-----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, HBqO82GCHWlaFrv9ioKd+YS2d2xgzpiRAigcGIKk8+HzEQPA5V1praOlYSWUYZoQ mMlMMnJsXB1WWFZEB3z/1g== 0000950135-98-002043.txt : 19980401 0000950135-98-002043.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950135-98-002043 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMTROL INC /RI/ CENTRAL INDEX KEY: 0000853547 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 050246955 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20328 FILM NUMBER: 98580334 BUSINESS ADDRESS: STREET 1: 1400 DIVISION ROAD CITY: WEST WARWICK STATE: RI ZIP: 02893 BUSINESS PHONE: 4018846300 MAIL ADDRESS: STREET 1: 1400 DIVISION ROAD CITY: WEST WARWICK STATE: RI ZIP: 02893 10-K405 1 AMTROL, INC 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the Transition period from to ----------------- -------------------- COMMISSION FILE NUMBER 0-20328 AMTROL INC ---------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) RHODE ISLAND 05-0246955 ------------ ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1400 DIVISION ROAD, WEST WARWICK, RI 02893 ------------------------------------ ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (401) 884-6300 Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] --- As of March 7, 1998, the aggregate market value of the Registrant's voting stock held by non-affiliates was none. As of March 26, 1998, 100 shares of Common Stock $0.01 par value, of the Registrant were outstanding. Documents Incorporated by Reference: NONE The Exhibit Index for this document appears on page 59 hereof. 2 PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS OVERVIEW AMTROL Inc ("AMTROL" or the "Company"), is a leading designer, manufacturer and marketer of flow and control products used in the water systems markets and selected sectors of the HVAC market. The Company's principal products include well water accumulators, hot water expansion controls, water treatment products, indirect-fired water heaters, returnable and non-returnable pressure-rated cylinders used primarily to store, transport and dispense refrigerant gases, and returnable cylinders used to dispense heating and cooking gases. Many of these products are based on a technology originated and developed by the Company, which uses a pre-pressurized vessel with an internal diaphragm to handle fluids under pressure. The Company believes that its leading market positions in its key product categories are attributable to the strength of AMTROL's brand names and product breadth, quality and innovation, as well as its marketing, distribution and manufacturing expertise. In addition, AMTROL's principal markets are highly replacement-oriented, with 60% to 70% of the Company's core business coming from replacement sales. These factors, combined with the Company's large installed base of products, have enabled AMTROL to demonstrate sales and earnings stability even during periods of weak domestic economic activity. AMTROL's brand names are among the most widely known in its markets. For example, the Company's key hot water expansion control product, the Extrol, is so widely recognized that customers frequently refer to any hot water expansion control as an "Extrol." Other well-known brand names of the Company include Well-X-Trol, Therm-X-Trol, Hot Water Maker and CHAMPION. The Company also believes that it is the recognized technology leader in virtually all of its core product lines. In many of the Company's major product lines, AMTROL's products are considered the industry standard, a key marketing advantage, because of their recognized quality and reliability. The Company's strong reputation and brand recognition ensure that nearly every significant wholesaler carries at least one AMTROL product. This facilitates new product introduction, effectively "pulling" the Company's new products through its distribution system. AMTROL also offers a broad range of products, including over 100 models of well water accumulators. This broad product offering allows AMTROL's customers to consolidate their suppliers and to purchase and manage inventory more efficiently. These factors have established the Company's products as a preferred brand and allow the Company to realize premium pricing on most of its branded products. During its 50-year history, the Company has built a strong franchise with wholesalers and OEMs, resulting in a broad distribution network serving more than 5,000 customers throughout North America. In addition, the Company continues to focus its efforts to better serve the DIY market, a rapidly growing channel of distribution, primarily through private label 2 3 arrangements with Lowe's Companies, Menards, Cotter & Company (True Value) and Ace Hardware. In June 1997, the Company acquired Petroleo Mecanica Alfa ("Alfa"), located in Guimaraes, Portugal. Alfa is Europe's largest manufacturer of reusable steel gas cylinders and supplies Europe, the Middle East and Africa, as well as the Far East, with containers for storing cooking, heating and refrigerant gases. Alfa provides the Company with a low-cost international manufacturing base for all of AMTROL's products and will be an important source of supply for the Company's international customers. With the acquisition of Alfa, approximately 22.3% of the Company's net sales in 1997 were derived from international markets, compared to 12.6% in 1996. On August 28, 1996, AMTROL entered into a merger agreement (the "Merger Agreement") with AMTROL Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, AMTROL Acquisition, Inc. ("Acquisition"), providing for the merger of AMTROL with Acquisition, with AMTROL continuing as the surviving corporation (the "Surviving Corporation"). The Merger Agreement was approved at a special meeting of shareholders of AMTROL held on November 12, 1996, and Acquisition was merged with and into AMTROL on November 13, 1996 (the "Merger"). Each share of common stock of Acquisition was converted into and exchanged into one share of common stock of the Surviving Corporation, with the result that AMTROL became a wholly-owned subsidiary of Holdings, a Delaware corporation controlled by The Cypress Group L.L.C. ("Cypress"). The Company was incorporated in Rhode Island in 1973, and is the successor to all of the assets and liabilities of a predecessor Rhode island corporation which was incorporated in 1946. The Company's principal executive offices are located at 1400 Division Road, West Warwick, Rhode Island 02893 (telephone number: (401) 884-6300). BUSINESS STRATEGY Upon the Merger, Mr. John P. (Jack) Cashman became the Chairman, Chief Executive Officer and President of the Company and worked closely with key members of AMTROL's management to develop a new strategic plan. During 1997, the Company has been executing the new strategic plan, which was designed to reduce costs and capitalize on AMTROL's position as a technological and market leader. The new strategic plan consists of the following key elements: (i) reduce operating expenses, (ii) enhance sales and profitability of core product offerings, and (iii) grow internationally and introduce new products. REDUCE OPERATING EXPENSES In 1996 and 1997, the Company initiated a series of actions designed to immediately reduce operating expenses and to establish new managerial and organizational accountability. Actions already implemented or in the process of being implemented are expected to generate significant cost savings. The cost savings estimates described herein are forward-looking statements based on management budgets. Realization of these 3 4 savings depends upon the effectiveness and timing of the planned actions and there can be no assurance that such cost savings can be achieved. Reduce Corporate Overhead Expenses. In connection with the Merger, the Company restructured its general and administrative staff and consolidated its three autonomous strategic business units to eliminate redundant and unnecessary functions, resulting in significant cost savings. These actions generated permanent annual cost savings aggregating approximately $4.0 million, including non-personnel expense reductions commencing in 1997. As a result of the headcount reductions undertaken in 1996 and 1997, the number of persons employed at corporate headquarters as of December 31, 1997 has decreased by approximately 15% since January 1, 1996. One-time costs related to these measures totaled approximately $2.5 million, which was anticipated and accounted for as part of purchase accounting associated with the Merger. Continue To Rationalize Manufacturing Facilities. The Company continued its rationalization of its manufacturing facilities in 1997 with the sale of its pump and accessory businesses and the closure of two of its manufacturing plants. The Company sold its Peru, Indiana facility and related pump business in May 1997, relocated production of certain products to other facilities and outsourced the production of other products. Costs associated with this action approximated $500,000. Also in May 1997, the Company sold its accessories business, American Granby Inc., which had little strategic overlap with AMTROL's core water systems and HVAC product lines, in order to focus on its core products. The Company closed its Singapore production facility in September 1997. The decision to close Singapore was assisted by the acquisition of Alfa, a low-cost international manufacturing facility, which will absorb the non-returnable chemical container production from the Singapore facility. In December 1997, the Company closed its production facility in Nashville, Tennessee and relocated most of the Nashville production to the Company's West Warwick, R.I. facility. Much of the production in Nashville represented redundant capacity which, due to significant improvements in manufacturing efficiency and productivity, the West Warwick plant will be able to absorb with insignificant incremental costs. The Company recorded a $2.5 million pre-tax charge in connection with the Singapore closure and a $3.0 million pre-tax charge in connection with the Nashville closure. Reduce Manufacturing Costs. The Company intends to continue to reduce labor costs through automating certain labor-intensive manufacturing processes and redesigning existing product lines. For example, the Company in 1997 automated its small vessel manufacturing line in its West Warwick, Rhode Island facility. The Company has identified and intends to implement several other manufacturing improvement projects which are expected to yield additional annual savings by the end of 1998. ENHANCE SALES AND PROFITABILITY OF CORE PRODUCT OFFERINGS The Company continues to look at initiatives to reinvigorate sales growth and increase profitability of its core product offerings. To accomplish this, the Company seeks agreements with major pump and boiler OEMs to incorporate AMTROL products into complete systems solutions and modifies current products to enhance appearance, 4 5 facilitate installation or meet the requirements of specific domestic and international markets. The Company continually educates its customers about the benefits of AMTROL products. These actions help to maintain demand for AMTROL's core products and allow AMTROL to continue to realize premium pricing and a favorable product mix, especially in international markets. EXPAND INTERNATIONALLY AND INTRODUCE NEW PRODUCTS By establishing an international presence through strategic alliances and acquisitions, management believes the Company's strong brand names, broad product offerings and core water systems expertise will allow it to capitalize on growing global demand for enhanced water pressure control and improved water quality and refrigerant systems. The 1997 acquisition of Alfa increased the Company's international presence significantly: international net sales were 22.3% of total net sales in 1997, compared to 12.6% in 1996. Alfa presents the Company with a low-cost platform from which it can expand distribution of its wide variety of products in Europe, the Middle East/Africa and the Far East. The Company will continue to selectively pursue OEM alliances and strategic acquisitions, such as the acquisition of Alfa. The Company believes that establishing local manufacturing and distribution facilities in international markets is critical to the Company's ability to build strong customer relationships, understand local product preferences and be price competitive while maintaining appropriate profit margins. In addition, strategic acquisitions, both domestic and international, provide the Company with an effective means of identifying and introducing new products and technologies in markets where it already has a strong presence. The Company will focus its international expansion on the target markets of Western Europe, Latin America, and to a lesser extent, the regions of Asia Pacific and Eastern Europe. EUROPE. In Europe, the large hydronic heating market (believed by the Company to be ten times the size of the U.S. market) and the general lack of adequate water pressure in municipal systems represent excellent opportunities for the Company in light of its core products expertise. The Company's brand names are already well recognized in Europe. The Company plans to apply its technical expertise to the special needs of the European market and to build on Alfa's product and distribution presence in the market for returnable pressure rated cylinders for heating and cooking gases. The Company plans to accelerate European growth through selective acquisitions, strategic joint ventures and distribution agreements. LATIN AMERICA. The Company intends to establish local sales, distribution and service capability in this region, which will enable the Company to better service its existing customers and provide a base for new business. ASIA/PACIFIC. Although the recent economic instability in this region decreased demand for the Company's products in 1997, and the Company's 1998 plans do not anticipate a significant rebound, the Company continues to maintain and invest in its sales and distribution presence in the region, and is prepared to pursue its opportunities in the Asia Pacific region when economic conditions improve. 5 6 PRODUCTS AND MARKETS The Extrol, the first product to utilize the technology developed by AMTROL for handling fluid under pressure in hydronic heating systems, redefined the standards for controlling the expansion of water in these systems. Older systems consisted simply of a vessel containing air, resulting in excessive pressure, less efficiency and excessive corrosion. AMTROL developed a technology which uses a flexible diaphragm inside a pre-pressurized vessel to maintain the separation of air and water in the vessel, and has applied this technology in both HVAC products and water systems products. HVAC PRODUCTS AMTROL's net sales to selected sectors of the HVAC market, which include net sales of products such as expansion accumulators, water heaters and pressure-rated cylinders for heating and refrigerant gases, accounted for approximately $91.8 million (or 52.0%) of the Company's total net sales in 1997. AMTROL's residential HVAC products include expansion vessels for heated water, potable water heaters and other accessories used in residential HVAC systems. AMTROL's commercial HVAC products are substantially identical in function to those used in residential applications, with the most significant difference being variations required by design codes to meet the higher operating pressures of larger systems. AMTROL's pressure-rated cylinders for refrigerant gases are used in the storage, transport and dispensing of gases used in air conditioning and refrigeration systems. In addition, with the acquisition of Alfa, the Company's products include returnable pressure-rated cylinders for storing gas used in residential and commercial heating and cooking applications. EXTROLS. Extrol expansion accumulators, the first AMTROL product line to incorporate the Company's diaphragm technology for handling fluid under pressure, are used in conjunction with hydronic heating systems, which provide heat by circulating hot water through baseboard piping and radiators. The Extrol product eliminates the corrosive effects of oxygen in the heating system and eliminates problems related to hot water expansion by allowing the volume of water to increase as the temperature of the water increases within a closed system, preventing operating problems resulting from excessive or deficient water pressure in the system. THERM-X-TROLS. Therm-X-Trols accumulate expanded hot water escaping from potable water heaters that has been prevented from flowing back into the public water supply by backflow prevention devices. In response to the Clean Water Act of 1984 certain jurisdictions established local codes to require owners of commercial and residential buildings to install backflow prevention devices in order to prevent the contamination of the public water supply. Local codes adopted by organizations that set standards for approximately 90% of the United States also require a separate device to handle the expanded water prevented from flowing back into the public water supply. The principal alternatives are relief valves, which permit water to drain inside the building, and thermal expansion accumulators, such as the Therm-X-Trol, which capture the water. Therm-X-Trol satisfies these code requirements, as well as the codes of cities that specifically require a thermal expansion accumulator. Additionally, the two largest domestic water 6 7 heater manufacturers will void their warranties if thermal expansion accumulators are not used in conjunction with their products where backflow prevention devices are installed. INDIRECT-FIRED WATER HEATERS. In response to market demands for energy conservation, AMTROL has developed a line of indirect-fired residential and commercial water heaters, which it manufactures and distributes under the brand name Hot Water Maker. Used in conjunction with a new or existing boiler installed to heat living and work areas, these water heaters offer an alternative to conventional gas and electric potable water heaters and tankless coils by generating hot water through the use of heat exchangers and circulators which circulate heated water from the boiler through a coil in the core of the water heater's reservoir. Hot Water Makers are sold for use in both commercial and residential applications. In addition to selling products under its own brand name, AMTROL is presently pursuing an OEM partnership strategy in this business whereby the Company supplies hydronic products manufacturers with private branded indirect-fired water heaters. PRESSURE-RATED CYLINDERS. The Company's Alfa subsidiary, located in Portugal, produces and distributes reusable liquid propane gas ("LPG") and reusable refrigerant cylinders. It is the largest producer of reusable steel gas cylinders in Europe. Reusable LPG cylinders are typically purchased by major gas companies or their distributors who fill the cylinders for customers who use the gas for heating and cooking in residential and commercial applications. AMTROL is one of two of the world's most significant manufacturers of non-returnable pressure-rated cylinders used in the storage, transport and dispensing of refrigerant gases for air conditioning and refrigeration systems. These gases include chlorofluorocarbons ("CFC's") and hydrochlorofluorocarbons ("HCFC's"), as well as newly developed alternative refrigerants designed to mimic the desirable characteristics of CFC's and HCFC's. The Montreal Protocol on Substances that deplete the Ozone Layer (to which 140 countries are signatories) required the phase out of CFC production by the end of 1995 and established an HCFC consumption limit beginning January 1, 1996, with a complete phase out of HCFC's by 2030. The United States has accelerated the HCFC phase out, requiring the phase out of certain HCFC's by 2003, others by 2020 and the remainder by 2030. During the past three years, these regulatory phase outs and consumption limits on CFC's and HCFC's have created disruptions in the market and have resulted in uneven and less predictable demand for the Company's pressure-rated cylinders. These conditions may continue during the transition to new alternative refrigerant gases until the aftermarket service demand for the new alternative refrigerant gases grows to previous CFC levels. However, the Company believes that the increasing use of refrigeration and air conditioning in developing nations will generate increased international sales of refrigerant gas cylinders. WATER SYSTEMS PRODUCTS AMTROL's net sales of its water systems products accounted for approximately $84.6 million (or 48.0%) of the Company's total net sales in 1997. These products consist primarily of water accumulators for residential and commercial well water systems and systems and components for residential water softening and purification. 7 8 WELL WATER SYSTEMS. AMTROL produces and sells well water accumulators for both residential and commercial applications under the brand names Well-X-Trol and CHAMPION, as well as under several private label programs. Virtually all of the water accumulators sold by the Company incorporate an internally mounted rubber diaphragm that seals an air charge and allows pressure to increase as water fills the plastic lined vessel. This design serves to control pressure while maintaining the separation of air and water in the vessel, thereby eliminating water logging (absorption of air into water) as well as reducing wear on switches, pump motors and other system components caused by unnecessary on/off cycling. A typical well water system consists of a submersible or jet pump located in the well that is attached to an AMTROL pre-pressurized vessel. The pre-pressurized vessel is connected to the plumbing system in order to provide water on demand at a constant pressure. As the water level and pressure in the vessel lowers, the diaphragm flexes, which in turn causes the pump to cycle on until a sufficient level of water pressure is achieved in the system. WATER TREATMENT/FILTRATION PRODUCTS. AMTROL offers a range of products to meet increasing global demand for improved water quality and water pressure. AMTROL manufactures and markets water softeners, reverse osmosis accumulators and other related systems that may be utilized to purify or treat residential municipal-supplied and well water. The Company also manufactures and markets products that address the need to boost water pressure in many domestic and international locations where the available pressure is not adequate. DISTRIBUTION AND MARKETING AMTROL's principal channel of distribution is plumbing, heating and pump specialty wholesalers. The Company maintains its presence in the United States and Canadian wholesale markets through a network of approximately 40 independent firms that represent multiple manufacturers, arranging sales on a commission basis, as well as approximately 20 salaried direct sales professionals. To service its customers with greater efficiency, the Company has streamlined its representative network and, through consolidation of multiple lines of business, has brought a broader range of products to its wholesalers. The Company also provides certain of its products to the rapidly growing DIY market segment through a separate sales force and marketing division. AMTROL has private label arrangements with Lowe's Companies, Menards, Cotter & Company (True Value) and Ace Hardware. At its Education Center, which is an integral part of the Company's marketing organization, and at Company-sponsored seminars throughout the United States and selected international locations, AMTROL provides education and training to wholesalers, contractors and engineers, independent sales representatives and their employees to assist them in understanding the technical aspects of their respective customers' requirements and AMTROL's product lines. By educating customers about the benefits of AMTROL's products, the Company's products are effectively "pulled" through its distribution system. 8 9 Non-returnable refrigerant pressure-rated cylinders are also sold to major chemical companies, which produce and package refrigerant gases, and to independent contractors that purchase bulk refrigerants and fill the cylinders. Alfa's major customers for reusable LPG cylinders are the major European gas companies or their distributors. Except for one customer to whom sales were approximately 6%, no single customer represented more than 5% of the Company's net sales in 1997. INTERNATIONAL SALES Sales in geographic regions outside of the United States and Canada, primarily Western Europe, Asia and Mexico, accounted for 13.2%, 12.6% and 22.3% of the Company's total net sales in fiscal years 1995, 1996 and 1997 respectively. The majority of these sales were refrigerant gas pressure-rated cylinders sold into Europe in 1997 and the sales of its newly acquired Alfa subsidiary. Over the last three years, AMTROL has opened international sales offices in Hong Kong and Singapore. In May 1997, the Company opened a sales office in Europe. In addition to these initiatives, AMTROL is building distribution networks in the Asia/Pacific region and Latin America/Mexico. To further penetrate European markets, AMTROL is selectively pursuing acquisitions and distribution, OEM and manufacturing alliances which complement its recent acquisition of Alfa. Previous management at the Company commenced manufacturing activities at leased facilities in Singapore in 1996 in order to expand its international presence. However, the acquisition of Alfa in 1997 made the Singapore facility unnecessary, particularly in light of the higher than anticipated cost structure, lack of an adequate local steel supply and an increasingly unstable economic environment. Accordingly, the Company closed its Singapore facility and ceased production in September 1997. A continued focus on international expansion is a key part of the Company's growth strategy. See "--New Management and Business Strategy--Expand Internationally." MANUFACTURING, RAW MATERIALS AND SUPPLIERS The Company manufactures water systems and HVAC products using components produced in its own facilities, as well as those of outside suppliers. To assure quality in its product lines and to enable the Company to respond quickly to changing market demands, AMTROL manufactures most critical components in its own facilities. The Company has a "Continuous Improvement Program" for quality control directed at producing higher yields, lower controllable costs per unit, higher order fill rates, better on-time delivery and decreased warranty claims. AMTROL believes it has developed substantial manufacturing expertise related to its technology and its expertise in high quality, low cost manufacturing. This expertise, combined with its extensive knowledge of the manufacturing tolerances required to handle fluids under pressure, provides a competitive advantage. Principal manufacturing processes include thin-wall steel deep drawing, welding and rubber injection molding. 9 10 The Company's engineering and development efforts are focused on improving the performance, quality and manufacturing cost of its products. In addition, the Company pursues opportunities to develop new products and processes, and adapt existing products for new applications. In September 1997, the Company ceased production operations in Singapore and transferred production equipment to its newly acquired production facility in Portugal. The unanticipated high cost structure in Singapore and the flexibility provided by the Alfa acquisition were the prime factors leading to this decision. In addition, as a result of productivity gains achieved at its West Warwick, Rhode Island production facility and as part of the Company's strategic initiative to reduce manufacturing costs and optimize the utilization of its worldwide manufacturing capacity, the Company decided in December 1997 to close its Nashville, Tennessee production facility and relocate production to the Rhode Island facility. Previously, due to significant productivity gains achieved at its principal manufacturing facilities, the Company decided to close two production facilities which were no longer necessary. The Company's Plano, Texas plant ceased operations in September 1995 and the Rogers, Arkansas plant ceased operations in April 1996. Production requirements were transferred to other manufacturing facilities. In addition to its ongoing facilities rationalization program, AMTROL has implemented a significant capital improvement program with the intention of further reducing manufacturing costs. During 1997, the Company spent $8.5 million on capital expenditures. Most significantly, the Company has spent approximately $2.4 million over the past two years to automate the small diameter vessel production line in West Warwick, Rhode Island, and approximately $2.0 million in conjunction with the acquisition of Alfa for productivity improvement and capacity expansion. AMTROL's three principal manufacturing facilities hold ISO 9001 Certification, the most complete certification in the ISO 9000 Series from the International Organization for Standardization ("ISO"). ISO certification requires periodic audits of AMTROL's systems for product design, development, production, installation and servicing, and has become the international standard of quality required for manufacturers serving the European Economic Community, Southeast Asia, the Middle East and Latin America. Raw material suppliers generally offer commodities used by the Company, such as steel, synthetic rubber and plastic resins, to all manufacturers on substantially similar terms. Significant increases in raw material prices can adversely impact margins if the Company is unable to pass on such increases to its customers. In 1995, the Company experienced increased raw material costs, particularly steel and corrugated paper, which it was unable to offset and, as a result, its gross margin was adversely impacted. During 1996, the Company experienced reductions in raw material prices offsetting many of the increases experienced in the prior year. Manufacturers of component parts also generally offer their products to others on substantially similar terms. Although certain components are only available from a limited number of manufacturers, the Company anticipates that it will be able to purchase all of the components it requires without disruption. The Company believes that its relationships with its suppliers are good. 10 11 SEASONALITY; BACKLOG Although AMTROL's sales are related to general economic activity and sales of certain of its products are seasonal, its overall business is not seasonal to any significant extent. Due to the generally short lead time in orders, the Company historically has not carried any material backlog. PATENTS, TRADEMARKS AND LICENSES While the Company owns a number of patents that are important to its business, the Company believes that its position in its markets depends primarily on factors such as manufacturing expertise, technological leadership, superior service and quality and strong brand name recognition, rather than on patent protection. The Company believes that foreign and domestic competitors have been unable to match the quality of AMTROL's branded products. The Company licenses certain of its technology to manufacturers in the Asia/Pacific region. The Company also has a number of registered and unregistered trademarks for its products. The Company believes the following registered trademarks, which appear on its products and are widely recognized in its markets, are material to its business: the AMTROL(R) name, Well-X-Trol(R), Therm-X-Trol(R), Extrol(R), Hot Water Maker(R) and CHAMPION(R). COMPETITION Although the Company experiences substantial competition from a limited number of competitors in each of its markets, the Company believes that it is a market leader in its core products. The principal means of competition in the water systems products and HVAC markets are technology, quality, service and price. AMTROL brand name products generally compete on the basis of technology, quality, service and product line breadth and generally do not compete on the basis of price. No single company competes with AMTROL over a significant number of its product lines. As the Company expands into international markets, it may experience competition from local companies. EMPLOYEES As of December 31, 1997, the Company had approximately 1,650 employees, none of whom were represented by collective bargaining units. AMTROL considers relations with its employees to be good. ENVIRONMENTAL MATTERS Some of the Company's operations generate waste materials that may give rise to liability under environmental laws. Some risk of environmental and other damage is inherent in these operations, and certain of the Company's operations have been named a party in government enforcement and private actions associated with hazardous waste sites (including several sites under the federal Comprehensive Environmental Response, Compensation and Liability Act, known as "Superfund") and, in several matters, have been identified as being potentially responsible for a share of cleanup costs associated 11 12 with such sites. Based upon the Company's experience in such matters, the amount of hazardous waste shipped to such sites attributable to the Company and the status of settlement proceedings, the Company estimates that its share of the aggregate cleanup costs for all of these sites will not be material. In addition, the Company is in the process of remediating contaminants discovered at its Plano, Texas facility, but does not anticipate that the costs associated with such remediation will be material. There can be no assurance that such liability arising from, for example, contamination at facilities the Company (or an entity or business the Company has acquired or disposed of) currently owns or operates or formerly owned or operated, or locations at which wastes or contaminants generated by the Company (or an entity or business the Company has acquired or disposed of) have been disposed of, will not arise or be asserted against the Company or entities for which the Company may be responsible in a manner that could materially and adversely affect the Company. The Company monitors and reviews its procedures and policies for compliance with environmental laws. Based upon the Company's experience to date, the Company operates in substantial compliance with environmental laws, and the cost of compliance with existing regulations is not expected to have a material adverse effect on the Company's results of operations, financial condition or competitive position. However, future events, such as changes in existing laws and regulations or enforcement policies, may give rise to additional compliance costs which could have a material adverse effect on the Company's results of operations, financial condition or competitive position. 12 13 ITEM 2. PROPERTIES The following table sets forth information regarding the Company's principal properties each of which is owned by the Company unless otherwise indicated:
LOCATION SQUARE FOOTAGE PRINCIPAL USE - -------- -------------- ------------- (approximate) West Warwick, RI 270,000 Corporate Headquarters, Manufacturing All AMTROL Product Lines, Education Center Guimaraes, Portugal 196,000 Manufacturing Pressure-rated Cylinders North Kingstown, RI(a) 126,000 Distribution Center for all AMTROL Products North Kingstown, RI(a) 80,000 Warehouse for Raw Materials And Finished Goods Paducah, KY 46,300 Manufacturing Pressure-rated Cylinders Mansfield, OH(a) 45,000 Distribution Center for Do-It-Yourself Market Baltimore, MD 37,000 Manufacturing Metal Stampings Ashland, OH(a) 37,000 Manufacturing Water Treatment/Filtration Products Kitchener, Ontario(a) 18,400 Distribution Singapore(a) 600 Sales Office for Southeastern Asia Hong Kong(a) 600 Sales Office for Northern Asia Antwerp, Belgium(b) -- Distribution Nashville, TN 121,600 Held for Sale Plano, TX 40,000 Held for Sale --------- TOTAL 1,018,500
(a) Leased facilities (b) The distribution center in Antwerp operates under a lease for space on an as-needed basis. AMTROL believes that its properties and equipment are generally well maintained, in good operating condition and adequate for its present needs. The Company regularly evaluates its manufacturing requirements and believes that it has sufficient capacity to meet its current and anticipated needs. The inability to renew any short-term real property lease would not have a material adverse effect on AMTROL's results of operations. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is named as a defendant in legal actions arising in the normal course of business. The Company is not a party to any pending legal proceeding the resolution of which management believes will have a material adverse effect on the Company's results of operations or financial condition or to any pending legal proceedings other than ordinary, routine litigation incidental to its business. See "Item 1, Business--Environmental Matters." ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS Not applicable. 13 14 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Common Stock of the Company is owned by Holdings; thus, no trading market exists for such stock. Similarly, all of the common stock of Holdings is held by affiliates of Cypress and certain officers of the Company, and no trading market exists for such stock. See Item 12, "Security Ownership of Certain Beneficial Owners and Management". 14 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for and as of each of the years and periods in the five-calendar-year period ended December 31, 1997 have been derived from the Consolidated Financial Statements of the Company, including the related notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated balance sheet data for November 12, 1996 have been derived from unaudited consolidated financial statements of the Company which, in the opinion of management, include all adjustments (consisting only of normal recurring items) necessary for a fair and consistent presentation of such data. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition and with the Consolidated Financial Statements of the Company, including the related notes thereto, appearing elsewhere in this Annual Report.
Predecessor Company Successor Company -------------------------------------------------- ------------------------------ PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, 1993 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- (In Thousands, except ratio data) Statement of Operations Data: Net sales $ 164,295 $ 173,472 $ 172,454 $ 152,193 $ 18,628 $ 176,432 Cost of goods sold 116,180 123,184 124,303 110,582 15,108(c) 131,180 --------- --------- --------- --------- --------- --------- Gross profit 48,115 50,288 48,151 41,611 3,520 45,252 Selling, general and administrative expenses 29,099 30,402 29,943 25,796 3,508 25,723 Amortization of goodwill -- -- -- -- 313 3,995 Plant closing charges -- -- 3,825 -- -- 5,500 Capitalized in-process research and development -- -- -- -- 1,000 -- --------- --------- --------- --------- --------- --------- Income (loss) from operations 19,016 19,886 14,383 15,815 (1,301) 10,034 Interest income (expense), net (805) (7) 60 53 (2,224) (18,256) License and distributorship fees 254 254 258 181 25 245 Other income (expense), net (141) (179) 65 (175) (99) 299 --------- --------- --------- --------- --------- --------- Income (loss) before provision for income taxes and extraordinary item 18,324 19,954 14,766 15,874 (3,599) (7,678) Provision (benefit) for income taxes 7,149 7,683 5,681 6,152 (1,310) (30) --------- --------- --------- --------- --------- --------- Income (loss) before extraordinary item 11,175 12,271 9,085 9,722 (2,289) (7,648) Extraordinary item (911)(a) -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) $ 10,264 $ 12,271 $ 9,085 $ 9,722 $ (2,289) $ (7,648) ========= ========= ========= ========= ========= ========= Other Data: Depreciation and amortization $ 4,520 $ 4,330 $ 4,673 $ 4,586 $ 598 $ 11,541 Capital expenditures 7,382 4,902 5,492 9,260 1,662 8,489 EBITDA(b) 23,790 24,470 23,139 20,582 (678) 26,886 Balance Sheet Data (at period end): Working capital $ 28,454 $ 37,293 $ 43,303 $ 41,778 $ 35,047 $ 24,376 Total assets 82,612 91,634 93,909 96,280 254,883 293,000 Long-term debt, less current installments 3,333 2,381 -- -- 159,175 184,164 Shareholders' equity 53,017 64,174 70,206 75,783 67,037 59,104
(a) Reflects an extraordinary loss of $1.5 million ($.9 million net of tax benefits) in 1993 from the early extinguishment of debt. (b) EBITDA represents income (loss) from operations before plant closing charges, plus depreciation and amortization and license and distributorship fees and other income related to operations. EBITDA is presented because it is a widely accepted indicator of a company's ability to incur and service indebtedness. EBITDA (subject to certain adjustments) will be used to determine compliance with certain covenants in the Indenture. EBITDA, however, should not be considered as an alternative to net income, as a measure of the Company's operating results, or as an alternative to cash flow as a measure of liquidity. (c) Reflects a $1.0 million charge related to the upward revision of the Company's Workers' Compensation reserve estimate. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The discussion in this section should be read in conjunction with the Consolidated Financial Statements of the Company included elsewhere herein. This Annual Report includes "forward-looking statements" within the meaning of the securities laws. All statements other than statements of historical facts included in this Annual Report regarding the Company's financial position and cost cutting and strategic plans are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from such expectations include, but are not limited to, the Company's ability to successfully implement its new business strategy and to achieve the estimated cost savings, the availability and cost of raw materials, changes in government regulation or enforcement policies, particularly related to refrigerant gases, development of competing technologies, acceptance of the Company's existing and planned new products in international markets, competition in the Company's markets, the rate of growth of developing economies and demand for the Company's products, and general economic, financial and business conditions, both domestically and internationally. SIGNIFICANT DEVELOPMENTS Following the acquisition of the Company by affiliates of Cypress in 1996, management began the execution of a new strategic plan to immediately reduce costs and capitalize on AMTROL's position as a technological and market leader. Consistent with this strategy, in 1997 the Company sold its American Granby accessory business and its Peru, Indiana production facility and the related pump business. In addition, the Company closed manufacturing facilities in Singapore and Nashville, Tennessee. Management believes that the sale of the less profitable accessories and pump businesses will allow management to focus greater resources on its core water systems and HVAC businesses, and that consolidation of manufacturing activities previously conducted at the Singapore and Nashville plants into other AMTROL facilities will promote operational efficiencies and lower the Company's overall cost structure. In 1997, AMTROL completed the acquisition of Petroleo Mecanica ALFA, S.A. ("Alfa") based in Guimaraes, Portugal. Alfa is Europe's largest manufacturer of reusable steel gas cylinders used to store cooking, heating and refrigerant gases. The Company expects to integrate its international water and HVAC systems business with Alfa's manufacturing and distribution operations. The acquisition of Alfa provides the Company with a significant low cost manufacturing base for AMTROL products for distribution in Europe and the Far East. 16 17 OVERVIEW AMTROL's principal markets are highly replacement-oriented with 60% to 70% of the Company's core business coming from replacement sales. The installed base of AMTROL's products in these core markets, combined with their stable nature, provide the Company with a consistent and predictable base business. Although generally stable, sales are affected by weather, as well as general economic activity. The Company monitors well water pump sales, existing home sales and boiler shipments in order to gauge activity in its markets. Although sales of certain of AMTROL's product lines are seasonal in nature, its overall business is not seasonal to any significant extent, as seasonal variations of individual product lines tend to offset each other. NET SALES. Net sales of the Company's HVAC products accounted for approximately 52.0% of the Company's total net sales in 1997, with the balance represented by sales of water systems products. While the percentage of water systems net sales to total net sales has been fairly constant, the acquisition of Alfa which supplies the HVAC market and the disposition of American Granby which supplied the water systems market caused a decrease in the percentage of the Company's business represented by water systems sales in 1997. Water systems sales would have accounted for approximately 51.0% of total 1997 sales without Alfa and American Granby, which is comparable to recent prior years. AMTROL's well water accumulators, marketed under the brand names Well-X-Trol and CHAMPION, account for approximately two-thirds of the Company's total water systems net sales and generally carry higher gross profit margins than other product sales. These pre-pressurized vessels are distributed through a network of pump specialty and plumbing and heating wholesalers and the DIY retail network. The market is continuing to experience a modest shift in the channels of distribution from wholesalers to DIY retailers, which generally generate slightly lower gross margins. Sales of water system accumulators are generally correlated to shipments of well water pumps. The Company's HVAC products include indirect-fired water heaters and water expansion accumulators for hydronic heating systems, non-returnable pressure-rated cylinders for refrigerant gas and returnable cylinders for cooking, heating and refrigeration gases. AMTROL believes it has opportunities to increase its sales in Europe, currently the world's largest hydronic heating market, through a combination of new products and strategic acquisitions. In particular, the acquisition of Alfa, based in Guimaraes, Portugal, provides the Company with a low cost manufacturing base conveniently situated for distribution of AMTROL's products in Europe, the Middle East and Africa. The Company believes that Therm-X-Trol product sales combined with planned new product introductions will provide growth opportunities in the plumbing and heating component of the HVAC product group. The market for refrigerant gas pressure-rated cylinders is seasonal in nature, with roughly 60% of annual sales coming in the first six months of the year as producers build inventory in preparation for air conditioner use in the summer season. An unseasonal hot spring and early summer favorably impact unit volume demand. 17 18 COST OF GOODS SOLD. The principal elements comprising the Company's cost of goods sold are raw materials, labor and manufacturing overhead. The major raw materials used by the Company in its production process are steel, corrugated paper, plastic resins and synthetic rubber. Significant increases in raw material prices can adversely impact margins if the Company is unable to pass on such increases to its customers. The Company has an infrastructure of capital equipment, buildings and related support costs and, accordingly, decreases in volume can have a significant adverse effect on margins. Cost of goods sold can also be significantly affected by changes in product mix. The Company has significantly reduced its manufacturing cost base in recent years by closing less efficient plants or plants with redundant, excess capacity. Production at the closed facilities has been transferred to other existing production plants with the anticipated effect of lowering the Company's total cost structure and increasing the absorption of fixed manufacturing overhead through higher production volume at the remaining plants. The Company closed plants in Singapore and Nashville, Tennessee in 1997. Production of water systems products at the Nashville facility has been transferred to the Company's West Warwick, Rhode Island facility, and production of disposable gas containers at the Singapore facility has been transferred to the Company's new Alfa facility in Portugal. In the past, the Company has experienced certain inefficiencies and additional costs as it assimilates the transferred production into other facilities, and such costs have often delayed the realization of expected savings associated with the transfer. The Company expects it will have similar experiences in the first half of 1998, particularly in relation to the relocation of Nashville production. The Company made significant capital investments in 1997 to enhance production capabilities, eliminate production bottlenecks and improve production yield. Although these investments caused certain production inefficiencies in 1997 due to disruption of the manufacturing process during installation, the Company expects a significant improvement in efficiencies in 1998 and beyond as a result of these investments. Historically, the Company's labor rate increases have been cost of living adjustments generally in line with inflation. However, the Company is transitioning to a pay-for-performance merit system based on skills, which may cause future labor cost increases to no longer track inflation. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. An important element of the new strategic plan developed in connection with the acquisition of the Company by affiliates of Cypress was a program to immediately reduce operating expenses and to establish new managerial and organizational accountability. Personnel reductions in 1996 and early 1997, in connection with the program, reduced by approximately 15% total personnel at the Company's corporate headquarters compared to the end of 1995. Other actions taken in 1996 and 1997 included consolidating the Company's three autonomous strategic business units to eliminate redundant and unnecessary functions. The cost reduction program generated approximately $4.0 million of annualized savings in 1997. At the same time, new initiatives undertaken by the Company in 1997 included increased investment in engineering and development as well increased spending in marketing to support the Company's planned expansion in international markets. 18 19 As a result of the Merger, the Company's amortization and interest expense have increased significantly in 1997. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in the Company's statement of operations:
Year Ended December 31, ------------------------- 1995 1996 1997 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of goods sold 72.1% 73.6% 74.4% ----- ----- ----- Gross profit 27.9% 26.4% 25.6% Selling, general and administrative expenses 17.4% 17.8% 14.6% Plant closing charges 2.2% 0.0% 3.1% Amortization of goodwill 0.0% 0.1% 2.3% ----- ----- ----- Income from operations 8.3% 8.5% 5.6% Interest income (expense), net .1% (1.3%) (10.3%) Other income, net .2% 0.0% 0.4% ----- ----- ----- Income before provision for income taxes 8.6% 7.2% (4.3%) Provision (benefit) for income taxes 3.3% 2.8% 0.0% ----- ----- ----- Net Income (Loss) 5.3% 4.4% (4.3%) ===== ===== =====
Results for 1997 were impacted by: (i) the acquisition of Alfa on June 30, 1997 as sales and income from this subsidiary were included in 1997 beginning on July 1, but were not included in the comparable period in 1996; (ii) the divestiture of the American Granby accessory business and the Peru, Indiana pump business in May 1997 as 1997 did not include sales and income from these businesses subsequent to May which were included in the comparable period in 1996; (iii) the closing of the Company's Singapore production facility in the third quarter and the Company's Nashville, Tennessee production facility in the fourth quarter which, combined, resulted in a pre-tax charge of $5.5 million to operating expenses; and (iv) higher amortization and interest expense as a result of the Merger. The composition of net sales, adjusted to exclude American Granby sales in all years, for the Company's HVAC and water systems products for the periods indicated is listed below:
1995 1996 1997 ---- ---- ---- HVAC $ 76.1 49.8% $ 74.5 49.3% $ 91.8 54.4% Water Systems 76.8 50.2% 76.7 50.7% 77.0 45.6% ------ ------ ------ ------ ------ ------ Net Sales $152.9 100.0% $151.2 100.0% $168.8 100.0% ====== ====== ====== ====== ====== ======
The amounts and percentage relationships in the above tables for 1996 combine the results of the predecessor for the period ended November 12, 1996 and the results of the successor for the period ended December 31, 1996. The increase in the percentage of sales represented by HVAC products in 1997 is due to the inclusion of Alfa sales. 19 20 COMPARABILITY OF FINANCIAL STATEMENTS. The consolidated financial statements of the Company for the periods prior to November 13, 1996 have been prepared on the historical cost basis. The Merger was accounted for as a purchase transaction. Operating results subsequent to the Merger are comparable to prior periods, with the exception of cost of sales (due to a $ 1.0 million charge in 1996 related to the reserve estimate), and purchase accounting related changes due to amortization of intangible assets and capitalized in-process research and development. The net impact of changes in amortization on 1997 operating income compared to 1996 was approximately $3.7 million. FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1996. NET SALES. Net sales in 1997 increased $5.6 million or 3.3% to $176.4 million from $170.8 million in 1996. This increase was primarily due to $17.8 million of sales attributable to Alfa, partially offset by the absence of American Granby's sales for eight months in 1997. Excluding the impact of the sale of American Granby, net comparable sales attributable to the Company's water systems products were virtually flat in 1997 at $77.0 million as increased sales of water well accumulators were offset by decreased sales of water treatment products. Net sales of HVAC products, with Alfa included in 1997, increased $17.3 million compared to 1996. Without Alfa, HVAC sales would have decreased by $.5 million in 1997. Container product sales for the year increased approximately $1.2 million, resulting from higher volumes, while net sales of other HVAC products decreased $1.7 million. The decrease was partly caused by an unusually high level of hot water maker product returns experienced in 1997 resulting from a manufacturing process problem which has since been corrected. These incremental product returns are gradually diminishing, and the Company expects product returns will approximate normal, historical levels by the end of 1998. In addition, the sale of the Company's Peru, Indiana production facility and the related pump business in May 1997 resulted in the discontinuation of a number of products, further contributing to the decline HVAC net sales. GROSS PROFIT. Gross profit increased $0.1 million or 0.3% in 1997 to $45.2 million from $45.1 million in 1996. As a percentage of sales, gross profit in 1997 decreased to 25.6% from 26.4% in 1996. The inclusion of the operating results of Alfa deflated the gross margin percentage in 1997 as the margins on reusable steel gas cylinders produced at this facility are lower than many other AMTROL products. Excluding Alfa and American Granby, gross profit in 1997 decreased $1.3 million (or 3.2%) to $41.2 million from $42.5 million in 1996, and as a percentage of sales decreased to 27.3% from 28.1% in 1996. The lower margin percentage this year was the result of: (i) unusually high product returns associated with a manufacturing process problem (as discussed above); (ii) unanticipated higher costs associated with the Singapore production facility through the end of August (when the facility was closed); and (iii) inefficiencies associated with the disruption of the manufacturing process during installation of certain major upgrades to manufacturing equipment and processes in 1997. The Company believes that it has successfully maintained market position and sales volume in the refrigerant container business, despite increased competition as well as the movement of refrigerant container 20 21 customers towards long-term single source contracts. However, competitive pricing actions have adversely affected margins in this market, conditions which the Company expects will continue for the foreseeable future. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $4.6 million (or 15.1%) in 1997 to $25.7 million from $30.3 million in 1996. As a percentage of net sales, selling, general and administrative expenses decreased in 1997 to 14.6% as compared to 17.7% in 1996. The decrease would have been even greater, $5.7 million (or 18.9%) if the results of Alfa were excluded. The decrease in selling, general and administrative expenses was primarily due to reductions in corporate overhead and restructuring of the Company's general and administrative staff, in connection with implementing the Company's new business strategy. In addition, expenses in 1996 included a one-time purchase accounting charge related to capitalized in-process research and development of $1.0 million. PLANT CLOSING CHARGES. In 1997, the Company recorded a $5.5 million pre-tax charge to operating expenses for severance and other costs associated with the closures of its plants in Nashville, Tennessee and Singapore. INCOME FROM OPERATIONS. For the reasons set forth above, income from operations decreased $4.5 million in 1997 to $10.0 million (after plant closing charges of $5.5 million) from $14.5 million in 1996. The inclusion of Alfa in the results for 1997 increased operating income by $1.9 million. Excluding the effects of goodwill amortization, plant closing charges and the acquisition of Alfa on 1997 results, and the effect of the write-off of capitalized in-process research and development and goodwill on 1996 results, operating income in 1997 would have increased $1.8 million (or 11.4%) to $17.6 million from $15.8 million in 1996. EARNINGS BEFORE INTEREST EXPENSE, DEPRECIATION AND AMORTIZATION (EBITDA) EBITDA in 1997 was $26.9 million compared to $19.9 million in 1996, an increase of $7.0 million. EBITDA represents income (loss) from operations before plant closing charges, plus depreciation and amortization, license and distributorship fees, and other income related to operations. EBITDA is presented because it is a widely accepted indicator of a company's ability to incur and service indebtedness. EBITDA (subject to certain adjustments) will be used to determine compliance with certain covenants in the Indenture governing the Company's Senior Subordinated Notes. (See "Liquidity and Capital Resources"). EBITDA, however, should not be considered as an alternative to net income, as a measure of the Company's operating results or as an alternative to cash flow as a measure of liquidity. INTEREST INCOME (EXPENSE), NET. Net interest expense increased $16.1 million in 1997 from 1996 due to borrowing costs related to the financing of the Merger. INCOME TAXES. Income tax expense decreased $4.9 million in 1997 as compared to 1996. NET INCOME (LOSS). The net loss in 1997 of $7.6 million compares to net income in 1996 of $7.4 million, an absolute change of $15.1 million. 21 22 FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1995. NET SALES. Net sales decreased $1.7 million (or .1%) in 1996 to $170.8 million from $172.5 million in 1995. This decrease was primarily attributable to weak domestic demand for refrigerant pressure-rated cylinders partially offset by increased sales of residential plumbing and heating products due to stronger demand in the new and replacement hydronic heating market. Net sales attributable to the Company's water systems products were virtually flat in 1996 at $96.3 million as increased sales of water well accumulators were offset by decreased sales of water treatment products. Net sales attributable to the Company's HVAC products decreased $1.6 million (or 2.1%) to $74.5 million in 1996, primarily due to a decrease in sales of refrigerant pressure-rated cylinders resulting from a pre-buy of domestic non-returnable cylinders in 1995, offset by increased sales of the Company's core HVAC products. The decline in domestic sales of non-returnable pressure-rated cylinders also reflects the continued transition from CFCs to new alternative refrigerant gases which is expected to continue until the after-market service demand for new refrigerant gases grows to previous CFC levels. GROSS PROFIT. Gross profit decreased $3.1 million (or 6.4%) to $45.1 million from $48.2 million in 1995. As a percentage of sales, gross profit decreased to 26.4% from 27.9% in 1995. A purchase accounting related charge to cost of sales of $1.0 million for worker compensation reserves was the most significant cause of the decline. In addition, inefficiencies associated with assimilating production requirements of the two manufacturing facilities closed during the prior fifteen months, and the cost of production interruptions associated with inclement weather contributed to the decline. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $.4 million (or 1.3%) in 1996 to $30.3 million from $29.9 million in 1995. As a percentage of net sales, selling, general and administrative expenses increased in 1996 to 17.7% as compared to 17.4% in 1995. This increase was due to a purchase accounting charge related to capitalized in-process research and development of $1.9 million, offset in part by reduced administrative expenses associated with the Chairman's office. Excluding capitalized in-process research and development, selling, general and administrative expenses decreased $.6 million (or 2.1%) in 1996 to $29.3 million from $29.9 million. INCOME FROM OPERATIONS. For the reasons set forth above, income from operations increased $.1 million in 1996 to $14.5 million from $14.4 million (after plant closing charges of $3.8 million) in 1995. Excluding the effects of goodwill amortization and capitalized in-process research and development in 1996 and the plant closing charges in 1995, income from operations decreased $2.4 million in 1996 to $15.8 million from $18.2 million in 1995. This decrease was primarily due to the lower gross profit percentage. EARNINGS BEFORE INTEREST EXPENSE, DEPRECIATION AND AMORTIZATION (EBITDA). EBITDA in 1996 was $19.9 million compared to $23.1 million in 1995, a decrease of $3.2 million. 22 23 INTEREST INCOME (EXPENSE), NET. Net interest expense increased $2.2 million in 1996 from 1995 due to borrowing costs related to the financing of the Merger. INCOME TAXES. Income tax expenses decreased $.8 million in 1996 as compared to 1995. NET INCOME. Net income decreased $1.7 million (or 18.7%) in 1996 to $7.4 million from $9.1 million (including plant closing charges (net of tax benefit) of $1.9 million) in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows from operating activities were approximately $11.9 million, $14.7 million and $3.7 million for the years ended December 31, 1995, 1996 and 1997, respectively. The Company's cash balance decreased $5.8 million at December 31, 1997 to $0.5 million from $6.3 million in 1996. The lower cash balance in 1997 is consistent with the Company's cash management policy which anticipates maintaining only enough cash to meet current operating needs. Although the Company has available up to $30 million from its revolving credit facility to meet short term working capital needs, it uses its excess cash to keep borrowing under the revolver to a minimum. Proceeds from the sale of the Company's American Granby accessories business and Peru, Indiana pump business approximated $6.0 million and were used to fund a portion of the cost to acquire Alfa. Working capital at December 31, 1997 was $24.4 million and the ratio of current assets to current liabilities was 1.6 to 1.0. This compares with working capital of $35.0 million in 1996 and a current ratio of 2.47 to 1.0. The decrease in working capital was primarily the result of the lower cash balance in 1997, representative of the Company's cash management policy, as well as an increase in notes payable to banks of $4.4 million assumed by the Company in connection with the Alfa acquisition. Accounts receivable were higher due to the inclusion of the new Alfa subsidiary in 1997. Inventory and accounts payable were also higher in 1997 as a result of the inclusion of Alfa, as well as to increased production in the last two months in anticipation of the closure of the Nashville plant. Higher levels of inventory were necessary to assure the availability of adequate supplies to meet customer demand during the relocation of Nashville production to West Warwick. The Company expects inventory to return to historical levels in 1998. Capital expenditures were $5.5 million, $10.9 million and $8.5 million in the years ended December 31, 1995, 1996 and 1997, respectively. These expenditures related primarily to ongoing maintenance and upgrading of the Company's manufacturing technology. Significant expenditures in 1997 included approximately $2.0 million at the new Alfa facility intended to exploit opportunities for improving productivity at that location and approximately $2.0 million related to improving the productivity of the Company's small tank production line. Capital expenditures in 1996 included $2.0 million related to the establishment of the Company's Singapore facility. Total capital expenditures are expected to be approximately $10.0 million in 1998 and $8.0 million in 1999. The 23 24 Company is currently in the process of implementing a new Enterprise Resource Planning System ("ERP"). The ERP Project, which uses database architecture and applications provided by Oracle Information Systems, will provide the Company with a wide-range of operational and administrative efficiencies and will assure that the Company's core information systems are Year 2000 compliant (See "Year 2000 Compliance"). Upon consummation of the Merger on November 13, 1996, the Company became party to the Bank Credit Facility. The Bank Credit Facility was amended in June and December 1997, primarily to permit the acquisition of Alfa, convert borrowings under the Company's revolving credit facility in connection with the acquisition to additional Tranche B Term Loans and to permit the closure of the Nashville, Tennessee production facility. The Bank Credit Facility, as amended, (the "Facility") consists of $65.0 million of senior term loans (the "Term Loans") and a $30.0 million revolving credit facility (the "Revolving Credit Facility"). A portion ($20.0 million) of the Term Loans (the "Tranche A Term Loans") will mature five and one-half years after the effective date of the Merger, with quarterly amortization payments during the term of such loans. The remainder ($45.0 million) of the Term Loans (the "Tranche B Term Loans") will mature seven and one-half years after the effective date of the Merger, with nominal quarterly amortization prior to the maturity of the Tranche A Term Loans and with the remaining amounts amortizing on a quarterly basis thereafter. The Revolving Credit Facility includes a sublimit providing for up to $20.0 million of availability on a revolving credit basis to finance permitted acquisitions. The commitments under the Revolving Credit Facility and the acquisition sublimit will each reduce by $5.0 million in the fourth year and $10.0 million in the fifth year after the effective date of the Merger. The Revolving Credit Facility will mature five and one-half years after the effective date of the Merger. The Bank Credit Facility is secured by substantially all assets of the Company and its domestic subsidiaries. In connection with the Merger, AMTROL issued $115.0 million of Senior Subordinated Notes due 2006 (the "Notes") issued under an Indenture dated as of November 13, 1996. The Notes are unsecured obligations of AMTROL. The Notes bear interest at a rate of 10.625% per annum and are payable semi-annually on each June 30 and December 31 commencing on June 30, 1997. The Notes are redeemable at the option of AMTROL on or after December 31, 2001. From and after December 31, 2001, the Notes will be subject to redemption at the option of AMTROL, in whole or in part, at various redemption prices, declining from 105.313% of the principal amount to par on and after December 31, 2003. In addition, on or prior to December 31, 1999, the Company may use the net cash proceeds of one or more public equity offerings to redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 110.625% of the principal amount thereof plus accrued interest to the date of redemption. Upon a "Change of Control" (as defined in the Indenture), each Note holder has the right to require the Company to repurchase such holder's Notes at a purchase price of 101% of the principal amount plus accrued interest. The Indenture contains certain affirmative and negative covenants and restrictions. As of December 31, 1997, AMTROL is in compliance with the various covenants of the Indenture. 24 25 The Company intends to fund its future working capital, capital expenditures and debt service requirements through cash flows generated from operations and borrowings under the Revolving Credit Facility (described above). Management believes that cash generated from operations, together with borrowings available under the Revolving Credit Facility, will be sufficient to meet the Company's working capital and capital expenditure needs in the foreseeable future. The Company may consider other options available to it in connection with funding future working capital and capital expenditure needs, including the issuance of additional debt and equity securities. INFLATION The Company believes that inflation does not have a material effect on its results of operations or financial condition. To insulate against fluctuating prices, the Company has negotiated annual contracts with suppliers of certain key raw materials (primarily steel) for a significant percentage of its expected usage through 1998. However, in 1995, the Company experienced increased raw material costs, particularly steel and corrugated paper. During 1996, the Company experienced reductions in raw material prices, offsetting many of the increases experienced in the prior year. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" establishes standards for computing and presenting earnings per share (EPS). This standard simplifies and supersedes the existing EPS computation and presentation rules and is effective for years ending after December 31, 1997. This new accounting pronouncement will have no impact on the Company as it does not report earnings per share. SFAS No. 130 "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners ("comprehensive income"). SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" introduces a new accounting model (the "management approach") for identifying and reporting on business segments. This approach replaces the notion of industry and geographic segments in earlier standards and requires a finer partitioning of geographic disclosures. Both statements 130 and 131 are effective for years beginning after December 15, 1997. As these new accounting standards require additional disclosures only, they will have no impact on the Company's financial condition, results of operations or cash flows, nor will the implementation of these standards in the Company's financial statements require the Company to incur material costs. 25 26 YEAR 2000 COMPLIANCE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is in the process of implementing a new Enterprise Resource Planning System (ERP) which, in addition to providing the Company with a wide-range of operational and administrative efficiencies, will assure that virtually all of the Company's core business systems are Year 2000 compliant. The Company anticipates the completion of significant portions of this project before the end of 1998. The estimated cost of this project is $5.0 million through 1999. Costs incurred in 1997 were not significant. The Company will begin to initiate formal communications with all of its significant suppliers and large customers in 1998 to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. While there can be no guarantee that the systems of other companies on which the Company's system rely will be timely converted and would not have an adverse effect on the Company's systems, the Company does not believe that its operations are materially vulnerable to the failure of any vendor or customer to properly address the Year 2000 Issue. The Company has determined it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The costs of and the date on which the Company believes it will complete the ERP Project are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The index to financial statements is included on page 36 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 27 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding each of the directors and executive officers of the Company: NAME AGE POSITION ---- --- -------- John P. Cashman 57 Chairman of the Board, Chief Executive Officer and President Samuel L. Daniels 49 Executive Vice President and Director Clifford A. Peterson 62 Senior Vice President-Operations & Technology and Director Edward J. Cooney 50 Senior Vice President, Chief Financial Officer, Treasurer and Secretary Donald W. Reilly 39 Vice President - Finance David P. Spalding 43 Director James A. Stern 47 Director Anthony D. Tutrone 33 Director John P. ("Jack") Cashman became Chairman of the Board, Chief Executive Officer and President upon the Merger. Mr. Cashman has over 30 years of general industrial management experience in the filtration, minerals, building products and pharmaceutical industries. From 1989 until March 1996, Mr. Cashman served as Chairman and Co-Chief Executive Officer of R. P. Scherer Corporation ("R P. Scherer"). Mr. Cashman joined R. P. Scherer concurrent with that company's leveraged buyout in 1989. Prior to R. P. Scherer, Mr. Cashman had an extensive career at Johns-Manville Corporation as the President of Manville International, President of Manville Canada Inc. and Senior Vice President of Manville Corporation, as well as numerous other positions in general management, marketing and operations. Samuel L. Daniels, Executive Vice President, has been with the Company since 1987 and became a director upon the Merger. From 1993 to 1996, Mr. Daniels served as Vice President-Water Systems. From 1991 to 1993, he served as General Manager of all AMTROL subsidiaries, and from 1989 to 1991, he was General Manager of the Company's Clayton Mark subsidiary He originally joined the Company in 1987 as Vice President of Marketing for Clayton Mark Inc. Prior to joining the Company, he was Vice President of Mueller Pump. 27 28 Clifford A. Peterson, Senior Vice President-Operations & Technology, joined the Company in July 1995 as Vice President of Technology and became a director upon the Merger. Mr. Peterson served as Executive Vice President and Chief Operating Officer from February to September 1996. From 1989 to 1994, he was Vice President-General Manager of the Production Mail Division of Pitney Bowes Inc. Prior to that, he served as Vice President-Operations of the Dictaphone Corporation. Edward J. Cooney, Senior Vice President, Chief Financial Officer and Treasurer, joined the Company in 1978, serving as Chief Financial Officer since 1991, as Senior Vice President-Operations from 1988 to 1991, as Vice President from 1985 to 1988 and as Treasurer since 1982. Prior to joining the Company, Mr. Cooney was associated for nine years with Arthur Andersen LLP, independent public accountants. Donald W. Reilly, Vice President-Finance, joined the Company in October 1997. From May 1992 to October 1997, he was Director of Finance and Corporate Controller of the A. T. Cross Company; and from 1981 to 1992, Mr. Reilly was associated with Ernst and Young LLP, independent public accountants. David P. Spalding became a director of the Company upon the Merger. Mr. Spalding has been Vice Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, he was Managing Director in the Merchant Banking Group of Lehman Brothers Inc. from February 1991. Previously, he held the position of Senior Vice President of Lehman Brothers Inc. from September 1988 to February 1991. From April 1987 to September 1988, he was Senior Vice President of General Electric Capital Corporation Corporate Finance Group, Inc. Prior to 1987 he was a Vice President of The First National Bank of Chicago. Mr. Spalding is also a director of Lear Corporation, William Scotsman, Inc., and Frank's Nursery & Craft, Inc. James A. Stern became a director of the Company upon the Merger. Mr. Stern has been Chairman of Cypress since its formation in April 1994. Prior to joining Cypress, Mr. Stern spent his entire career with Lehman Brothers Inc., most recently as head of the Merchant Banking Group. He also, at various times, served as head of Lehman's High Yield and Primary Capital Markets Groups, and was co-head of Investment Banking. In addition, Mr. Stern was a member of the firm's Operating Committee. Mr. Stern is a director of Noel Group, Inc., Lear Corporation, Cinemark USA, Inc., R.P. Scherer, Genesis ElderCare Corp. and Frank's Nursery & Craft, Inc. Anthony D. Tutrone became a director of the Company upon the Merger. Mr. Tutrone has been a Principal of Cypress since its formation in April 1994. Prior to joining Cypress, he was a member of the Merchant Banking Group of Lehman Brothers, Inc. from 1986 to 1994, except from 1990 to 1992 when he attended Harvard Business School. 28 29 COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934. Prior to the Merger, AMTROL Common Stock was registered pursuant to Section 12 of the Securities Exchange Act of 1934 as amended (the "Exchange Act"). Section 16(a) of the Exchange Act requires the Company's officers, directors and persons who beneficially own more than ten percent of a registered class of the Company's equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission. On November 13, 1996, pursuant to Rule 12h-3 under the Exchange Act, AMTROL filed with the Securities and Exchange Commission a certification on Form 15, suspending its obligations under Section 15(d) to file reports required by Section 13(a) of the Exchange Act with respect to AMTROL Common Stock, and terminating the registration of AMTROL Common Stock under Section 12(g) of the Exchange Act. Accordingly, officers, directors and greater than ten-percent beneficial owners are no longer required to file reports under Section 16(a) of the Exchange Act. 29 30 ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued by the Company to its Chief Executive Officer and each of its executive officers (in addition to its Chief Executive Officer) who earned more than $100,000 in salary and bonus in 1997 in each case for services rendered in all capacities to the Company during 1997.
SUMMARY COMPENSATION TABLE -------------------------- LONG TERM ANNUAL --------- ------ COMPENSATION COMPENSATION(a) ------------ --------------- AWARDS ------ NAME AND PRINCIPAL SECURITIES ------------------ UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS OPTIONS/SARS(c) COMPENSATION(d) -------- ---- ------ ----- --------------- --------------- John P. Cashman 1997 $440,000 $49,720 44,796 $17,000 Chairman, President and 1996 -- -- -- -- CEO(e) 1995 -- -- -- -- Samuel L. Daniels(b) 1997 240,000 27,120 6,838 7,486 Executive Vice President 1996 149,192 39,600 20,000 8,395 1995 129,000 27,500 10,000 6,285 Clifford A. Peterson(b) Clifford A. Peterson(b) 1997 200,000 22,600 6,838 12,766 Senior Vice President- 1996 159,521 44,010 15,000 8,682 Operations & Technology 1995 115,731 31,500 10,000 718 Edward J. Cooney(b) 1997 180,000 20,340 6,838 8,862 Senior Vice President- 1996 169,329 44,010 12,000 8,795 Chief Financial Officer 1995 162,500 34,200 10,000 8,792
(a) Any perquisite or other personal benefits received from the Company by any of the named executives were substantially less than the reporting thresholds established by the Securities and Exchange Commission (the lesser of $50,000 or 10% of the individual's cash compensation). (b) Includes portion of salary deferred under the Company's 401(k) Plan. (c) Numbers for 1997 represent options to purchase common stock of Holdings, the parent corporation of AMTROL. Numbers for 1995 and 1996 represent options to purchase common stock of AMTROL, which, in connection with the Merger, were either canceled in exchange for cash equal to the spread between the option exercise price and $28.25 per share (the per share Merger consideration) or exchanged for options exercisable for Holdings' common stock based on a conversion ratio of .2825 per share of Holdings' common stock for each share of AMTROL common stock. 30 31 (d) Amounts paid in 1997 include the Company's contributions under the Company's 401(k) Plan in the amount of $17,000, $6,616, $9,256 and $7,304 for Messrs. Cashman, Daniels, Peterson and Cooney, respectively, and premiums paid by the Company with respect to term life insurance purchased for such executive officers and not made available generally to salaried employees in the amount of $870, $3,510 and $1,558 for Messrs. Daniels, Peterson and Cooney , respectively. (e) Mr. Cashman joined the Company on November 13, 1996, upon consummation of the Merger, but received no compensation until 1997. OPTION PLANS The following table sets forth, for the named executive officers, information regarding stock options granted during 1997 pursuant to the Holdings 1997 Incentive Stock Plan, which was approved on December 16, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR ------------------------------------- % OF TOTAL NUMBER OF OPTIONS/ SECURITIES SARS GRANTED UNDERLYING TO EMPLOYEES EXERCISE OR OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION GRANT DATA NAME GRANTED(A) YEAR ($/SH) DATE PRESENT VALUE (c) - ---- ---------- ---- ------ ---- ----------------- John P. Cashman 44,796(a) 68.5% $100 12/16/2007 $21.55 Samuel L. Daniels 6,838(b) 10.5% $100 12/16/2007 $21.55 Clifford A. Peterson 6,838(b) 10.5% $100 12/16/2007 $21.55 Edward J. Cooney 6,838(b) 10.5% $100 12/16/2007 $21.55
(a) These are non-qualified options which are immediately exercisable. Shares purchased under the options are subject to repurchase by Holdings at the exercise price upon certain circumstances. Options for 22,398 shares are released from restrictions based upon continued employment, with 7,454 shares released immediately and 14,944 shares released in 32 equal monthly installments though August 2000. Options for 22,398 shares are released from restrictions based upon relative achievement of management's business plan for fiscal years 1997 through 2001. One-half of such performance-based options are released from restriction based upon annual performance and one-half based upon cumulative performance. Restrictions lapse upon a public offering or sale of Holdings, AMTROL or substantially all of the assets of AMTROL (a "Triggering Event"). (b) One-half (3,419 shares) of these options are incentive stock options which vest 1,000 shares on date of grant, 218 shares in January 1998 and the balance in 31 equal monthly installments of 71 shares through August 2000. One-half (3,419 shares) of these options are non qualified stock options which are immediately exercisable, provided that purchased shares are subject to repurchase by Holdings at the exercise price until such shares vest based upon relative achievement of management's business plan for fiscal years 1997 through 2001. One-half of such performance based options vest based upon annual performance and one-half based upon cumulative performance. Options vest and restrictions lapse upon a Triggering Event. 31 32 (c) Computed using the Black-Scholes option valuation model. The following assumptions have been used in the calculation: volatility, 0; expected option life, 3 years; risk-free interest, 5.0%. The Black-Scholes option pricing model was designed to value readily tradeable stock options with relatively short lives. The options granted are not tradeable. However, management believes that the assumptions used and the model applied to value the awards yield a reasonable estimate of the fair value of the option grants under the circumstances. The following table sets forth certain information regarding stock options exercised during 1997 and currently outstanding options held by the named executive officers as of December 31, 1997. No options were exercised by the named executives during 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES ---------------------------------------------------------------------------------- NUMBER OF SECURITIES UNDERLYING UNEXERCISED NUMBER OF OPTION/SARS AT SECURITIES FISCAL YEAR END UNDERLYING 1997 (a) VALUE OF UNEXERCISED OPTIONS/SARS EXERCISABLE/ IN-THE-MONEY NAME EXERCISED VALUE REALIZED($) UNEXERCISABLE OPTIONS/SAR($)(b) - ---- --------- ----------------- ------------- ----------------- John P. Cashman 0 0 44,796/0 0/0 Samuel L. Daniels 0 0 9,081/2,419 200,036/0 Clifford A. Peterson 0 0 11,481/2,419 316,250/0 Edward J. Cooney 0 0 7,258/2,419 100,003/0
(a) Immediately prior to the Merger, Messrs. Daniels, Peterson, and Cooney exchanged options exercisable for AMTROL Common Stock for options exercisable for Holdings Common Stock ("Amended Options") based on a conversion ratio of .2825 share of Holdings Common Stock for each share of AMTROL Common Stock subject to the option. Includes 4,662, 7,062 and 2,839 shares of Holdings Common Stock subject to Amended Options received by Messrs. Daniels, Peterson and Cooney, respectively, in the exchange. All Amended Options are fully exercisable. (b) Based on the market value of $100 per share (determined by the Holdings Board of Directors to be the purchase price of Holdings common stock issued in connection with the Merger) less the exercise price of the options. 32 33 SUPPLEMENTAL RETIREMENT PLANS The Company maintains two Supplemental Retirement Plans: Supplemental Retirement Plan I which covers a former officer and director and Supplemental Retirement Plan II which covers Mr. Cooney and two former officers. Under Supplemental Retirement Plan I, the former officer is entitled to receive an annual benefit of $150,000 per year for 15 years following his retirement. In January 1997, he began to receive the annual benefit in equal quarterly installments. Mr. Cooney is entitled to receive an annual benefit of $50,000 per year for a period of 15 years upon retirement on or after age 62. The retirement benefit is forfeited in its entirety if he terminates employment or dies prior to age 62. In the event a participant in either Supplemental Retirement Plan dies after retirement, his beneficiary will receive any remaining benefits which such participant was entitled to receive at the time of his death. EMPLOYMENT AGREEMENTS AND OTHER TRANSACTIONS The Company, either directly or through its subsidiaries, has entered into employment agreements (each referred to individually as an "Agreement" and collectively as the "Agreements"), with Messrs. Cashman, Daniels, Peterson and Cooney to secure their continued employment with the Company. The Agreements provide for annual base salaries of $440,000 for Mr. Cashman, $240,000 for Mr. Daniels, $200,000 for Mr. Peterson and $180,000 for Mr. Cooney, subject to adjustments annually commencing in January 1998. In addition, the executives are entitled to participate in incentive compensation plans and all employee benefit arrangements generally appropriate to such executive's responsibilities. In the event the executive's employment is terminated without cause by the Company or with Good Reason by the executive, such executive is entitled to; (i) a monthly amount, for 24 months after termination, equal to one-twelfth of the executive's annual average salary for the prior 24 months (the "Termination Benefit"); (ii) the pro rata portion of any bonus or incentive compensation otherwise payable for the fiscal period in which such termination occurs; and (iii) maintenance for 24 months of all life, disability, medical and health insurance benefits to which the executive was entitled immediately prior to termination. In the case of Mr. Cashman, the Agreement provides that in the event of his death, his estate is entitled to receive an amount equal to the monthly Termination Benefit for 24 months, reduced by any amounts payable under any insurance or other plan providing a death benefit which is maintained by the Company. The Agreements also prohibit the executive, for a period of two years after the termination of his employment, from directly or indirectly, advising, assisting or being connected with any enterprise which competes with the Company. In addition, under separate Management Stockholder's Agreements between Holdings and Messrs. Cashman, Daniels, Peterson, and Cooney, if prior to a public offering of the common stock of Holdings, the executive dies or becomes disabled while employed by the Company or following normal retirement or the executive's employment is terminated without Cause by the Company or with Good Reason by the executive (as such terms are defined in the agreements), the executive has the right to require Holdings to purchase all or any portion of Holdings common stock then held by the executive at the repurchase price specified in the agreement and to pay the executive the amount by 33 34 which the repurchase price exceeds the exercise price of any options then held by the executive. If there exists and is continuing an event of default on the part of the Company under any loan guarantee or other agreement under which the Company has borrowed money or such repurchase would result in an event of default, the Company shall not be obligated to repurchase any of the common stock. The repurchase price is $100 if the repurchase occurs prior to November 13, 1999, and the market price of the Holdings common stock thereafter. If an executive's employment is terminated for Cause by the Company or without Good Reason by the executive, Holdings has the right to purchase all, but not less than all, Holdings common stock then held by the executive at a price equal to the lesser of $100 or the market price of the Holdings common stock, provided that if the executive's employment is terminated by the executive without Good Reason following a public offering, the repurchase price is the market price of the Holdings common stock. If Holdings exercises its repurchase right it must also pay the executive an amount equal to the excess of the repurchase price over the exercise price of any options held by the executive in cancellation of such options. Good Reason includes certain significant changes in the nature of the executive's employment including certain reductions in compensation and changes in responsibilities and powers. 34 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company is a direct, wholly owned subsidiary of Holdings. The following table sets forth information with respect to the beneficial ownership of Holdings common stock by (i) each person known to the Company to beneficially own more than 5% of Holdings' outstanding common stock, (ii) each of the Company's directors and certain executive officers and (iii) all directors and executive officers of the Company as a group. Unless otherwise indicated below, the persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned.
NUMBER OF SHARES OF ------------------- NAME AND ADDRESS OF BENEFICIAL OWNER HOLDINGS COMMON STOCK PERCENTAGE ------------------------------------ --------------------- ---------- Cypress Merchant Banking Partners L.P. (a) 637,957 93.0% c/o The Cypress Group L.L.C. 65 East 55th Street, 19th Floor New York, NY 10022 Cypress Offshore Partners L.P. (a) 33,043 4.8% c/o The Cypress Group L.L.C. 65 East 55th Street, 19th Floor New York, NY 10022 John P. Cashman(c) 59,796 8.2% Samuel L. Daniels(b)(c) 9,583 1.4% Clifford A. Peterson(b)(c) 11,983 1.7% Edward J. Cooney(b)(c) 7,760 1.1% David P. Spalding(a) -- -- James A. Stern(a) -- -- All directors and executive officers as a group 89,122 11.5% (consisting of 7 persons)
(a) Cypress Merchant Banking Partners L.P. and Cypress Offshore Partners L.P. are affiliates of The Cypress Group L.L.C. Messrs. Spalding and Stern are executives of The Cypress Group L.L.C. and may be deemed to share beneficial ownership of the shares shown as beneficially owned by such Cypress entities. Each of such individuals disclaims beneficial ownership of such shares. SEE, Item 10, "Directors and Executive Officers of the Registrant." (b) Immediately prior to the Merger, each of these individuals exchanged options exercisable for AMTROL Common Stock for options exercisable for Holdings common stock. Includes 4,662, 7,062 and 2,839 shares of common stock issuable upon exercise of such options by Messrs. Daniels, Peterson and Cooney, respectively. See, Item 11, "Executive Compensation". (c) Includes 44,796, 4,921, 4,921, and 4,921 shares of Common Stock issuable upon exercise of options granted to Messrs. Cashman, Daniels, Peterson and Cooney, respectively, which will become exercisable within 60 days. See Item 11, "Executive Compensation". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 35 36 PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE & REPORT ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS The following financial statements are included in a separate section of this Report commencing on the page numbers specified below: PAGE ---- Reports of Independent Public Accountants 38 Consolidated Balance Sheets as of December 31, 1997 and 1996 (Successor) 40 Consolidated Statements of Operations for the Fiscal Year Ended December 31, 1997 and the Period Ended December 31, 1996 (Successor); and the Period Ended November 12, 1996 and the Fiscal Year Ended December 31, 1995 (Predecessor) 41 Consolidated Statements of Shareholders' Equity for the Fiscal Year Ended December 31, 1997 and the Period Ended December 31, 1996 (Successor); and the Period Ended November 12, 1996 and Fiscal Year Ended December 31, 1995 (Predecessor) 42 Consolidated Statements of Cash Flows for the Fiscal Year ended December 31, 1997 and the Period Ended December 31, 1996 (Successor); and the Period Ended November 12,1996 and Fiscal Year Ended December 31, 1995 (Predecessor) 43 Notes to Consolidated Financial Statements 44 (a)(2) FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts and Reserves for the Fiscal Year Ended December 31, 1997 and the Period Ended December 31, 1996 (Successor); and the period Ended November 12, 1996 and Fiscal Year Ended December 31, 1995 (Predecessor). 57
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. 36 37 (a)(3) EXHIBITS See List of Exhibits (b) REPORT FILED ON FORM 8-K On January 6, 1998, the Company filed a Form 8-K reporting the completion of the acquisition of Petroleo Mecanica Alfa, SA on December 22, 1997 and the amendment of its existing Bank Credit agreement. 37 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMTROL Inc.: We have audited the accompanying consolidated balance sheets of AMTROL Inc. (the Successor), (a Rhode Island corporation and wholly-owned subsidiary of AMTROL Holdings Inc.), and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 1997 and for the period from November 13, 1996 to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our 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 provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AMTROL Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the year ended December 31, 1997 and the period from November 13, 1996 to December 31, 1996 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic consolidated financials statements taken as a whole. The financial statement schedule listed in item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Boston, Massachusetts March 13, 1998 38 39 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To AMTROL Inc.: We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of AMTROL Inc. (the Predecessor) (a Rhode Island corporation), and subsidiaries for the year ended December 31, 1995 and period ended November 12, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of AMTROL Inc. and subsidiaries' operations and their cash flows for the year ended December 31, 1995, and period ended November 12, 1996, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic consolidated financials statements taken as a whole. The financial statement schedule listed in item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Boston, Massachusetts March 6, 1997 39 40 AMTROL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS
DECEMBER 31 1996 1997 ---- ---- Current Assets: Cash and cash equivalents $ 6,383 $ 544 Accounts receivable, less allowance for doubtful accounts of $1,055 and $1,088 in 1996 and 1997, respectively 21,861 30,180 Inventories 24,783 31,285 Income tax refund receivable 2,000 323 Prepaid income taxes 1,734 2,495 Prepaid expenses and other 691 1,089 Assets held for sale 1,500 1,533 -------- -------- Total current assets 58,952 67,449 -------- -------- Property, Plant and Equipment, at cost Land 4,153 3,669 Buildings and improvements 8,081 6,432 Machinery and equipment 20,048 39,891 Furniture and fixtures 907 888 Construction-in-progress and other 4,277 1,804 -------- -------- 37,466 52,684 Less-accumulated depreciation and amortization 577 6,997 -------- -------- 36,889 45,687 -------- -------- Other Assets: Goodwill 147,756 169,784 Debt financing costs 8,387 7,762 Cash surrender value of officers' life insurance 1,614 523 Deferred income taxes -- 419 Other 1,285 1,376 -------- -------- 159,042 179,864 -------- -------- $254,883 $293,000 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 825 $ 3,498 Notes payable to banks -- 4,397 Accounts payable 5,794 15,718 Accrued expenses 14,472 15,779 Accrued interest 2,232 608 Accrued income taxes 582 3,073 --------- --------- Total current liabilities 23,905 43,073 --------- --------- Other Noncurrent Liabilities 4,544 6,659 --------- --------- Deferred Income Taxes 222 -- --------- --------- Long-Term Debt, less current installments 159,175 184,164 --------- --------- Commitments and Contingencies -- -- Shareholders' Equity: Common stock $.01 par value- Authorized-1,000 shares; Issued-100 shares -- -- Additional paid-in capital 69,326 69,326 Retained earnings (2,289) (9,937) Cumulative translation adjustment -- (285) --------- --------- Total shareholder's equity 67,037 59,104 --------- --------- $ 254,883 $ 293,000 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 40 41 AMTROL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
PREDECESSOR COMPANY SUCCESSOR COMPANY -------------------------------------------------------------------- YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, 1995 1996 1996 1997 ---- ---- ---- ---- Net Sales $ 172,454 $ 152,193 $ 18,628 $ 176,432 Cost of Goods Sold 124,303 110,582 15,108 131,180 --------- --------- --------- --------- Gross profit 48,151 41,611 3,520 45,252 Operating Expenses: Selling 15,171 14,236 1,997 13,175 General and administrative 14,772 11,560 1,511 12,548 Plant closing charges 3,825 -- -- 5,500 Amortization of Goodwill -- -- 313 3,995 Capitalized in-process research and development -- -- 1,000 -- --------- --------- --------- --------- Income (loss) from operations 14,383 15,815 (1,301) 10,034 Other Income (Expense): Interest expense (195) (151) (2,263) (18,684) Interest income 255 204 39 428 License and distributorship fees 258 181 25 245 Other, net 65 (175) (99) 299 --------- --------- --------- --------- Income (loss) before provision for income taxes 14,766 15,874 (3,599) (7,678) Provision (Benefit) for Income Taxes 5,681 6,152 (1,310) (30) --------- --------- --------- --------- Net Income (Loss) $ 9,085 $ 9,722 $ (2,289) $ (7,648) ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 41 42 AMTROL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (In thousands)
TREASURY STOCK ---------------------------- ADDITIONAL CUMULATIVE COMMON PAID-IN TRANSLATION RETAINED NUMBER OF STOCK CAPITAL ADJUSTMENT EARNINGS SHARES COST ----- ------- ---------- -------- ------ ---- PREDECESSOR COMPANY Balance, December 31, 1994 $ 76 $ 28,377 -- $ 36,728 67 $ 1,007 Net income -- -- -- 9,085 -- -- Dividend -- -- -- (1,500) -- -- Exercise of stock options -- 598 -- -- -- -- Repurchase of common stock -- -- -- -- 146 2,259 Tax effect of disqualifying dispositions on stock options -- 108 -- -- -- -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 $ 76 $ 29,083 -- $ 44,313 213 $ 3,266 Net income -- -- -- 9,722 -- -- Dividend -- -- -- (6,694) -- -- Exercise of stock options -- 191 -- -- -- -- Repurchase of common stock -- -- -- -- 1 15 -------- -------- -------- -------- -------- -------- Balance, November 12, 1996 $ 76 $ 29,274 -- $ 47,341 214 $ 3,281 ======== ======== ======== ======== ======== ======== SUCCESSOR COMPANY Net loss -- -- -- $ (2,289) -- -- Issuance of common stock in connection with Merger, net -- $ 69,326 -- -- -- -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 $ -- $ 69,326 -- $ (2,289) -- $ -- ======== ======== ======== ======== ======== ======== Net loss -- -- -- $ (7,648) -- -- Cumulative Translation adjustment -- -- $ (285) -- -- -- -------- -------- -------- -------- -------- -------- Balance, December 31, 1997 $ -- $ 69,326 $ (285) $ (9,937) -- $ -- ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 42 43 AMTROL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------- ----------------- YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, 1995 1996 1996 1997 --------- --------- --------- --------- Cash Flows Provided by Operating Activities: Net income (loss) $ 9,085 $ 9,722 $ (2,289) $ (7,648) --------- --------- --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization 4,673 4,586 598 11,541 Writedown of assets held for sale to realizable value 980 -- -- -- Provision for losses on accounts receivable 93 172 91 370 Loss (gain) on sale of fixed assets 83 92 (106) 2 Capitalized in-process research and development -- -- 1,000 -- Changes in assets and liabilities- (Increase) decrease in assets- Accounts receivable, net (532) (1,215) 3,199 (2,376) Income tax refund receivable -- -- (2,000) 2,581 Inventory (498) (3,573) 2,633 (1,474) Prepaid income taxes (685) 1,090 (31) (761) Prepaid expenses and other current assets (284) 577 736 (331) Other assets (602) (520) 331 (838) Increase (decrease) in liabilities- Accounts payable 369 2,443 (3,175) 4,547 Accrued expenses and current liabilities 123 (1,990) 3,085 (1,152) Other noncurrent liabilities (965) (283) (65) (71) Deferred income taxes 48 (389) -- (641) --------- --------- --------- --------- 2,803 990 6,296 11,397 --------- --------- --------- --------- Net cash provided by operating activities 11,888 10,712 4,007 3,749 --------- --------- --------- --------- Cash Flows From Investing Activities: Acquisition of Alfa -- -- -- (25,500) Cash paid for Merger -- -- (218,200) -- Proceeds from sale of property, plant and equipment 30 1,991 9 681 Capital expenditures (5,492) (9,260) (1,662) (8,489) --------- --------- --------- --------- Net cash used in investing activities (5,462) (7,269) (219,853) (33,308) --------- --------- --------- --------- Cash Flows from Financing Activities: Cash dividends (1,500) (6,694) -- Repayment of long-term debt (4,948) (3,500) -- (5,367) Issuance of long-term debt 1,615 3,500 -- 29,150 Proceeds from sale of notes -- -- 115,000 -- Proceeds from term loan -- -- 45,000 -- Payment of transaction financing costs -- -- (13,100) -- Issuance of common stock in connection with Merger -- -- 69,326 -- Issuance of common stock - exercise of stock options 598 191 -- -- Repurchase of treasury stock (2,259) (15) -- -- Tax effect of disqualifying dispositions of incentive stock options 108 -- -- -- --------- --------- --------- --------- Net cash (used in) provided by financing activities (6,386) (6,518) 216,226 23,783 --------- --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 40 (3,075) 380 (5,776) Effect of exchange rate changes on cash and cash equivalents -- -- -- (63) Cash and Cash Equivalents, beginning of period 9,038 9,078 6,003 6,383 --------- --------- --------- --------- Cash and Cash Equivalents, end of period $ 9,078 $ 6,003 $ 6,383 $ 544 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 43 44 (1) BASIS OF PRESENTATION For periods prior to November 13, 1996, the accompanying financial statements represent the consolidated results and financial position of AMTROL Inc. and Subsidiaries (the Predecessor). On November 13, 1996, the Predecessor merged with AMTROL Acquisition, Inc., a wholly-owned subsidiary of AMTROL Holdings, Inc., a Delaware corporation organized by The Cypress Group L.L.C. as more fully described in Note 3 (the Merger). Financial statements for periods subsequent to November 12, 1996 represent the consolidated financial statements of AMTROL Inc. and Subsidiaries (the Successor) after giving effect to the Merger. References to the Company refer to the Predecessor prior to the Merger and the Successor post-Merger. (2) ORGANIZATION AND OPERATIONS The Company designs, manufactures and markets products used principally in flow control, storage, heating and other treatment of fluids in the water systems market and selected sectors of the heating, ventilating and air conditioning ("HVAC") market. The Company offers a broad product line of quality fluid handling products and services marketed under widely recognized brand names. (3) MERGER AND FINANCING AMTROL Acquisition Inc. ("Acquisition") and AMTROL Holdings, Inc. ("Holdings") were formed by The Cypress Group L.L.C. ("Cypress") in 1996 to effect the acquisition of all of the outstanding common stock of the Predecessor through the Merger of Acquisition with and into the Successor. Upon consummation of the Merger on November 13, 1996, all of the outstanding common stock of Acquisition was converted into common stock of the Successor and the Successor became a wholly-owned subsidiary of Holdings. The Successor, as the surviving entity, continues to be named AMTROL Inc. Holdings has no other material assets, liabilities or operations other than those that result from its ownership of the common stock of the Successor. The Merger was accounted for as a purchase transaction effective as of November 13, 1996, in accordance with Accounting Principles Board Opinion No. 16, Business Combinations, and EITF Issue No. 88-16, Basis in Leveraged Buyout Transactions and, accordingly, the consolidated financial statements for the periods subsequent to November 12, 1996 reflect the purchase price, including transaction costs, allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values as of November 12, 1996. The excess of the purchase price over the fair value of net assets acquired has been allocated to goodwill. 44 45 (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of AMTROL Inc. and its wholly owned subsidiaries (the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FISCAL YEAR The Company uses a calendar fiscal year and four quarterly interim periods ending on Saturday of the thirteenth week of the quarter. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and short-term investments that are readily convertible into cash with an original maturity to the Company of three months or less. DEPRECIABLE PROPERTY AND EQUIPMENT The Company provides for depreciation by charges to income (computed on the straight-line method) in amounts estimated to amortize the cost of properties over their estimated useful lives which generally fall within the following ranges: Building and improvements 10-40 years Machinery and equipment 3-12 years Furniture and fixtures 5-20 years Other 3-10 years
Leasehold improvements are amortized over the life of the lease or the estimated useful life of the improvement, whichever is shorter. Interest costs, during the construction period, on borrowings used to finance construction of buildings and related property are included in the cost of the constructed property. 45 46 (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES The Company's inventories are stated at the lower of cost or market including material, labor and manufacturing overhead (see Note 8.) GOODWILL The excess of purchase price over the fair value of net assets acquired is allocated to goodwill and is included in other assets. Goodwill is being amortized over 40 years. The Company accounts for long-lived and intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company continually reviews its intangible assets for events or changes in circumstances which might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the amortization of such intangibles over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. At December 31, 1997, no such impairment of assets was indicated. FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the Company has determined the estimated fair value of its financial instruments using appropriate market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The Company's financial instruments consist of cash, accounts receivable, accounts payable, senior subordinated notes and bank debt. The carrying value of these assets and liabilities is a reasonable estimate of their fair market value at December 31, 1997. ENGINEERING AND DEVELOPMENT EXPENSES All costs for engineering and development, which amounted to approximately $.9 million, $.8 million, $.1 million and $1.0 million for fiscal 1995, the periods ended November 12 and December 31, 1996, and fiscal 1997, respectively, are charged to general and administrative expense as incurred. 46 47 (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTEREST RATE SWAP AGREEMENTS The Company uses interest rate swap agreements to manage interest rate cost and the risks associated with changing interest rates. The differential to be paid or received is accrued as interest rates change and is recognized in interest expense over the life of the contact. The counter-party to the interest rate swap agreements is a major financial institution. Credit loss from counter-party non-performance is not anticipated. DEFERRED FINANCING COSTS Deferred financing costs are stated at cost as a component of other assets and amortized over the life of the related debt using the effective interest method. Amortization of deferred financing costs is included in interest expense. ACCRUED EXPENSES Certain customers are allowed a rebate if agreed upon sales targets are achieved for a given year. At December 31, 1996 and 1997, the Company has accrued $3.6 million and $3.3 million, respectively, for such volume allowances. These amounts are included in accrued expenses in the accompanying consolidated balance sheets. INTERNATIONAL SALES In fiscal 1995, the periods ended November 12 and December 31, 1996, and in fiscal 1997, net sales to customers in various geographic areas outside the United States and Canada, primarily Mexico, Western Europe and Asia, amounted to $22.6 million, $19.7 million, $1.9 million and $39.4 million, respectively. FOREIGN CURRENCY TRANSLATION The accounts of Alfa (see note 5) have been translated into United States Dollars. Assets and liabilities have been translated at the year-end rate of exchange, stockholder's equity at historical rates and income statement accounts at the average exchange rates prevailing during the year. The cumulative effect of the resulting translation is reflected as a separate component of stockholder's equity. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 130 "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners ("comprehensive income"). SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" introduces a new accounting model (the "management approach") for identifying and reporting on 47 48 business segments. This approach replaces the notion of industry and geographic segments in earlier standards and requires a finer partitioning of geographic disclosures. Both SFAS 130 and SFAS 131 are effective for years beginning after December 15, 1997. As these new accounting standards require additional disclosures only, they will have no impact on the Company's financial condition, results of operations or cash flows, nor will the implementation of these standards in the Company's financial statements require the Company to incur material costs. STOCK OPTIONS The Company accounts for employee stock options in accordance with SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). As permitted under SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for its stock option plans. RECLASSIFICATION Certain prior year balances have been reclassified to conform with the current year presentation. (5) ACQUISITION On June 30, 1997, the Company entered into a Promissory Agreement and a Complementary Document to the Promissory Agreement (collectively, the "Purchase Agreements") to acquire all the outstanding capital shares of Petroleo Mecanica Alfa, S.A., a corporation organized under the laws of Portugal ("Alfa"), for $25.5 million (United States Dollars) plus assumed debt of $8.7 million. The Company assumed immediate management control of Alfa and, accordingly, the operating results and financial position of Alfa are included in the Company's consolidated results of operations and consolidated balance sheets from July 1, 1997. The Company paid $20 million of the purchase price on June 30, 1997 from borrowings available under its revolving credit facility and paid the remaining $5.5 million upon final closure of the transaction in December 1997. The Company's 1997 income from operations includes $1.9 million relating to the operations of Alfa subsequent to July 1, 1997. The following represents pro forma net sales and net income as though the acquisition of Alfa ocurred as of January 1, 1997: Net sales $192,068, net loss $8,600. 48 49 (6) SALE OF ASSETS In May 1997, the Company sold all of the assets, subject to substantially all liabilities, of its American Granby Inc. subsidiary. Accordingly, the results of American Granby included in the accompanying consolidated statements of operations are as follows:
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------- ----------------- YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, 1995 1996 1996 1997 ---- ---- ---- ---- Sales $19,539 $17,980 $ 1,592 $ 7,576 Operating income $ 302 $ 130 $ 1 $ 23
Also in May 1997, the Company sold its Peru, Indiana production facility and the related pump business. AMTROL transferred certain production activities performed in Peru to the Company's West Warwick, Rhode Island facility. The Company believes that the operational efficiencies gained through production consolidation will offset lost contribution from the pump business. The Company utilized the net proceeds of the sales of approximately $6.0 million to fund seasonal working capital demands as well as the acquisition of Alfa (see Note 5). (7) PLANT CLOSINGS In September 1997, the Company ceased operations at its Singapore production facility. The Company relocated its production of non-returnable chemical containers to other facilities, including its newly acquired Alfa facility in Guimaraes, Portugal. In December 1997, the Company ceased operations at its Nashville, Tennessee production facility. The Nashville facility manufactured water systems and pressure rated cylinders. Many of the product lines manufactured in the Nashville facility are also manufactured in the Company's West Warwick, Rhode Island facility which will absorb most of the Nashville production. The Company's 1997 results include a pre-tax charge to operating expenses of $5.5 million in connection with the closures of the Singapore and Nashville facilities, including approximately $1.5 million of severance costs (of which $.3 million was paid at December 31, 1997). Included in current assets as "Assets Held for Sale" is approximately $1.2 million representing the net market value of land and buildings used in the Nashville operation. 49 50 (8) INVENTORIES Inventories were as follows at December 31 (in thousands):
1996 1997 ---- ---- Raw materials and work in process $ 9,429 $13,670 Finished goods 15,354 17,615 ------- ------- $24,783 $31,285 ======= =======
Inventories valued under the last-in, first-out (LIFO) cost method comprised approximately 60.5% of the 1996 totals and 68.2% of the 1997 totals. The value of inventories under the LIFO method is substantially the same as if the first-in, first-out (FIFO) cost method of inventory accounting had been used. (9) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS Long-term debt consisted of the following at December 31 (in thousands):
1996 1997 ---- ---- Revolving credit facility $ -- $ 4,000 Tranche A Term Loan 20,000 19,425 Tranche B Term Loan 25,000 44,698 Senior subordinated notes, due 2006, 10.625% 115,000 115,000 Other -- 4,539 -------- -------- 160,000 187,662 Less-Current portion of long-term debt 825 3,498 -------- -------- Total $159,175 $184,164 ======== ========
REVOLVING CREDIT AND TERM LOANS The Company entered into a Bank Credit Agreement in November 1996, amended in June and December 1997 (the Agreement), that provides for secured borrowings from a syndicate of lenders. The Agreement, as amended, consists of: (i) a five and one-half year revolving credit facility providing for up to $30 million in revolving loans, $5.0 million of which may be used for letters of credit (the Revolving Credit Facility); and (ii) a term loan facility providing for $65.0 million in term loans, consisting of a five and one-half year Tranche A Term Loan of $20.0 million and a seven and one half year Tranche B Term Loan for $45.0 million (collectively, the Term Loans). The Revolving Credit Facility includes a $20.0 million sublimit which is available to finance permitted acquisitions. The highest amount outstanding during 1997 was $20.0 million which was used in connection with the acquisition of Alfa, as discussed in Note 5. This amount was repaid in December 1997 concurrent with an amendment to the Agreement whereby borrowings under the Tranche B facility were increased by $20 million. At December 31, 1997, borrowings of $4.0 million were outstanding on the Revolving Credit Facility. 50 51 The loans under the Agreement bear interest, at the Company's option, at either (A) a "base rate" equal to the higher of (i) the federal funds rate plus .5% or (ii) the bank's prime lending rate plus (x) in the case of Tranche A Term Loans and loans under the Revolving Credit Facility, an applicable spread ranging from .75% to 1.50% (determined based on the Company's leverage ratio) or (y) in the case of Tranche B Term Loans, 2.00%; or (B) a `Eurodollar rate" plus (x) in the case of Tranche A Term Loans and loans under the Revolving Credit Facility, an applicable spread ranging from 1.75% to 2.50% (determined based on the Company's leverage ratio), or (y) in the case of Tranche B Term Loans, 3.00%. Swingline Loans may only be "base rate" loans. Tranche A Term Loans amortize on a quarterly basis over the term of the loans. The Tranche B Term Loans have nominal quarterly amortization prior to the maturity of the Tranche A Term Loans, and will amortize remaining amounts on a quarterly basis thereafter. The commitments under the Revolving Credit Facility and the acquisition sublimit will each reduce by $5.0 million in the fourth year and $10.0 million in the fifth year after the date of the Merger. The Revolving Credit Facility will mature five and one-half years after the date of the Merger. In addition, the Agreement provides for mandatory prepayments, subject to certain exceptions, of the Term Loans with the net proceeds of certain asset sales, with the net proceeds of certain debt and equity issuances and from a portion of the Company's excess cash flow. The Revolving Credit Facility also requires the Company to pay a commitment fee on the average daily aggregate unutilized portion of the Revolving Credit Facility at a rate of .50% per annum, payable quarterly in arrears, as well as a commission on trade and standby letters of credit of 1.25% per annum of the amount to be drawn under the Agreement. Amounts outstanding under the Revolving Credit Facility are due on May 12, 2002. The Agreement contains a number of covenants that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, incur guaranty obligations, repay other indebtedness or amend other debt instruments, pay dividends, create liens on assets, enter into leases, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures, engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, the Agreement requires compliance with certain financial covenants, including requiring the Company to maintain a minimum level of earnings before income taxes, depreciation and amortization (i.e., "EBITDA"), a minimum ratio of EBITDA to interest expense and a maximum ratio of Indebtedness to EBITDA, in each case tested at the end of each fiscal quarter of the Company. The Company's obligations under the Agreement are guaranteed by Holdings and each direct and indirect domestic subsidiary of the Company. The Company's obligations under the Agreement are secured by substantially all assets of the Company and its subsidiaries. 51 52 The Company has entered into interest rate swap agreements which have effectively converted $13.0 million of floating rate borrowings to fixed borrowings for a three-year period. The agreements are contracts to periodically exchange floating interest rate payments for fixed rate payments over the life of the agreements and are used to manage the Company's interest rate exposure. SENIOR SUBORDINATED NOTES In connection with the Merger, the Company issued $115.0 million of Senior Subordinated Notes due in 2006 (the "Notes"). The Notes are unsecured obligations of the Company. The Notes bear interest at a rate of 10.625% per annum and are payable semi-annually on each June 30 and December 31 commencing on June 30, 1997. The Notes are redeemable at the option of the Company on or after December 31, 2001. The Notes will be subject to redemption at the option of the Company, in whole or in part, at various redemption prices, declining from 105.313% of the principal amount to par on and after December 31, 2003. In addition, on or prior to December 31, 1999, the Company may use the net cash proceeds of one or more equity offerings to redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 110.625% of the principal amount thereof plus accrued interest to the date of redemption. Upon a change of control, each Note holder has the right to require the Company to repurchase such holder's Notes at a purchase price of 110% of the principle amount plus accrued interest. The Note Indenture contains certain affirmative and negative covenants and restrictions. As of December 31, 1997, the Company was in compliance with the various covenants of the Note Indenture and the credit agreement. OTHER LONG-TERM DEBT Other long-term debt represents borrowings assumed by the Company in connection with the 1997 acquisition of Alfa. They are comprised of the equivalent of approximately $4.5 million of loans payable to the Industrial Development Fund of Portugal as well as several local Portuguese banks. The loans amortize in roughly equal installments through 2000 and accrue interest at LIBOR plus a premium ranging from 1.25% to 1.5%, adjusted quarterly or semi-annually. The loans are secured by substantially all property and equipment owned by Alfa. Alfa also has available revolving credit facilities with local banks providing for short-term working capital loans of up to the equivalent of approximately $6.5 million. Borrowings under these agreements accrue interest at LIBOR plus a premium ranging from .375% to 1.375%. The highest amount outstanding under these facilities in 1997 was approximately $5.4 million, and the balance outstanding at December 31 was $4.4 million. Cash paid for interest amounted to $0.1 million, $0.1 million , $0 and $20.3 million for fiscal 1995, the periods ended November 12, 1996 and December 31, 1996, and fiscal 1997, respectively. 52 53 (10) INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
PREDECESSOR COMPANY SUCCESSOR COMPANY ----------------------------- ---------------------------- YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, 1995 1996 1996 1997 ---- ---- ---- ---- Current: Federal $ 5,798 $ 5,233 $(1,376) $ -- State 586 258 (23) -- Foreign -- -- -- 714 ------- ------- ------- ------- 6,384 5,491 (1,399) 714 Deferred: Federal (591) 622 82 (625) State (112) 39 7 (119) ------- ------- ------- ------- (703) 661 89 (744) ------- ------- ------- ------- $ 5,681 $ 6,152 $(1,310) $ (30) ======= ======= ======= =======
The deferred income tax provision resulted primarily from temporary differences due to the use of accelerated depreciation for income tax purposes and straight-line depreciation for financial statement purposes, temporary differences related to deferred compensation and the reversal of temporary differences related to safe-harbor lease transactions that had previously transferred tax benefits to the Company. The difference between a provision computed using the respective statutory U.S. federal income tax rate and the provision for income taxes in the accompanying consolidated financial statements is primarily the result of state taxes, net of federal benefit, non-deductible goodwill amortization and foreign losses for which no benefit is available. Significant items giving rise to deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are as follows (in thousands) :
1996 1997 ---- ---- Prepaid Income Taxes: Warranty reserves - current $ 145 $ 239 Allowance for doubtful accounts 351 354 Plant closing reserve -- 744 Accrued vacation 278 187 UNICAP adjustment 253 365 Other 707 606 ------ ------ $1,734 $2,495 ====== ======
53 54
1996 1997 ---- ---- Deferred Income Taxes: Net operating loss carry forward $ -- $(1,617) Accelerated depreciation 1,265 2,553 Safe harbor leases 492 163 Warranty reserves-long-term (781) (780) Deferred compensation and restricted stock plan (724) (676) Other (30) (62) ------- ------- $ 222 $ (419) ======= =======
Cash paid (received) for income taxes amounted to $7.1 million and $4.3 million for fiscal 1995 and the period ended November 12, 1997, respectively, and $0 for the period ended December 31, 1996 and fiscal 1997, respectively. (11) PENSION AND PROFIT SHARING PLANS The Company has a defined contribution 401(k) plan covering substantially all of its U.S. employees. Under the Plan, eligible employees are permitted to contribute up to 10% of gross pay, not to exceed the maximum allowed under the Internal Revenue Code. The Company matches each employee contribution up to 6% of gross pay at a rate of $.25 per $1 of employee contribution. The Company also contributes 3% of each employee's gross pay up to the Social Security taxable wage base and 4% of amounts in excess of that level up to approximately $.2 million of wages. Company contributions to the 401(k) plan totaled approximately $1.1 million in 1995, $.9 million and $.1 million for the periods ending November 12 and December 31, 1996, respectively, and $1.1 million in 1997. (12) LEASE COMMITMENTS The Company leases certain plant facilities and equipment. Total rental expenses charged to operations approximated $.8 million in fiscal 1995, $1.0 million and $.2 million for the periods ended November 12 and December 31, 1996, and $1.5 million in fiscal 1997, respectively. Minimum rental commitments under all non-cancelable operating leases are as follows (in thousands): 1998 $ 1,063 1999 600 2000 582 2001 573 2002 553 -------- $ 3,371 ========
Certain of the leases provide for renewal options. 54 55 (13) COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Revolving Credit Facility contains a sublimit to support the issuance of letters of credit in the amount of $5.0 million with approximately $.2 million outstanding. The Company is involved in various legal proceedings which, in the opinion of management, will not result in a material adverse effect on its financial condition or results of operations. The Company has received three "Notice Letters" from the Environmental Protection Agency ("EPA") stating that it is one of several potential responsible parties pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, and that it will be required to share in the cost of cleaning up the sites identified by the EPA. The Company's degree of responsibility, if any, is not presently determinable in all cases; however, management is of the opinion that these will not have a material adverse effect on the accompanying consolidated financial statements. (14) STOCK PLANS On December 16, 1997, the board of directors of the Company's parent, Amtrol Holdings, Inc., approved the Holdings 1997 Incentive Stock Plan and immediately granted to certain key employees options to purchase 65,310 shares of the common stock of Holdings for $100 per share, the fair value of the options at the date of the grant. The options include 32,655 non-qualified options which are exercisable immediately provided that purchased shares are subject to repurchase by Holdings at the exercise price until such shares vest based on relative achievement of management's business plan for fiscal years 1997 through 2001. An additional 22,398 non-qualified options are also immediately exercisable but are subject to repurchase by Holdings, in monthly diminishing amounts, if the holder terminates employment before August 2000. The remaining 10,257 options are incentive stock options of which 3,000 vest immediately, 654 are released from restrictions in January 1998 and the remainder are released from restrictions ratably through August 2000. The Company applies APB opinion No. 25 to account for its stock option plans. Accordingly, pursuant to the terms of the 1997 Holdings Incentive Stock Plan, no compensation cost related to the issuance of stock options has been recognized in the Company's financial statements. However, if the Company had determined compensation cost for options issued in 1997 under the provisions of SFAS No. 123, the Company's net loss in 1997 would have increased by approximately $0.6 million. The fair value of the options granted in 1997 were estimated using the Black-Scholes option pricing model. The following key assumptions were used to value the options granted in 1997: volatility, 0; weighted average risk free rate, 5.00%; average expected life, 3 years. The weighted average fair value per share of the stock options granted in 1997 amounted to $13.62. It should be noted that the option pricing model used was designed to value readily tradeable stock options with relatively short lives. The options granted are not tradeable. However, management believes that the assumptions used and the model applied to value 55 56 the awards yield a reasonable estimate of the fair value of the options grants under the circumstances. In connection with the Merger, certain holders of options to purchase shares of the common stock of the predecessor exchanged such options for Amended Options to purchase an aggregate of 17,041 shares of Holdings common stock with weighted average exercise price of $57.38 per share. All such options are immediately exercisable. No options from any source were exercised in 1997. 56 57 ITEM 14(A)(2) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
BALANCE AT BALANCE BEGINNING AT END OF CONSOLIDATED OF PERIOD PROVISION RECOVERIES WRITE-OFFS PERIOD ------------ --------- --------- ---------- ---------- ------ PREDECESSOR Year Ended December 31, 1995 Allowance for doubtful accounts 1,094 93 2 (199) 990 Period Ended November 12, 1996 Allowance for doubtful accounts 990 172 21 (108) 1,075 SUCCESSOR Period Ended December 31, 1996 Allowance for doubtful accounts 1,075 91 4 (115) 1,055 Year Ended December 31, 1997 1,055 370 3 (340)* 1,088
*Includes $135 related to the disposition of the Company's American Granby subsidiary in May 1997. 57 58 SIGNATURES Pursuant to the requirements of Section 13 or 5(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in West Warwick, Rhode Island, on the 25th day of March 1998. AMTROL Inc. By: s/s Edward J. Cooney ------------------------------ Edward J. Cooney Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934, this registration statement has been signed by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- s/s John P. Cashman Chairman of the Board, President March 25, 1998 - ---------------------------------------- and Chief Executive Officer (principal John P. Cashman executive officer) and Director s/s Samuel L. Daniels Executive Vice President and Director March 25, 1998 - ---------------------------------------- Samuel L. Daniels s/s Clifford A. Peterson Senior Vice President and Director March 25, 1998 - ---------------------------------------- Clifford A. Peterson s/s Edward J. Cooney Senior Vice President, Chief Financial March 25, 1998 - ---------------------------------------- Officer and Treasurer (principal Edward J. Cooney financial officer) s/s Donald W. Reilly Vice President Finance (principal March 25, 1998 - ---------------------------------------- accounting officer) Donald W. Reilly s/s David P. Spalding Director March 25, 1998 - ---------------------------------------- David P. Spalding s/s James A. Stern Director March 25, 1998 - ---------------------------------------- James A. Stern s/s Anthony D. Tutrone Director March 25, 1998 - ---------------------------------------- Anthony D. Tutrone
58 59 EXHIBIT INDEX EXHIBIT # DOCUMENT DESCRIPTION - --------- -------------------- 3.1 Restated Articles of Incorporation of AMTROL Inc. (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 3.2 Bylaws of AMTROL Inc. (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 4.1 Indenture, dated as of November 1, 1996 between AMTROL Acquisition, Inc. and The Bank of New York (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 4.2 Form of 10-5/8% Senior Subordinated Notes due 2006 (included in Exhibit 4.1) (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 4.3 First Supplemental Indenture, dated as of November 13, 1996, between AMTROL Inc. and The Bank of New York (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 10.1 Credit Agreement, dated as of November 13, 1996, among AMTROL Acquisition, Inc. and AMTROL Holdings, Inc., various lending institutions party thereto, Morgan Stanley Senior Funding, Inc. as documentation agent, and Bankers Trust Company, as administrative agent (incorporated by reference from the Company's Registration Statement on Form S-4, Registration No. 333-18075, declared effective by the Securities and Exchange Commission on January 2, 1997). 10.1.1 First Amendment to Credit Agreement, dated as of June 24, 1997 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended July 5, 1997). 10.1.2 Second Amendment to Credit Agreement, dated as of December 12, 1997 (incorporated by reference to Exhibit 7(c) in the Company's Current Report on Form 8-K dated December 22, 1997). 10.2 AMTROL Inc. Pension Plan and Trust (incorporated by reference from the Company's Registration Statement on Form S-1, Registration No. 33-48413, declared effective by the Commission on March 18, 1993).* 10.3 Amendments to AMTROL Inc. Pension Plan and Trust (incorporated by reference from the Company's Registration Statement on Form S-1, Registration No. 33-48413, declared effective by the Securities and Exchange Commission on March 18, 1993).* 10.4 AMTROL Inc. Executive Cash Bonus Plan (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).* 10.5 AMTROL Inc. Supplemental Retirement Plan II (incorporated by reference from the Company's Registration Statement on Form S-1, Registration No. 33-48413, declared effective by the Commission on March 18, 1993).* 59 60 10.6 First Amendment to AMTROL Inc. Supplemental Retirement Plan II (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).* 10.7 Employment Agreement dated January 19, 1997 by and between AMTROL Inc. and Samuel L. Daniels. (incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 1996).* 10.8 Employment Agreement dated January 19, 1997 by and between AMTROL Inc. and Clifford A. Peterson. (incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 1996).* 10.9 Employment Agreement dated January 19, 1997 by and between AMTROL Inc. and Edward J. Cooney. (incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 1996).* 10.10 Employment Agreement dated as of April 22, 1997 by and between John P. Cashman and AMTROL Management International Inc.* 10.11 AMTROL Holdings Inc. 1997 Incentive Stock Plan dated December 16, 1997.* 21 Subsidiaries of AMTROL Inc. 27 Financial Data Schedule 60 EX-10.10 2 EMPLOYMENT AGREEMENT (J. CASHMAN) 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement"), dated as of April 22, 1997 between John P. Cashman, an individual with a residence address of 83 Ailesbury Road, Dublin 4 Ireland (the "Employee") and AMTROL Management International Inc., a Rhode Island corporation with a principal place of business at 1400 Division Road, West Warwick, Rhode Island 02893 (the "Company"). WHEREAS, the Company desires to assure itself of the benefit of the Employee's services and experience for a period of time in order to fulfill its obligations under that certain Executive Management Agreement of even date by and between AMTROL Inc. ("AMTROL") and the Company (the "Management Agreement"), and the Employee is willing to enter into an agreement to that end upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties hereto agree as follows: 1. TERM OF AGREEMENT. Subject to the terms and conditions hereof, the term of this Agreement shall commence on the date hereof and, subject to earlier termination by the Employee or the Company as hereinafter provided, shall continue for a period of two (2) years beginning on the first day of each month after the date hereof. Such term of employment is hereinafter referred to as the "Employment Period." 2. SERVICES TO BE RENDERED. (a) During the Employment Period, the Employee shall serve the Company as its Chairman, President and Chief Executive Officer and consistent with the Company's obligations under the Management Agreement, shall serve as the Chairman, President and Chief Executive Officer of AMTROL. (b) The Employee agrees that he will, during the Employment Period, devote substantially all of his business time and attention and his full ability to the business of the Company and the fulfillment of the Company's obligations to AMTROL under the Management 1 2 Agreement as the Chairman, President and Chief Executive Officer of the Company and AMTROL and shall well and faithfully serve the Company and AMTROL and its subsidiaries and shall exercise the powers and authorities and fulfill the responsibilities hereby conferred upon him honestly, diligently, in good faith and in the best interest of the Company and AMTROL and its subsidiaries and use his best efforts to promote their interests. The Employee may, however, serve as an outside director of any other corporation provided Employee obtains the prior written consent of the Company and the Board of Directors of AMTROL, which shall not be unreasonably withheld. 3. COMPENSATION. (a) In full payment for services rendered to the Company under this Agreement, the Company shall pay the Employee a salary of $440,000 per year during the first year of the Employment Period ("Base Salary"), payable in equal monthly installments. The Compensation Committee of the Board of Directors of the Company or in the absence of a Compensation Committee, the full Board of Directors of the Company shall determine the salary to be paid to the Employee during subsequent years of the Employment Period. (b) In addition to the compensation otherwise provided for in this Section 3, during the Employment Period, the Employee also shall be entitled to: (i) participate in the Company's and AMTROL's stock option plans, in accordance with the terms thereof, as from time to time may be in effect; (ii) by resolution of the Compensation Committee, participate in the Company's and AMTROL's incentive compensation plans, in accordance with the terms thereof, as from time to time may be in effect; (iii) participate in the Company's and AMTROL's retirement plans, in accordance with the terms thereof, as from time to time may be in effect or in some similar plan at the same or less cost to the Company; and (iv) participate in such group life, disability, accident, hospital and medical insurance plans ("Welfare Plans") in accordance with the terms thereof, as from time to time may be in effect; provided, that any such participation is generally appropriate to Employee's responsibilities hereunder; and provided, further, that benefits and terms of participation under the Welfare Plans may be changed by the Company from time to time in its sole discretion. To the extent stock options are to be granted in 2 3 accordance with a Company or AMTROL stock option plan for the Company fiscal year ending within the year Employee's employment with the Company terminates, Employee shall be entitled to such options in accordance with the plan's terms. (c) The Employee shall be entitled, during the Employment Period, to vacations and fringe benefits consistent with the policies and practices of the Company, which shall be the same as the policies and practices of AMTROL. (d) The Company shall provide the Employee, during the Employment Period, with the use of a Company-owned or leased automobile, and will pay all taxes and insurance on said vehicle, or will pay an allowance, grossed-up for any income tax on a formula consistent with the R.P. Scherer Corporation plan. 4. DISABILITY, DEATH AND TERMINATION. (a) In the event of the Employee's inability to perform the principal duties of his job at the Company due to physical or mental condition, as determined by a physician ("Permanent Incapacitating Disability") for any consecutive period of at least six (6) months with or without accommodation, the Company may, at its election, terminate the Employee's employment hereunder. The date of Permanent Incapacitating Disability shall be on the last day of such period. In the event of any such termination, the Company shall be obligated (i) for compensation earned by the Employee hereunder, but not yet paid, prior to such termination, and (ii) to pay the Employee each month, for twenty-four (24) consecutive months, an amount equal to the monthly Termination Benefit (the "Disability Benefit"); provided, however, that the amount of the Disability Benefit shall be reduced by any amounts received by the Employee in respect of the Employee's disability from any employee benefit or disability plans maintained by the Company (including any plans maintained by AMTROL in which the Employee participates as an Employee of the Company or, pursuant to the Management Agreement, as an officer of AMTROL). (b) Except as provided in this Section 4(b), the obligations of the Company under this Agreement shall terminate upon the death of the Employee. In the event of the Employee's death during the term of this Agreement, the Company shall be obligated (i) for 3 4 compensation earned by the Employee hereunder, but not yet paid, prior to the Employee's death, and (ii) to pay the Employee's estate each month, for twenty-four (24) consecutive months, an amount equal to the monthly Termination Benefit (the "Death Benefit"); provided, however, that the amount of the Death Benefit shall be reduced by any amounts payable to the Employee's estate or heirs in respect of the Employee's death from any insurance or plan maintained by the Company which provides a death benefit to the Employee (including any such insurance or plans maintained by AMTROL in which the Employee participates as an Employee of the Company or, pursuant to the Management Agreement, as an officer of AMTROL). (c) The Employee may terminate this Agreement at any time by providing written notice to the Company. In the event that (i) the Employee voluntarily terminates employment with the Company without Good Reason, or (ii) the Company terminates the Employee's employment for Cause, the Company's obligations hereunder shall terminate and no further payments of any kind (other than in respect of compensation earned by the Employee as determined hereunder prior to such termination) shall thereafter be made by the Company to the Employee hereunder. 4 5 "Cause" as used within this Agreement means: (i) any act or acts of the Employee constituting a felony (or its equivalent) under the laws of the United States, any state thereof or any foreign jurisdiction; (ii) any material breach by the Employee of any employment agreement with the Company or the policies of the Company or AMTROL or any of its subsidiaries or the willful and persistent (after written notice to the Employee) failure or refusal of the Employee to perform his duties of employment or comply with any lawful directives of the Board of Directors of the Company; (iii) a course of conduct amounting to gross neglect, willful misconduct or dishonesty; or (iv) any misappropriation of material property of the Company by the Employee or any misappropriation of a corporate or business opportunity of the Company or its affiliates by the Employee. "Good Reason" as used within this Agreement means: (i) any material reduction by the Company of such Employee's duties, responsibilities or titles; (ii) any involuntary removal of such Employee from any position previously held (except in connection with a promotion or a termination for Cause, death or disability, or the voluntary termination by the Employee other than for Good Reason); (iii) within six months after a Change in Control; or (iv) such other reasons (including non-employment-related reasons) as may be approved by the Company, in its sole discretion, from time to time. provided, however, that a Good Reason shall not be deemed to have occurred under clause (i) or (ii) unless the Employee notifies the Company that he believes one of such events has occurred within 60 days after he has knowledge of it and if it has, the Company shall not have cured it within 60 days of receipt of such notice. (d) The Company may terminate Employee's employment at any time without Cause by providing written notice to the Employee. If the Company terminates the Employee's employment without Cause or if the Employee voluntarily terminates employment with the Company for Good Reason, the Company shall: (1) pay the Employee a monthly amount, for twenty-four (24) consecutive months after termination, equal to one twelfth of the Employee's 5 6 annual average salary as computed by the Company for the prior twenty-four (24) consecutive months, or if the Employee has not been employed for twenty-four (24) consecutive months, for the number of consecutive months employed, preceding the date of termination (the "Termination Benefit") until the Termination Benefit is paid in full; (2) pay, on the date otherwise due and payable, the pro-rata portion of any bonus or incentive compensation otherwise payable to the Employee without regard to his termination with respect to the fiscal period in which such termination occurs; and (3) provide Employee with benefits in accordance with Section 3(b) (iv) and Section 3(d) for a period of twenty-four (24) consecutive months after termination. 5. CONFIDENTIALITY. For purposes of this Agreement, "proprietary information" shall mean any information relating to the business of the Company or AMTROL or any of its subsidiaries that has not previously been publicly released by duly authorized representatives of the Company or AMTROL and shall include (but shall not be limited to) AMTROL information encompassed in all research, product development, designs, plans, formulations and formulating techniques, proposals, marketing and sales plans, financial information, costs, pricing information, strategic business plans, customer information, and all methods, concepts, or ideas in or reasonably related to the business of AMTROL. The Employee agrees to regard and preserve as confidential all proprietary information pertaining to AMTROL's business that has been or may be obtained by the Employee in the course of his employment with the Company or its provision of services under the Management Agreement, whether he has such information in his memory or in writing or other physical form. The Employee will not, without prior written authority from the Company to do so, use for his benefit or purposes, or disclose to any other person, firm, partnership, corporation or other entity, either during the term of his employment hereunder or thereafter, any proprietary information connected with the business or developments of the Company or AMTROL, except as required in connection with the performance by the Employee of his duties and responsibilities as an employee of the Company. This provision shall not apply after the proprietary information has been voluntarily disclosed to the public, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. 6 7 6. REMOVAL OF DOCUMENTS OR OBJECTS. The Employee agrees not to remove from the premises of the Company or AMTROL, except as an employee of the Company in pursuit of the business of the Company or AMTROL or any of its subsidiaries, or except as specifically permitted in writing by the Company, any document (regardless of the medium on which it is recorded), object, computer program, computer source code, object code or data (the "Documents") containing or reflecting any proprietary information of the Company or AMTROL. The Employee recognizes that all such Documents, whether developed by him or by someone else, are the exclusive property of the Company or AMTROL, as the case may be. 7. NON-COMPETITION. The Employee agrees that during the Employment Period and for a period of two (2) years after such Employment Period terminates or is terminated, he will not in any way, directly or indirectly, manage, operate, control, solicit officers or employees of AMTROL, accept employment, a directorship or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than one percent (1%) of the outstanding shares of a corporation's stock which is listed on a national securities exchange) any enterprise which competes or shall compete with AMTROL, by engaging in or otherwise carrying on the research, development, manufacture or sale of any product of any type developed, manufactured or sold by AMTROL or any subsidiary thereof, whether now or hereafter (to the extent that any such product is under consideration by the Board of Directors of AMTROL at the time the Employee's employment terminates or is terminated). 8. CORPORATE OPPORTUNITIES. The Employee agrees that during the Employment Period he will not take any action which might divert from AMTROL or any subsidiary of AMTROL any opportunity which would be within the scope of any of the present or future businesses of AMTROL or any of its subsidiaries (which future businesses are then under consideration by the Board of Directors of AMTROL), the loss of which has or would have had, in the reasonable judgment of the Board of Directors of AMTROL, an adverse effect upon AMTROL, unless the Board of Directors of AMTROL has given prior written approval. 7 8 9. RELIEF. It is understood and agreed by and between the parties hereto that the service to be rendered by the Employee hereunder, and the rights and privileges granted to the Company by the Employee hereunder, are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and that a breach by the Employee of any of the provisions contained in this Agreement will cause the Company great irreparable injury and damage. The Employee hereby expressly agrees that the Company shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach of this Agreement by the Employee. The Employee further expressly agrees that in the event the Employee breaches the non-competition provisions of Section 7 of this Agreement or the confidentiality provisions of Section 5 of this Agreement, the balance of any payments due under this Agreement shall be forfeited by the Employee. The provisions of this Section 9 shall not, however, be construed as a waiver of any of the rights which the Company may have for damages or otherwise. 10. WARRANTY. The Employee hereby warrants that he is free to enter into this Agreement and to render his services pursuant hereto. 11. NON-ASSIGNABILITY. Except as otherwise provided herein, this Agreement may not be assigned by either the Company or the Employee, except that Employee may assign his rights to receive compensation or other payments hereunder to a financial institution as collateral for a loan incurred to purchase stock of AMTROL or AMTROL Holdings, Inc.. 12. MERGER OR CONSOLIDATION. In the event of a "Change of Control" (as such term is defined in the Indenture dated as of November 1, 1996 between AMTROL Acquisition, Inc. and the Bank of New York, as Trustee, as amended by the First Supplemental Indenture date November 13, 1996), this Agreement may be assigned and transferred to such successor in interest as an asset of the Company upon such assignee assuming the Company's obligations hereunder, in which event the Employee agrees to continue to perform his duties and obligations 8 9 according to the terms and conditions hereof for such assignee or transferee of this Agreement subject to Employee's right to terminate for Good Reason in accordance with Section 4(c)(iii). 13. WITHHOLDING. The Company shall have the right to withhold the amount of taxes, which in the determination of the Company, are required to be withheld under law with respect to any amount due or paid under this Agreement. 14. NOTICES. All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (a) If to the Company, AMTROL Management International Inc. 1400 Division Road West Warwick, Rhode Island 02893 Attention: President With a copy to: Hinckley, Allen & Snyder 1500 Fleet Center Providence, Rhode Island 02903 Attention: Margaret D. Farrell, Esq. (b) If to the Employee, to him at such address as set forth on the title page hereof or as he shall otherwise have specified by notice in writing to the Company. 15. GOVERNMENTAL REGULATION. Nothing contained in this Agreement shall be construed so as to require the commission of any act contrary to law and wherever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. 16. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of Rhode Island. Any suit, action or proceeding against the Employee with respect to this Agreement, or any judgment entered by any 9 10 court in respect of any thereof, may be brought in any court of competent jurisdiction in the State of Rhode Island and the Employee hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment. The Employee hereby irrevocably waives any objections which he may now or hereafter have to the laying of the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Rhode Island and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum. No suit, action or proceeding against the Company with respect to this Agreement may be brought in any court, domestic or foreign, or before any similar domestic or foreign authority other than in a court of competent jurisdiction in the State of Rhode Island, and the Employee hereby irrevocably waives any right which he may otherwise have had to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. The Company hereby submits to the jurisdiction of such courts for the purpose of any such suit, action or proceeding. The Employee irrevocably waives his right to trial by jury with regard to any suit, action, or proceeding with respect to this Agreement; provided, however, that if such waiver of the right to jury trial shall be held unenforceable, the invalidity or unenforceability of this provision shall not impair the validity or enforceability of any other provision of this Agreement. 17. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of the parties in respect of the subject matter contained herein and supersedes all prior agreements, arrangements and understandings relating to the subject matter, but specifically excluding that certain Management Stockholder's Agreement by and between AMTROL Holdings, Inc. and the Employee dated November 13, 1996. 18. AMENDMENT. This Agreement may not be modified or amended or any term or provision waived or discharged except in writing, signed by both parties hereto or their duly authorized representatives. 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Employee: Company: AMTROL MANAGEMENT - ---------------------------------- INTERNATIONAL INC. By: DAVID P. SPALDING ------------------------------ Title: DIRECTOR --------------------------- 11 EX-10.11 3 1997 INCENTIVE STOCK PLAN 1 EXHIBIT 10.11 AMTROL HOLDINGS, INC. 1997 INCENTIVE STOCK PLAN EFFECTIVE: DECEMBER 16, 1997 2 AMTROL HOLDINGS, INC. 1997 INCENTIVE STOCK PLAN 1. Purpose AMTROL Holdings, Inc. (the "Company") desires to attract and retain the best available talent and encourage the highest level of performance by employees and other persons who perform services for the Company in order to serve the best interests of the Company and stockholders. By affording eligible persons the opportunity to acquire proprietary interests in the Company and by providing them incentives to put forth maximum efforts for the success of the Company's business, the AMTROL Holdings, Inc. 1997 Incentive Stock Plan (the "1997 Plan") is expected to contribute to the attainment of those objectives. 2. Scope and Duration Awards under the 1997 Plan may be granted in the form of incentive stock options ("incentive stock options") as provided in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), in the form of non-qualified stock options ("non-qualified options") (unless otherwise indicated, references in the 1997 Plan to "options" include incentive stock options and non-qualified options), in the form of shares of the common stock, par value $.01 per share, of the Company (the "Common Stock") that are restricted as provided in paragraph 9 ("restricted shares"). The maximum aggregate number of shares of Common Stock as to which awards may be granted from time to time under the 1997 Plan is 65,310 shares, subject to adjustment as provided in paragraph 12. The shares available may be in whole or in part, as the Board of Directors of the Company (the "Board of Directors") shall from time to time determine, authorized but unissued shares or issued shares reacquired by the Company. Unless otherwise provided by the Stock Committee, shares covered by expired or terminated options and forfeited restricted shares will be available for subsequent awards under the 1997 Plan, except to the extent prohibited by Rule 16b-3, as amended, or any successor provision thereto ("Rule 16b-3"), or other applicable rules under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Any shares issued by the Company in respect of the assumption or substitution of outstanding awards from a corporation or other business entity by the Company shall not reduce the number of shares available for awards under the 1997 Plan. No incentive stock option shall be granted more than 10 years after the Effective Date. 3. Administration (a) The 1997 Plan shall be administered by the Board of Directors or, in the discretion of the Board of Directors, a committee of directors designated by the Board of Directors, until such time as the Company has a class of securities registered pursuant to Section 12 of the Exchange Act, at which time the 1997 Plan shall be administered by a committee (the "Stock Committee") consisting of not less than two members who shall qualify as "Non-Employee Directors " within the meaning of Rule 16b-3 (unless Rule 16b-3 shall permit fewer than two members to so qualify); PROVIDED, HOWEVER, that, with respect to individual participants who are not subject to Section 16(b) of the Exchange Act, the Stock Committee of the Board of Directors may delegate authority to administer the 1997 Plan to another committee of directors 1 3 (the "Employee Committee") which committee may include directors who do not meet the standards set forth immediately above. Unless the context otherwise requires, the term "Committee" shall refer to the Board of Directors or committee designated to administer the 1997 Plan, as the case may be, until such time as the Stock Committee has been constituted and, thereafter, to both the Stock Committee and the Employee Committee. (b) The Committee shall have plenary authority in its discretion, subject to and not inconsistent with the express provisions of the 1997 Plan to grant options, to determine the purchase price of the shares of Common Stock covered by each option, the term of each option, the persons to whom, and the time or times at which options shall be granted, and the number of shares to be covered by each option; to designate options as incentive stock options or non-qualified options; to grant restricted shares and to determine the term of the restricted period and other conditions applicable to such shares, the persons to whom, and the time or times at which, restricted shares shall be granted and the number of shares to be covered by each grant; to interpret the 1997 Plan; to prescribe, amend and rescind rules and regulations relating to the 1997 Plan; to determine the terms and provisions of the option agreements (which need not be identical) and the restricted share agreements (which need not be identical) entered into in connection with awards under the 1997 Plan; and to make all other determinations deemed necessary or advisable for the administration of the 1997 Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the 1997 Plan. (c) The Committee may employ attorneys, consultants, accountants or other persons and the Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all persons who have received awards, the Company and all other interested persons. No member or agent of the Committee shall be personally liable for any action, determination or interpretation taken or made in good faith with respect to the 1997 Plan or awards made thereunder, and all members and agents of the Committee shall be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. 2 4 4. Eligibility; Factors to be Considered in Granting Awards (a) Awards will be limited to officers and other key employees of the Company and its subsidiaries, and except in the case of incentive stock options, any other non-employees who may provide services to the Company or its subsidiaries (all such persons being hereinafter referred to as "employees"). In determining the employees to whom awards shall be granted and the number of shares or units to be covered by each award, the Committee shall take into account the nature of the employees' duties, their present and potential contributions to the success of the Company and such other factors as it shall deem relevant in connection with accomplishing the purposes of the 1997 Plan. A director of the Company or of a subsidiary who is not also an employee of the Company (or deemed to be an employee of the Company as provided above) will not be eligible to receive an award. (b) Awards may be granted singly, in combination or in tandem and may be made in combination or in tandem with, in replacement of, or as alternatives to, awards or grants under any other employee plan maintained by the Company, its present and future subsidiaries. An employee who has been granted an award or awards under the 1997 Plan may be granted an additional award or awards, subject to such limitations as may be imposed by the Code on the grant of incentive stock options. No award of incentive stock options shall result in the aggregate fair market value of Common Stock with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year (determined at the time the incentive stock option is granted) exceeding $100,000. The Committee, in its sole discretion, may grant to an employee who has been granted an award under the 1997 Plan or any other employee plan maintained by the Company or its subsidiaries, or any predecessors or successors thereto, in exchange for the surrender and cancellation of such award, a new award in the same or a different form and containing such terms, including without limitation a price which is different (either higher or lower) than any price provided in the award so surrendered and canceled, as the Committee may deem appropriate. 5. Option Price The purchase price of the Common Stock covered by each option shall be determined by the Committee, but in the case of an incentive stock option shall not be less than 100% of the fair market value (110% in the case of a 10% shareholder of the Company) of the Common Stock on the date the option is granted, as determined in good faith by the Board of Directors (the "Market Value") for the date on which the option is granted. The Committee shall determine the date on which an option is granted, PROVIDED that such date is consistent with the Code and any applicable rules or regulations thereunder. In the absence of such determination, the date on which the Committee adopts a resolution granting an option shall be considered the date on which such option is granted, PROVIDED the employee to whom the option is granted is promptly notified of the grant and an option agreement is duly executed as of the date of the resolution. The purchase price shall be subject to adjustment as provided in paragraph 12. 3 5 6. Terms of Options The term of each incentive stock option granted under the 1997 Plan shall not be more than 10 years (5 years in the case of a 10% shareholder of the Company) from the date of grant, as the Committee shall determine, subject to earlier termination as provided in paragraphs 10 and 11. The term of each non-qualified stock option granted under the 1997 Plan shall be such period of time as the Committee shall determine, subject to earlier termination as provided in paragraphs 10 and 11. 7. Exercise of Options; Loans (a) Subject to the provisions of the 1997 Plan, an option granted under the 1997 Plan shall become vested as determined by the Committee. The Committee may, in its discretion, determine as a condition of any option, that all or a stated percentage of the options shall become exercisable, in installments or otherwise, only after completion of a specified service requirement. The Committee may also, in its discretion, accelerate the exercisability of any option at any time and provide, in any option agreement, that the option shall become immediately exercisable as to all shares of Common Stock remaining subject to the option on or following either (i) December 31, 2001, (ii) a Change of Control (as defined in this paragraph), or (iii) an underwritten primary public offering of common stock of the Company or AMTROL Inc. ("AMTROL") pursuant to an effective registration statement under the Securities Act (the date upon which an event described in clause (i), (ii) or (iii) of this paragraph 7(a) occurs shall be referred to herein as an "acceleration date"). "Change of Control" means the occurrence of any of the following events: (1) the Company ceases to own directly 100% on a fully diluted basis of the economic and voting interest in AMTROL's capital stock; or (2) the Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of a majority in the aggregate of the total voting power of the Voting Stock of the Company or AMTROL, whether as a result of issuance of securities of the Company or AMTROL, any merger, consolidation, liquidation or dissolution of the Company or AMTROL, any direct or indirect transfer of securities or otherwise (for purposes of this clause (2) the Permitted Holders shall be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") so long as the Permitted Holders beneficially own (as so defined), directly or indirectly, in the aggregate a majority of the voting power of the Voting Stock of the parent corporation); or (3) the merger or consolidation of the Company or AMTROL with or into another person or the merger of another Person with or into the Company or AMTROL, or the sale of all or substantially all the assets of the Company or AMTROL to another Person (other than a person that is controlled by the Permitted Holders), and, in the case of any such merger or consolidation, the securities of the Company or AMTROL, that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Company or AMTROL, as the case may be, are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent, immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving corporation. As used herein, "Permitted Holders" means (i) Cypress Merchant Banking Partners L.P., Cypress Offshore Partners L.P. and any person who, on the Effective Date, is directly or indirectly, controlling, controlled by or under common control with either of the foregoing and (ii) any person who is a member of the senior 4 6 management of the Company or AMTROL and a stockholder of the Company, on the Effective Date. "Voting Stock" means securities having ordinary voting power for the election of directors of the Company or AMTROL, respectively. (b) An option may be exercised at any time or from time to time (subject, in the case of an incentive stock option, to such restrictions as may be imposed by the Code), as to any or all full shares as to which the option has become exercisable. Notwithstanding the foregoing provision, no option may be exercised without the prior consent of the Committee by an employee who is subject to Section 16(b) of the Exchange Act until the expiration of six months from the date of the grant of the option. (c) The purchase price of the shares as to which an option is exercised shall be paid in full at the time of exercise; payment may be made in cash, which may be paid by check, or other instrument acceptable to the Company, or, with the consent of the Committee, in shares of the Common Stock, valued at the Market Value on the date of exercise, or if there were no sales on such date, on the next preceding day on which there were sales or (if permitted by the Committee and subject to such terms and conditions as it may determine) by surrender of outstanding awards under the 1997 Plan. In addition, any amount necessary to satisfy applicable federal, state or local tax requirements shall be paid promptly upon notification of the amount due. The Committee may permit such amount to be paid in shares of Common Stock previously owned by the employee, or a portion of the shares of Common Stock that otherwise would be distributed to such employee upon exercise of the option, or a combination of cash and shares of such Common Stock. (d) Except as provided in paragraphs 8, 10 and 11, no option may be exercised at any time unless the holder thereof is then an employee of or performing services for the Company or one of its subsidiaries. For this purpose, "subsidiary" shall include, as under Treasury Regulations Section 1.421-7(h)(3) and (4), Example (3), any corporation that is a subsidiary of the Company during the entire portion of the requisite period of employment during which it is the employer of the holder. (e) Subject to any terms and conditions that the Committee may determine in respect of the exercise of options involving the surrender of outstanding awards, upon, but not until, the exercise of an option or portion thereof in accordance with the 1997 Plan, the option agreement and such rules and regulations as may be established by the Committee, the holder thereof shall have the rights of a stockholder with respect to the shares issued as a result of such exercise. (f) The Company may make loans to such option holders as the Committee, in its discretion, may determine (including a holder who is a director or officer of the Company) in connection with the exercise of options granted under the 1997 Plan; PROVIDED, HOWEVER, that the Committee shall not authorize the making of any loan where the possession of such discretion or the making of such loan would result in a "modification" (as defined in Section 424 of the Code) of any incentive stock option. Such loans shall be subject to the following terms and conditions and such other terms and conditions as the Committee shall determine not inconsistent with the 1997 Plan. Such loans shall bear interest at such rates as the Committee shall determine from time to time, which rates may be below then current market rates (except in the case of incentive 5 7 stock options). In no event may any such loan exceed the fair market value, at the date of exercise, of the shares covered by the option, or portion thereof, exercised by the holder. No loan shall have an initial term exceeding five years, but any such loan may be renewable at the discretion of the Committee. When a loan shall have been made, shares of Common Stock having a fair market value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan. Every loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. 8. Transferability of Options (a) Incentive stock options granted under the 1997 Plan shall not be transferable otherwise than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by Section 414(p) of the Code. Incentive stock options may be exercised during the lifetime of the employee only by the employee or by the employee's guardian or legal representative (unless such exercise would disqualify an option as an incentive stock option). (b) No transfer of an option or restricted shares by will or the laws of descent and distribution shall be effective to bind the Company unless the Committee shall have been furnished with (i) written notice thereof and with a copy of the will and/or such evidence as the Committee may deem necessary to establish the validity of the transfer and (ii) an agreement by the transferee to comply with all the terms and conditions of the option or restricted share award that are or would have been applicable to the employee to whom the award was granted and to be bound by the acknowledgments made by the employee in connection with the grant of the option or restricted shares. (c) During an employee's lifetime, the Committee may permit the transfer, assignment or other encumbrance of an outstanding option, unless such option is an incentive stock option and the Committee and the employee intend that it shall retain such status. With the approval of the Committee and subject to such conditions as the Committee may prescribe, an employee may, upon providing written notice to the Secretary of the Company, elect to transfer any or all such non-qualified stock options granted under the 1997 Plan to members of his or her immediate family, including, but not limited to, the employee's spouse, children, grandchildren and the spouses of children and grandchildren or to trusts for the benefit of the employee and/or such immediate family members or to partnerships in which the employee and/or such family members are the only partners ("Permitted Transferees"); provided, however, that no such transfer by any participant may be made in exchange for consideration. 9. Award and Delivery of Restricted Shares (a) At the time an award of restricted shares is made, the Committee shall establish a period of time (the "Restricted Period") applicable to such award. Each award of restricted shares may have a different Restricted Period. The Committee may, in its sole discretion, at the time an award is made, prescribe conditions for the incremental lapse of restrictions during the Restricted Period, for the lapse or termination of restrictions upon the satisfaction of other conditions in addition to or other than the expiration of the Restricted Period 6 8 with respect to all or any portion of the restricted shares and provide for the lapse of all restrictions with respect to all restricted shares covered by the award upon the occurrence of an acceleration date as defined in paragraph 7(a). The Committee may also, in its sole discretion, shorten or terminate the Restricted Period or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the restricted shares. (b) Upon the grant of an award of restricted shares, a stock certificate representing a number of shares of Common Stock equal to the number of restricted shares granted to an employee shall be registered in the employee's name but shall be held in custody by the Company for the employee's account. The employee shall generally have the rights and privileges of a stockholder as to such restricted shares, including the right to vote such restricted shares, except that, subject to the provisions of paragraph 10, the following restrictions shall apply: (i) the employee shall not be entitled to delivery of the certificate until the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee; (ii) none of the restricted shares may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period and until the satisfaction of any other conditions prescribed by the Committee; and (iii) all of the restricted shares shall be forfeited and all rights of the employee to such restricted shares shall terminate without further obligation on the part of the Company unless the employee has remained an employee of the Company or any of its subsidiaries or any combination thereof until the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee applicable to such restricted shares. At the discretion of the Committee, cash and stock dividends with respect to the restricted shares may be either currently paid or withheld by the Company for the employee's account subject to the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee, and interest may be paid on the amount of cash dividends withheld at a rate and subject to such terms as determined by the Committee. Upon the forfeiture of any restricted shares, such forfeited restricted shares and any cash or stock dividends withheld for the employee's account shall be transferred to the Company without further action by the employee. The employee shall have the same rights and privileges, and be subject to the same restrictions, with respect to any shares received pursuant to paragraph 12. (c) Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee or at such earlier time as provided for in paragraph 10, the restrictions applicable to the restricted shares shall lapse and a stock certificate for the number of shares of Common Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, except any that may be imposed by law, to the employee or the employee's beneficiary or estate, as the case may be. The Company shall not be required to deliver any fractional share of Common Stock but will pay, in lieu thereof, the fair market value (determined as of the date the restrictions lapse) of such fractional share to the employee or the employee's beneficiary or estate, as the case may be. No payment will be required from the employee upon the issuance or delivery of any restricted shares, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due and prior to or concurrently with the issuance or delivery of a certificate representing such shares. The Committee may permit such amount to be paid in (i) shares of Common Stock previously owned by the employee, (ii) a portion of the shares of Common Stock that otherwise would be distributed to such employee 7 9 upon the lapse of the restrictions applicable to the restricted shares, or (iii) a combination of cash and shares of such Common Stock; PROVIDED, HOWEVER, unless otherwise approved by the Committee, that an election by an employee subject to Section 16(b) of the Exchange Act to use shares of Common Stock described in clause (ii) above to satisfy any federal, state or local tax requirement shall be made only during the period commencing on the third business day following the date of release for publication of any annual or quarterly summary statements of the Company's sales and earnings and ending on the twelfth business day following such date (a "Window Period"), and PROVIDED FURTHER that the Committee shall have sole discretion to consent to or disapprove of any such election (which consent or disapproval may be given at any time after the election to which it relates). 10. Termination of Employment (a) Unless otherwise determined by the Committee, and subject to such restrictions as may be imposed by the Code in the case of any incentive stock options, in the event that the employment of an employee to whom an option has been granted under the 1997 Plan shall be terminated (except as set forth in paragraph 11), such option may, subject to the provisions of the 1997 Plan, be exercised (to the extent that the employee was entitled to do so at the termination of his employment) at any time within three months after such termination, or, in the case of an employee whose termination results from retirement from active employment at or after age 55 within one year after such termination, but in no case later than the date on which the option terminates; PROVIDED, HOWEVER, that any option held by an employee whose employment is terminated for cause shall forthwith terminate, to the extent not theretofore exercised. (b) Unless otherwise determined by the Committee, if an employee to whom restricted shares have been granted ceases to be an employee of the Company or of a subsidiary prior to the end of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee for any reason other than death or total disability (as defined in paragraph 11), the employee shall immediately forfeit all restricted shares. Awards granted under the 1997 Plan shall not be affected by any change of duties or position so long as the holder continues to be an employee of the Company or any of its subsidiaries. Any option or restricted share agreement, or any rules and regulations relating to the 1997 Plan, may contain such provisions as the Committee shall approve with reference to the determination of the date employment terminates and the effect of leaves of absence. Any such rules and regulations with reference to any option agreement shall be consistent with the provisions of the Code and any applicable rules and regulations thereunder. Nothing in the 1997 Plan or in any award granted pursuant to the 1997 Plan shall confer upon any employee any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary to terminate such employment at any time. (c) Notwithstanding anything else in the 1997 Plan to the contrary, if the corporation employing an individual to whom an option or restricted share has been granted under the 1997 Plan ceases to be a subsidiary of the Company, then the Committee may provide that service with such employer or its direct or indirect or subsidiaries in any capacity shall be considered employment with the Company for purposes of the 1997 Plan. 8 10 11. Death or Total Disability of Employee If an employee to whom an option has been granted under the 1997 Plan shall die or suffer a "total disability" while employed by the Company or its subsidiaries or within three months (or, in the case of an employee whose termination results from retirement from active employment at or after age 55, within one year) after the termination of such employment (other than termination for cause), such option may be exercised, to the extent that the employee or a Permitted Transferee of the option was entitled to do so at the termination of employment (including by reason of death or total disability), as set forth herein (subject to the restrictions set forth in paragraphs 7 and 8 with respect to persons subject to Section 16(b) of the Exchange Act) by the employee, the legal guardian of the employee (unless such exercise would disqualify an option as an incentive stock option), a legatee or legatees of the employee under the employee's last will, by the employee's personal representatives or distributees or by the Permitted Transferee, whichever is applicable, at any time within one year after the date of the employee's death or total disability, but in no case later than the date on which the option terminates. For purposes hereof, "total disability" is defined as the permanent inability of an employee, as a result of accident or sickness, to perform any and every duty pertaining to such employee's occupation or employment for which the employee is suited by reason of the employee's previous training, education and experience. 12. Adjustment upon Changes in Capitalization, etc. (a) Notwithstanding any other provision of the 1997 Plan, the Committee may at any time, in its sole discretion, make or provide for such adjustments to the 1997 Plan, to the number and class of shares available thereunder or to any outstanding options or restricted shares as it may deem appropriate to prevent dilution or enlargement of rights, including adjustments in the event of distributions to holders of Common Stock other than a normal cash dividend, changes in the outstanding Common Stock by reason of stock dividends, split-ups, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, liquidations and the like. In the event of any offer to holders of Common Stock generally relating to the acquisition of their shares, the Committee may, in its sole discretion, make any adjustment as it deems equitable in respect of outstanding options including in the Committee's discretion revision of outstanding options so that they may be exercisable for or payable in the consideration payable in the acquisition transaction. Any such determination by the Committee shall be conclusive. No adjustment shall be made in respect of an incentive stock option if such adjustment would disqualify such option as an incentive stock option under Section 422 of the Code and the Treasury Regulations thereunder. No adjustment shall be made in the minimum number of shares with respect to which an option may be exercised at any time. Any fractional shares resulting from such adjustments to options shall be eliminated. (b) In the event the Company issues any Common Stock (other than as a stock dividend or stock split or pursuant to the 1997 Plan), the number of shares of Common Stock as to which awards may be granted from time to time under the 1997 Plan shall be increased by such number of shares of Common Stock as the Board shall determine to permit additional grants of stock awards based upon the terms of the new equity for which such additional shares of Common Stock were issued. 9 11 13. Effective Date The 1997 Plan shall be effective as of December 16, 1997 (the "Effective Date"), provided that the adoption of the 1997 Plan shall have been approved by the stockholders of the Company. The Committee thereafter may, in its discretion, grant awards under the 1997 Plan, the grant, exercise or payment of which shall be expressly subject to the conditions that, to the extent required at the time of grant, exercise or payment, (i) if the Company deems it necessary or desirable, a Registration Statement under the Securities Act of 1933 with respect to such shares shall be effective, and (ii) any requisite approval or consent of any governmental authority of any kind having jurisdiction over awards granted under the 1997 Plan shall be obtained. 14. Termination and Amendment The Board of Directors of the Company may suspend, terminate, modify or amend the 1997 Plan, provided that any amendment that would increase the aggregate number of shares that may be issued under the 1997 Plan, materially increase the benefits accruing to participants under the 1997 Plan, or materially modify the requirements as to eligibility for participation in the 1997 Plan shall be subject to the approval of the Company's stockholders to the extent required by Rule 16b-3, applicable law or any other governing rules or regulations, except that any such increase or modification that may result from adjustments authorized by paragraph 12 does not require such approval. If the 1997 Plan is terminated, the terms of the 1997 Plan shall, notwithstanding such termination, continue to apply to awards granted prior to such termination. In addition, no suspension, termination, modification or amendment of the 1997 Plan may, without the consent of the employee to whom an award shall theretofore have been granted, adversely affect the rights of such employee under such award. 15. Written Agreements Each award of options or restricted shares shall be evidenced by a written agreement, executed by the employee and the Company, which shall contain such restrictions, terms and conditions as the Committee may require. 10 12 16. Effect on Other Stock Plans The adoption of the 1997 Plan shall have no effect on awards made or to be made pursuant to other stock plans covering employees of the Company or its subsidiaries, or any predecessors or successors thereto. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan as of the ____ day of December, 1997. AMTROL HOLDINGS, INC. By: --------------------------- Title: ------------------------ 11 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF AMTROL INC. NAME OF SUBSIDIARY PLACE OF INCORPORATION - ------------------ ---------------------- Petroleo Mecanica Alfa, S.A. Guimaraes, Portugal AMTROL Asia Pacific Ltd. Hong Kong AMTROL Canada Ltd. Ontario, Canada AMTROL Export Sales Inc. Barbados AMTROL International Inc. Rhode Island AMTROL Ltd. Delaware Water Soft Inc. Rhode Island AMTROL Holdings Portugal, SGPS, Unipessoal, Lda. Guimaraes, Portugal AMTROL Investment Inc. Rhode Island AMTROL Management International Inc. Rhode Island AGI Holdings Inc. Rhode Island AMTROL Europe Ltd. Rhode Island EX-27 5 FINACIAL DATA SCHEDULE
5 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 554 0 31,268 (1,088) 31,285 67,449 52,684 6,997 293,000 43,073 187,662 0 0 69,326 (10,222) 293,000 176,432 176,432 131,180 131,180 25,723 9,495 18,684 (7,678) (30) (7,648) 0 0 0 (7,648) 0 0
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