's results of operations. However, increased sales volume, an active materials management program, and the diversity of materials used in the Company's production processes have somewhat diminished the impact from changes in the cost of these five raw materials. No assurances can be given that this will protect the Company from future changes in the prices for such raw materials. The domestic and international markets for valves are intensely competitive and include companies possessing greater financial, marketing and other resources than the Company. Management considers product reputation, price, effectiveness of distribution and breadth of product line to be the primary competitive factors. The Company believes that new product development and product engineering are also important to success in the valve industry and that the Company's position in the industry is attributable in significant part to its ability to develop new and innovative products quickly and to adapt and enhance existing products. During fiscal 1997, the Company began development of several new and innovative products to enhance market position and is currently implementing newly identified manufacturing and design programs to reduce costs. The Company employs over 100 engineers and technicians, which does not include engineers working in the Chinese joint ventures, who engage primarily in these activities. Although the Company owns certain patents and trademarks that it considers to be of importance, it does not believe that its business and competitiveness as a whole is dependent on any one or more patents or trademarks or on patent or trademark protection generally. The Company's financial information by geographic area is contained in Note 14 of Notes to Consolidated Financial Statements incorporated herein by reference. From time to time, the Company's results of operations may be adversely affected by fluctuations in foreign exchange rates. Backlog was $104,559,000 at August 15, 1997 and $97,917,000 at August 16, 1996. The Company does not believe that its backlog at any point in time is indicative of future operating results. Available funds and funds provided from the Company's operations are sufficient to meet anticipated capital requirements. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", below as it relates to the impact of foreign exchange rates and capital requirements. As of June 30, 1997, the Company's domestic and foreign operations employed approximately 3,900 people, plus 750 employees in the Company's joint ventures located in the People's Republic of China. There are approximately 139 employees that are covered by collective bargaining agreements in the United States and Canada. The Company believes that its employee relations are excellent. EXECUTIVE OFFICERS - ------------------ Information with respect to the executive officers of the Company is set forth below:
Name Position Age ---- -------- --- TIMOTHY P. HORNE Chairman of the Board, Chief Executive Officer and Director 59 DAVID A. BLOSS, SR. President, Chief Operating Officer and Director 47 FREDERIC B. HORNE Corporate Vice President and Director 47 KENNETH J. MCAVOY Chief Financial Officer, Treasurer, Secretary and Director 57 ROBERT T. MCLAURIN Corporate Vice President of Asian Operations 66 MICHAEL O. FIFER Vice President of Corporate Development 40 WILLIAM C. MCCARTNEY Vice President of Finance 43 SUZANNE M. ZABITCHUCK Corporate Counsel and Assistant Secretary 42
Timothy P. Horne joined the Company in September 1959 and has been a Director since 1962. Mr. Horne served as the Company's President from 1976 to 1978 and again from 1994 to April 1997. He has served as Chief Executive Officer since 1978 and he became the Company's Chairman of the Board in April 1986. David A. Bloss, Sr., was appointed President and Chief Operating Officer in April, 1997. He joined the Company as Executive Vice President in July 1993 and has been a Director since January 1994. Prior to joining the Company, Mr. Bloss was for five years associated with the Norton Company, a manufacturer of abrasives and cutting tools, serving most recently as President of the Superabrasives Division. Frederic B. Horne, brother of Timothy P. Horne, joined the Company in 1973 and has been Corporate Vice President of the Company since August 1987 and a Director since 1980. Mr. Horne served as the Company's Vice President and General Manager from 1978 to August 1987. Kenneth J. McAvoy joined the Company in 1981 as Corporate Controller. He served as the Company's Vice President of Finance from 1984 to 1994. He has been the Chief Financial Officer and Treasurer since June 1986, and has been a Director since January 1994. Mr. McAvoy served as Executive Vice President of European Operations from January 1994 to June 1996. Mr. McAvoy has also served as Secretary or Clerk since January 1985. Robert T. McLaurin was appointed Corporate Vice President of Asian Operations in August 1994. He served as the Senior Vice President of Manufacturing of Watts Regulator Co. from 1983 to August 1994. He joined Watts Regulator Company as Vice President of Manufacturing in 1978. Michael O. Fifer joined the Company in May 1994 and was appointed the Company's Vice President of Corporate Development. Prior to joining the Company, Mr. Fifer was Associate Director of Corporate Development with Dynatech Corp., a diversified high-tech manufacturer, from 1991 to April 1994. William C. McCartney joined the Company in 1985 as Controller. He was appointed the Company's Vice President of Finance in 1994, and he has been Corporate Controller of the Company since April 1988. Suzanne M. Zabitchuck has been Corporate Counsel of the Company since joining the Company in December 1992. Ms. Zabitchuck was appointed Assistant Secretary in August 1993. Ms. Zabitchuck was associated with The Stride Rite Corporation, a shoe manufacturer, serving as its Associate General Counsel and Clerk immediately prior to joining the Company. PRODUCT LIABILITY AND ENVIRONMENTAL MATTERS - ------------------------------------------- The Company, like other worldwide manufacturing companies, is subject to a variety of potential liabilities connected with its business operations, including potential liabilities and expenses associated with possible product defects or failures and compliance with environmental laws. The Company maintains product liability and other insurance coverage which it believes to be generally in accordance with industry practices. Nonetheless, such insurance coverage may not be adequate to protect the Company fully against substantial damage claims which may arise from product defects and failures. Leslie Controls, Inc. and Spence Engineering Company, both subsidiaries of the Company, are involved as third-party defendants in various civil product liability actions pending in the U.S. District Court, Northern District of Ohio. The underlying claims have been filed by present or former employees of various shipping companies for personal injuries allegedly received as a result of exposure to asbestos. The shipping companies contend that they installed in their vessels certain valves manufactured by Leslie Controls and/or Spence Engineering which contained asbestos. Leslie Controls is also a defendant in a similar matter pending in the Superior Court of California, San Francisco County. The Company has resort to certain insurance coverage with respect to these matters. Coverage has been disputed by certain of the carriers and, therefore, recovery is questionable, a factor which the Company has considered in its evaluation of these matters. The Company has established reserves which it currently believes are adequate in light of the probable and estimable exposure of pending and threatened litigation of which it has knowledge. Based on facts presently known to it, the Company does not believe that the outcome of these proceedings will have a material adverse effect on its financial condition, results of operations, or its liquidity. Certain of the Company's operations generate solid and hazardous wastes, which are disposed of elsewhere by arrangement with the owners or operators of disposal sites or with transporters of such waste. The Company's foundry and other operations are subject to various federal, state and local laws and regulations relating to environmental quality. Compliance with these laws and regulations requires the Company to incur expenses and monitor its operations on an on-going basis. The Company cannot predict the effect of future requirements on its capital expenditures, earnings or competitive position due to any changes in either federal, state or local environmental laws, regulations or ordinances. The Company is currently a party to or otherwise involved with various administrative or legal proceedings under federal, state or local environmental laws or regulations involving a number of sites, in some cases as a participant in a group of potentially responsible parties. Four of these sites, the Sharkey and Combe Landfills in New Jersey, the San Gabriel Valley/El Monte, California water basin site, and the Cherokee Oil Resources Site in Charlotte, North Carolina, are listed on the National Priorities List. With respect to the Sharkey Landfill, the Company has been allocated .75% of the remediation costs, an amount which is not material to the Company. No allocations have been made to date with respect to the Combe Landfill or San Gabriel Valley sites. The EPA has formally notified several entities that they have been identified as being potentially responsible parties with respect to the San Gabriel Valley site. As the Company was not included in this group, its potential involvement in this matter is uncertain at this point given that either the PRP's named to date or the EPA could seek to expand the list of potentially responsible parties. With respect to the Cherokee Oil Resources Site, the Company has elected to participate in a de minimis settlement. In addition to the foregoing, the Solvent Recovery Service of New England site and the Old Southington landfill site, both in Connecticut, are on the National Priorities List but, with respect thereto, the Company has resort to indemnification from third parties and based on currently available information, the Company believes it will be entitled to participate in a de minimis capacity. With respect to the Combe Landfill, the Company is one of approximately 30 potentially responsible parties. The Company and all other PRP's received a Supplemental Directive from the New Jersey Department of Environmental Protection & Energy in 1994 seeking to recover approximately $9 million in the aggregate for the operation, maintenance, and monitoring of the implemented remedial action taken up to that time in connection with the Combe Landfill North site. Certain of the PRP's, including the Company, are currently negotiating with the state only to assume maintenance of this site in an effort to reduce future costs. The Company and the remaining PRP's have also received a formal demand from the U.S. Environmental Protection Agency to recover approximately $17 million expended to date in the remediation of this site. The EPA has filed suit against certain of the PRP's, and the Company has recently been named a third-party defendant in this litigation. Based on facts presently known to it, the Company does not believe that the outcome of these proceedings will have a material adverse effect on its financial condition, results of operations, or its liquidity. The Company has established balance sheet accruals which it currently believes are adequate in light of the probable and estimable exposure of pending and threatened environmental litigation and proceedings of which it has knowledge. Given the nature and scope of the Company's manufacturing operations, there can be no assurance that the Company will not become subject to other environmental proceedings and liabilities in the future which may be material to the Company. Item 2. PROPERTIES. ----------- The Company's manufacturing operations include four casting foundries, two of which are located in the United States, one in Europe and one at Tianjin Tanggu Watts Valve Company Limited ("Tanggu Watts"), a joint venture located in the People's Republic of China. Castings from these foundries and other components are machined and assembled into finished valves at 22 manufacturing facilities located in the United States, Canada, Europe and the People's Republic of China. Many of these facilities contain sales offices or warehouses from which the Company ships finished goods to customers and com- missioned representative organizations. The Company's corporate headquarters are located in North Andover, Massachusetts. The vast majority of the Company's operating facilities and the related real estate are owned by the Company. The buildings and land located in Nerviano, Italy and Tianjin, People's Republic of China and the land located in Suzhou, People's Republic of China, are leased by Pibiviesse S.p.A. ("PBVS"), Tanggu Watts and Suzhou Watts Valve Co., Ltd. ("Suzhou Watts") respectively, under lease agreements, the terms of which are 6 years, 30 years, and 30 years, respectively. Additionally, during fiscal 1997 the Company relocated the operations of Jameco Industries, Inc. ("Jameco") to the Company's Watts Regulator plant in Spindale, North Carolina and began to consolidate the operations of PBVS into one location at Nerviano, Italy. Certain of the Company's facilities are subject to mortgages and collateral assignments under loan agreements with long-term lenders. In general, the Company believes that its properties, including machinery, tools and equipment, are in good condition, well maintained and adequate and suitable for their intended uses. The Company believes that the manufacturing facilities are currently operating at a level that management considers normal capacity. This utilization is subject to change as a result of increases or decreases in sales. Item 3. LEGAL PROCEEDINGS. ------------------ Item 3(a). The Company is from time to time involved in various legal and administrative procedures. See Part I, Item 1, "Product Liability and Environmental Matters". Item 3(b). None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- There were no matters submitted during the fourth quarter of the fiscal year covered by this Report to a vote of security holders through solicitation of proxies or otherwise. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ------------------------------------------------------------------ MATTERS. -------- MARKET INFORMATION - ------------------ The following tabulation sets forth the high and low sales prices of the Company's Class A Common Stock on the New York Stock Exchange during fiscal 1997 and fiscal 1996 and cash dividends per share: High Low Dividend High Low Dividend ---- --- -------- ---- --- -------- 1997 1996 ---- ---- First Quarter $19 7/8 $15 1/2 $.07 $25 5/8 $22 3/8 $.0625 Second Quarter 24 1/4 19 .07 25 1/8 20 .0625 Third Quarter 26 3/8 23 .0775 23 5/8 16 5/8 .07 Fourth Quarter 26 1/2 21 1/4 .0775 20 5/8 17 7/8 .07 There is no established public trading market for the Class B Common Stock of the Company, which is held exclusively by members of the Horne family and management. The principal holders of such stock are subject to restrictions on transfer with respect to their shares. Each share of Class B Common Stock (10 votes per share) of the Company is convertible into one share of Class A Common Stock (1 vote per share). Aggregate common stock dividend payments for fiscal 1997, 1996, and 1995, were $7,992,000, $7,793,000 and $6,951,000, respectively. While the Company presently intends to continue to pay cash dividends, payment of future dividends necessarily depends upon the Board of Directors' assessment of the Company's earnings, financial condition, capital requirements and other factors. See Note 8 of Notes to Consolidated Financial Statements incorporated herein by reference regarding restrictions on payment of dividends. The number of record holders of the Company's Class A Common Stock as of August 12, 1997 was 232. The Company believes that the number of beneficial shareholders of the Company's Class A Common Stock was in excess of approximately 4,500 as of August 12, 1997. The number of record holders of the Company's Class B Common Stock as of August 12, 1997 was 11. Item 6. SELECTED FINANCIAL DATA. ------------------------ The selected financial data set forth below should be read in conjunction with the Company's consolidated financial statements, related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
FIVE YEAR FINANCIAL SUMMARY (Amounts in thousands, except per share information) 1997 1996(1) 1995 1994 1993(2) ---- ------- ---- ---- ------- Selected Data Net sales from continuing operations $ 720,340 $ 640,876 $ 576,851 $ 444,484 $ 398,688 Income (loss) from continuing operations 48,460 (53,765) 42,463 39,400 24,923 Net income (loss) 51,747 (50,285) 45,738 41,010 27,274 Total assets 622,083 656,294 676,394 546,722 526,119 Total debt 128,359 163,150 144,240 98,244 103,434 Income (loss) per share from continuing operations 1.77 (1.82) 1.43 1.33 0.83 Net income (loss) per share 1.89 (1.70) 1.54 1.38 0.91 Dividends per common share 0.295 0.265 0.235 0.20 0.16 (1) Fiscal 1996 includes an after-tax charge of $92,986,000 related to: restructuring costs of $25,415,000; an impairment of long-lived assets of $63,065,000; other charges of $13,753,000 principally for product liability costs, additional bad debt reserves and environmental remediation costs; and additional inventory valuation reserves of $9,508,000 (see Item 7 - "Management Initiatives"). (2) Fiscal 1993 includes an after-tax charge of $7,471,000 related to cumulative change in accounting method and other unusual charges.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS. -------------------------- MANAGEMENT INITIATIVES - ---------------------- In fiscal 1996, the Company re-evaluated its strategy and decided to restructure its business in an effort to improve the efficiency of the Company's worldwide operations as described below: DIVESTITURE - ----------- As part of this strategy, the Company decided to divest itself of the Municipal Water Group of Companies, which consisted of Henry Pratt Company, James Jones Company, and Edward Barber & Company Ltd. This divestiture was completed on September 4, 1996 resulting in an after-tax gain of $3,208,000. The proceeds were used primarily to reduce long-term debt, fund the Company's share repurchase program and fund acquisitions. This divestiture will enable the Company to focus its acquisition and growth strategies on its core markets, namely plumbing and heating and water quality, and industrial, and oil and gas. The results of operations of the Municipal Water Group have been reported as income from discontinued operations. IMPAIRMENT OF LONG-LIVED ASSETS - ------------------------------- During fiscal 1996 the Company recorded a $63,065,000 impairment of long-lived asset loss. The impairment charge mainly pertains to the Company's Italian subsidiaries and was the result of the potential non-deductibility of goodwill amortization coupled with decreasing margins and operating profits. In connection with the re-evaluation of its business strategy in Italy, management concluded an impairment had occurred and recorded a loss by reducing the value of affected long-lived assets, primarily goodwill, to fair value, as determined using a discounted cash flow approach. RESTRUCTURING ACTIVITIES - ------------------------ The Company also decided to undertake certain restructuring initiatives aimed at improving the efficiency of certain of its continuing operations. The two most significant initiatives are the consolidation and downsizing of Pibiviesse S.p.A. ("PBVS") and the relocation of Jameco Industries, Inc. ("Jameco"). The Company initiated a plan to consolidate and downsize the operations of its PBVS subsidiary in Italy. The downsizing has occurred, and the consolidation will be completed during fiscal 1998. PBVS has experienced an improvement in sales volume and gross margin in fiscal 1997, even though the restructuring efforts are still on-going. The Company also decided to relocate the manufacturing operations of Jameco from Wyandanch, New York to a Watts Regulator plant in Spindale, North Carolina. The expansion of the Spindale facility, which will house the Jameco activity, is complete, and the manufacturing machinery and equipment has been relocated. We expect this transfer to be fully completed in early fiscal 1998. The $25,415,000 of restructuring expense recorded in fiscal 1996 includes $9,300,000 of severance; $8,400,000 of asset write-downs for assets to be abandoned or sold; and $7,715,000 of exit costs. The $7,715,000 of exit costs are comprised primarily of lease and other contract termination costs and plant closure costs. It is expected that the restructuring plan will be substantially complete by the end of fiscal year 1998, although unanticipated events could affect the cost and timing of the restructuring plan. OTHER MATTERS - ------------- In fiscal 1996, the Company recorded a $13,753,000 selling, general and administrative expense charge, principally for product liability costs, environmental remediation requirements and additional bad debt reserves. Also, a $9,508,000 inventory write-down was recorded during fiscal 1996 to reduce inventories to their estimated market value. CONCLUSION - ---------- The effect of the aforementioned fiscal year 1996 charges is summarized below: (In thousands) -------------- Inventory write-down charged to cost of goods sold $ 9,508 Selling, general and administrative expense charge 13,753 Impairment of long-lived assets 63,065 Restructuring expense 25,415 --------- 111,741 Income tax benefit (18,755) --------- After-tax charge $ 92,986 ======== RESULTS OF OPERATIONS - --------------------- FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO - ------------------------------------------- FISCAL YEAR ENDED JUNE 30, 1996 - ------------------------------- Net sales from continuing operations increased $79,464,000 (12.4%) to $720,340,000. An analysis of this increase in net sales is as follows: 1997 - 1996 (In thousands) Domestic -Internal Growth $43,256 6.8% International -Internal Growth $25,297 3.9% -Exchange Rate Effect $(8,037) (1.3%) -------- ------ Total International $17,260 2.6% Acquisitions $18,948 3.0% -------- ------ Total Increase $79,464 12.4% ======== ====== The increase in net sales from internal growth is primarily attributable to increased unit shipments of oil and gas valves and plumbing and heating valves. The increased unit shipments of oil and gas valves is supported by a strong worldwide oil and gas market. The increased unit shipments of plumbing and heating valves is primarily associated with increased demand from plumbing and heating wholesalers and increased penetration into the home repair retail market (DIY). The increased sales due to acquisitions is primarily attributable to the acquisition of Ames Company, Inc. ("Ames") of Woodland, CA in January 1997. The Company intends to maintain its strategy of seeking acquisition opportunities as well as expanding its existing market position to achieve sales growth. Gross profit from continuing operations increased $33,194,000 (15.6%). Excluding the $9,508,000 of inventory write-downs recorded in cost of sales last fiscal year, gross profit would have increased $23,686,000 (10.7%) to $245,392,000 and decreased as a percentage of net sales from 34.6% to 34.1%. The gross profit percentage was primarily, among other things, adversely affected by decreased absorption of fixed expenses that occurred because the Company reduced production levels to achieve inventory reductions. The decreased absorption was partially offset by improved gross margins for oil and gas valves due to increased sales volumes and factory efficiencies. Selling, general and administrative expenses in the year ended June 30, 1996 include a $13,753,000 charge for product liability costs, environmental remediation and additional bad debt reserves. Selling, general and administrative expenses excluding this charge increased $9,786,000 (6.6%) to $158,984,000 and decreased as a percentage of net sales from 23.3% to 22.1%. The increase in spending is primarily attributable to increased commissions and variable selling expenses associated with the increased sales and the inclusion of the expenses of acquired companies. The Company's effective tax rate was favorably effected in fiscal 1997 by tax planning strategies and utilization of foreign net operating loss carry forwards. During fiscal 1996, the Company's effective tax rate was unfavorably effected by the substantially non-deductible nature of the long-lived asset impairment loss. Earnings from continuing operations increased by $102,225,000 when compared to fiscal 1996, and by $9,239,000 (23.6%) when the $92,986,000 after-tax effect of the items described above under "Management Initiatives" are excluded from the comparison. The Company's return on average stockholders' investment, excluding the gain on the sale of the Municipal Water Group, was 14.9% for fiscal 1997 compared to 9.6% in fiscal 1996 (as adjusted to exclude the 1996 items described above). The Company experienced an unfavorable impact due to the change in foreign exchange rates since June 30, 1996. This change did not have a material adverse impact on the results of operations or the financial condition of the Company. RESULTS OF OPERATIONS - --------------------- FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO - ------------------------------------------- FISCAL YEAR ENDED JUNE 30, 1995 - ------------------------------- Net sales from continuing operations increased $64,025,000 (11.1%) to $640,876,000. An analysis of this increase in net sales is as follows: 1996 - 1995 (In thousands) Domestic -Internal Growth $11,759 2.0% International -Internal Growth $ 4,697 0.8% -Exchange Rate Effect $ 3,145 0.6% -------- ------ Total International $ 7,842 1.4% Acquisitions $44,424 7.7% -------- ------ Total Increase $64,025 11.1% ======= ====== This increase in internal growth was primarily attributable to increased unit shipments of plumbing and heating and water quality valves in the United States and Europe. The increase in sales from acquisitions was primarily attributable to the acquisition of Anderson-Barrows Metals Corporation of Palmdale, CA, PBVS of Nerviano, Italy, and Etablissements Trubert S.A. of Chartres, France. Gross profit from continuing operations increased $1,486,000 (0.7%) to $212,198,000 but decreased as a percentage of sales from 36.5% to 33.1%. This decreased percentage was primarily attributable to the inclusion of $9,508,000 in costs related primarily to inventory write-downs to market value. Gross profit from continuing operations exclusive of these charges would have been $221,706,000 or 34.6% of net sales. This decreased percentage was primarily attributable to lower gross margins experienced within the Industrial and Oil and Gas group as a result of competitive pricing and unfavorable manufactur- ing variances. In addition, unfavorable manufacturing variances associated with reduced production levels caused by lower sales volume experienced within the steam group adversely impacted the Company's gross margin. The inclusion of certain acquired companies which operate at a lower gross margin than the rest of the Company also adversely impacted the gross margin. Gross profit was also adversely affected by increased raw material costs of bronze ingot, carbon and stainless steel, which, due to competitive pricing pressures, could not be completely recovered through price increases. Selling, general and administrative expenses from continuing operations increased $29,350,000 (22%) to $162,951,000. This increase is primarily attributable to the inclusion of a $13,753,000 additional charge for product liability costs, environmental remediation and bad debt reserves discussed above and the expenses of acquired companies. Interest income from continuing operations decreased $1,228,000 (63.6%) to $702,000 due to decreased levels of cash and short-term investments. Interest expense from continuing operations increased $592,000 (6.3%) to $9,960,000. This increase was primarily attributable to the increased levels of debt incurred in association with the acquisitions. The effective tax rate from continuing operations, exclusive of the restructuring, impairment of long-lived assets and other matters, decreased to 37.1% in fiscal 1996 from 37.7% in fiscal 1995. Net income (loss) from continuing operations decreased $96,228,000 (226.6%) to $(53,765,000). Net income from continuing operations exclusive of the impairment loss, restructuring charge and other matters referred to under "Management Initiatives" above, would have decreased $3,242,000 (7.6%) to $39,221,000. The change in foreign exchange rates did not have a material impact on the net results of operations or the financial condition of the Company. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During fiscal 1997, the Company generated $58,870,000 in cash flow from operations, which was principally used to reduce borrowings under its line of credit and to fund capital expenditures. In fiscal 1997, the Company received $88,164,000 of proceeds as a result of its sale of the Municipal Water Group. These proceeds were used to fund the acquisitions that are described below, reduce the borrowings under its line of credit and to fund additional share purchases under its existing stock repurchase program. Capital expenditures for fiscal 1997 were $29,742,000, primarily for manufacturing machinery and equipment, as part of its commitment to continuously improve its manufacturing capabilities. The Company's capital expenditure budget for fiscal 1998 is $29,500,000. The Company purchased 1,321,300 shares of Class A Common Stock for an aggregate purchase price of $25,564,000. During the twelve months ended June 30, 1997, the Company invested $37,705,000 in two acquisitions. In September 1996, a wholly-owned subsidiary of the Company purchased certain assets and assumed certain liabilities of CPC. CPC is a manufacturer of high quality control valves, manual and actuated shut-off valves, cryogenic filters, valve manifolds and bayonet fittings for the cryogenic and ultra-high purity and industrial gas market. CPC had sales of approximately $2,500,000 for the twelve months ended May 31, 1996. In January 1997, a wholly-owned subsidiary of the Company purchased Ames. Ames designs, manufactures, and markets UL/FM certified backflow prevention valves for use in the fire protection market. Ames had sales of approximately $27,000,000 for the twelve months ended December 31, 1996. The Company has available an unsecured $125,000,000 line of credit which expires on August 31, 1999. The Company's intent is to utilize this credit facility to support the Company's acquisition program, working capital requirements of acquired companies, and for general corporate purposes. As of June 30, 1997, there was $29,000,000 borrowed under this line of credit. Working capital at June 30, 1997 was $224,702,000 compared to $286,205,000 at June 30, 1996. The ratio of current assets to current liabilities was 2.9 to 1 at June 30, 1997 compared to 3.2 to 1 at June 30, 1996. This decrease is principally attributable to repayment of long-term debt and the Company's stock repurchase program. Cash and short-term investments were $14,422,000 at June 30, 1997 compared to $0 at June 30, 1996. Debt as a percentage of total capital employed was 27.8% at June 30, 1997 compared to 33.8% at June 30, 1996. At June 30, 1997 the Company was in compliance with all covenants related to its existing debt. The Company from time to time is involved with environmental proceedings and incurs costs on an on-going basis related to environmental matters. The Company currently anticipates that it will not incur significant expenditures in fiscal 1998 in connection with any of these environmentally contaminated sites. Please see Part I, Item 1, "Product Liability and Environmental Matters". The Company anticipates that available funds and funds provided from current operations will be sufficient to meet current operating requirements and anticipated capital expenditures for at least the next 24 months. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -------------------------------------------- The index to financial statements is included in page 12 of this Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. --------------------- The information called for by this Item 9 was previously reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 1997. Also see Item 14(b). PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. --------------------------------------------------- DIRECTORS - --------- The information appearing under the caption "Information as to Directors and Nominees for Director" in the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on October 21, 1997 is incorporated herein by reference. EXECUTIVE OFFICERS - ------------------ Information with respect to the executive officers of the Company is set forth in Item 1 of this Report under the caption "Executive Officers". Item 11. EXECUTIVE COMPENSATION. ----------------------- The information appearing under the caption "Compensation Arrangements" in the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on October 21, 1997 is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. --------------------------------------------------------------- The information appearing under the caption "Principal and Management Stockholders" in the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on October 21, 1997 is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- The information appearing under the caption "Compensation Arrangements-Certain Transactions" in the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders to be held on October 21, 1997 is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 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: Report of Independent Auditors 16 Consolidated Statements of Operations for each of the Three Years in the Period Ended June 30, 1997 17 Consolidated Balance Sheets as of June 30, 1997 and 1996 18 Consolidated Statements of Stockholders' Equity for each of the Three Years in the Period Ended June 30, 1997 19 Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended June 30, 1997 20 Notes to Consolidated Financial Statements 21 (a)(2) SCHEDULES - ---------------- Schedule II - Valuation and Qualifying Accounts for each of the Three Years in the Period Ended June 30, 1997 33 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 - --------------- Exhibits 10.1-10.6, 10.8, 10.22, and 10.29 constitute all of the management contracts and compensation plans and arrangements of the Company required to be filed as exhibits to this Annual Report. Upon written request of any stockholder to the Chief Financial Officer at the Company's principal executive office, the Company will provide any of the Exhibits listed below. Exhibit No. Description and Location 3.1 Restated Certificate of Incorporation, as amended. (12) 3.2 Amended and Restated By-Laws. (1) 9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31, 1991 (2), Amendments dated November 19, 1996*, February 24, 1997*, June 5, 1997*, and August 26, 1997.* 9.2 The George B. Horne Voting Trust Agreement-1997 dated as of August 26, 1997. * 10.1 Employment Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. (14) 10.2 Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. (14) 10.3 Deferred Compensation Agreement between the Registrant and Timothy P. Horne, as amended. (4) 10.4 1996 Stock Option Plan, dated October 15, 1996. (15) 10.5 1989 Nonqualified Stock Option Plan. (3) 10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated December 30, 1994, as amended and restated effective as of January 1, 1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment No. 3 (14), Amendment No. 4 dated September 4, 1996.* 10.7 Registration Rights Agreement dated July 25, 1986. (5) 10.8 Executive Incentive Bonus Plan, as amended. (12) 10.9 Indenture dated as of December 1, 1991 between the Registrant and The First National Bank of Boston, as Trustee, including form of 8-3/8% Note Due 2003. (8) 10.10 Loan Agreement and Mortgage among The Industrial Development Authority of the State of New Hampshire, Watts Regulator Co. and Arlington Trust Company dated August 1, 1985. (4) 10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and Franklin, New Hampshire, facilities) financing dated December 31, 1985. (4) 10.12 Sale Agreement between Village of Walden Industrial Development Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11) 10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1, 1994 by and among the Registrant, Spence Engineering Company, Inc. and First Union National Bank of North Carolina. (11), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.14 Trust Indenture from Village of Walden Industrial Development Agency to The First National Bank of Boston, as Trustee, dated June 1, 1994. (11) 10.15 Loan Agreement between Hillsborough County Industrial Development Authority and Leslie Controls, Inc. dated July 1, 1994. (11) 10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1, 1994 by and among the Registrant, Leslie Controls, Inc. and First Union National Bank of North Carolina (11), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.17 Trust Indenture from Hillsborough County Industrial Development Authority to The First National Bank of Boston, as Trustee, dated July 1, 1994. (11) 10.18 Loan Agreement between The Rutherford County Industrial Facilities and Pollution Control Financing Authority and Watts Regulator Company dated September 1, 1994. (12) 10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated September 1, 1994 by and among the Registrant, Watts Regulator Company and The First Union National Bank of North Carolina (12), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.20 Trust Indenture from The Rutherford County Industrial Facilities and Pollution Control Financing Authority to The First National Bank of Boston,as Trustee, dated September 1, 1994. (12) 10.21 Amended and Restated Stock Restriction Agreement dated October 30, 1991 (2), Amendment dated August 26, 1997.* 10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified Stock Option Plan (7), Amendment No. 1. (14) 10.23 Letters of Credit relating to retrospective paid loss insurance programs. (10) 10.24 Form of Stock Restriction Agreement for management stockholders. (5) 10.25 Revolving Credit Agreement dated December 23, 1987 between Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and related Guaranty of Watts Industries, Inc. and Watts Regulator Co. dated December 14, 1987. (6) 10.26 Loan Agreement dated September 1987 with, and related Mortgage to, N.V. Sallandsche Bank. (6) 10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding A.G. and the participations in Multiscope Due S.R.L. dated November 6, 1992. (9) 10.28 Revolving Credit Agreement dated August 30, 1994 between and among Watts Investment Company, certain financial institutions, the First National Bank of Boston, as Agent, and the Registrant, as Guarantor (11), Amendment No. 1 (14), Amendment No. 2. (14) 10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October 17, 1995 (13), Amendment No. 1 dated August 5, 1997.* 10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco International Ltd. and Watts Industries, Inc. (16) 11. Statement Regarding Computation of Earnings per Common Share. * 21. Subsidiaries. * 23.1 Consent of KPMG Peat Marwick LLP. * 23.2 Consent of Ernst & Young LLP, Independent Auditors, predecessor auditors.* 23.3 Consent of Deloitte & Touche, Independent Auditors, predecessor auditors.* 27. Financial Data Schedule. * INCORPORATED BY REFERENCE TO: - ----------------------------- (1) Relevant exhibit to Registrant's Form 8-K dated May 15, 1992. (2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991. (3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30, 1989. (4) Relevant exhibit to Registrant's Form S-1 (No.33-6515) dated June 17, 1986. (5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the Second Amendment to such Form S-1 dated August 21, 1986. (6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February 16, 1989. (7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year ended June 30, 1992. (8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992. (9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993 to Form 8-K dated November 6, 1992. (10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993. (11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994. (12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995. (13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November 29, 1995. (14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996. (15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August 1, 1997. (16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996. * Filed as an exhibit to this Report with the Securities and Exchange Commission (b) REPORTS ON FORM 8-K. - ------------------------ A report on Form 8-K was filed with the Securities and Exchange Commission on April 11, 1997. The following items were reported in the Form 8-K: (1) Item 4. Changes in Registrant's Certifying Accountant. (2) Item 7 (c). Financial Statements, Pro Forma Financial Information and Exhibits. Letters from Ernst & Young LLP and Deloitte & Touche were filed as Exhibits (letter re change in certifying accountant). SIGNATURES Pursuant to the requirements of Section 13 or 15(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. WATTS INDUSTRIES, INC. By: /s/ TIMOTHY P. HORNE --------------------- TIMOTHY P. HORNE CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER DATED: SEPTEMBER 8, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /S/ TIMOTHY P. HORNE Chairman of the Board and Chief Executive Officer September 8, 1997 - -------------------------- Timothy P. Horne (Principal Executive Officer) and Director /S/ KENNETH J. MCAVOY Chief Financial Officer and Treasurer (Principal Financial September 8, 1997 - -------------------------- Kenneth J. McAvoy and Accounting Officer), Secretary, and Director /S/ DAVID A. BLOSS, SR. President and Chief Operating Officer, and Director September 8, 1997 - -------------------------- David A. Bloss, Sr. /S/ FREDERIC B. HORNE Corporate Vice President and Director September 8, 1997 - -------------------------- Frederic B. Horne /S/ NOAH T. HERNDON Director September 8, 1997 - -------------------------- Noah T. Herndon /S/ WENDY E. LANE Director September 8, 1997 - -------------------------- Wendy E. Lane /S/ GORDON W. MORAN Director September 8, 1997 - -------------------------- Gordon W. Moran /S/ DANIEL J. MURPHY, III Director September 8, 1997 - -------------------------- Daniel J. Murphy, III
Independent Auditors' Report The Board of Directors Watts Industries, Inc.: We have audited the accompanying consolidated balance sheet of Watts Industries, Inc. and subsidiaries as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the accompanying financial statement schedule of valuation and qualifying accounts as of and for the year ended June 30, 1997. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit. The accompanying consolidated financial statements and schedule of valuation and qualifying accounts of Watts Industries, Inc. and subsidiaries as of June 30, 1996 and for each of the years in the two year period then ended were audited by other auditors whose report thereon dated August 6, 1996 included an explanatory paragraph as discussed in note 4 to the consolidated financial statements that described the Company's adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Watts Industries, Inc. and subsidiaries as of June 30, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick L.L.P. August 1, 1997 Boston, Massachusetts
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Fiscal Year Ended June 30 1997 1996 1995 ------------------------------------ Net sales $ 720,340 $ 640,876 $ 576,851 Cost of goods sold 474,948 428,678 366,139 --------- --------- --------- GROSS PROFIT 245,392 212,198 210,712 Selling, general and administrative expenses 158,984 162,951 133,601 Impairment of long-lived assets 0 63,065 0 Restructuring charge 0 25,415 0 --------- --------- --------- OPERATING INCOME (LOSS) 86,408 (39,233) 77,111 --------- --------- --------- Other (income) expense: Interest income (763) (702) (1,930) Interest expense 10,493 9,960 9,368 Other 1,091 919 1,483 --------- --------- --------- 10,821 10,177 8,921 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 75,587 (49,410) 68,190 Provision for income taxes 27,127 4,355 25,727 --------- --------- --------- INCOME (LOSS) FROM CONTINUING OPERATIONS 48,460 (53,765) 42,463 Income from discontinued operations, net of taxes 79 3,480 3,275 Gain on disposal of discontinued operations, net of taxes 3,208 0 0 --------- --------- --------- NET INCOME (LOSS) $ 51,747 $ (50,285) $ 45,738 ========= ========= ========= Income (loss) per common share: Continuing operations $ 1.77 $ (1.82) $ 1.43 Discontinued operations .00 .12 .11 Gain on disposal of discontinued operations .12 .00 .00 --------- --------- --------- NET INCOME (LOSS) $ 1.89 $ (1.70) $ 1.54 ========= ========= ========= Dividends per common share $ .295 $ .265 $ .235 ========= ========= ========= Weighted average number of common shares 27,433 29,527 29,755 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) June 30 1997 1996 ---------------- ASSETS CURRENTASSETS: Cash and cash equivalents $ 13,904 $ 0 Short-term investments 518 0 Trade accounts receivable, less allowance for doubtful accounts of $7,945 in 1997 and $8,822 in 1996 121,349 116,370 Inventories: Raw materials 64,261 64,182 Work in process 26,030 30,994 Finished goods 80,926 86,922 --------- -------- 171,217 182,098 Prepaid expenses and other assets 13,087 9,283 Deferred income taxes 22,480 29,998 Net assets held for sale 3,037 78,401 --------- -------- Total Current Assets 345,592 416,150 OTHER ASSETS: Goodwill, net of accumulated amortization of $13,484 in 1997 and $10,450 in 1996 110,928 79,489 Other 12,869 12,705 PROPERTY, PLANT AND EQUIPMENT Land 10,147 11,503 Buildings and improvements 66,191 63,821 Machinery and equipment 192,581 170,304 Construction in progress 12,312 14,700 --------- -------- 281,231 260,328 Accumulated depreciation (128,537) (112,378) --------- -------- 152,694 147,950 --------- -------- TOTAL ASSETS $622,083 $656,294 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 48,896 $ 46,022 Accrued expenses and other liabilities 53,738 73,260 Accrued compensation and benefits 15,834 7,756 Current portion of long-term debt 2,422 2,907 --------- -------- Total Current Liabilities 120,890 129,945 LONG-TERM DEBT, NET OF CURRENT PORTION 125,937 160,243 DEFERRED INCOME TAXES 16,675 19,178 OTHER NONCURRENT LIABILITIES 13,796 16,291 MINORITY INTEREST 11,146 11,054 STOCKHOLDERS' EQUITY: Preferred Stock, $.10 par value; 5,000,000 shares authorized; no shares issued or outstanding 0 0 Class A Common Stock, $.10 par value; 80,000,000 shares authorized; 1 vote per share; 15,797,460 shares in 1997 and 16,856,838 shares in 1996 issued and outstanding 1,580 1,686 Class B Common Stock, $.10 par value; 25,000,000 shares authorized; 10 votes per share; 11,215,627 shares in 1997 and 11,365,627 shares in 1996 issued and outstanding 1,121 1,136 Additional paid-in capital 44,643 67,930 Retained earnings 293,170 249,415 Currency translation adjustment (6,875) (584) --------- -------- Total Stockholders' Equity 333,639 319,583 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $622,083 $656,294 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Class A Class B Additional Currency Total Common Stock Common Stock Paid-In Retained Translation Stock- ------------------------------------------- holders* Shares Amount Shares Amount Capital Earnings Adjustment Equity ----------------------------------------------------------------------------------- Balance at June 30, 1994 18,009,822 $ 1,801 11,472,470 $1,147 $92,996 $268,706 $(3,048) $361,602 Net income 45,738 45,738 Shares of Class B Common Stock converted to Class A Common Stock 68,000 7 (68,000) (7) Shares of Class A Common Stock issued upon the exercise of stock options 140,394 14 2,500 2,514 Common Stock cash dividends (6,951) (6,951) Change in currency translation adjustment 2,734 2,734 ----------------------------------------------------------------------------------- Balance at June 30, 1995 18,218,216 1,822 11,404,470 1,140 95,496 307,493 (314) 405,637 Net loss (50,285) (50,285) Shares of Class B Common Stock converted to Class A Common Stock 38,843 4 (38,843) (4) Shares of Class A Common Stock issued upon the exercise of stock options 74,522 7 1,245 1,252 Shares of Class A Common Stock exchanged upon the exercise of stock options and retired (15,843) (1) (390) (391) Purchase and retirement of treasury stock (1,458,900) (146) (28,421) (28,567) Common Stock cash dividends (7,793) (7,793) Change in currency translation adjustment (270) (270) ----------------------------------------------------------------------------------- Balance at June 30, 1996 16,856,838 1,686 11,365,627 1,136 67,930 249,415 (584) 319,583 NET INCOME 51,747 51,747 SHARES OF CLASS B COMMON STOCK CONVERTED TO CLASS A COMMON STOCK 150,000 15 (150,000) (15) SHARES OF CLASS A COMMON STOCK ISSUED UPON THE EXERCISE OF STOCK OPTIONS 111,922 11 2,145 2,156 PURCHASE AND RETIREMENT OF TREASURY STOCK (1,321,300) (132) (25,432) (25,564) COMMON STOCK CASH DIVIDENDS (7,992) (7,992) CHANGE IN CURRENCY TRANSLATION ADJUSTMENT (6,291) (6,291) ----------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 15,797,460 $ 1,580 11,215,627 $1,121 $44,643 $293,170 $(6,875) $333,639 ===================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
WATTS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) Fiscal Year Ended June 30 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Income (loss) from continuing operations $ 48,460 $ (53,765) $ 42,463 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by continuing operating activities: Restructuring charge, net of payments (8,918) 21,635 0 Impairment of long-lived assets 0 63,065 0 Depreciation and amortization 20,828 21,574 20,345 Deferred income taxes 3,725 (14,556) 3,313 Loss (gain) on disposal of equipment 241 (1,405) (453) Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable (5,773) (12,979) (16,353) Inventories 7,734 (17,524) (11,453) Prepaid expenses and other assets (2,049) 4,688 (4,696) Accounts payable, accrued expenses and other liabilities (6,031) 35,028 4,161 ----------- ----------- ----------- 58,217 45,761 37,327 Net cash provided by discontinued operations 653 9,638 3,447 ----------- ----------- ----------- Net cash provided by operating activities 58,870 55,399 40,774 ----------- ----------- ----------- INVESTING ACTIVITIES Additions to property, plant and equipment (29,742) (31,080) (27,980) Proceeds from sale of property, plant and equipment 1,715 1,462 1,287 Discontinued operations: Proceeds from disposal of discontinued operations 88,164 0 0 Additions to property, plant and equipment (142) (1,141) (3,013) Increase in other assets (1,494) (1,347) (597) Business acquisitions, net of cash acquired (37,705) (13,415) (73,242) Repayment of debt of acquired businesses 0 (680) (18,729) Net changes in short-term investments (652) 4,483 54,286 ----------- ----------- ----------- Net cash provided by (used in) investing activities 20,144 (41,718) (67,988) ----------- ----------- ----------- FINANCING ACTIVITIES Proceeds from long-term borrowings 106,346 91,867 65,430 Payments of long-term debt (140,662) (73,399) (34,656) Proceeds from exercise of stock options 1,935 772 2,059 Dividends (7,992) (7,793) (6,951) Purchase and retirement of common stock (25,564) (28,567) 0 ----------- ----------- ----------- Net cash provided by (used in) financing activities (65,937) (17,120) 25,882 ----------- ----------- ----------- Effect of exchange rate changes on cash and cash equivalents 827 96 (213) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,904 (3,343) (1,545) Cash and cash equivalents at beginning of year 0 3,343 4,888 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,904 $ 0 $ 3,343 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS The Company designs, manufactures and sells an extensive line of valves for the plumbing and heating, water quality, industrial, and oil and gas markets located predominately in North America, Europe, and Asia. (2) ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Watts Industries, Inc. and its majority and wholly-owned subsidiaries (the Company). Upon consolidation, all significant intercompany accounts and transactions are eliminated. REVENUE RECOGNITION Revenue is recognized, net of a provision for estimated returns and allowances, upon shipment. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of investments with maturities of three months or less at the date of purchase. Short-term investments consist of participation in mutual funds whose portfolios consist principally of United States Government securities. Short-term investments are valued at cost, which approximates market. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers included in the Company's customer base and their dispersion across many different industries and geographic areas. At June 30, 1997, the Company had no significant concentrations of credit risk. INVENTORIES Inventories are stated principally at the lower of cost (first-in, first-out method) or market. GOODWILL Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. This balance is amortized over 40 years using the straight-line method. The carrying value of goodwill is reviewed if facts and circumstances suggest it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted operating cash flows of the entity acquired over the remaining amortization period, the carrying value of the goodwill is reduced to its fair value, as determined using a discounted cash flow approach. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and improvements and 3 to 15 years for machinery and equipment. LONG-LIVED ASSETS Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. In such instances, the carrying value of long-lived assets is reduced to their estimated fair value, as determined using a discounted cash flow approach. INCOME TAXES Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOREIGN CURRENCY TRANSLATION Balance sheet accounts of foreign subsidiaries are translated into United States dollars at fiscal year-end exchange rates. Operating accounts are translated at weighted average exchange rates for each year. Net translation gains or losses are adjusted directly to a separate component of stockholders' equity. STOCK BASED COMPENSATION As allowed under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company accounts for its stock-based employee compensation plans in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. EARNINGS PER COMMON SHARE Earnings per common share is calculated using the weighted average number of Class A and B Common Shares outstanding during each period and common stock equivalents, when dilutive. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company principally in the management of foreign currency exposures on certain anticipated intercompany transactions. Gains and losses on contracts designated as hedges of existing assets and liabilities are recognized in income as foreign currency gains (losses) as exchange rates change. Gains and losses on contracts designated as hedges of identifiable foreign currency firm commitments are deferred and included in the related foreign currency transaction. 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. BASIS OF PRESENTATION Certain amounts in fiscal years 1996 and 1995 have been reclassified to permit comparison with the 1997 presentation. NEW ACCOUNTING STANDARDS SFAS No. 128, Earnings Per Share, will become effective during fiscal year 1998. At that time, the Company will be required to exclude the effect of dilutive common stock equivalents from its primary earnings per share calculation and restate all prior periods on that basis. The effect of implementation of this new standard is not expected to be material. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. The Company is currently evaluating the effects of these new standards. (3) DISCONTINUED OPERATIONS, RESTRUCTURING AND OTHER MATTERS DISCONTINUED OPERATIONS On September 4, 1996, the Company divested itself of its Municipal Water Group of businesses, which included Henry Pratt Company, James Jones Company and Edward Barber & Company Ltd. by selling the stock of each entity and realizing a $3.2 million after-tax gain. The results of operations of these companies have been reported as discontinued operations, net of income taxes, in the consolidated statements of operations. Unassigned corporate interest expense has been allocated based on the ratio of the net assets of the discontinued operations to the consolidated net assets and unassigned debt of the Company. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes the results of operations of the Municipal Water Group: Fiscal Year Ended June 30, ------------------------------ 1997 1996 1995 ------------------------------ (in thousands) Revenues $14,027 $86,179 $80,815 Costs and expenses 13,900 80,278 75,358 ------- ------- ------- Income before income taxes 127 5,901 5,457 Income taxes 48 2,421 2,182 ------- ------- ------- Income from discontinued operations $ 79 $ 3,480 $ 3,275 ======= ======= ======= The net assets of the Municipal Water Group are classified as net assets held for sale in the accompanying consolidated balance sheet at June 30, 1996 and consisted of accounts receivable, $15,843,000; inventories, $19,301,000; goodwill, $31,835,000; property, plant and equipment, $20,409,000; other assets, $5,415,000; current liabilities, $10,900,000; and other liabilities, $3,502,000. RESTRUCTURING During fiscal year 1996, the Company decided to undertake certain restructuring initiatives aimed at improving the efficiency of certain of its continuing operations. The two most significant of those initiatives are the consolidation and downsizing of Pibiviesse S.p.A. ("Pibiviesse") and the relocation of Jameco Industries, Inc. ("Jameco"). In connection with this restructuring plan, the Company recorded a $25,415,000 restructuring charge during fiscal year 1996. The restructuring charge consisted of $9,300,000 for severance costs, $7,715,000 for plant closure costs and $8,400,000 for asset write-downs. Cash payments for accrued employee severance and other plant closure costs were $3,780,000 during fiscal year 1996 and the Company's remaining accrued restructuring liability was $12,819,000 at June 30, 1996. During fiscal year 1997, such cash payments amounted to $8,918,000 and the Company's remaining accrued restructuring liability was $3,874,000 at June 30, 1997. It is expected that the consolidation and downsizing of Pibiviesse will be completed during fiscal year 1998. The Jameco relocation was substantially complete at June 30, 1997 and its operations have been integrated into a Company plant in Spindale, North Carolina. Since commencement of the restructuring plan, there has been a related net reduction of 205 employees. At June 30, 1997, it is expected that approximately 119 additional restructuring related employee terminations will occur. OTHER MATTERS During fiscal year 1996, the Company recorded a $13.8 million selling, general and administrative expense charge, principally for product liability costs, environmental remediation reserves and bad debt reserves. The Company also recorded a $9.5 million cost of goods sold charge during fiscal year 1996 to write down inventories to their estimated market value. (4) LONG-LIVED ASSET IMPAIRMENT During fiscal year 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and recorded a $63,065,000 charge for long-lived asset impairment losses. Such losses occurred principally at its Italian subsidiaries and were the result of declining margins and operating profits at the subsidiaries, and the potential non-deductibility of goodwill for income tax purposes. In connection with a re-evaluation of its business strategy in Italy, management concluded an impairment had occurred and recorded a loss by reducing the carrying value of affected long-lived assets, primarily goodwill, to fair value, as determined using a discounted cash flow approach. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (5) BUSINESS ACQUISITIONS During fiscal year 1997, the Company acquired Ames Company, Inc. of Woodland, California and Consolidated Precision Corporation of Riviera Beach, Florida. In fiscal year 1996, the Company acquired four businesses, the most significant being the purchase of Etablissements Trubert S.A. located in Chartres, France. Five businesses were acquired by the Company during fiscal year 1995, the most significant being the purchases of Jameco Industries, Inc., Anderson-Barrows Metals Corporation, and Pibiviesse S.p.A. of Italy. All of these acquired companies are valve manufacturers and the aggregate purchase price of the acquisitions was approximately $124.4 million. The goodwill which resulted from these acquisitions is being amortized on a straight-line basis over a 40 year period unless circumstances indicate an impairment loss has occurred (see note 4). These acquisitions have all been accounted for under the purchase method and the results of operations of the acquired businesses have been included in the consolidated financial statements from the date of acquisition. Had these acquisitions occurred at the beginning of fiscal year 1997 or 1996, the effect on operating results would not have been material. (6) INCOME TAXES The significant components of the Company's deferred income tax liabilities and assets are as follows: June 30, ------------------- 1997 1996 ------------------- (in thousands) Deferred income tax liabilities: Excess tax over book depreciation $ 8,855 $10,959 Inventory 5,962 5,336 Other 1,858 2,883 ------- -------- Total deferred income tax liabilities 16,675 19,178 ------- -------- Deferred income tax assets: Accrued expenses 18,727 20,345 Net operating loss carryforward 6,054 4,449 Other 1,906 6,543 ------- -------- Total deferred income tax assets 26,687 31,337 Valuation allowance for deferred income tax assets (4,207) (1,339) ------- -------- Net deferred income tax assets 22,480 29,998 ------- -------- Net deferred income tax asset $ 5,805 $10,820 ======= ======= The components of the provision for income taxes were as follows: Fiscal Year Ended June 30, ------------------------------ 1997 1996 1995 ------------------------------ (in thousands) Continuing operations $27,127 $4,355 $25,727 Discontinued operations 3,412 2,421 2,182 ------- ------ ------- $30,539 $6,776 $27,909 ======= ====== ======= WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The provision for income taxes from continuing operations is based on the following pre-tax income (loss): Fiscal Year Ended June 30, ------------------------------ 1997 1996 1995 ------------------------------ (in thousands) Domestic $60,530 $19,816 $59,760 Foreign 15,057 (69,226) 8,430 -------- -------- -------- $75,587 $(49,410) $68,190 ======= ========= ======== The provision for income taxes from continuing operations consists of the following: Fiscal Year Ended June 30, ------------------------------ 1997 1996 1995 ------------------------------ (in thousands) Current tax expense (benefit): Federal $20,417 $15,739 $18,299 Foreign (369) 1,176 685 State 1,714 1,996 3,430 -------- ------- -------- 21,762 18,911 22,414 -------- ------- -------- Deferred tax expense (benefit): Federal 1,377 (8,458) 764 Foreign 3,747 (3,964) 2,411 State 241 (2,134) 138 -------- ------- -------- 5,365 (14,556) 3,313 -------- ------- -------- $27,127 $4,355 $25,727 ======= ========= ======== Actual income taxes reported from continuing operations are different than would have been computed by applying the federal statutory tax rate to income (loss) from continuing operations before income taxes. The reasons for this difference are as follows: Fiscal Year Ended June 30, ------------------------------ 1997 1996 1995 ------------------------------ (in thousands) Computed expected federal income tax expense (benefit) $26,455 $(17,294) $23,867 State income taxes, net of federal tax benefit 1,271 (90) 2,319 Goodwill writedown and amortization 898 17,443 807 Foreign tax rate and regulation differential (1,893) 3,830 (791) Other, net 396 466 (475) -------- ------- -------- $27,127 $4,355 $25,727 ======= ========= ======== At June 30, 1997, the Company has foreign net operating loss carryforwards of $11.5 million for income tax purposes that expire in fiscal years 1998 through 2005. In addition, foreign net operating losses of $4.6 million can be carried forward indefinitely. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $28 million, $37 million and $43 million at June 30, 1997, 1996 and 1995, respectively. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been recorded thereon. Upon distribution of those earnings, in the form of dividends or otherwise, the Company will be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of U.S. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credits would be available to reduce some portion of any U.S. income tax liability. Withholding taxes of approximately $2.1 million would be payable upon remittance of all previously unremitted earnings at June 30, 1997. The Company made income tax payments of $30.2 million, $27.8 million and $25.2 million in fiscal years 1997, 1996 and 1995, respectively. (7) ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: June 30, --------------------- 1997 1996 --------------------- (in thousands) Restructuring costs $ 3,874 $12,819 Commissions and sales incentives payable 8,606 10,276 Accrued insurance costs 10,626 10,652 Other 30,632 39,513 -------- -------- $53,738 $73,260 ======== ======== (8) FINANCING ARRANGEMENTS Long-term debt consists of the following: June 30, --------------------- 1997 1996 --------------------- (in thousands) 8-3/8% Notes, due December, 2003 $ 75,000 $ 75,000 $125 million revolving line of credit, accruing interest at a variable rate of LIBOR plus 25 basis points or the bank's prime rate (6.55% at June 30, 1997) and expiring in August, 1999 29,000 61,300 Industrial Revenue Bonds, maturing periodically from 2003 through 2020, accruing interest at a variable rate based on weekly tax-exempt interest rates (4.25% at June 30, 1997) 17,265 17,265 Other 7,094 9,585 -------- -------- 128,359 163,150 Less current portion 2,422 2,907 --------- --------- $125,937 $160,243 ========= ========= At June 30, 1997, $96,000,000 was available for borrowing under the Company's $125 million revolving line of credit. Principal payments during each of the next five fiscal years are due as follows: 1998-$2,422,000; 1999-$2,067,000; 2000-$30,132,000; 2001-$438,000; and 2002-$358,000. Interest paid for all periods presented in the accompanying consolidated financial statements approximates interest expense. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Certain of the Company's loan agreements contain covenants that require, among other items, the maintenance of certain financial ratios and net worth, and limit the Company's ability to enter into secured borrowing arrangements. Under its most restrictive loan covenant, which requires the Company to maintain a net worth of not less than the sum of $295 million and 50% of cumulative consolidated net income for periods subsequent to June 30, 1996, the Company had $12.8 million available at June 30, 1997 for the payment of dividends. (9) COMMON STOCK The Company's Board of Directors authorized the purchase of up to 1,500,000 and 2,000,000 shares of the Company's common stock in open market and private purchases during fiscal years 1997 and 1996, respectively. At June 30, 1997, 2,780,200 shares of the Company's common stock had been purchased and retired since commencement of this purchase plan. The Class A Common Stock and Class B Common Stock have equal dividend and liquidation rights. Each share of the Company's Class A Common Stock is entitled to one vote on all matters submitted to stockholders and each share of Class B Common Stock is entitled to ten votes on all such matters. Shares of Class B Common Stock are convertible into shares of Class A Common Stock, on a one-to-one basis, at the option of the holder. The Company has reserved a total of 6,231,108 shares of Class A Common Stock for issuance under its stock-based compensation plans and 11,215,627 shares for conversion of Class B Common Stock to Class A Common Stock. (10) STOCK-BASED COMPENSATION The Company has several stock option plans under which key employees and outside directors have been granted incentive (ISOs) and nonqualified (NSOs) options to purchase the Company's Class A Common Stock. Generally, options become exercisable over a five-year period at the rate of 20% per year and expire ten years after the date of grant. ISOs and NSOs granted under the plans have exercise prices of not less than 100% and 50% of the fair market value of the common stock on the date of grant, respectively. At June 30, 1997, 4,882,914 shares of Class A Common Stock were authorized for future grants of options under the Company's stock option plans. The following is a summary of stock option activity and related information:
Fiscal Year Ended June 30, --------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------------- WEIGHTED Weighted Weighted AVERAGE average average (Options in thousands) EXERCISE exercise exercise OPTIONS PRICE Options price Options price --------------------------------------------------------------------------------- Outstanding at beginning of year 1,137 $ 21.04 1,019 $ 20.06 1,056 $ 18.32 Granted 378 16.38 314 23.36 289 23.81 Canceled (55) 21.79 (121) 22.16 (186) 20.09 Exercised (112) 17.28 (75) 15.61 (140) 14.66 ------- ----------- -------- ----------- ------- ----------- Outstanding at end of year 1,348 $ 20.01 1,137 $ 21.04 1,019 $ 20.06 ======= =========== ======== =========== ======= =========== Exercisable at end of year 552 $ 20.39 460 $ 19.34 371 $ 18.37 ======= =========== ======== =========== ======= ===========
WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table summarizes information about options outstanding at June 30, 1997:
Options Outstanding Options Exercisable ----------------------------------- ------------------------------ Weighted average Weighted Weighted (Options in thousands) remaining average average Number contractual exercise Number exercise Range of Exercise Prices outstanding life (years) price exercisable price ------------------------------------------------------------------- $10.69 - $11.38 13 3.4 $10.84 13 $10.84 $14.25 - $16.38 420 8.5 16.20 52 15.02 $16.60 - $19.80 228 5.3 17.44 165 17.36 $22.13 - $26.13 687 6.9 23.37 322 23.20 ------ ----- ------- ----- ------- $10.69 - $26.13 1,348 5.6 20.01 552 20.39 ====== ===== ======= ===== =======
The Company has a Management Stock Purchase Plan which allows for the granting of Restricted Stock Units (RSUs) to key employees to purchase up to 1,000,000 shares of Class A Common Stock at 75% of the fair market value on the date of grant. RSUs generally vest annually over a three-year period from the date of grant. At June 30, 1997, 46,419 RSUs were outstanding. Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123 for awards granted after June 30, 1995 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The weighted average grant date fair value of options granted during fiscal years 1997, 1996 and 1995 was $3.72, $5.69 and $6.03, respectively. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model and the following assumptions: Options -------------------- 1997 1996 -------------------- Expected life (years) 5.0 5.0 Expected stock price volatility 15.0% 15.0% Expected dividend yield 1.8% 1.1% Risk-free interest rate 6.56% 6.17% The Company's pro forma information follows: Fiscal Year Ended June 30, -------------------- 1997 1996 -------------------- (in thousands, except per share information) Net income (loss) - as reported $51,747 $(50,285) Net income (loss) - pro forma 51,132 (50,613) Primary net income (loss) per share - as reported 1.89 (1.70) Primary net income (loss) per share - pro forma 1.86 (1.71) Because SFAS 123 is applicable only to awards granted subsequent to June 30, 1995, its pro forma effect will not be fully reflected until fiscal year 2000. (11) EMPLOYEE BENEFIT PLANS The Company sponsors defined benefit pension plans covering substantially all of its domestic nonunion employees. Benefits are based primarily on years of service and employees' compensation. The funding policy of the Company for these plans is to contribute annually the maximum amount that can be deducted for federal income tax purposes. At June 30, 1997, the fair value of assets held in trust for the Company's defined benefit plans approximated the related projected benefit obligation. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of net pension expense follow: Fiscal Year Ended June 30, ------------------------------- 1997 1996 1995 ------------------------------- (in thousands) Defined benefit plans: Service cost - benefits earned $1,516 $1,620 $1,736 Interest cost on projected benefit obligation 2,189 2,200 1,915 Actual return on plan assets (1,976) (3,689) (802) Net amortization and deferral (346) 1,447 (1,369) --------- --------- --------- Total pension expense $1,383 $1,578 $1,480 ========= ========= ========= The funded status of the Company's principal defined benefit plans and the amounts recognized in the consolidated balance sheets at June 30, follows: 1997 1996 1995 ------------------------------- (in thousands) Vested benefit $(22,804) $(22,429) $(20,013) Nonvested benefit (1,299) (1,774) (1,307) --------- --------- --------- Accumulated benefit obligation (24,103) (24,203) (21,320) Benefit obligation related to future compensation levels (5,002) (5,699) (3,245) --------- --------- --------- Projected benefit obligation (29,105) (29,902) (24,565) Fair value of plan assets, invested primarily in equities and debt securities 28,014 29,348 24,635 --------- --------- --------- Plan assets greater (less) than projected benefit obligation (1,091) (554) 70 Unrecognized transition (asset) obligation (2,225) (2,543) (2,862) Unrecognized prior service cost 1,055 546 602 Unrecognized net (gain) loss (676) 9 430 Minimum liability adjustment (217) (420) (469) --------- --------- --------- Net accrued pension cost included in consolidated balance sheets $(3,154) $(2,962) $(2,229) ========= ========= ========= The primary assumptions used in determining related obligations of the plans were: discount rate 8%; increases in compensation levels 5%; and long-term rates of return on assets 8%; in fiscal years 1997, 1996 and 1995. The Company sponsors a 401(k) Savings Plan for substantially all domestic nonunion employees. Under the Plan, the Company matches a specified percentage of employee contributions, subject to certain limitations. Company expense incurred in connection with this plan was $330,000, $350,000 and $260,000 in fiscal years 1997, 1996 and 1995, respectively. (12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION CONTINGENCIES Lawsuits and other proceedings or claims, arising from the ordinary course of operations, are pending or threatened against the Company and its subsidiaries. The Company has established reserves which it presently believes are adequate in light of probable and estimable exposure to pending and threatened litigation of which it has knowledge. On the basis of information presently available, management is of the opinion that any additional liability resulting from these matters will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. ENVIRONMENTAL REMEDIATION The Company has been named a potentially responsible party with respect to identified contaminated sites. The level of contamination varies significantly from site to site as do the related levels of remediation efforts. Environmental liabilities are WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) recorded based on the most probable cost, if known, or on the estimated minimum cost of remediation. The Company's accrued estimated environmental liabilities are based on assumptions which are subject to a number of factors and uncertainties. Circumstances which can affect the reliability and precision of these estimates include identification of additional sites, environmental regulations, level of cleanup required, technologies available, number and financial condition of other contributors to remediation and the time period over which remediation may occur. The Company recognizes changes in estimates as new remediation requirements are defined or as new information becomes available. The Company estimates that its accrued environmental remediation liabilities will likely be paid over the next five to ten years. (13) FINANCIAL INSTRUMENTS Fair Value of Long-Term Debt The fair value of the Company's 8-3/8% notes, due December 2003, is based on quoted market prices. The fair value of the Company's variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company's long-term debt, including the current portion, are as follows: June 30, --------------------- 1997 1996 --------------------- (in thousands) Carrying amount $128,359 $163,150 Estimated fair value 133,774 166,994 USE OF DERIVATIVES The Company uses foreign currency forward exchange contracts to reduce the impact of currency fluctuations on certain anticipated intercompany purchase transactions that are expected to occur within the fiscal year. Related gains and losses are recognized when the contracts expire, which is generally in the same period as the underlying foreign currency denominated transaction. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the balances and transactions being hedged. At June 30, 1997 and 1996, there were no open foreign currency forward exchange contracts. (14) FINANCIAL INFORMATION BY GEOGRAPHIC AREA Financial information by geographic area is summarized as follows. Transfer prices to foreign subsidiaries are intended to produce profit margins commensurate with sales and marketing efforts:
FISCAL YEAR ENDED JUNE 30, 1997 -------------------------------------------------------------------------- DOMESTIC CANADA EUROPE ASIA ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------- (IN THOUSANDS) NET SALES $ 535,954 $ 27,681 $ 139,636 $ 17,069 $ 0 $ 720,340 TRANSFER BETWEEN AREAS 12,209 5,549 421 4,004 (22,183) 0 ---------- ---------- ---------- ---------- ---------- ---------- $ 548,163 $ 33,230 $ 140,057 $ 21,073 $ (22,183) $ 720,340 ========== ========== ========== ========== ========== ========== OPERATING INCOME OF GEOGRAPHIC AREAS $ 81,283 $ 1,401 $ 16,074 $ 653 $ (574) $ 98,837 ========== ========== ========== ========== ========== ========== GENERAL CORPORATE EXPENSES 12,429 ---------- OPERATING INCOME $ 86,408 ========== ASSETS $ 450,302 $ 23,742 $ 118,171 $ 31,499 $ (1,631) $ 622,083 ========== ========== ========== ========== ========== ==========
WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal Year Ended June 30, 1996 -------------------------------------------------------------------------------- Domestic Canada Europe Asia Eliminations Consolidated -------------------------------------------------------------------------------- (in thousands) Net sales $ 476,279 $ 28,086 $ 118,673 $ 17,838 $ 0 $ 640,876 Transfer between areas 10,220 5,180 3,549 0 (18,949) 0 --------- --------- --------- --------- --------- --------- $ 486,499 $ 33,266 $ 122,222 $ 17,838 $ (18,949) $ 640,876 ========= ========= ========= ========= ========= ========= Operating income (loss) of geographic areas $ 43,576 $ (7,709) $ (59,242) $ 907 $ (2,558) $ (25,026) ========= ========= ========= ========= ========= General corporate expenses 14,207 --------- Operating loss $ (39,233) ========= Assets of continuing operations $ 400,469 $ 25,357 $ 123,270 $ 30,118 $ (1,321) $ 577,893 Net assets of discontinued operations 65,202 0 13,199 0 0 78,401 --------- --------- --------- --------- --------- --------- $ 465,671 $ 25,357 $ 136,469 $ 30,118 $ (1,321) $ 656,294 ========= ========= ========= ========= ========= =========
Fiscal Year Ended June 30, 1995 -------------------------------------------------------------------------------- Domestic Canada Europe Asia Eliminations Consolidated -------------------------------------------------------------------------------- (in thousands) Net sales $ 441,808 $ 30,016 $ 93,518 $ 11,509 $ 0 $ 576,851 Transfer between areas 12,592 5,231 0 0 (17,823) 0 --------- --------- --------- --------- ---------- --------- $ 454,400 $ 35,247 $ 93,518 $ 11,509 $ (17,823) $ 576,851 ========= ========= ========= ========= ========== ========= Operating income of geographic areas $ 75,415 $ 1,913 $ 8,978 $ 1,429 $ (65) $ 87,670 ========= ========= ========= ========= ========== General corporate expenses 10,559 --------- Operating income $ 77,111 ========= Assets of continuing operations $ 393,012 $ 29,567 $ 154,069 $ 17,550 $ (1,191) $ 593,007 Net assets of discontinued operations 71,743 0 11,644 0 0 83,387 --------- --------- --------- --------- ---------- --------- $ 464,755 $ 29,567 $ 165,713 $ 17,550 $ (1,191) $ 676,394 ========= ========= ========= ========= ========== =========
Included in domestic sales are export sales of $54.1 million in fiscal year 1997, $43.5 million in fiscal year 1996 and $39.7 million in fiscal year 1995. WATTS INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (15) QUARTERLY FINANCIAL INFORMATION (Unaudited)
First Second Third Fourth Quarter(a) Quarter Quarter Quarter ---------------------------------------------------- (in thousands, except per share information) Fiscal year ended June 30, 1997: Net sales $176,008 $174,220 $184,191 $185,921 Gross profit 60,356 60,152 63,730 61,154 Income from continuing operations 12,346 11,750 12,889 11,475 Net income 15,633 11,750 12,889 11,475 Income per common share: Continuing operations .45 .43 .47 .42 Discontinued operations .12 .00 .00 .00 Net income .57 .43 .47 .42 Dividends per common share .07 .07 .0775 .0775 (a) Includes $3.2 million after-tax gain from sale of discontinued operations.
First Second Third Fourth Quarter Quarter Quarter(a) Quarter(b) ------------------------------------------------------ (in thousands, except per share information) Fiscal year ended June 30, 1996: Net sales $154,129 $156,593 $159,823 $170,331 Gross profit 56,921 55,913 44,941 54,423 Income (loss) from continuing operations 11,664 10,051 (80,303) 4,823 Net income (loss) 12,134 10,777 (79,273) 6,077 Income (loss) per common share: Continuing operations .39 .33 (2.70) .17 Discontinued operations .02 .03 .03 .04 Net income (loss) .41 .36 (2.67) .21 Dividends per common share .0625 .0625 .07 .07 (a) Includes $63.1 long-lived asset impairment loss; $19.9 million restructuring charge; $13.8 million charge, principally for product liability costs, additional bad debt reserves and environmental remediation costs; and $9.5 million charge for additional inventory valuation reserves. The aggregate after-tax effect of these charges on net income was $89.6 million. (b) Includes $5.5 million restructuring charge ($3.4 million after-tax).
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS WATTS INDUSTRIES, INC. AND SUBSIDIARIES (AMOUNTS IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------------------ ADDITIONS - ------------------------------------------------------------------------------------------------------------------ Balance at Charged to Costs Charged to Other Deductions Balance at Description Beginning of Period and Expenses Accounts - Describe Describe (1) End of Period - ------------------------------------------------------------------------------------------------------------------ Year ended June 30, 1997 Deducted from asset account: Allowance for doubtful accounts $8,822 $2,489 $30 (2) $3,396 $7,945 Year ended June 30, 1996 Deducted from asset account: Allowance for doubtful accounts $5,417 $4,408 $320 (2) $1,323 $8,822 Year ended June 30, 1995 Deducted from asset account: Allowance for doubtful accounts $4,105 $1,351 $1,173 (2) $1,212 $5,417 (1) Uncollectible accounts written off, net of recoveries. (2) Balance acquired in connection with acquisition of Ames in 1997, Trubert and Artec in 1996, Jameco and Anderson-Barrows in 1995.
EXHIBIT INDEX Exhibits 10.1-10.6, 10.8, 10.22, and 10.29 constitute all of the management contracts and compensation plans and arrangements of the Company required to be filed as exhibits to this Annual Report. Upon written request of any stockholder to the Chief Financial Officer at the Company's principal executive office, the Company will provide any of the Exhibits listed below. Exhibit No. Description and Location 3.1 Restated Certificate of Incorporation, as amended. (12) 3.2 Amended and Restated By-Laws. (1) 9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31, 1991 (2), Amendments dated November 19, 1996*, February 24, 1997*, June 5, 1997*, and August 26, 1997.* 9.2 The George B. Horne Voting Trust Agreement-1997 dated as of August 26, 1997. * 10.1 Employment Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. (14) 10.2 Supplemental Compensation Agreement effective as of September 1, 1996 between the Registrant and Timothy P. Horne. (14) 10.3 Deferred Compensation Agreement between the Registrant and Timothy P. Horne, as amended. (4) 10.4 1996 Stock Option Plan, dated October 15, 1996. (15) 10.5 1989 Nonqualified Stock Option Plan. (3) 10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated December 30, 1994, as amended and restated effective as of January 1, 1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment No. 3 (14), Amendment No. 4 dated September 4, 1996.* 10.7 Registration Rights Agreement dated July 25, 1986. (5) 10.8 Executive Incentive Bonus Plan, as amended. (12) 10.9 Indenture dated as of December 1, 1991 between the Registrant and The First National Bank of Boston, as Trustee, including form of 8-3/8% Note Due 2003. (8) 10.10 Loan Agreement and Mortgage among The Industrial Development Authority of the State of New Hampshire, Watts Regulator Co. and Arlington Trust Company dated August 1, 1985. (4) 10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and Franklin, New Hampshire, facilities) financing dated December 31, 1985. (4) 10.12 Sale Agreement between Village of Walden Industrial Development Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11) 10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1, 1994 by and among the Registrant, Spence Engineering Company, Inc. and First Union National Bank of North Carolina. (11), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.14 Trust Indenture from Village of Walden Industrial Development Agency to The First National Bank of Boston, as Trustee, dated June 1, 1994. (11) 10.15 Loan Agreement between Hillsborough County Industrial Development Authority and Leslie Controls, Inc. dated July 1, 1994. (11) 10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1, 1994 by and among the Registrant, Leslie Controls, Inc. and First Union National Bank of North Carolina (11), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.17 Trust Indenture from Hillsborough County Industrial Development Authority to The First National Bank of Boston, as Trustee, dated July 1, 1994. (11) 10.18 Loan Agreement between The Rutherford County Industrial Facilities and Pollution Control Financing Authority and Watts Regulator Company dated September 1, 1994.(12) 10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated September 1, 1994 by and among the Registrant, Watts Regulator Company and The First Union National Bank of North Carolina (12), Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996.* 10.20 Trust Indenture from The Rutherford County Industrial Facilities and Pollution Control Financing Authority to The First National Bank of Boston,as Trustee, dated September 1, 1994. (12) 10.21 Amended and Restated Stock Restriction Agreement dated October 30, 1991 (2), Amendment dated August 26, 1997.* 10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified Stock Option Plan (7), Amendment No. 1. (14) 10.23 Letters of Credit relating to retrospective paid loss insurance programs. (10) 10.24 Form of Stock Restriction Agreement for management stockholders. (5) 10.25 Revolving Credit Agreement dated December 23, 1987 between Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and related Guaranty of Watts Industries, Inc. and Watts Regulator Co. dated December 14, 1987. (6) 10.26 Loan Agreement dated September 1987 with, and related Mortgage to, N.V. Sallandsche Bank. (6) 10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding A.G. and the participations in Multiscope Due S.R.L. dated November 6, 1992. (9) 10.28 Revolving Credit Agreement dated August 30, 1994 between and among Watts Investment Company, certain financial institutions, the First National Bank of Boston, as Agent, and the Registrant, as Guarantor (11), Amendment No. 1 (14), Amendment No. 2. (14) 10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October 17, 1995 (13), Amendment No. 1 dated August 5, 1997.* 10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco International Ltd. and Watts Industries, Inc. (16) 11 Statement Regarding Computation of Earnings per Common Share. * 21 Subsidiaries. * 23.1 Consent of KPMG Peat Marwick LLP. * 23.2 Consent of Ernst & Young LLP, Independent Auditors, predecessor auditors.* 23.3 Consent of Deloitte & Touche, Independent Auditors, predecessor auditors.* 27 Financial Data Schedule. * Incorporated By Reference To: - ----------------------------- (1) Relevant exhibit to Registrant's Form 8-K dated May 15, 1992. (2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991. (3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30, 1989. (4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17, 1986. (5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the Second Amendment to such Form S-1 dated August 21, 1986. (6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February 16, 1989. (7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year ended June 30, 1992. (8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992. (9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993 to Form 8-K dated November 6, 1992. (10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993. (11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994. (12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995. (13) Relevant exhibit to Registrant's Form S-8 (No.33-64627) dated November 29, 1995. (14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996. (15) Relevant exhibit to Registrant's Form S-8 (No.333-32685) dated August 1, 1997. (16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996. * Filed as an exhibit to this Report with the Securities and Exchange Commission EX-9.1 2 AMENDMENTS AMENDMENT TO VOTING TRUST AGREEMENT WHEREAS, Timothy P. Horne and Frederic B. Horne are trustees (the "Trustees") under the Horne Family Voting Trust Agreement - 1991 dated as of October 31, 1991 (the "Agreement"); and WHEREAS, Frederic B. Horne desires to withdraw Eleven Thousand (11,000) shares of Class B Common Stock of Watts Industries, Inc., a Delaware corporation, for the purpose of gifting such shares to his minor daughter, Kristina M. Horne; and WHEREAS, the Trustees desire to amend Schedule A to the Agreement to reflect such transaction. NOW, THEREFORE, the parties do hereby agree as follows: 1. Schedule A to the Agreement is hereby amended and restated in its entirety to read as follows: SCHEDULE A ---------- STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- Timothy P. Horne ("TPH") 2,751,220 126, 161 Frederic B. Horne ("FBH") 1,344,166 159, 185 Timothy P. Horne and George B. Horne ("GBH") as trustees of The George B. Horne Trust - 1982 2,004,600 132, 158, 184 Frederic B. Horne, as Trustee of The Peter W. Horne Trust - 1976 1,285,840 156, 175 FBH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Kristina M. Horne 22,600 184 TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tara V. Horne 30,200 184 STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tiffany R. Horne 22,600 184 Timothy P. Horne, as Trustee of The Deborah Horne Trust - 1976 1,335,840 138, 157 Timothy P. Horne, as Trustee of The Daniel W. Horne Trust - 1980 1,335,840 134, 155 Tara V. Horne 50,000 126 Judith Rae Horne, as Trustee of The Tiffany Rae Horne Trust - 1984 50,000 126 * As adjusted to reflect the two-for-one stock split effected by means of a stock dividend payable on March 15, 1994. 2. Except as hereinabove provided, the parties ratify and confirm the Agreement in all respects. The parties hereto have executed this Amendment to the Agreement in one or more counterparts under seal as of November 19, 1996. ------------------------- Timothy P. Horne, as Trustee of the Horne Family Voting Trust - 1991 ------------------------- Frederic B. Horne, as Trustee of the Horne Family Voting Trust - 1991 AMENDMENT TO VOTING TRUST AGREEMENT WHEREAS, Timothy P. Horne and Frederic B. Horne are trustees (the "Trustees") under the Horne Family Voting Trust Agreement - 1991 dated as of October 31, 1991 (the "Agreement"); and WHEREAS, Frederic B. Horne desires to withdraw Fifty Thousand (50,000) shares of Class B Common Stock of Watts Industries, Inc., a Delaware corporation, for the purpose of converting such shares to shares of Class A Common Stock; and WHEREAS, the Trustees desire to amend Schedule A to the Agreement to reflect such transaction. NOW, THEREFORE, the parties do hereby agree as follows: 1. Schedule A to the Agreement is hereby amended and restated in its entirety to read as follows: SCHEDULE A STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- Timothy P. Horne ("TPH") 2,751,220 126, 161 Frederic B. Horne ("FBH") 1,294,166 185, 188 Timothy P. Horne and George B. Horne ("GBH") as trustees of The George B. Horne Trust - 1982 2,004,600 132, 158, 184 Frederic B. Horne, as Trustee of The Peter W. Horne Trust - 1976 1,285,840 156, 175 FBH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Kristina M. Horne 22,600 184 TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tara V. Horne 30,200 184 STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tiffany R. Horne 22,600 184 Timothy P. Horne, as Trustee of The Deborah Horne Trust - 1976 1,335,840 138, 157 Timothy P. Horne, as Trustee of The Daniel W. Horne Trust - 1980 1,335,840 134, 155 Tara V. Horne 50,000 126 Judith Rae Horne, as Trustee of The Tiffany Rae Horne Trust - 1984 50,000 126 * As adjusted to reflect the two-for-one stock split effected by means of a stock dividend payable on March 15, 1994. 2. Except as hereinabove provided, the parties ratify and confirm the Agreement in all respects. The parties hereto have executed this Amendment to the Agreement in one or more counterparts under seal as of February 24, 1997. ------------------------- Timothy P. Horne, as Trustee of the Horne Family Voting Trust - 1991 ------------------------- Frederic B. Horne, as Trustee of the Horne Family Voting Trust - 1991 AMENDMENT TO VOTING TRUST AGREEMENT WHEREAS, Timothy P. Horne and Frederic B. Horne are trustees (the "Trustees") under the Horne Family Voting Trust Agreement - 1991 dated as of October 31, 1991 (the "Agreement"); and WHEREAS, Peter W. Horne desires to withdraw Fifty Thousand (50,000) shares of Class B Common Stock of Watts Industries, Inc., a Delaware corporation, for the purpose of converting such shares to shares of Class A Common Stock; and WHEREAS, the Trustees desire to amend Schedule A to the Agreement to reflect such transaction. NOW, THEREFORE, the parties do hereby agree as follows: 1. Schedule A to the Agreement is hereby amended and restated in its entirety to read as follows: SCHEDULE A STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- Timothy P. Horne ("TPH") 2,751,220 126, 161 Frederic B. Horne ("FBH") 1,294,166 185, 188 Timothy P. Horne and George B. Horne ("GBH") as trustees of The George B. Horne Trust - 1982 2,004,600 132, 158, 184 Frederic B. Horne, as Trustee of The Peter W. Horne Trust - 1976 1,235,840 156, 190 FBH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Kristina M. Horne 22,600 184 TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tara V. Horne 30,200 184 STOCKHOLDER NO. OF SHARES* CLASS B CERT. NO. - ----------- -------------- ----------------- TPH and GBH, trustees of The GBH Grandchildren's 1995 Irrevocable Trust f/b/o Tiffany R. Horne 22,600 184 Timothy P. Horne, as Trustee of The Deborah Horne Trust - 1976 1,335,840 138, 157 Timothy P. Horne, as Trustee of The Daniel W. Horne Trust - 1980 1,335,840 134, 155 Tara V. Horne 50,000 126 Judith Rae Horne, as Trustee of The Tiffany Rae Horne Trust - 1984 50,000 126 * As adjusted to reflect the two-for-one stock split effected by means of a stock dividend payable on March 15, 1994. 2. Except as hereinabove provided, the parties ratify and confirm the Agreement in all respects. The parties hereto have executed this Amendment to the Agreement in one or more counterparts under seal as of June 5, 1997. ------------------------- Timothy P. Horne, as Trustee of the Horne Family Voting Trust - 1991 ------------------------- Frederic B. Horne, as Trustee of the Horne Family Voting Trust - 1991 AMENDMENT TO HORNE FAMILY VOTING TRUST AGREEMENT--1991 AMENDMENT dated as of the 26th day of August, 1997 by and among Timothy P. Horne and Frederic B. Horne, as trustees (together, the "Trustees") under the Horne Family Voting Trust Agreement--1991 (the "Voting Trust Agreement"), Timothy P. Horne, Frederic B. Horne, George B. Horne and Tara V. Horne, individually, Timothy P. Horne as trustee of the Daniel W. Horne Trust--1980, Timothy P. Horne as trustee of the Deborah Horne Trust--1976, Frederic B. Horne as trustee of the Peter W. Horne Trust--1976, Timothy P. Horne and George B. Horne, as Trustees of the Grandchildren's Trust f/b/o Tara V. Horne, Timothy P. Horne and George B. Horne, as Trustees of the Grandchildren's Trust f/b/o Tiffany R. Horne, Frederic B. Horne and George B. Horne, as Trustees of the Grandchildren's Trust f/b/o Kristina M. Horne and Judith Rae Horne, as Trustees of the Tiffany Rae Horne Trust--1984 (each, a "Stockholder" and collectively, the "Stockholders") and Watts Industries, Inc., a Delaware corporation (the "Company"). WHEREAS, each of the holders of voting trust certificates under the Voting Trust Agreement, other than Frederic B. Horne as trustee of the Peter W. Horne Trust--1976, desires to withdraw all of such holder's shares of Class B Common Stock, par value $.10 per share ("Class B Common Stock"), of the Company represented by such voting trust certificates from the Voting Trust Agreement. WHEREAS, the Trustees desire to consent and agree to the above-described withdrawals. WHEREAS, the Trustees and the Stockholders, representing the registered holders of a majority of the voting trust certificates outstanding, desire to amend the Voting Trust Agreement to provide that the Voting Trust Agreement may be terminated by a written amendment signed by all of the Trustees and by the registered holders of a majority of the voting trust certificates outstanding under the Voting Trust Agreement at the time of any such proposed termination. NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. The parties hereto do hereby consent to the withdrawal from the Voting Trust Agreement of all shares of Class B Common Stock represented by voting trust certificates outstanding as of the date hereof, other than those shares of Class B Common Stock represented by voting trust certificates held by Frederic B. Horne as trustee of the Peter W. Horne Trust--1976, and amend Schedule A to the Voting Trust Agreement by amending and restating Schedule A is its entirety to read as Schedule A attached hereto. 2. Section 13 of the Voting Trust Agreement is hereby amended by deleting such Section 13 in its entirety and substituting therefor the following: "13. Amendment; Termination. This Agreement may be amended by a written amendment signed by all of the Trustees and by registered holders of a majority of the voting trust certificates then outstanding; provided, however, that after each of TIMOTHY P. HORNE, FREDERIC B. HORNE and all individuals appointed as Trustees pursuant to the second paragraph of Section 11 shall cease to serve as Trustees hereunder, this Agreement may be amended by a written instrument signed by registered holders of a majority of the voting trust certificates then outstanding. For all purposes of this Agreement, references to percentages of voting trust certificates outstanding shall refer to the number of votes represented by the shares of stock of the Company represented by such voting trust certificates. This Agreement may be terminated only by a written instrument signed by all of the Trustees and registered holders of a majority of the voting trust certificates then outstanding; provided, however, that after each of TIMOTHY P. HORNE, FREDERIC B. HORNE and all individuals designated as Trustees pursuant to the second paragraph of Section 11 shall cease to serve as Trustees hereunder, this Agreement may be terminated as provided above but without the consent of the Trustees. If not previously terminated in accordance with the terms hereof, this Agreement shall terminate ten (10) years from the date of this Agreement; provided, however, that at any time within two (2) years prior to such date (or any subsequent date of termination fixed in accordance with the provisions hereof and applicable law), one or more of the persons designated in the following provisions of this Section 13 may, by written agreement, extend the duration of this Agreement for an additional term not exceeding 10 years from the expiration date as originally fixed or as last extended. The foregoing right of extension shall be exercisable by (i) any individual Stockholder living who holds one or more voting trust certificates and not subject to any incapacity at the time of the proposed extension, and if so exercised shall be binding upon any and all holders of voting trust certificates in respect of shares originally or subsequently deposited hereunder by such individual Stockholder, (ii) the trustee of any trust Stockholder that holds voting trust certificates who is living and not subject to any incapacity at the time of the proposed extension, and regardless of whether such trust is then still in existence, and if so exercised shall be binding upon any and all holders of voting trust certificates in respect of shares originally or subsequently deposited hereunder by such trust Stockholder and any and all beneficiaries thereof or successors in interest thereto, and (iii) the holder of any voting trust certificate representing shares not covered by either of the preceding clauses (i) or (ii), and if so exercised shall be effective with respect to all shares represented by such voting trust certificate, it being understood that the provisions of clauses (i) or (ii) of this paragraph (and not this clause (iii)) shall govern any extension with respect to shares referred to therein if and to the extent a Stockholder referred to therein is able to consent to such extension. Any such action to extend this Agreement shall be binding upon the Trustees, any Stockholder or other person consenting to such extension as provided above and all successors in interest of any such Stockholder or other person (including without limitation any holder of voting trust certificates representing shares deposited by any Stockholder consenting (or on whose behalf consent is given) to such extension in the manner provided above). Extensions in accordance with this Section 13 (i) shall not be deemed to constitute the commencement of a new voting trust for purposes of the DGCL, (ii) shall be filed with the registered office of the Company in Delaware, as provided by law and (iii) shall not involve or require any transfer of shares as contemplated by the last paragraph of Section 5." 3. The effective date of this Amendment shall be the date first set forth above. 4. As amended by this Amendment, the Voting Trust Agreement is in all respects ratified and confirmed, and as so amended by this Amendment the Voting Trust Agreement shall be read, taken and construed as one and the same instrument. 5. This Amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. 6. This First Amendment shall be governed in accordance with the laws of the State of Delaware without regard to principles of conflicts of law. [Remainder of page intentionally left blank.] The parties hereto have executed this Amendment to the Voting Trust Agreement in one or more counterparts under seal as of the __th day of August, 1997. WATTS INDUSTRIES, INC. By: ------------------------------- Timothy P. Horne, Chairman ----------------------------------- Timothy P. Horne, as Trustee and a Stockholder ----------------------------------- Frederic B. Horne, as Trustee and a Stockholder ----------------------------------- George B. Horne ----------------------------------- Tara V. Horne ----------------------------------- Frederic B. Horne, as Trustee of the Peter W. Horne Trust--1976 ----------------------------------- Timothy P. Horne, as Trustee of the Deborah Horne Trust--1976 ----------------------------------- Timothy P. Horne, as Trustee of the Daniel W. Horne Trust--1980 - ----------------------------------- ----------------------------------- Timothy P. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Tara V. Horne Tara V. Horne - ----------------------------------- ----------------------------------- Timothy P. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Tiffany R. Horne Tiffany R. Horne - ----------------------------------- ----------------------------------- Frederic B. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Kristina M. Horne Kristina M. Horne ----------------------------------- Judith Rae Horne, as Trustee of the Tiffany Rae Horne Trust--1984 SCHEDULE A Number of Shares Name of Class B Common Stock Frederic B. Horne as trustee of the Peter W. Horne Trust--1976 1,235,840 EX-9.2 3 GEORGE B. HORNE VOTING TRUST THE GEORGE B. HORNE VOTING TRUST AGREEMENT - 1997 THIS AGREEMENT is made as of the 26th day of August 1997, by and among TIMOTHY P. HORNE, as the Trustee having Determination Power (as hereinafter defined), and as the initial trustee hereunder hereinafter referred to, together with his successors in trust as provided herein, as the "Trustees", WATTS INDUSTRIES, INC., a Delaware corporation (the "Company"), TIMOTHY P. HORNE, as trustee of The George B. Horne Trust - 1982, as Restated and Republished from time to time, as a depositor of shares and recipient and holder of voting trust certificates hereunder (in such capacity hereinafter sometimes referred to, together with any other person or persons who hereafter might deposit shares in this voting trust and thereby become holders of voting trust certificates hereunder, individually as a "Depositor" and collectively as the "Depositors"), and GEORGE B. HORNE individually (in such capacity hereinafter sometimes referred to, together with the Depositors and any other person or persons who are or hereafter become parties hereto as "Beneficiaries" hereunder or subject hereto as holders of voting trust certificates, individually as a "Beneficiary" and collectively as the "Beneficiaries"). WITNESSETH: WHEREAS, the parties hereto desire to enter into this Agreement, effective as of the date hereof, with a view toward promoting and enhancing the long-term stability and growth of the Company; and WHEREAS, the parties hereto agree that, pursuant to this Agreement and on the terms and conditions set forth herein, the Trustees shall be granted the sole and exclusive voting power in all matters with respect to those shares of capital stock of the Company which are subject to this Agreement as set forth herein, together with the other rights and powers specified herein; and WHEREAS, the parties hereto intend that this Agreement will satisfy the requirements of Section 218(a) of the Delaware General Corporation Law, as amended (the "DGCL"), and be treated as a voting trust thereunder; and WHEREAS, the Trustees have consented to act under this Agreement for the purposes hereinafter provided. NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto mutually promise, covenant, undertake and agree as follows: 1. Transfer of Stock to Trustees. The Depositor is, contemporaneously with the execution of this Agreement, depositing with the Trustees one or more certificates representing that number of shares of the Class B Common Stock of the Company held by such Depositor as set forth opposite such Depositor's name on Schedule A attached hereto, and each Beneficiary shall deposit with the Trustees immediately upon receipt certificates representing any shares of capital stock of the Company having voting powers which such Beneficiary hereafter acquires or receives during the term of this Agreement other than (i) shares of Class A Common Stock of the Company acquired by such Beneficiary under any stock purchase, savings, option, bonus, stock appreciation, profit-sharing, thrift, incentive, pension or similar plan of the Company, or acquired by such Beneficiary in any open market purchase, (ii) any shares of Class B Common Stock listed on Schedule A as not being held pursuant to and subject to this Agreement, if any, and (iii) shares of capital stock of the Company issued as a stock dividend or pursuant to a stock split in respect of any shares of capital stock of the Company held by such Beneficiary which are not subject to this Agreement. All such stock certificates shall be so endorsed, or accompanied by such instruments of transfer, as to enable the Trustees to cause such certificates to be transferred into the names of the Trustees after the filing of this Agreement as required by law, which the Trustees shall forthwith cause to be done as hereinafter provided. Upon receipt by the Trustees of the certificates for any such shares of stock and the transfer of the same into the names of the Trustees, the Trustees shall hold the same subject to the terms of this Agreement and shall issue and deliver to the depositors of shares of stock hereunder voting trust certificates representing their interests in such stock deposited pursuant to this Agreement. Except as specifically provided in this Agreement, and without limitation of the voting rights of the Trustees including in connection with any merger or other sale of the Company, the Trustees shall not sell, assign, donate, pledge, encumber, grant any security interest with respect to, hypothecate, or otherwise transfer or dispose of any of the capital stock of the Company held pursuant to this Agreement. During the term of this Agreement, no shares subject to this voting trust may be withdrawn except in the manner provided below in this Section 1. Any such withdrawal by a registered holder of voting trust certificates shall be effected only by a written amendment to this Agreement in the form of Schedule B attached hereto executed by the requisite number of Trustees then serving as such hereunder then required to take action under Section 10. The Trustee having the Determination Power shall have the right to consent to such amendment and withdrawal in his sole discretion and approval by such Trustee having the Determination Power with respect to such amendment and withdrawal shall be deemed to constitute approval of all Trustees at any time serving. If TIMOTHY P. HORNE is not then serving as a Trustee hereunder, then consent to such amendment and withdrawal shall be by the holders of a majority in interest of the voting trust certificates hereunder then outstanding. Upon the surrender by such holder to the Trustees of the voting trust certificate or certificates designated in such amendment, the Trustees are authorized to deliver or cause to be delivered to such holder (i) a certificate or certificates for the shares of the capital stock of the Company so withdrawn, with any appropriate restrictive legends, and (ii) a new voting trust certificate in respect of the remaining shares held hereunder, if any signed in the manner contemplated by the terms of this Agreement. Shares withdrawn from this voting trust, when so withdrawn, shall be free of any restrictions imposed by this Agreement, but shall remain subject to any and all restrictions imposed by other agreements or by law. Nothing in this Section 1 or in any such amendment shall modify, amend, limit or terminate any other restrictions contained in. or be construed as a consent to any transfer of shares subject to this Agreement under, any other agreement or instrument, unless such amendment specifically refers to such other agreement or instrument and satisfies all requirements for amendment or waiver thereof (including execution and delivery by appropriate parties). The other provisions of this Section 1 notwithstanding, removal of shares from this Voting Trust shall be required if the removal and liquidation of such shares is needed to enable the Estate of a deceased holder of voting trust certificates to pay its federal and/or state death or estate tax, and the other assets of such estate are insufficient to pay such tax. Any depositor may request that he or she be allowed to withdraw one or more shares of stock from the trust by filing a written request for withdrawal with the Trustee of the Trust. Such written request shall set forth the number of shares that the depositor wishes to withdraw from the trust and shall state the intended purpose for the requested withdrawal of shares from the trust. Any request for withdrawal of shares may be approved by the Trustee, within the Trustee's absolute discretion, provided that the Trustee in his discretion shall have determined that approval of the request for withdrawal shall not be adverse to the best interests of Watts Industries, Inc. or its successors and provided that the Trustee shall have determined that the request for withdrawal, if approved, shall be in the best interests of the Class B Stockholders. All such shares so withdrawn for any reason in accordance with these provisions shall be subject to any restrictions imposed upon the said Class B Shares of the Common Stock of Watts Industries, Inc., in accordance with any Stock Restriction Agreement entered by or on behalf of such Holder during his or her lifetime. 2. Agreement. Copies of this Agreement and of every agreement supplemental hereto or amendatory hereof shall be provided to the Trustees and to the Company, and shall, prior to the issuance of voting trust certificates hereunder, be filed with and maintained in the registered office of the Company in Delaware and at such other place as the Trustees shall designate, and shall be open to inspection daily during business hours by any Beneficiary. All voting trust certificates shall be issued, received and held subject to all of the terms of this Agreement. All persons and entities who accept a voting trust certificate issued hereunder shall be bound by the provisions of this Agreement with the same effect as if they were parties to this Agreement. All certificates for the Company's capital stock transferred and delivered to the Trustees pursuant hereto shall be surrendered by the Trustees to the Company and canceled and new certificates therefor shall be issued to and held by the Trustees in their own names in their capacities as Trustees hereunder and shall bear a legend indicating that the shares represented by such certificate are subject to this Agreement (which fact shall also be stated in the stock ledger of the Company). 3. Voting Trust Certificates. Each voting trust certificate to be issued and delivered by the Trustees in respect of the capital stock of the Company, as hereinbefore provided, shall state the number of shares which it represents, shall be signed by the Trustees then in office, and shall be in substantially the form of Schedule C attached hereto and bear the restrictive legend set forth thereon, it being understood that during any period in which a Trustee has the Determination Power (as hereinafter defined), voting trust certificates issued hereunder may be signed by that Trustee alone and such Trustee's signature shall be deemed for all purposes to constitute the signature and authorization of all Trustees hereunder and to evidence conclusively that the issuance of the related certificate is the act of all Trustees then serving. 4. Transfer of Certificates; Restrictions. The transfer of any voting trust certificate (including without limitation any sale, assignment, donation, pledge, encumbrance, grant of a security interest, hypothecation or other transfer or disposition) shall be subject to any restrictions, conditions and other provisions applicable to it or to the stock which it represents, whether imposed by law, specified on the relevant certificate or specified in the Restated Certificate of Incorporation of the Company, as amended (the "Restated Certificate") (provided that any transfer of voting trust certificates without a transfer of the underlying stock held in this voting trust shall in no way affect the voting rights of such underlying stock, consistent with the terms of the Restated Certificate), this Agreement or any other agreement. Any attempted transfer in violation of such restrictions, conditions and other provisions shall be void ab initio and the Trustees shall not register such transfer or recognize the intended transferee as the holder of the voting trust certificate for any purpose. To the extent permitted by law, voting trust certificates shall not be subject to attachment, garnishment, judicial order, levy, execution or similar process, however instituted, for satisfaction of a judgment or otherwise. Subject to the foregoing provisions, the voting trust certificates shall be transferable on the books of the Trustees, at such office as the Trustees may designate, by the registered owner thereof, either in person or by attorney duly authorized, upon surrender thereof, according to the rules established for that purpose by the Trustees, and the Trustees may treat the registered holder as the owner thereof for all purposes whatsoever, but they shall not be required to deliver new voting trust certificates hereunder without the surrender of such existing voting trust certificates for cancellation by the Trustees at the time of their issuance of new voting trust certificates. If a voting trust certificate is lost, stolen, mutilated or destroyed, the Trustees, in their discretion, may issue a duplicate of such certificate upon receipt of (a) evidence of such fact satisfactory to them; (b) indemnity satisfactory to them; (c) the existing certificate, if mutilated; and (d) their reasonable fees and expenses in connection with the issuance of a new trust certificate. 5. Termination Procedure. Upon the termination of the voting trust at any time, as hereinafter provided, the Trustees shall mail written notice of such termination to the registered owners of the outstanding voting trust certificates at the address appearing on the transfer books of the Trustees. From the date specified in any such notice (which date shall be fixed by the Trustees) the voting trust certificates shall cease to have any effect, and the holders of such voting trust certificates shall have no further rights under this voting trust other than to receive certificates for shares of stock of the Company or other property distributable under the terms hereof upon the surrender of such voting trust certificates. Within 30 days after the termination of this voting trust, the Trustees shall deliver to the registered holders of all voting trust certificates outstanding as of the date of such termination, stock certificates for the number of shares of such class or classes of the Company's capital stock represented thereby as to which they shall be entitled upon the surrender for cancellation of such voting trust certificates, properly endorsed or accompanied by properly endorsed instruments of transfer, if appropriate, at the place designated by the Trustees, and after payment, if the Trustees so require, by the persons entitled to receive such stock certificates, of a sum sufficient to cover any stamp tax or governmental charge in respect of the transfer or delivery of such stock certificates. Such certificates or shares shall bear such legend referring to the restrictions on transfer of such shares as may be required by this Agreement, by law or otherwise. Thereupon, all liability of the Trustees for delivery of such certificates of shares shall terminate, and the voting trust certificates representing the beneficial interest in the shares so delivered by the Trustees shall be null and void. If upon such termination, one or more registered holders of outstanding voting trust certificates shall fail to surrender such voting trust certificates, or the Trustees for any reason shall be unable to comply with the provisions of the preceding paragraph, the Trustees may, at any time subsequent to 30 days after the termination of this Agreement, deposit with the Company stock certificates representing the number of shares of capital stock represented by such voting trust certificates, together with written instructions authorizing the Company to deliver such stock certificates in exchange for voting trust certificates representing a like interest in the capital stock of the Company; and upon such deposit, all further liability of the Trustees for the delivery of such stock certificates and the delivery or payment of dividends upon surrender of the voting trust certificates shall cease, and the Trustees shall not be required to take any further actions hereunder. Notwithstanding anything herein to the contrary, upon any extension of this voting trust as contemplated by Section 13 hereof, the shares of stock held herein with respect to which this voting trust is being extended shall continue to be held by the Trustees and/or their successor Trustees rather than being transferred to the registered holders of voting trust certificates in respect thereof for recontribution, and in such event no transfer of such shares shall be deemed to have occurred for any purpose. 6. Dividends. If any dividend in respect of the stock deposited with the Trustee is paid, in whole or in part, in stock of the Company having voting powers, the Trustees shall likewise hold, subject to the terms of this Agreement, the stock certificates which are received by them on account of such dividend, and the holder of each outstanding voting trust certificate representing stock on which such dividend has been paid shall be entitled to receive a voting trust certificate issued under this Agreement for the number of shares and class of stock received as such dividend with respect to the shares represented by such voting trust certificate. Holders entitled to receive the voting trust certificates issued in respect of such dividends shall be those registered as such on the transfer books of the Trustees at the close of business on the record date for such dividend. If any dividend in respect of the stock deposited with the Trustees is paid other than in capital stock of the Company having voting powers, then the Trustees shall promptly distribute the same to the holders of outstanding voting trust certificates registered as such at the close of business on the record date for such distribution. Such distribution shall be made to such holders of voting trust certificates ratably, in accordance with the number of shares represented by their respective voting trust certificates. In lieu of receiving cash dividends upon the capital stock of the Company deposited with the Trustees and paying the same to the holders of outstanding voting trust certificates pursuant to the preceding paragraph, the Trustees may instruct the Company in writing to pay such dividends directly to the holders of the voting trust certificates specified by the Trustees. Such instructions are deemed given hereby and until receipt of written instructions to the contrary from the Trustees, the Company agrees to pay such dividends directly to the holders of the voting trust certificates. The Trustees may at any time revoke such instructions and by written notice to the Company direct it to make dividend payments to the Trustees. The Company shall not be liable to any holder of a voting trust certificate or any person claiming to be entitled to any such dividends by reason of adhering to any written instructions of the Trustees. 7. Subscription Rights. If any stock or other securities of the Company are offered for subscription to all of the holders of any class of the Company's captial stock depostied hereunder, the Trustees promptly, upon receipt of notice of such offer, shall mail a copy thereof to each registered holder of the outstanding voting trust certificates representing such class of capital stock. Upon receipt by the Trustees, at least five days prior to the last day fixed by the Company for subscription and payment, of a request for any such registered holder of voting trust certificates to subscribe for such shares on behalf of such registered holder, accompanied by the sum of money required to pay for such stock or other securities, the Trustees shall make such subscription and payment, and upon receipt from the Company of the certificates for shares or other securities so subscribed for, shall issue to such registered holder a voting trust certificate representing such shares if the same be stock of the Company having voting powers, but if the same be shares or other securities other than stock having voting powers, the Trustees shall mail or deliver such securities to the voting trust certificate holder in whose behalf the subscription was made, or may instruct the Company to make delivery directly to the voting trust certificate holder entitled thereto. 8. Dissolution of the Company. In the event of the dissolution or total or partial liquidation of the Company (other than in the event of a transaction described in Section 9 below), whether voluntary or involuntary, the Trustees shall receive the moneys, securities, rights or property to which the holders of outstanding shares of the Company's captial stock deposited hereunder are entitled, and shall distribute the same among the registered holders of voting trust certificates in proportion to their interests, as shown by the transfer books of the Trustees, or the Trustees may in their discretion deposit such moneys, securities, rights or property with any bank or trust company with authority and instructions to distribute the same as above provided, and upon such deposit, all further obligations or liabilities of the Trustee in respect of such moneys, securities, rights or property so deposited shall cease. 9. Reorganization or Sale of the Company. In the event that there occurs (i) any merger or consolidation transaction involving the Company and one or more other entities, or a transaction in which all or substantially all of the assets of the Company are transferred to another entity or (ii) a transaction in which stockholders of the Company transfer or exchange shares held by them wholly or partially for capital stock of another entity having voting powers, and in any such transaction securities of such entity having voting powers are received by the Trustees in respect of the shares subject to this voting trust, it being understood that in connection with any such transaction or otherwise all voting powers in respect of shares subject to this voting trust shall be exercised by the Trustees in accordance with the terms hereof and that shares may be removed from this voting trust only in accordance with Section 1, thus giving the Trustees all power and authority to vote all shares subject hereto in connection with any such transaction, then in connection with any such transaction the term "Company" for all purposes of this Agreement shall include such successor entity, and the Trustees shall receive and hold under this Agreement any such capital stock of such successor entity received on account of the ownership, as Trustees hereunder, of the stock held hereunder immediately prior to such transaction. Voting trust certificates issued and outstanding under this Agreement at the time of such transaction may remain outstanding or the Trustees may, in their discretion, substitute for such voting trust certificates new voting trust certificates in appropriate form and with appropriate modifications to reflect the number of shares of other securities then held, and the terms, "stock" and "capital stock" as used herein shall be taken to include any securities which may be received by the Trustees in lieu of all or any part of the capital stock of the Company. In the event that there occurs any transaction described in the preceding paragraph and in connection therewith the Trustees receive assets other than capital stock having voting powers, the Trustees shall distribute such assets to the registered holders of the outstanding voting trust certificates hereunder pro rata on the basis of their respective interests in the shares held hereunder and, if such consideration shall consist wholly of such assets, this Agreement shall thereafter terminate. 10. Rights, Powers and Duties of Trustees. Until the actual delivery to the holders of voting trust certificates issued hereunder of stock certificates in exchange therefor, and until the surrender of such voting trust certificates for cancellation, in each case in accordance with the terms of this Agreement, title to all of the Company's stock deposited hereunder shall be vested in the Trustees, who shall be deemed the holders of record of such shares for all purposes, and the Trustees shall have the sole and exclusive right, acting as hereinafter provided and subject to such limitations as are set forth herein, to exercise, in person or by their nominees or proxies, all of the rights and powers in respect of all stock deposited hereunder, including the right to vote such stock and to take part in or consent to any corporate or stockholders' action of any kind whatsoever, whether ordinary or extraordinary, subject to the provisions hereinafter set forth. The right to vote shall include the right to vote in connection with the election of directors and other resolution or proposed action of any character whatsoever which may be presented at any meeting or require the consent of stockholders of the Company. It is expressly understood and agreed that the holders of voting trust certificates in their capacities as such shall not have any right, either under said voting trust certificates or under this Agreement, or under any agreement or doctrine or concept of law, express or implied, or otherwise, with respect to any shares held by the Trustees hereunder to vote such shares or to take part in or consent to any corporate action, or to do or perform any other act or thing which the holders of the Company's common stock of any class are now or may hereafter become entitled to do or perform. No Trustee shall incur any responsibility in his capacity as trustee, individually or otherwise, in voting the shares held hereunder or in any matter or act committed or omitted to be done under or in connection with this Agreement, or for any vote or act committed or omitted to be done by any predecessor or successor Trustee, except for such Trustee's willful malfeasance. The Trustees shall at all times keep, or cause to be kept, complete and accurate records of all stock deposited with them hereunder, the identity, addresses and ownership of the Depositors and Beneficiaries, and all voting trust certificates issued by the Trustee. Such records shall be open to inspection by any Depositor or Beneficiary under this Agreement on reasonable notice given to the Trustees at their usual place of business during their normal business hours. Whenever action is required of the Trustees, such action may be taken by written consent signed by the requisite number of Trustees or by vote of the requisite number of Trustees at a meeting of the Trustees. So long as there are two (2) or more Trustees hereunder, the concurrence of both (if there are two (2) Trustees) or a majority (if there are more than two (2) Trustees) of the Trustees then serving shall be necessary and sufficient for the validity of any action taken by the Trustees, and if at any time there is one Trustee hereunder (subject to Section 11) such Trustee's action shall be necessary and sufficient for the validity of any action taken by the Trustees. Notwithstanding the foregoing, if at any time TIMOTHY P. HORNE and or any other person shall serve as co-Trustees hereunder, and if for any reason the Trustees shall fail to concur with respect to any action proposed to be taken by the Trustees under or pursuant to this Agreement (including without limitation any voting decision, any amendment in connection with the withdrawal of shares as contemplated by Section 1, any other trust amendment or trust termination), then TIMOTHY P. HORNE, for so long as he is serving as a Trustee hereunder, shall have the power (such power being herein called the "Determination Power") to determine in his sole discretion, whether or not such proposed action is to be taken and upon his approval such action when and if taken shall have the same force and effect as if both or all of the Trustees had agreed with respect thereto. Any and all documents or instruments executed by or on behalf of the Trustees hereunder (including without limitation voting trusting certificates) may be executed by Timothy P. Horne alone and his signature shall evidence conclusively the authorization and all of the Trustees hereunder. In the event that TIMOTHY P. HORNE shall cease to serve as a Trustee hereunder, then no Trustee hereunder shall have the Determination Power, except in accordance with a duly-published amendment to this Agreement adopted in accordance with the terms hereof, provided, however, that the foregoing shall not be deemed to limit the authority of any person serving as a sole Trustee under and in accordance with this Agreement. 11. Remaining Trustees; Successor Trustees; Successors' Determination Power At least one (1) individual shall serve as a Trustee hereunder during any period in which TIMOTHY P. HORNE serves as a Trustee hereunder. The said TIMOTHY P. HORNE shall have full discretionary authority to serve as the sole Trustee until such time as he shall determine that he is unwilling or unable to so serve and shall have resigned by written instrument, or until his death or permanent incapacity or disability. During any period following TIMOTHY P. HORNE's service as a Trustee hereunder (subject to the further provisions of this Section 11 as set forth in the second paragraph hereof), there shall be at least two (2) Trustees hereunder. Notwithstanding the preceding two sentences or any other provisions of this Agreement or otherwise to the contrary, if at any time no Trustee shall be serving hereunder for any reason (as a result, for example, of the deaths of the Trustees), then this Agreement and the voting trust created hereby shall nevertheless remain in existence and in full force and effect until a new Trustee shall be appointed in accordance with this Section 11. All Trustees hereunder shall be individuals. Trustees shall in no event be subject to removal for any reason and any Trustee hereunder shall serve until his or her resignation, death, permanent disability or incapacity (as hereinafter defined). Any Trustee hereunder may resign by a signed instrument delivered to the remaining Trustee or Trustees, if any, or otherwise to the registered holders of the outstanding voting trust certificates. The following provisions shall govern the succession of Trustees hereunder. In the event TIMOTHY P. HORNE shall cease to serve as a Trustee hereunder, then Attorney WALTER J. FLOWERS, NOAH T. HERNDON, and Attorney JOHN R. LECLAIRE shall thereupon become Co-Trustees hereunder if they are then living and willing and able to serve as such. In the event that either WALTER J. FLOWERS, NOAH T. HERNDON, or JOHN R. LECLAIRE shall be unwilling or unable to serve as a Co-Trustee, then a Primary Designee or a Secondary Designee (as defined hereinbelow) shall be appointed to serve in the stead of a named Co-Trustee who shall be unwilling or unable to serve in that capacity. In the event that any one of WALTER J. FLOWERS, NOAH T. HERNDON, JOHN R. LECLAIRE or any Primary Designee or Secondary Designee is unable or unwilling or shall otherwise fail to serve as a Trustee hereunder at the time he would otherwise become such, or after becoming a Co-Trustee shall cease to serve as such for any reason, then there shall continue to be two (2) trustees hereunder, and a person or the persons indicated below (if available) shall become a Co-Trustee or Trustees in accordance with the following line of succession in order that there will ultimately be three (3) Co-Trustees to serve in such office in accordance with the terms of this Trust: (1) First, any individual designated as the "Primary Designee" in accordance with the following paragraph of this Section 11; (2) Next, any individual designated as the "Secondary Designee" in accordance with the following paragraph of this Section 11; and (3) Then, one (1) or two (2) individuals (as applicable) appointed by the holders of a majority in interest of the voting trust certificates then outstanding, such that in the event the individual or individuals contemplated to serve as a Trustee or Trustee(s) hereunder for any reason fail or are unable to serve as such at the time he or they would otherwise be a Trustee or Trustees hereunder or thereafter cease to serve as such for any reason, or if no designation of a Primary Designee and/or a Secondary Designee shall be in effect, then the next available individual in the line of succession shall become a Trustee hereunder, provided, however, that if for any reason there shall ever be a single Trustee hereunder during any period following TIMOTHY P. HORNE's service as a Trustee hereunder, then such sole Trustee shall be authorized to take all actions on behalf of the Trustee until such time as another Trustee shall be appointed, provided that the party or parties authorized to designate a successor or successors shall endeavor to do so promptly. In the event of any disagreement between the Co-Trustees with regard to any issue involving the Trust, the majority vote of the Trustees then in office shall be determinative of any issue which shall be considered by the Trustees. At any time TIMOTHY P. HORNE, if then living and not then subject to any incapacity (as hereinafter defined) may by written instrument signed and filed with the registered office of the Company in Delaware, designate (i) an individual to serve as Primary Designee in the line of succession contemplated by this Section 11 (the "Primary Designee"), and (ii) if he so elects, an additional individual to succeed, or to serve in lieu of or with the Primary Designee as a trustee hereunder (the "Secondary Designee") as also contemplated by this Section 11. Any such designation shall also be revocable by a written instrument signed by TIMOTHY P. HORNE if then living and not then subject to any incapacity (as hereinafter defined), and filed with the registered office of the Company in Delaware at any time prior to the time at which a designated successor becomes a Trustee hereunder. It is understood that the provisions of this Section 11 are intended to permit the designation of up to two individuals to become Trustees in accordance with the line of succession as Trustees hereunder, and while designations of particular individuals may be revoked and a new individual designated in his or her place (such as in the case of a designee's death, for example), no more than two individuals may become Trustees hereunder pursuant to a designation as a Primary or Secondary Designee absent an amendment to this Agreement, it being understood that in event a Secondary Designee becomes a Trustee hereunder because a Primary Designee shall have failed to serve as a Trustee hereunder, then the individual who becomes a Trustee hereunder shall be deemed the Primary Designee and the individuals so empowered in this paragraph may thereafter name a new Secondary Designee in accordance with the terms hereof. In the event that TIMOTHY P. HORNE dies or becomes subject to any incapacity (as hereinafter defined), the power designated in this paragraph shall become personal to and may be exercised only by the individuals named in this paragraph in accordance with the terms hereof. The provisions of this paragraph are intended to be permissive and shall authorize, but not require, the appointment of a Primary or Secondary Designee. In the event of the permanent disability or incapacity of a Trustee, he shall cease to serve in that capacity as provided in this paragraph. For purposes of this Agreement, "permanent disability" shall mean any physical or mental disability or incapacitation that precludes a Trustee from performing his responsibilities under this Agreement and which is not capable of cure or correction, and "incapacity" shall mean any mental state by reason of which the individual in question would not be deemed competent under the law of his state of principal residence. If permanent disability or incapacity is claimed with respect to a Trustee or other person, said permanent disability or incapacity shall be evidenced by a written certification (a "Certification") signed by two doctors attending such Trustee or other person, which doctors shall be licensed to practice medicine in the state of the relevant person's principal residence, and , in the case of a Trustee, such Trustee shall cease to serve in such capacity upon receipt by a co-Trustee, successor Trustee or the registered holders of the voting trust certificates then outstanding, as the case may be, of a Certification. Absent a Certification, the individual in question shall be presumed to be not subject to any permanent disability or incapacity and he shall be recognized as a duly-appointed Trustee of this Trust. The rights, powers and privileges of each of the Trustees named hereunder shall be possessed by any successor Trustee with the same effect as though such successor had originally been a party to this Agreement; provided, however, that no Trustee or successor Trustee hereunder shall possess the Determination Power referred to in Section 10 unless it is specifically conferred upon such Trustee pursuant to the provisions hereof. In any other circumstance, no Trustee hereunder other than TIMOTHY P. HORNE shall have the Determination Power. In the event that there shall be more than one Trustee serving at any time, and in the event that the Trustees shall not concur on matters not specifically contemplated by the terms of this Agreement, the Trustees shall consider such matter and they shall vote among them to determine the disposition of the issue among them, [bearing in mind the relative interests of the Shareholders, the Corporation, and the Depositors into this Trust]. The majority vote of the Trustees shall be determinative and shall resolve the matter after giving due consideration to the purposes of this Trust. Each Trustee shall affix his signatures to this Agreement and each successor Trustee appointed pursuant to this Section 11 shall accept appointment or election hereunder by affixing his signature to this Agreement at the time he becomes a Trustee hereunder. By affixing their signatures to this Agreement, the Trustees and each successor Trustee agree to be bound by the terms hereof. Reference in this Agreement to "Trustees" means the Trustee or Trustees at the time acting in that capacity, whether an original Trustee or any additional or successor Trustee, as the context requires. 12. Compensation and Reimbursement of Trustees. Each Trustee shall serve without compensation. The Trustees shall have the right to incur and to pay such reasonable expenses and charges and to employ and pay such agents, attorneys and counsel as they may deem necessary and proper. Any such expenses or charges incurred by and due to the Trustees may be deducted from the dividends, proceeds or other moneys or property received by the Trustees in respect of the stock deposited hereunder or may be payable by the Company in its discretion. Nothing herein contained shall disqualify any Trustee or any successor Trustee, including without limitation any person named as a Primary or Secondary Designee, or any firm in which he is interested, from serving the Company or any of its subsidiaries as an officer or director or in any other capacity(including without limitation as legal counsel, financial adviser or lender), holding any class of stock in the Company, becoming a creditor of the Company or otherwise dealing with it in good faith, depositing his stock in trust pursuant to this Agreement, voting for himself as a director of the Company in any election thereof, or taking any other action as a Trustee hereunder in connection with any matter in which such Trustee has any direct or indirect interest. The provisions of the foregoing notwithstanding, each Trustee shall be entitled to be fully indemnified by the assets of the voting trust and the holders of outstanding voting trust certificates, pro rata in accordance with their interests at the time of the relevant payment, against all costs, charges, expenses, loss, liability and damage (except for damage caused by his own willful malfeasance) incurred by him in the administration of this trust or in the exercise of any power conferred upon the Trustees by this Agreement. 13. Amendment; Termination. This Agreement may be amended by a written amendment signed by the number of Trustees authorized to take action at the relevant time under Section 10, or, if the Trustees (if more than one) do not concur with respect to any proposed amendment at any time when any Trustee holds the Determination Power, then by the Trustee having the Determination Power, which approval shall constitute approval of all of the Trustees then serving and, except as contemplated by Section 1, by registered holders of a majority of the voting trust certificates then outstanding; provided, however, that no such amendment shall modify or amend the provisions of the following two paragraphs without the written consent of each individual Depositor or the Trustee of each Trust Depositor who is living at the time of such proposed amendment. For all purposes of this Agreement, references to percentages of voting trust certificates outstanding shall refer to the number of votes represented by the shares of stock of the Company represented by such voting trust certificates. This Agreement may be terminated only by a written instrument signed by the number of Trustees authorized to take action at the relevant time under Section 1 or, if the Trustees (if more than one) do not concur with respect to any proposed termination at any time when any Trustee holds the Determination Power, then by the Trustee having the Determination Power, which approval shall constitute approval of all of the Trustees, registered holders of a majority of the voting trust certificates then outstanding and each individual Depositor or the Trustee of each Trust Depositor who is living at the time of the proposed termination. If not previously terminated in accordance with the terms hereof (including under the circumstances contemplated by the provisions of Section 9) this Agreement shall terminate on the day which is twenty-four (24) years after the date first entered above upon this GEORGE B. HORNE VOTING TRUST AGREEMENT - 1997, provided, however, that at any time within two (2) years prior to such date (or prior to any subsequent date of termination fixed in accordance with the provisions hereof and of applicable law), one or more of the persons designated in the following provisions of this Section 13 may, by written agreement, extend the duration of this Agreement for an additional term not exceeding twenty-four (24) years from the expiration date as originally fixed or as last extended. The foregoing right of extension shall be exercisable in respect of particular shares subject hereto by (i) the individual Depositor who originally deposited the relevant shares, if the Depositor is then living and is not subject to any incapacity at the time of the proposed extension, and if so exercised such extension shall be binding upon any and all holders of voting trust certificates in respect of the shares deposited hereunder by such individual Depositor, (ii) the trustee of any trust Depositor which deposited the relevant shares, including without limitation any trust Depositor which is a revocable trust, which trustee is then living and not subject to any incapacity at the time of the proposed extension, and regardless of whether such trust is then still in existence, and if so exercised shall be binding upon any and all holders of voting trust certificates in respect of shares deposited hereunder by such trust Depositor and any and all beneficiaries thereof or successors in interest thereto, and (iii) the holder of any voting trust certificate representing shares not covered by either of the preceding clauses (i) or (ii), and if so exercised shall be effective with respect to all shares represented by such voting trust certificate, it being understood that the provisions only of clauses (i) or (ii) of this paragraph and not of clause (iii) shall govern any extension with respect to shares referred to therein if and to the extent a Depositor referred to therein is available to consent to such extension. Any such action to extend this Agreement shall be binding upon the Trustees and Depositor and upon all holders of the related voting trust certificates (including without limitation trustees, officers, beneficiaries and owners of any trust or other entity which is such a holder thereof) and any and all successors in interest of any of the foregoing (including without limitation any holder of voting trust certificates representing shares deposited by any Depositor consenting or on whose behalf consent is given by the relevant trustee to such extension in the manner provided above, and any Beneficiary or successor of a Beneficiary of any trust Depositor. Extensions in accordance with this Section 13 shall not be deemed to constitute the commencement of a new voting trust for purposes of the DGCL, (ii) shall be filed with the registered office of the Company in Delaware, as provided by law, and (iii) shall not involve or require any transfer of shares as contemplated by the last provisions of Section 5. 14. Notices; Distributions. Unless otherwise specifically provided in this Agreement, any notice to or communication with any holder of any voting trust certificate or other party hereunder shall be deemed to be sufficiently given or made if mailed, postage prepaid, to such holder at his or her address appearing on the books of the trust, which shall in all cases be deemed to be the address of such holder for all purposes under this Agreement, without regard to what other or different addresses of which the Trustees may have notice. Every notice so given shall be effective, whether or not received, and the date of mailing shall be the date such notice is deemed given for all purposes. Any notice to any Trustee hereunder shall be sufficient if mailed, postage prepaid, by certified or registered mail to him, with a copy sent to the Company at Watts Industries, Inc.,. Route 114 and Chestnut Street, North Andover, Massachusetts 01845. Subject to Section 6 hereof, all distributions of cash, securities, or other property hereunder by the Trustees to the holders of voting trust certificates may be made, in the discretion of the Trustees, by mail (regular, registered or certified mail, as the Trustees may deem advisable), in the same manner as hereinabove provided for the giving of notices to the holders of voting trust certificates. 15. Construction. This Agreement is to be construed as a Delaware contract, is to take effect as a sealed instrument, and is binding upon and inures to the benefit of the parties hereto and their heirs, executors, administrators, representatives, successors and permitted assigns. In case any one or more of the provisions or parts of a provisions contained in this Agreement or in any voting trust certificate hereunder shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceablitity shall not affect any other provision or part of a provision hereof or thereof, but this Agreement and such voting trust certificates shall be construed as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein, and the parties will use their best efforts to substitute a valid, legal and enforceable provision which, insofar as practicable, implements the purposes and intents thereof. 16. Gender. Words used in this Agreement, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural (and all references to the `Trustees' shall refer to the Trustee then serving if only one Trustee is then serving), and any other gender, masculine, feminine, or neuter, as the context requires. 17 Execution. This Agreement may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall constitute but one and the same instrument. END IN WITNESS WHEREOF, the parties hereof have executed this Agreement under seal, all as of this day and year first above written. - ----------------------------------- ------------------------------- Timothy P. Horne, as Trustee George B. Horne, Individually, and as the Depositor, as Beneficiary of the GBH Trust - 1982, as Currently Republished Timothy P. Horne, as Trustee of the Watts Industries, Inc. George B. Horne Trust - 1982 as Currently Republished ___________________________________ By: _________________________________ SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne as Trustee of 2,104,600 20,000 The George B. Horne Trust - 1982 as Currently Republished SCHEDULE B AMENDMENT TO VOTING TRUST AGREEMENT WHEREAS, [___________________] and [___________________] are Trustees under a Voting Trust Agreement dated as of August 1997, such Voting Trust Agreement, being referred to herein as the "Agreement"); and WHEREAS, [____________________] desires to withdraw [_______(_____] shares of Class B Common Stock of Watts Industries, Inc., a Delaware corporation. WHEREAS, the Trustees and the holders of not less than a majority in interest of the voting trust certificates outstanding hereunder desire to consent and agree to the above-described transactions. NOW, THEREFORE, the parties hereto do hereby agree as follows: The parties hereto do hereby consent to the withdrawal of such shares and to amend Schedule A to the Agreement by amending and restating Schedule A in its entirety to read as follows: SCHEDULE A Number of Class B Stock Name Shares Certificate No. [Name of Registered Holders] [___________] [___________] 2. Except as hereinabove provided, the parties ratify and confirm the Agreement in all respects. The parties hereto have executed this Amendment to the Agreement in one or more counterparts under seal as of the [___] th day of [_____], 19 [___]. [Signatures to be added per the terms of the Agreement] SCHEDULE C ---------- FORM OF VOTING TRUST CERTIFICATE ------------------------ This Voting Trust Certificate has not been registered under the Securities Act of 1933, as amended, and may not be sold or otherwise transferred unless (a) covered by an effective registration statement under the Securities Act of 1933, as amended, or (b) the trustees and the Company have been furnished with an opinion of counsel satisfactory to them to the effect that no registration is legally required for such transfer. This Voting Trust Certificate has been issued under, and is subject to, a certain Voting Trust Agreement, dated as of August ___, 1997, by and among the Company and Timothy P. Horne as Trustee, and certain other persons, (as identified on Schedule A of said Agreement as amended), a copy of which will be furnished by the Company to the holder of this Voting Trust Certificate upon written request and without charge, and this Voting Trust Certificate can only be transferred subject to, and in accordance with, such Agreement. This Voting Trust Certificate is subject to restrictions on transfer contained in the Company's Restated Certificate of Incorporation, as amended, a copy of which restrictions will be provided to the holder of this Voting Trust Certificate upon request and without charge. The shares represented by this Voting Trust Certificate are subject to restrictions on transfer pursuant to a Stock Restriction Agreement, a copy of which will be furnished by the Company to the holder of this Voting Trust Certificate upon written request and without charge. No. __________ Shares: _____________ This certificate that the undersigned trustee has received a certificate or certificates in the name of _____________________ evidencing ownership of ______________ shares of the [Class B Common Stock of Watts Industries, Inc., a Delaware corporation (the "Company"),] and that said shares are held subject to all of the terms and conditions of a certain Voting Trust Agreement dated as of the _____ day of August, 1997 (the "Agreement"), and are entitled to all of the benefits set forth in the Agreement. Copies of the Agreement and of every amendment and supplement thereto are on file at the office of the Company and shall be available for the inspection of every Beneficiary thereof or party thereto during normal business hours. The holder of this Certificate, which is issued, received and held under the Agreement, by acceptance hereof, assents to and is bound by the Agreement with the same effect as if the Agreement has been signed by him in person. The shares of stock represented by this Certificate bear the legend: "These shares are subject to a certain Voting Trust Agreement, dated as of August _____, 1997, by and among the Company and Timothy P. Horne as trustee, and certain other persons, [as amended] a copy of which will be furnished by the Company to the holder of this Certificate upon written request and without charge, and these shares can only be transferred subject to, and in accordance with , such Agreement." Subject to the provisions of the foregoing and the Agreement, this Certificate is transferable only on the books of the Trustees by the registered holder in person or his duly authorized attorney, and the holder hereof, by accepting this certificate, manifests his consent that the trustees may treat the registered holder hereof as the true owner for all purposes, except the delivery of stock certificates, which delivery shall not be made without the surrender of this certificate or otherwise pursuant to the Agreement. IN WITNESS WHEREOF, _____________________ [and __________________], trustee, [have] [has] executed this certificate as of this ____th day of _________________, 19___. _____________________________ _________________, as Trustee SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne 2,751,220 28-a SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne as Trustee of 1,335,840 The Daniel W. Horne Trust - 1980 28-b SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne as Trustee of 1,335,840 The Deborah Horne Trust - 1976 28-c SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Tara V. Horne 50,000 28-d SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne as Trustee of 30,200 The George B. Horne Grandchildren Trust - 1995 F/B/O Tara V. Horne 28-e SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Timothy P. Horne as Trustee of 22,600 The George B. Horne Grandchildren Trust - 1995 F/B/O Tiffany Horne 28-f SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Judith Rae Horne as Trustee of 163,520 The Tiffany Horne Trust - 1984 28-g SCHEDULE A No. of Shares No. of Shares Class B Stock Not Subject to Depositor Subject to Trust Certificate No. Trust (if any) Judith Rae Horne as Custodian for 44,220 Tiffany Rae Horne under the MA Uniform Gifts to Minors Act 28-h EX-10.6 4 AMENDMENT NUMBER 4 AMENDMENT NUMBER FOUR WATTS INDUSTRIES, INC. RETIREMENT PLAN FOR SALARIED EMPLOYEES WHEREAS, Watts Industries, Inc. (the "Sponsoring Employer") established the Watts Industries, Inc. Retirement Plan For Salaried Employees (the "Plan") which was amended and restated effective as of January 1, 1994; WHEREAS, pursuant to Section 13.01 of the Plan, the Sponsoring Employer reserved the right to amend the Plan; and WHEREAS, the Sponsoring Employer desires to amend the Plan to reflect the sale of Henry Pratt Company and James Jones Company and for other administrative matters. NOW, THEREFORE, except as otherwise provided, the Plan is hereby amended effective September 4, 1996 as follows: 1. Section 1.16 of the Plan is amended by deleting James Jones Company and Henry Pratt Company from the list of entities which are considered to be an "Employer". 2. Section 1.16 of the Plan is amended effective July 1, 1996 by adding Webster Valve, Inc. to the list of entities which are considered to be an "Employer". 3. Section 3.01(b)(ii) is amended by deleting that last sentence thereof and substituting the following in its place: "Service for benefit accrual purposes shall begin on or after January 1, 1987 and shall end on the earlier of September 4, 1996 or the date a Participant terminates his Service." 4. Section 3.01(b)(viii) is amended by deleting the last sentence thereof and substituting the following in its place: "Service for benefit accrual purposes shall begin on or after October 1, 1993 and shall end on the earlier of September 4, 1996 or the date a Participant terminates his Service." 5. Section 6.02 is amended by adding the following new paragraph to the end thereof: (c) Effective September 4, 1996, a Participant who is an Employee of Henry Pratt Company of James Jones Company on September 4, 1996 shall be 100% vested and shall be entitled to a deferred vested benefit commencing on his Normal Retirement Date equal to his Accrued Normal Retirement Benefit determined in accordance with the provisions of Section 6.021(c). 6. Effective January 1, 1996, Section 2.05 is amended by adding the following sentence to the end thereof: "During any computation period in which an Eligible Employee's Hours of Service cannot be determined, the Eligible Employee shall be credited with 190 Hours of Service for each month during such period in which he or she completes one Hour of Service." 7. Section 5.032, as amended by Amendment Number One, is hereby clarified by deleting the third paragraph thereof and inserting the following in its place: "Notwithstanding the above, in the case of a Participant whose Compensation for a Plan Year beginning prior to January 1, 1994 exceeded $150,000, such Participant's Accrued Benefit shall not be less than an amount equal to the sum of his or her Accrued Benefit determined as of December 31, 1993 plus an amount equal to the Participant's Accrued Benefit determined in accordance with the provisions of this Section 5.032 based on Years of Benefit Service earned by the Participant after December 31, 1993." IN WITNESS WHEREOF, Watts Industries, Inc. has caused this instrument to be executed by its authorized officer and its seal affixed hereto this ____ day of ___________ , 1996. WATTS INDUSTRIES, INC. By:___________________________________ EX-10.13 5 AMENDMENT NUMBER 2 AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT THIS AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT, dated as of October 1, 1996, by and among SPENCE ENGINEERING COMPANY, INC., a Delaware corporation (the "Borrower"), WATTS INDUSTRIES, INC., a Delaware corporation (the "Guarantor") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association organized and existing under the laws of the United States with its principal offices located in Charlotte, North Carolina (the "Bank"); W I T N E S S E T H: WHEREAS, the Borrower, the Guarantor and the Bank have previously entered into the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of June 1, 1994, as amended by Amendment No. 1 to the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of August 1, 1996 (collectively, the "Agreement"), pursuant to which the Bank has issued its irrevocable letter of credit, dated June 17, 1994; and WHEREAS, the Borrower, the Guarantor and the Bank now desire to amend certain provisions of the Agreement; NOW, THEREFORE, in consideration of the premises, mutual covenants hereinafter contained and other good and valuable consideration, the Borrower, the Guarantor and the Bank do hereby amend the Agreement as follows: Section 1. Section 7.7 of the Agreement Amended. Section 7.7 of the Agreement is hereby amended by deleting in its entirety said Section 7.7 of the Agreement and inserting in lieu of the following: "7.7. Current Ratio. The Guarantor will not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities, at any time, to be less than 2.00 to 1.00." Section 2. Effect of Modification and Amendment of Agreement. The Agreement shall be deemed to be modified and amended in accordance with the provisions of this Amendment No. 2 to the Agreement and the respective rights, duties and obligations of the Borrower, the Guarantor and the Bank under the Agreement shall remain to be determined, exercised and enforced under the Agreement subject in all respects to such modifications and amendments in writing, and all the terms and conditions of this Amendment No. 2 to the Agreement shall be part of the terms and conditions of the Agreement for any and all purposes. All the other terms of the Agreement shall continue in full force and effect subject to the amendments set forth herein. Section 3. Representations and Warranties. The Borrower and the Guarantor each represent and warrant to the Bank as follows: (a) Representations and Warranties in Agreement. The representations and warranties of the Borrower and the Guarantor contained in the Agreement (i) were true and correct when made, and (ii) after giving effect to this Amendment No. 2, continue to be true and correct on the date hereof (except to the extent of changes resulting from transactions contemplated or permitted by the Agreement, as amended hereby, and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date). (b) Authority. The execution and delivery by each of the Borrower and the Guarantor of this Amendment No. 2 and the performance by each of the Borrower and the Guarantor of all of its respective agreements and obligations under this Amendment No. 2 are within its corporate authority, have been duly authorized by all necessary corporate action and do not and will not: (i) contravene any provision of its charter documents or any amendment thereof; (ii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of its property under any agreement, deed of trust, indenture, mortgage or other instruments to which it is a party or by which any of its properties are bound including, without limitation, any of the Other Agreements; (iii) violate or contravene any provision of any law, statute, rule or regulation to which the Borrower or the Guarantor is subject or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official applicable to the Borrower or the Guarantor; (iv) require any waivers, consents or approvals by any of its creditors which have not been obtained; or (v) require any approval, consent, order, authorization or license by, or giving notice to, or taking any other action with respect to, any governmental or regulatory authority or agency under any provision of any law, except (A) those actions which have been taken or will be taken prior to the date of execution of this Amendment No. 2 and (B) filings with the Securities and Exchange Commission to be made on or prior to May 15 September 30, 1996. (c) Enforceability of Obligations. This Amendment No. 2 and the Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower and the Guarantor enforceable against the Borrower and the Guarantor in accordance with their respective terms, provided that: (i) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors; and (ii) the availability of the remedies of specific performance and injunctive relief may be subject to the discretion of the court before which any proceedings for such remedies may be brought. Section 4. Counterparts. This Amendment No. 2 to the Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Borrower, the Guarantor and the Bank have caused this Amendment No. 2 to the Agreement to be executed in their respective names and their respective seals to be hereunto affixed and attested by their duly authorized representatives, all as of the date first above written. THE BORROWER: SPENCE ENGINEERING COMPANY, INC. By:__________________________________ Title: THE GUARANTOR: WATTS INDUSTRIES, INC. By:__________________________________ Title: THE BANK: FIRST UNION NATIONAL BANK OF NORTH CAROLINA ATTEST: By:_______________________________ Title: _________________________ - ---------------------------- Title: (Corporate Seal) EX-10.16 6 AMENDMENT NUMBER 2 AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT THIS AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT, dated as of October 1, 1996, by and among LESLIE CONTROLS, INC., a New Jersey corporation (the "Borrower"), WATTS INDUSTRIES, INC., a Delaware corporation (the "Guarantor") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association organized and existing under the laws of the United States with its principal offices located in Charlotte, North Carolina (the "Bank"); W I T N E S S E T H: WHEREAS, the Borrower, the Guarantor and the Bank have previously entered into the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of July 1, 1994, as amended by Amendment No. 1 to the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of August 1, 1996 (collectively, the "Agreement"), pursuant to which the Bank has issued its irrevocable letter of credit, dated August 4, 1994; and WHEREAS, the Borrower, the Guarantor and the Bank now desire to amend certain provisions of the Agreement; NOW, THEREFORE, in consideration of the premises, mutual covenants hereinafter contained and other good and valuable consideration, the Borrower, the Guarantor and the Bank do hereby amend the Agreement as follows: Section 1. Section 7.7 of the Agreement Amended. Section 7.7 of the Agreement is hereby amended by deleting in its entirety said Section 7.7 of the Agreement and inserting in lieu of the following: "7.7. Current Ratio. The Guarantor will not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities, at any time, to be less than 2.00 to 1.00." Section 2. Effect of Modification and Amendment of Agreement. The Agreement shall be deemed to be modified and amended in accordance with the provisions of this Amendment No. 2 to the Agreement and the respective rights, duties and obligations of the Borrower, the Guarantor and the Bank under the Agreement shall remain to be determined, exercised and enforced under the Agreement subject in all respects to such modifications and amendments in writing, and all the terms and conditions of this Amendment No. 2 to the Agreement shall be part of the terms and conditions of the Agreement for any and all purposes. All the other terms of the Agreement shall continue in full force and effect subject to the amendments set forth herein. Section 3. Representations and Warranties. The Borrower and the Guarantor each represent and warrant to the Bank as follows: (a) Representations and Warranties in Agreement. The representations and warranties of the Borrower and the Guarantor contained in the Agreement (i) were true and correct when made, and (ii) after giving effect to this Amendment No. 2, continue to be true and correct on the date hereof (except to the extent of changes resulting from transactions contemplated or permitted by the Agreement, as amended hereby, and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date). (b) Authority. The execution and delivery by each of the Borrower and the Guarantor of this Amendment No. 2 and the performance by each of the Borrower and the Guarantor of all of its respective agreements and obligations under this Amendment No. 2 are within its corporate authority, have been duly authorized by all necessary corporate action and do not and will not: (i) contravene any provision of its charter documents or any amendment thereof; (ii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of its property under any agreement, deed of trust, indenture, mortgage or other instruments to which it is a party or by which any of its properties are bound including, without limitation, any of the Other Agreements; (iii) violate or contravene any provision of any law, statute, rule or regulation to which the Borrower or the Guarantor is subject or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official applicable to the Borrower or the Guarantor; (iv) require any waivers, consents or approvals by any of its creditors which have not been obtained; or (v) require any approval, consent, order, authorization or license by, or giving notice to, or taking any other action with respect to, any governmental or regulatory authority or agency under any provision of any law, except (A) those actions which have been taken or will be taken prior to the date of execution of this Amendment No. 2 and (B) filings with the Securities and Exchange Commission to be made on or prior to September 30, 1996. (c) Enforceability of Obligations. This Amendment No. 2 and the Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower and the Guarantor enforceable against the Borrower and the Guarantor in accordance with their respective terms, provided that: (i) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors; and (ii) the availability of the remedies of specific performance and injunctive relief may be subject to the discretion of the court before which any proceedings for such remedies may be brought. Section 4. Counterparts. This Amendment No. 2 to the Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Borrower, the Guarantor and the Bank have caused this Amendment No. 2 to the Agreement to be executed in their respective names and their respective seals to be hereunto affixed and attested by their duly authorized representatives, all as of the date first above written. THE BORROWER: LESLIE CONTROLS, INC. By:__________________________________ Title: THE GUARANTOR: WATTS INDUSTRIES, INC. By:__________________________________ Title: THE BANK: FIRST UNION NATIONAL BANK OF NORTH CAROLINA ATTEST: By:_______________________________ Title: _________________________ - ---------------------------- Title: (Corporate Seal) EX-10.19 7 AMENDMENT NUMBER 2 AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT THIS AMENDMENT NO. 2 TO THE LETTER OF CREDIT, REIMBURSEMENT AND GUARANTY AGREEMENT, dated as of October 1, 1996, by and among WATTS REGULATOR CO., a Massachusetts corporation (the "Borrower"), WATTS INDUSTRIES, INC., a Delaware corporation (the "Guarantor") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association organized and existing under the laws of the United States with its principal offices located in Charlotte, North Carolina (the "Bank"); W I T N E S S E T H: WHEREAS, the Borrower, the Guarantor and the Bank have previously entered into the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of September 1, 1994, as amended by Amendment No. 1 to the Letter of Credit, Reimbursement and Guaranty Agreement, dated as of August 1, 1996 (collectively, the "Agreement"), pursuant to which the Bank has issued its irrevocable letter of credit, dated September 29, 1994; and WHEREAS, the Borrower, the Guarantor and the Bank now desire to amend certain provisions of the Agreement; NOW, THEREFORE, in consideration of the premises, mutual covenants hereinafter contained and other good and valuable consideration, the Borrower, the Guarantor and the Bank do hereby amend the Agreement as follows: Section 1. Section 7.7 of the Agreement Amended. Section 7.7 of the Agreement is hereby amended by deleting in its entirety said Section 7.7 of the Agreement and inserting in lieu of the following: "7.7. Current Ratio. The Guarantor will not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities, at any time, to be less than 2.00 to 1.00." Section 2. Effect of Modification and Amendment of Agreement. The Agreement shall be deemed to be modified and amended in accordance with the provisions of this Amendment No. 2 to the Agreement and the respective rights, duties and obligations of the Borrower, the Guarantor and the Bank under the Agreement shall remain to be determined, exercised and enforced under the Agreement subject in all respects to such modifications and amendments in writing, and all the terms and conditions of this Amendment No. 2 to the Agreement shall be part of the terms and conditions of the Agreement for any and all purposes. All the other terms of the Agreement shall continue in full force and effect subject to the amendments set forth herein. Section 3. Representations and Warranties. The Borrower and the Guarantor each represent and warrant to the Bank as follows: (a) Representations and Warranties in Agreement. The representations and warranties of the Borrower and the Guarantor contained in the Agreement (i) were true and correct when made, and (ii) after giving effect to this Amendment No. 2, continue to be true and correct on the date hereof (except to the extent of changes resulting from transactions contemplated or permitted by the Agreement, as amended hereby, and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse, and to the extent that such representations and warranties relate expressly to an earlier date). (b) Authority. The execution and delivery by each of the Borrower and the Guarantor of this Amendment No. 2 and the performance by each of the Borrower and the Guarantor of all of its respective agreements and obligations under this Amendment No. 2 are within its corporate authority, have been duly authorized by all necessary corporate action and do not and will not: (i) contravene any provision of its charter documents or any amendment thereof; (ii) conflict with, or result in a breach of any material term, condition or provision of, or constitute a default under or result in the creation of any mortgage, lien, pledge, charge, security interest or other encumbrance upon any of its property under any agreement, deed of trust, indenture, mortgage or other instruments to which it is a party or by which any of its properties are bound including, without limitation, any of the Other Agreements; (iii) violate or contravene any provision of any law, statute, rule or regulation to which the Borrower or the Guarantor is subject or any decree, order or judgment of any court or governmental or regulatory authority, bureau, agency or official applicable to the Borrower or the Guarantor; (iv) require any waivers, consents or approvals by any of its creditors which have not been obtained; or (v) require any approval, consent, order, authorization or license by, or giving notice to, or taking any other action with respect to, any governmental or regulatory authority or agency under any provision of any law, except (A) those actions which have been taken or will be taken prior to the date of execution of this Amendment No. 2 and (B) filings with the Securities and Exchange Commission to be made on or prior to September 30, 1998. (c) Enforceability of Obligations. This Amendment No. 2 and the Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Borrower and the Guarantor enforceable against the Borrower and the Guarantor in accordance with their respective terms, provided that: (i) enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors; and (ii) the availability of the remedies of specific performance and injunctive relief may be subject to the discretion of the court before which any proceedings for such remedies may be brought. Section 4. Counterparts. This Amendment No. 2 to the Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Borrower, the Guarantor and the Bank have caused this Amendment No. 2 to the Agreement to be executed in their respective names and their respective seals to be hereunto affixed and attested by their duly authorized representatives, all as of the date first above written. THE BORROWER: WATTS REGULATOR CO. By:__________________________________ Title: THE GUARANTOR: WATTS INDUSTRIES, INC. By:__________________________________ Title: THE BANK: FIRST UNION NATIONAL BANK OF NORTH CAROLINA ATTEST: By:_______________________________ Title: _________________________ - ---------------------------- Title: (Corporate Seal) EX-10.21 8 AMENDMENT NUMBER 1 AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCK RESTRICTION AGREEMENT AMENDMENT NO. 1 TO STOCK RESTRICTION AGREEMENT made as of August 26, 1997 by and among the undersigned, each of whom is a stockholder or beneficiary of a trust stockholder (hereinafter individually referred to as a "Stockholder" and collectively as the "Stockholders") of Watts Industries, Inc. (hereinafter referred to as the "Company"), a corporation organized under the laws of the State of Delaware. WITNESSETH WHEREAS, the shares of Class B Common Stock, par value $.10 per share, of the Company (the "Class B Common Stock") owned or beneficially owned by the undersigned are subject to a Stock Restriction Agreement dated as of October 31, 1991 (the "Existing Agreement"); and WHEREAS, the parties hereto desire to amend certain provisions of the Existing Agreement. NOW THEREFORE, in consideration of the mutual promises herein contained, the parties hereto hereby amend the Existing Agreement as follows: 1. Restatement of Section 7. Section 7 of the Existing Agreement is hereby amended and restated in its entirety to read as follows: "7. Exceptions to Restrictions The restrictions set forth in this Agreement shall be inapplicable to: a. transfers of Stock between any Stockholder and his guardian or conservator; b. transfers of Stock upon any Stockholder's death to his executors or administrators or to the trustees under his will; c. transfers of Stock among or between persons (if not individuals, the beneficial interest(s) in which are owned by, and the trustees or directors and officers of which are, an individual or individuals) having a family relationship (i.e., a relationship by blood, marriage or adoption) with Timothy P. Horne, Frederic B. Horne or George B. Horne, including the estates of such persons, or among or between any of such persons or estates and the trustees under the Horne Family Voting Trust Agreement - 1991 or The George B. Horne Voting Trust Agreement - 1997, in each case as the same may be amended, or any successor trust or trusts formed by members of the Horne family; and d. transfers of Stock (by redemption or otherwise) to the Company upon the death of any person having a family relationship (as defined in paragraph c) with Timothy P. Horne, Frederic B. Horne or George B. Horne; provided, however, that such Stock in the hands of each such transferee (except the Company in connection with a transfer contemplated by clause d of this Section 7) shall remain subject to this Agreement. In the event Stock is or is to be transferred upon or as a result of death to any of the persons or entities described in clauses a, b, c or d of this Section 7, Section 3 shall not apply to such transfer, provided that such Stock shall remain subject to this Agreement in the hands of the relevant transferee." 2. Schedule A. Schedule A to the Existing Agreement is hereby deleted and replaced with Schedule A attached hereto, which replacement Schedule A reflects the Stockholders who are parties to the Existing Agreement and the Stock subject to the Existing Agreement as of the date of this Amendment. 3. Governing Law; Effect of Amendment This Amendment shall be construed under and governed by the laws of the State of Delaware. Except as amended hereby, the Existing Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, each of the undersigned has executed or caused this Agreement to be duly executed as of the date first set forth above, in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute a single instrument executed under seal. -------------------------- Timothy P. Horne -------------------------- Frederic B. Horne The Deborah Horne Trust - 1976 By: _______________________ Timothy P. Horne, as Trustee, and his successors in trust and not individually The Daniel W. Horne Trust - 1980 By: _______________________ Timothy P. Horne, as Trustee, and his successors in trust and not individually The Peter W. Horne Trust - 1976 By: _______________________ Frederic B. Horne, as Trustee, and his successors in trust and not individually -------------------------- Deborah Horne -------------------------- Daniel W. Horne -------------------------- Peter W. Horne The George B. Horne Trust - 1982 By: ______________________ George B. Horne, as Trustee, and his successors in trust and not individually By: ______________________ Timothy P. Horne, as Trustee, and his successors in trust and not individually -------------------------- George B. Horne -------------------------- Tara V. Horne - ----------------------------------- ---------------------------------- Timothy P. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Tara V. Horne Tara V. Horne - ----------------------------------- ---------------------------------- Timothy P. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Tiffany R. Horne Tiffany R. Horne - ----------------------------------- ---------------------------------- Frederic B. Horne, as Trustee of the George B. Horne, as Trustee of the Grandchildren's Trust f/b/o Grandchildren's Trust f/b/o Kristina M. Horne Kristina M. Horne ---------------------------------- Judith Rae Horne, as Trustee of the Tiffany Rae Horne Trust--1984 ACKNOWLEDGED: - -------------------------- ------------------------ Timothy P. Horne, as Trustee Frederic B. Horne, as Trustee under the Horne Family Voting under the Horne Family Voting Trust Agreement - 1991 dated Trust Agreement - 1991 dated October 31, 1991, as the same October 31, 1991, as the same may be amended, and his may be amended, and his successors in trust successors in trust - -------------------------- Timothy P. Horne, as Trustee under the George B. Horne Voting Trust Agreement - 1997 dated August __, 1997, as the same may be amended, and his successors in trust. SCHEDULE A TO AMENDMENT NO. 1 STOCK RESTRICTION AGREEMENT Name of Stockholder Shares of Class B Common Stock Timothy P. Horne 2,751,220** Frederic B. Horne 1,865,323 Timothy P. Horne and George B. Horne, 2,104,600** as Trustees of the George B. Horne 20,000 Trust - 1982 Timothy P. Horne as Trustee of The 1,335,840** Daniel W. Horne Trust - 1980 Timothy P. Horne as Trustee of The 1,335,840** Deborah Horne Trust - 1976 Frederic B. Horne as Trustee of The 1,235,840* Peter W. Horne Trust - 1976 Timothy P. Horne and George B. Horne 30,200** as Trustees of the Grandchildren's 1995 Irrevocable Trust f/b/o Tara V. Horne Timothy P. Horne and George B. Horne 22,600** as Trustees of the Grandchildren's 1995 Irrevocable Trust f/b/o Tiffany R. Horne Frederic B. Horne and George B. Horne 22,600 as Trustees of the Grandchildren's 1995 Irrevocable Trust f/b/o Kristina M. Horne Tara V. Horne 50,000** Judith Rae Horne as Trustee of the 50,000** Tiffany Rae Horne Trust -1984 Frederic B. Horne as Custodian for 11,000 Kristina M. Horne under the Massachusetts Uniform Gifts to Minors Act - -------------- * Shares are subject to the Horne Family Voting Trust Agreement - 1991 dated as of October 31, 1991, as the same may be amended, the trustees of which voting trust may be deemed the record holder of such shares. ** Shares are subject to The George B. Horne Voting Trust - 1997 dated as of August __, 1997, as the same may be amended, the trustees of which voting trust may be deemed the record holder of such shares. EX-10.29 9 AMENDMENT NUMBER 1 AMENDMENT NO. 1 WATTS INDUSTRIES, INC. MANAGEMENT STOCK PURCHASE PLAN August 5, 1997 The Watts Industries, Inc. Management Stock Purchase Plan ("Management Plan") is hereby amended as follows: 1. Article I. INTRODUCTION: Delete "RSUs are granted at a discount of 25% from the fair market value of the Stock on the date of grant." and replace it with "RSUs are granted at a discount of 33% from the fair market value of the Stock on the date of grant." 2. Article IV. PARTICIPATION, Sub-article B. Valuation of RSUs; Fair Market Value of Stock: Delete "The "Cost" of each RSU shall be equal to 75% of the fair market value of the Stock on the date the RSU is awarded." and replace it with "The "Cost" of each RSU shall be equal to 67% of the fair market value of the Stock on the date the RSU is awarded." 3. Except as provided for in this Amendment No. 1, all of the terms and conditions of the Management Plan shall remain in full force and effect. EXECUTED as of the date first set forth above. Watts Industries, Inc. By:___________________ EX-11 10 EARNINGS PER SHARE Exhibit 11 Computation of Net Income per Common Share Watts Industries, Inc. (Amounts in thousands, except per share information) Fiscal year ended June 30 1997 1996 1995 ------------------------------------ FULLY DILUTED Average shares outstanding: Class A Common Stock, par value $.10 15,868 18,161 18,118 Class B Common Stock, par value $.10 11,266 11,366 11,448 Net effect of dilutive stock options--based upon treasury stock method using ending market price, if higher than average 299 0 189 price ------------------------------------ Total 27,433 29,527 29,755 ==================================== Income (loss) from continuing operations $48,460 $(53,765) $42,463 Income from discontinued operations 79 3,480 3,275 Gain on disposal of discontinued 3,208 0 0 operations ==================================== Net income (loss) $51,747 $(50,285) $45,738 ==================================== Income (loss) per Common Share: Income (loss) from continuing $1.77 $(1.82) $1.43 operations Income from discontinued operations .00 .12 .11 Gain on disposal of discontinued .12 .00 .00 operations ==================================== Net income (loss) $1.89 $(1.70) $1.54 ==================================== EX-21 11 SUBSIDARIES Exhibit 21 DIRECT AND INDIRECT SUBSIDIARIES OF WATTS INDUSTRIES, INC. AS OF 8/15/97 DOMESTIC: Watts International Sales Corp. [Massachusetts] Watts Investment Company [Delaware] Watts Regulator Company [Massachusetts] Watts Securities Corp. [Massachusetts] Circle Seal Controls, Inc. [Delaware] Green Country Castings, Inc. [Oklahoma] KF Industries, Inc. [Oklahoma] KF Sales Corp. [Delaware] Rudolph Labranche, Inc. [New Hampshire] Leslie Controls, Inc. [New Jersey] Spence Engineering Company, Inc. [Delaware] Ancon U.S.A., Inc. [Delaware] Anderson-Barrows Metals Corp. [California] Jameco Acquisition Corp. [Delaware] Jameco Industries, Inc. [New York] Webster Valve, Inc. [New Hampshire] Ames Holdings, Inc. [Delaware] Ames Company, Inc. [California] Yolo-Ames Leasing Company, Inc. [California] INTERNATIONAL: Watts Industries (Canada) Inc. [Canada] Watts Investment Company Canada Ltd. [Canada] Watts Industries Europe B.V. [The Netherlands] Watts Industries France S.A. [France] Watts Industries Germany GmbH [Germany] Wattsco International [U.S. Virgin Islands] Watts Ocean BV [The Netherlands] Watts Eurotherm SA [France] Watts UK Ltd. [United Kingdom] Watts G.R.C. SA [Spain] Watts Intermes AG [Switzerland] Watts Intermes GmbH [Austria] Watts Intermes SpA [Italy] * Intermes UK Ltd [United Kingdom] KF Industries Europe BV [The Netherlands] * Kingsworth Products Ltd. [United Kingdom] Leslie International V.I. [Virgin Islands] Watts M.T.R GmbH [Germany] Ocean B.V. [The Netherlands] Pibiviesse SpA [Italy] B.V. Philabel [The Netherlands] Watts AG [Switzerland] Watts Ocean NV [Belgian] WIG Armaturen Vertriebs, GmbH [Germany] WSA Heizungs und Sanitartechnik GmbH [Germnay] WIC Verwaltungs und Beteiligungs GmbH [Germany] ISI SpA [Italy] Watts ISI SpA [Italy] In addition to the foregoing, the Company holds an 80% interest in De Martin Srl [Italy], a 60% interest in Tianjin Tanggu Watts Valve Company Limited, a Chinese joint venture, and a 60% interest in Suzhou Watts Valve Co., Ltd., a Chinese joint venture. The Company also holds a 49% interest in Jameco International LLC. * Dissolution pending EX-23.1 12 CONSENT OF KPMG PEAT MARKWICK LLP Exhibit 23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors Independent Auditors' Consent The Board of Directors Watts Industries, Inc. We consent to the incorporation by reference in the Registration Statements pertaining to the 1996 Stock Option Plan (Form S-8 No. 333-32685), 1986 Incentive Stock Option Plan (Post-Effective Amendment No. 1 to Form S-8 No. 33-30377), Nonqualified Stock Option Plan (Form S-8 No. 33-37926), 1991 Non-Employee Directors' Nonqualified Stock Option Plan (Form S-8 No. 33-69422), and Management Stock Purchase Plan (Form S-8 No. 33-64627) of Watts Industries, Inc. of our report dated August 1, 1997, relating to the consolidated balance sheet of Watts Industries, Inc. and subsidiaries as of June 30, 1997, the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, and the related schedule of valuation and qualifying accounts as of and for the year ended June 30, 1997, which report appears in the June 30, 1997 annual report on Form 10-K of Watts Industries, Inc. KPMG Peat Marwick LLP Boston, Massachusetts September 12, 1997 EX-23.2 13 CONSENT OF ERNST & YOUNG Exhibit 23.2 - Consent of Ernst & Young LLP, Independent Auditors, Predecessor Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-32685) pertaining to the Watts Industries, Inc. 1996 Stock Option Plan (Post Effective Amendment No. 1 to Form S-8 No. 33-30377) pertaining to the 1986 Incentive Stock Option Plan, (Form S-8 No. 33-37926) pertaining to the Nonqualified Stock Option Plan, (Form S-8 No. 33-69422) pertaining to the 1991 Non-Employee Directors' Nonqualified Stock Option Plan of Watts Industries, Inc. and (Form S-8 No. 33-64627) pertaining to the Watts Industries, Inc. Management Stock Purchase Plan, and in the related Prospectuses of our report dated August 6, 1996, with respect to the consolidated financial statements included in this Annual Report (Form 10-K) of Watts Industries, Inc. Ernst & Young LLP Boston, Massachusetts September 11, 1997 Report of Ernst & Young LLP, Independent Auditors Board of Directors Watts Industries, Inc. We have audited the accompanying consolidated balance sheets of Watts Industries, Inc. and subsidiaries as of June 30, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows the years ended June 30, 1996 and 1995. Our audits also included the financial statement schedule for the years ended June 30, 1996 and 1995, listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the financial statements of Watts Industries Europe B.V., a wholly-owned subsidiary, which statements reflect total assets of $136,500,000 as of June 30, 1996, and net sales of $118,700,000 in fiscal year 1996 and $93,500,000 in fiscal year 1995. Those statements and schedule were audited by other auditors, Deloitte & Touche, whose reports have been furnished to us, and our opinion , insofar as it relates to data included for Watts Industries Europe B.V., is based solely on their reports. We conducted our audits 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 audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Watts Industries, Inc. and subsidiaries at June 30, 1996, and the consolidated results of their operations and their cash flows the years ended June 30, 1996 and 1995, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the report of other auditors, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in fiscal year 1996, the Company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." August 6, 1996 Boston, Massachusetts EX-23.3 14 CONSENT OF DELOITTE & TOUCHE Exhibit 23.3 - Consent of Deloitte & Touche, Independent Auditors, Predecessor Auditors INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statements (Post-Effective Amendment No. 1 to Form S-8 No. 33-30377, No. 33-37926, No. 33-69422, No. 33-64627 and No. 333-32685) of Watts Industries, Inc. on Form S-8 of our report dated August 6, 1996 (which expresses an unqualified opinion and indicates that the financial statements have been prepared in accordance with accounting principles generally accepted in the Netherlands and comply with the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil Code), with respect to the financial statements of Watts Industries Europe B.V. (not presented separately herein) and our report dated August 6, 1996, with respect to the financial statement schedule of Watts Industries Europe B.V. (not presented separately herein), appearing in this Annual Report on Form 10-K of Watts Industries, Inc. for the year ended June 30, 1997. Deloitte & Touche September 12, 1997 Leiden, The Netherlands INDEPENDENT AUDITORS' REPORT Board of Directors Watts Industries Europe B.V. We have audited the financial statements including the consolidated/combined balance sheet of Watts Industries Europe B.V. as of June 30, 1996 and the statements of operations for each of the two years in the period ended June 30, 1996 (not separately presented herein) expressed in Dutch Guilders. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Netherlands and the United States of America. 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 statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated/combined financial statements of Watts Industries Europe B.V. present fairly the consolidated/combined financial position of Watts Industries Europe B.V. as of June 30, 1996 and the results for each of the two years in the period ended June 30, 1996 in accordance with accounting principles generally accepted in the Netherlands and comply with the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil Code. Generally accepted accounting principles in the Netherlands vary in certain significant respects from generally accepted accounting principles in the United States. The application of the latter would have affected the determination of consolidated/combined net earnings in the years ended June 30, 1996 and 1995 and the determination of stockholders' equity at June 30, 1996 to the extent summarized in Note G to the financial statements. Deloitte & Touche August 6, 1996 Leiden, The Netherlands INDEPENDENT AUDITORS' REPORT We have audited the financial statements including the consolidated/combined financial statements of Watts Industries Europe B.V., a wholly owned subsidiary of Watts Industries, Inc. as of June 30, 1996, and for each of the two years in the period ended June 30, 1996, and have issued our report thereon dated August 6, 1996 (which expresses an unqualified opinion and indicates that the financial statements have been prepared in accordance with accounting principles generally accepted in the Netherlands and comply with the legal requirements for financial statements as included in Part 9, Book 2 of the Netherlands Civil Code). Our audits also included Financial Statement Schedule II of Watts Industries Europe B.V. (not presented separately herein) which is included in the related schedule of Watts Industries, Inc., in the Annual Report on Form 10-K of Watts Industries, Inc. for the year ended June 30, 1997. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule of Watts Industries Europe B.V. referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche August 6, 1996 Leiden, The Netherlands EX-27 15 FDS -- EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1997 JUN-30-1997 13,904 518 129,294 7,945 171,217 345,592 281,231 128,537 622,083 120,890 128,359 2,701 0 0 330,938 622,083 720,340 720,340 474,948 633,932 10,821 891 10,493 75,587 27,127 48,460 79 3,208 0 51,747 1.89 1.89 INCLUDES LONG-TERM DEBT AND CURRENT PORTION INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES. INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
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