SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________
Commission file number 0-14787
WATTS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2916536
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(State of incorporation) (I.R.S. Employer Identification No.)
815 Chestnut Street, North Andover, MA 01845
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 688-1811
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.10 per share
Name of exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on August 26, 1999 was $365,276,600.
As of August 26, 1999, 16,472,507 shares of Class A Common Stock, $.10 par
value, and 9,985,247 shares of Class B Common Stock, $.10 par value, of the
Registrant were outstanding.
Documents Incorporated by Reference
There are no documents incorporated by reference into this Report.
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PART I
Item 1. BUSINESS.
General
Watts Industries, Inc., (the "Company") designs, manufactures and sells an
extensive line of valves for the plumbing and heating, water quality,
industrial, and oil and gas industries. Watts has focused on the valve industry
since its inception in 1874, when it was founded to design and produce steam
regulators for New England textile mills. The Company was incorporated in
Delaware in 1985. Today, the Company is a leading manufacturer and supplier of
plumbing and heating and water quality valve products, which account for
approximately 60% of its sales. The Company's growth strategy emphasizes
internal development of new valve products and entry into new markets for
specialized valves and related products through diversification of its existing
business and strategic acquisitions in related business areas, both domestically
and abroad.
On December 15, 1998, the Company announced plans to spin-off its
industrial, oil and gas businesses into a separate publicly traded company,
CIRCOR International, Inc. Under the terms of the planned spin-off transaction,
which is expected to be complete on or about October 18, 1999, the Company will
distribute one share of CIRCOR common stock to each record shareholder of the
Company for every two shares of Company common stock owned as of the record date
by that shareholder (the "Distribution"). After the Distribution, the Company
will continue to manufacture and distribute plumbing and heating and water
quality products through its three geographic business segments: North America,
Europe, and Asia.
The Board of Directors and management of the Company have determined that
separation of the industrial, oil and gas businesses from the plumbing and
heating and water quality business by means of the spin-off of CIRCOR is in the
best interests of the Company, CIRCOR and the Company's shareholders. In
reaching this conclusion, the Company's Board of Directors and management
considered, among other things, that:
o the separation will allow CIRCOR to raise equity capital in the financial
markets to fund its plan for future growth in order to expand its market
positions in the instrumentation and fluid regulation and petrochemical
industries;
o the Company's plumbing & heating and water quality business and CIRCOR's
instrumentation and fluid regulation and petrochemical businesses are
distinct, complex businesses with different challenges, strategies and
means of doing business and that the businesses will be better positioned
to respond to the opportunities and challenges in their respective
industries and thereby achieve their full potential under separate
ownership;
o the separation will permit the management of the Company and CIRCOR to
focus on the opportunities and challenges specific to their respective
businesses;
o the separation will allow CIRCOR to offer employee incentives that are
more directly linked to the performance of the instrumentation and fluid
regulation and petrochemical businesses so that these incentives are
better aligned with the interests of CIRCOR shareholders; and
o the separation will result in two distinct publicly traded equity
securities that will enable investors to better understand and evaluate
the respective businesses of the Company and CIRCOR.
On May 11, 1999, the Company's Board of Directors voted to amend the
Company's By-Laws to change the Company's fiscal year from June 30 of each year
to December 31 of each year. The Company will file a report on Form 10-K
covering the transition period of July 1, 1999 to December 31, 1999 ("Fiscal
1999.5").
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The business description which follows describes the general development
of the Company's entire business for the fiscal year ended June 30, 1999,
including its plumbing and heating and water quality business and its
industrial, oil and gas business. The Company and its plumbing and heating and
water quality business intended to be conducted after the Distribution is also
described, as appropriate.
The Company's plumbing and heating and water quality product lines include
safety pressure relief valves, water pressure regulators, thermostatic mixing
valves, ball valves, automatic control valves, water distribution manifolds,
zone valves, thermostatic radiator valves, check valves, and valves for water
service primarily in residential and commercial environments, and metal and
plastic water supply/drainage products including stop valves, tubular brass
products, faucets, drains, sink strainers, compression and flare fittings, and
plastic tubing and braided metal hose connectors for residential construction
and home repair and remodeling, backflow preventers for preventing contamination
of potable water caused by reverse flow within water supply lines and fire
protection equipment, and drain systems for laboratory drainage and high purity
process installations.
The Company's industrial, oil and gas product lines include steam
regulators and control devices for industrial, HVAC and naval/marine
applications; pneumatic valve and motion switch products for medical,
analytical, military and aerospace applications; ball valves, solenoid valves,
cryogenic valves, pneumatic and electric actuators, strainers, relief valves,
check valves, and butterfly valves for industrial applications; and needle
valves, metering valves, plug valves, tube fittings, floating and trunnion ball
valves, pipeline closures, specialty gate valves, oil field check valves, and
large ball valves for the oil and gas, and chemical and petrochemical
industries.
Within a majority of the product lines the Company manufactures and
markets, the Company believes that it has one of the broadest product lines in
terms of the distinct designs, sizes and configurations of its valves. Products
representing a majority of the Company's sales have been approved under
regulatory standards incorporated into state and municipal plumbing and heating,
building and fire protection codes, and similar approvals from oil and gas
industry standards agencies and from various agencies in the European market
have been obtained. The Company has consistently advocated the development and
enforcement of performance and safety standards, and is currently planning new
investments and implementing additional procedures as part of its commitment to
meet these standards. The Company maintains quality control and testing
procedures at each of its manufacturing facilities in order to produce products
in compliance with code requirements. Additionally, a majority of the Company's
manufacturing subsidiaries have either acquired or are working to acquire ISO
9000, 9001 or 9002 certification from the International Organization for
Standardization (ISO).
On July 22, 1998, a wholly owned subsidiary of the Company acquired Hoke,
Inc. ("Hoke") located in Cresskill, New Jersey. Hoke manufactures industrial
valves and fittings, consisting of miniaturized pressure regulators, needle
valves, metering valves, ball valves, plug valves and its line of Gyrolok(R)
tube fittings for instrumentation applications, for the chemical and
petrochemical, oil and gas, industrial, OEM, and analytical instrumentation
markets. Hoke's sales for the Company's fiscal year ended June 30, 1999 were
approximately $60,000,000. On January 14, 1999, the Company acquired SSI
Equipment, Inc. ("SSI") located in Burlington, Ontario. SSI manufactures an
extensive line of strainers that are used in commercial and industrial
applications. Based on SSI's previous sales, SSI should provide approximately
$4,000,000 of sales to CIRCOR annually. On April 8, 1999, a wholly owned
subsidiary of the Company acquired Go Regulator, Inc. ("Go Regulator") located
in San Dimas, California. Go Regulator manufactures a complete line of pressure
regulators and reducers for the control of either liquid or pneumatic pressure
in process, instrumentation, and analytical applications. Go Regulator had sales
of approximately $5,200,000 for its most recent twelve month period. Hoke, SSI,
and Go Regulator will be spun-off as part of CIRCOR in the Distribution.
On March 9, 1999 a wholly owned subsidiary of the Company acquired
Cazzaniga S.p.A. ("Cazzaniga") located in Biassono, Italy near Milan. Cazzaniga,
whose last twelve (12) months sales were approximately $35 million, is an
integrated manufacturer of plumbing and heating products including water
distribution manifolds, zone valves, check valves, and their principle line of
thermostatic radiator valves. The manufacturing plant features a
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yellow brass forging foundry, high speed chucking machines with robotics, German
automatic screw machines, and extensive automated assembly contained within a
211,000 square foot facility.
The Company relies primarily on commissioned representative organizations,
some of whom maintain a consigned inventory of the Company's products, to market
its product lines. These organizations, which accounted for approximately 59% of
the Company's net sales in the fiscal year ended June 30, 1999, sell primarily
to plumbing and heating wholesalers, DIY Market accounts, and steam, industrial,
and oil and gas distributors for resale to end users in the United States and
abroad. The Company anticipates that after the Distribution commissioned
representative organizations will account for approximately 73% of the Company's
net sales. The Company sells metal and plastic water supply/drainage products
including valves, tubular brass products, faucets, drains, sink strainers,
compression and flare fittings, plastic tubing and braided metal hose connectors
for the residential construction and home repair and remodeling industries
through do-it-yourself plumbing retailers, national catalog distribution
companies, hardware stores, building material outlets and retail home center
chains ("DIY Markets") and through the Company's existing plumbing and heating
wholesalers. The industrial product line is sold to domestic process industries
through distributors and to aerospace and aircraft industries through special
distributors and manufacturers' representatives, and the oil and gas product
line is sold to domestic oil and gas industries through stocking supply stores
and internationally through commissioned agents. The Company also sells products
directly to certain large original equipment manufacturers (OEM's) and private
label accounts. The Company also maintains direct and indirect sales channels
for water valves, steam valves, relief valves, shut-off valves, check valves,
butterfly valves, ball valves and flow meters to the power generation, maritime,
heating, ventilation and air-conditioning, irrigation, fire protection, and
refrigeration industries and utilities. The Company believes that sales to the
residential construction and to the oil and gas markets may be subject to
cyclical variations to a greater extent than its other targeted markets. During
all of fiscal 1999, sales to the oil and gas markets declined as depressed oil
and gas prices led producers to spend less on maintenance, repair, exploration,
and drilling projects. However, because the Company sells into different
geographic areas, and to large and diverse customers, the potential adverse
effects from cyclical variations tend to be mitigated. No assurance can be given
that the Company will be protected from a broad downturn in the economy. There
was no single customer which accounted for more than 10% of the Company's net
sales in the fiscal year ended June 30, 1999.
The Company has a fully integrated and highly automated manufacturing
capability including foundry operations, machining operations, plastic injection
molding and assembly. The Company's foundry operations include metal pouring
systems and automatic core making, yellow brass forging, mold making and pouring
capabilities. The Company's acquisition of Cazzaniga adds yellow brass forging
and machining capabilities to the Company's European operations. The Company's
machining operations feature computer-controlled machine tools, high-speed
chucking machines with robotics and automatic screw machines for machining
bronze, brass, iron and steel components. The Company has invested heavily in
recent years to expand its manufacturing base and to ensure the availability of
the most efficient and productive equipment. The Company is committed to
maintaining its manufacturing equipment at a level consistent with current
technology in order to maintain high levels of quality and manufacturing
efficiencies. As part of this commitment, the Company has spent a total of
$89,943,000 on capital expenditures over the last three fiscal years. The
Company has budgeted $10,000,000 for Fiscal 1999.5 for plumbing and heating and
water quality primarily for manufacturing facilities and equipment. See
"Properties" below. The Company is also completing its implementation of an
integrated enterprise-wide software system in most of its U.S. and Canadian
locations to make operations more efficient and to improve communications with
suppliers and customers. Capital expenditures were $31,031,000, $29,170,000, and
$29,742,000 for fiscal 1999, 1998, and 1997, respectively. Depreciation and
amortization for such periods were $30,218,000, $23,185,000, and $20,828,000,
respectively.
Five significant raw materials used in the Company's production processes
are bronze ingot, brass rod, stainless steel, cast iron, and carbon steel. While
the Company historically has not experienced significant difficulties in
obtaining these commodities in quantities sufficient for its operations, there
have been significant changes in their prices. The Company's gross profit
margins are adversely affected to the extent that the selling
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prices of its products do not increase proportionately with increases in the
costs of bronze ingot, brass rod, stainless steel, cast iron, and carbon steel.
Any significant unanticipated increase or decrease in the prices of these
commodities could materially affect the Company's results of operations.
However, increased sales volume, an active materials management program, and the
diversity of materials used in the Company's production processes have somewhat
diminished the impact from changes in the cost of these five raw materials. No
assurances can be given that such factors will protect the Company from future
changes in the prices for such raw materials.
The domestic and international markets for valves are intensely
competitive and include companies possessing greater financial, marketing and
other resources than the Company. Management considers product reputation,
price, effectiveness of distribution and breadth of product line to be the
primary competitive factors. The Company believes that new product development
and product engineering are also important to success in the valve industry and
that the Company's position in the industry is attributable in significant part
to its ability to develop new and innovative products quickly and to adapt and
enhance existing products. During fiscal 1999, the Company continued to develop
new and innovative products to enhance market position and is continuing to
implement manufacturing and design programs to reduce costs. The Company employs
approximately 90 engineers and technicians, which does not include engineers
working in the Chinese joint ventures, who engage primarily in these activities.
Although the Company owns certain patents and trademarks that it considers to be
of importance, it does not believe that its business and competitiveness as a
whole is dependent on any one or more patents or trademarks or on patent or
trademark protection generally.
The Company's financial information by geographic business segment is
contained in Note 15 of Notes to Consolidated Financial Statements incorporated
herein by reference. From time to time, the Company's results of operations may
be adversely affected by fluctuations in foreign exchange rates. Backlog was
$80,541,000 at August 20, 1999 of which $24,255,000 was from continuing
operations and $98,645,528 at August 14, 1998 of which $24,711,112 was from
continuing operations. The Company does not believe that its backlog at any
point in time is indicative of future operating results. Available funds and
funds provided from the Company's operations are sufficient to meet anticipated
capital requirements. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations", below as it relates to the
impact of foreign exchange rates and capital requirements.
As of June 30, 1999, the Company's domestic and foreign operations
employed approximately 4,600 people, plus 900 employees in the Company's joint
ventures located in the People's Republic of China. After CIRCOR is spun-off in
the Distribution, the Company will employ approximately 2,600 people, plus 840
employees in the Company's joint venture located in the People's Republic of
China. There are approximately 165 employees that are covered by collective
bargaining agreements in the United States and Canada, but all of these
employees are employed by companies of CIRCOR that will be spun-off. The Company
believes that its employee relations are excellent.
Executive Officers
Information with respect to the executive officers of the Company is set forth
below:
Name Position Age
---- -------- ---
Timothy P. Horne Chairman of the Board, Chief Executive Officer 61
and Director
David A. Bloss, Sr. President, Chief Operating Officer and Director 49
Kenneth J. McAvoy Chief Financial Officer, Treasurer, Secretary 59
and Director
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Robert T. McLaurin Corporate Vice President of Asian Operations 68
Michael O. Fifer Group Vice President 42
William C. McCartney Vice President of Finance and Corporate 45
Controller
Suzanne M. Zabitchuck Corporate Counsel and Assistant Secretary 44
Timothy P. Horne joined the Company in September 1959 and has been a
Director since 1962. Mr. Horne served as the Company's President from 1976 to
1978 and again from 1994 to April 1997. He has served as Chief Executive Officer
since 1978 and he became the Company's Chairman of the Board in April 1986.
David A. Bloss, Sr., was appointed President and Chief Operating Officer
in April, 1997. He joined the Company as Executive Vice President in July 1993
and has been a Director since January 1994. Prior to joining the Company, Mr.
Bloss was for five years associated with the Norton Company, a manufacturer of
abrasives and cutting tools, serving most recently as President of the
Superabrasives Division. Mr. Bloss will be the Chairman of the Board, Chief
Executive Officer and President of CIRCOR.
Kenneth J. McAvoy joined the Company in 1981 as Corporate Controller. He
served as the Company's Vice President of Finance from 1984 to 1994. He has been
the Chief Financial Officer and Treasurer since June 1986, and has been a
Director since January 1994. Mr. McAvoy served as Executive Vice President of
European Operations from January 1994 to June 1996. Mr. McAvoy has also served
as Secretary or Clerk since January 1985.
Robert T. McLaurin was appointed Corporate Vice President of Asian
Operations in August 1994. He served as the Senior Vice President of
Manufacturing of Watts Regulator Co. from 1983 to August 1994. He joined Watts
Regulator Company as Vice President of Manufacturing in 1978.
Michael O. Fifer joined the Company in May 1994 and was appointed the
Company's Vice President of Corporate Development, which title was recently
changed to Group Vice President. Prior to joining the Company, Mr. Fifer was
Associate Director of Corporate Development with Dynatech Corp., a diversified
high-tech manufacturer, from 1991 to April 1994.
William C. McCartney joined the Company in 1985 as Controller. He was
appointed the Company's Vice President of Finance in 1994, and he has been
Corporate Controller of the Company since April 1988.
Suzanne M. Zabitchuck has been Corporate Counsel of the Company since
joining the Company in December 1992. Ms. Zabitchuck was appointed Assistant
Secretary in August 1993. Ms. Zabitchuck was associated with The Stride Rite
Corporation, a shoe manufacturer, serving as its Associate General Counsel and
Clerk immediately prior to joining the Company.
Product Liability, Environmental and Other Litigation Matters
The Company, like other worldwide manufacturing companies, is subject to a
variety of potential liabilities connected with its business operations,
including potential liabilities and expenses associated with possible product
defects or failures and compliance with environmental laws. The Company
maintains product liability and other insurance coverage which it believes to be
generally in accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect the Company fully against substantial
damage claims which may arise from product defects and failures.
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James Jones Litigation
On June 25, 1997, Nora Armenta sued James Jones Company and its present
and past owners, Mueller Co., Tyco International (U.S.) Inc. and Watts
Industries, Inc. in the California Superior Court for Los Angeles County with a
complaint that sought tens of millions of dollars in damages. By this complaint
and an amended complaint filed on November 4, 1998, ("First Amended Complaint")
Armenta, a former employee of James Jones, sued on behalf of 34 municipalities
as a qui tam plaintiff under the California False Claims Act. Late in 1998, the
Los Angeles Department of Water and Power ("DWP") intervened. Of the remaining
33 named municipalities, four (Burbank, Pomona, Santa Monica and South Gate)
chose to intervene shortly before the Court-imposed deadline of July 15, 1999.
The case will now go forward with the municipalities that have intervened.
The First Amended Complaint alleges that the Company's former subsidiary
(James Jones Company) sold products which did not meet contractually specified
standards used by the named municipalities for their water systems and falsely
certified such standards had been met. Armenta claims that these municipalities
were damaged by their purchase of these products, and seeks treble damages,
legal costs, attorneys' fees and civil penalties under the False Claims Act.
The DWP's intervention filed on December 9, 1998 adopted the First Amended
Complaint and added claims for breach of contract, fraud and deceit, negligent
misrepresentation, and unjust enrichment. The DWP seeks past and future
reimbursement costs, punitive damages, contract difference in value damages,
treble damages, civil penalties under the False Claims Act and costs of the
suit.
One of the lawsuit's allegations is the suggestion that because some of
the purchased James Jones products are out of specification and contain more
lead than the 85 bronze specified, a risk to public health might exist. This
contention is predicated on the average difference of about 2% lead content in
81 bronze (6% to 8% lead) and 85 bronze (4% to 6% lead) alloys and the
assumption that this would mean increased consumable lead in public drinking
water. The evidence and discovery available to date indicate that this is not
the case.
In addition, bronze that does not contain more than 8% lead is approved
for home plumbing fixtures by the City of Los Angeles, and the Federal
Environmental Protection Agency defines metal for pipe fittings with no more
than 8% lead as "lead free" under Section 1417 of the Federal Safe Drinking
Water Act.
The Company intends to contest this matter vigorously, and discovery is
currently under way. Presently, the Company cannot determine whether any loss
will result from this litigation. See Note 13 of the Notes to the Consolidated
Financial Statements.
Product Liability
Leslie Controls, Inc. and Spence Engineering Company, both subsidiaries of
the Company, are involved as third-party defendants in various civil product
liability actions pending in the U.S. District Court, Northern District of Ohio.
The underlying claims have been filed by present or former employees of various
shipping companies for personal injuries allegedly received as a result of
exposure to asbestos. The shipping companies contend that they installed in
their vessels certain valves manufactured by Leslie Controls and/or Spence
Engineering which contained asbestos. The Company maintains product liability
and other insurance coverage which it believes to be generally in accordance
with industry practices. Nonetheless, such insurance coverage may not be
adequate to protect the Company fully against substantial damage claims which
may arise from product defects and failures. Coverage with respect to these
matters has been disputed by certain of the carriers and, therefore, recovery is
questionable, a factor which the Company has considered in its evaluation of
these matters. Based on facts presently known to it, the Company does not
believe the outcome of these proceedings will have a material adverse effect on
its financial condition or results of operations.
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Environmental
Certain of the Company's operations generate solid and hazardous wastes,
which are disposed of elsewhere by arrangement with the owners or operators of
disposal sites or with transporters of such waste. The Company's foundry and
other operations are subject to various federal, state and local laws and
regulations relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its operations on
an ongoing basis. The Company cannot predict the effect of future requirements
on its capital expenditures, earnings or competitive position due to any changes
in federal, state or local environmental laws, regulations or ordinances.
The Company is currently a party to or otherwise involved with various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a number of sites, in some cases as a participant
in a group of potentially responsible parties ("PRPs"). Three of these sites,
the Sharkey and Combe Landfills in New Jersey, and the San Gabriel Valley/El
Monte, California water basin site, are listed on the National Priorities List.
With respect to the Sharkey Landfill, the Company has been allocated .8144% of
the remediation costs, an amount which is not material to the Company. No
allocations have been made to date with respect to the Combe Landfill or San
Gabriel Valley sites. The EPA has formally notified several entities that they
have been identified as being potentially responsible parties with respect to
the San Gabriel Valley site. As the Company was not included in this group, its
potential involvement in this matter is uncertain at this point given that
either the PRPs named to date or the EPA could seek to expand the list of
potentially responsible parties. In addition to the foregoing, the Solvent
Recovery Service of New England site and the Old Southington landfill site, both
in Connecticut, are on the National Priorities List, but, with respect thereto,
the Company has resort to indemnification from third parties and based on
currently available information, the Company believes it will be entitled to
participate in a de minimis capacity.
With respect to the Combe Landfill, the Company recently paid
approximately $414,000 as its share of a $6.3 million settlement in a CERCLA
cost recovery action filed by the U.S. Environmental Protection Agency. The New
Jersey Department of Environmental Protection has filed a related claim with
respect to the same site for approximately $5.5 million in the New Jersey
Superior Court for Morris County. The state action has more defendants than the
settled federal action, and part of the state claim is for future costs which
may be subject to negotiation.
During the quarter ending March 31, 1998, the Company received an
administrative order from the New Hampshire Department of Environmental Services
(the "NH DES") with respect to certain regulatory issues concerning its
Franklin, New Hampshire operation. The Company has recently entered into an
amended administrative order with the NH DES and has withdrawn its appeal of
this matter. The state agency has not as of yet issued any fines or penalties in
connection with this matter.
Based on facts presently known to it, the Company does not believe that
the outcome of these environmental proceedings will have a material adverse
effect on its financial condition or results of operations. Given the nature and
scope of the Company's manufacturing operations, there can be no assurance that
the Company will not become subject to other environmental proceedings and
liabilities in the future which may be material to the Company. See Note 13 of
the Notes to the Consolidated Financial Statements.
Other Litigation
Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. Based on the facts currently known to it, the Company does not
believe that the ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of operation. See
Note 13 of the Notes to the Consolidated Financial Statements.
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Item 2. PROPERTIES.
The Company maintains 41 facilities worldwide with its corporate
headquarters located in North Andover, Massachusetts. The manufacturing
operations include four casting foundries, two of which are located in the
United States, one in Europe and one at Tianjin Tanggu Watts Valve Company
Limited ("Tanggu Watts"), a joint venture located in the People's Republic of
China, and it maintains one yellow brass forging foundry located in Italy.
Castings and forgings from these foundries and other components are machined and
assembled into finished valves at 27 manufacturing facilities located in the
United States, Canada, Europe and China. Many of these facilities contain sales
offices or warehouses from which the Company ships finished goods to customers
and commissioned representative organizations. The vast majority of the
Company's operating facilities and the related real estate are owned by the
Company. The buildings and land located in (i) Spartanburg, South Carolina and
Southington, Connecticut; (ii) Nerviano, Italy and (iii) Tianjin, People's
Republic of China and the land located in (iv) Suzhou, People's Republic of
China, are leased by Hoke, Pibiviesse S.p.A. ("PBVS"), Tanggu Watts, and Suzhou
Watts Valve Co., Ltd. ("Suzhou Watts") respectively, under lease agreements, the
terms of which are 10 years and 10 years, 6 years, 30 years, and 30 years,
respectively. With the exception of the Tanggu Watts property, the other
described leased properties will become part of CIRCOR.
Upon completion of the spin-off of CIRCOR in the Distribution, the Company
will maintain 22 facilities worldwide which will include 16 manufacturing
facilities, 5 of which include foundries. With the exception of the Tanggu Watts
property, the Company will own all of its major facilities. During fiscal 1999,
the Company expanded its manufacturing capabilities with the purchase of a
building adjacent to its existing facility in Spindale, North Carolina and the
Company sold the former Jameco Industries property located in Wyandanch, New
York. Certain of the Company's facilities are subject to mortgages and
collateral assignments under loan agreements with long-term lenders. In general,
the Company believes that its properties, including machinery, tools and
equipment, are in good condition, well maintained and adequate and suitable for
their intended uses. The Company believes that the manufacturing facilities are
currently operating at a level that management considers normal capacity. This
utilization is subject to change as a result of increases or decreases in sales.
Item 3. LEGAL PROCEEDINGS.
Item 3(a). The Company is from time to time involved in various legal and
administrative procedures. See Part I, Item 1, "Product Liability, Environmental
and Other Litigation Matters".
Item 3(b). None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this Report to a vote of security holders through solicitation
of proxies or otherwise.
Annual Meeting of Stockholders and Stockholder Proposals
On May 11, 1999, the Company's Board of Directors voted to amend the
Company's By-Laws to change the Company's fiscal year from June 30 of each year
to December 31 of each year. The Company will file a report on Form 10-K
covering the transition period of July 1, 1999 to December 31, 1999 ("Fiscal
1999.5"). As a consequence of the Company's decision to change its fiscal year
end and on-going activities related to the spin-off of CIRCOR in the
Distribution, the Company has elected to postpone and reschedule its 1999 Annual
Meeting of Stockholders which would have been held on October 19, 1999.
Therefore, the Company intends to hold its next Annual Meeting of Stockholders
on or about April 25, 2000.
In order for any stockholder proposal to be included in the proxy
statement for the Company's Annual Meeting of Stockholders, such proposal must
be received at the principal executive offices of the Company, 815
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Chestnut Street, North Andover, MA 01845, not later than December 15, 1999 and
must satisfy certain rules of the Securities and Exchange Commission.
Nominations and proposals of stockholders may also be submitted to the
Company for consideration at the Annual Meeting if certain conditions set forth
in the Company's bylaws are satisfied, but will not be included in the proxy
materials unless the conditions set forth in the preceding paragraph are
satisfied. Such nominations (or other stockholder proposals) must be delivered
to or mailed and received by the Company not less than 75 days nor more than 120
days prior to the Annual Meeting which dates will be February 3, 2000, and
December 20, 1999, respectively. Shareholder proposals received by the Company
outside of the aforementioned dates will be considered untimely received for
consideration at such Annual Meeting. To submit a nomination or other proposal,
a stockholder should send the nominee's name or proposal and appropriate
supporting information required by the Company's bylaws to the Secretary of the
Company at the address set forth above.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The following tabulation sets forth the high and low sales prices of the
Company's Class A Common Stock on the New York Stock Exchange during fiscal 1999
and fiscal 1998 and cash dividends paid per share:
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
1999 1998
---- ----
First Quarter 24 5/16 16 1/2 $.0875 $27 3/4 $22 5/8 $.0775
Second Quarter 20 5/8 16 .0875 28 11/16 24 1/2 .0775
Third Quarter 17 12 1/4 .0875 31 3/8 26 1/16 .0875
Fourth Quarter 19 7/8 13 9/16 .0875 30 15/16 20 7/8 .0875
There is no established public trading market for the Class B Common Stock
of the Company, which is held exclusively by members of the Horne family and
management. The principal holders of such stock are subject to restrictions on
transfer with respect to their shares. Each share of Class B Common Stock (10
votes per share) of the Company is convertible into one share of Class A Common
Stock (1 vote per share). Aggregate common stock dividend payments for fiscal
1999, 1998, and 1997, were $9,358,000, $8,936,000, and $7,992,000, respectively.
While the Company presently intends to continue to pay cash dividends, payment
of future dividends necessarily depends upon the Board of Directors' assessment
of the Company's earnings, financial condition, capital requirements and other
factors. See Note 9 of Notes to Consolidated Financial Statements incorporated
herein by reference regarding restrictions on payment of dividends.
The number of record holders of the Company's Class A Common Stock as of
August 26, 1999 was 188. The Company believes that the number of beneficial
shareholders of the Company's Class A Common Stock was approximately 3,400 as of
August 26, 1999. The number of record holders of the Company's Class B Common
Stock as of August 26, 1999 was 9.
10
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Item 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.
FIVE YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
1999 1998 1997 1996(1) 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Data
Net sales from continuing operations $ 474,458 $ 442,077 $ 447,235 $ 411,261 $ 362,014
Income (loss) from continuing operations 29,454 28,123 26,515 (24,824) 25,255
Net income (loss) 35,956 53,369 51,747 (50,285) 45,738
Total assets 637,742 552,896 526,366 370,454 376,894
Long-term debt 118,916 71,674 94,841 111,715 99,868
Income (loss) per share from continuing operations-diluted 1.10 1.03 0.97 (0.84) 0.85
Net income (loss) per share-diluted 1.34 1.95 1.89 (1.70) 1.54
Cash dividends declared per common share 0.350 0.330 0.295 0.265 0.235
</TABLE>
(1) Fiscal 1996 net income includes an after-tax charge of $92,986,000 related
to: restructuring costs of $25,415,000; an impairment of long-lived assets of
$63,065,000; other charges of $13,753,000 principally for product liability
costs, additional bad debt reserves and environmental remediation costs; and
additional inventory valuation reserves of $9,508,000.
11
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
On December 15, 1998 the Company announced its plan to spin-off its
industrial, oil and gas business as a separately traded public company, CIRCOR
International, Inc. Under the terms of the spin-off, which is expected to be
completed in October 1999, the holders of Watts common stock will receive one
share of CIRCOR common stock for every two shares of Watts stock held. The
Company's results of operations have been restated to reflect CIRCOR as
discontinued operations for all periods presented.
Results of Operations
12 Months Ended June 1999 Compared to
12 Months Ended June 1998
Net sales from continuing operations for the twelve months ended June 30,
1999 increased by $32,381,000, or 7.3%, to $474,458,000 from $442,077,000 in the
fiscal year ended June 30, 1998. The increase in net sales is attributable to
the following:
(Revenue $'s 1999-1998)
Internal Growth $25,455,000 5.7%
Acquisitions $10,095,000 2.3%
Divestitures ($3,386,000) (0.8%)
Foreign Exchange $217,000 0.1%
--------------------------------------------------------
Total Change $32,381,000 7.3%
========================================================
The increase in net sales from internal growth is primarily attributable
to increased unit shipments in the North American segment. The growth in net
sales due to acquired companies is primarily attributable to the inclusion of
Cazzaniga S.p.A. of Biassono, Italy, which was acquired in March, 1999.
Excluding Cazzaniga, shipments in the European segment were consistent with the
prior year.
The Company's gross profit increased $11,788,000, or 7.4%, to
$171,713,000. The increased gross profit is primarily attributable to increased
sales. Gross margin remained consistent at 36.2% in both fiscal 1999 and 1998.
Selling general and administrative expenses increased $7,021,000 (6.2%)
to $119,875,000. This increase is attributable to the inclusion of the expenses
of Cazzaniga, and increased variable selling expenses including commissions and
freight and marketing costs.
Operating income from continuing operations increased $4,767,000, or
10.1%, from $47,071,000 to $51,838,000 primarily due to increased gross profit.
Other expense from continuing operations increased $1,256,000 to
$1,688,000. This increase is attributable to the Company's share of losses
related to its equity investment in Jameco International LLC. Increased minority
interest expense resulting from the improved performance at the Company's joint
venture in China also contributed to the increase in other expense.
Income from continuing operations increased $1,331,000 (4.7%) to
$29,454,000. This increase is primarily attributable to the income generated by
acquired companies and increased gross profit from existing companies.
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<PAGE>
The Company's consolidated results of operations are impacted by the
effect that changes in foreign exchange rates have on its international
subsidiaries operating results. Changes in foreign exchange rates had an
immaterial impact on net income in fiscal 1999.
Income from discontinued operations, net of taxes, decreased $18,744,000
to $6,502,000. The Company recognized $6,166,000 in the current year net
after-tax costs to execute the spin-off transaction. These costs include taxes,
certain relocation costs, and professional fees. Excluding these costs, income
from discontinued operations would have declined $9,578,000 and diluted earnings
per share would have decreased from 92 cents to 59 cents. Net sales from
discontinued operations increased $33,822,000 million (11.7%) to $321,711,000.
The increase is primarily due to the inclusion of net sales from acquired
companies. Domestic oil and gas valves experienced a decline of 29.8% in net
sales. The competitive aspects resulted in abnormally low pricing while the
reduced manufacturing levels caused a loss of overhead absorption of fixed
expenses. Net sales of international oil and gas valves decreased 20.9%, as new
project awards have significantly slowed due to market conditions.
The Company also recorded a charge to discontinued operations of
$5,000,000 ($3,000,000 net of tax), for legal expenses associated with the
litigation involving James Jones Company. James Jones Company was a subsidiary
of the Company in the municipal water works division until September 1996 when
it was sold to Tyco International Ltd. See Part I, Item 1, "Product Liability,
Environmental and Other Litigation Matters."
Results of Operations
12 Months Ended June 1998 Compared to
12 Months Ended June 1997
The Company's net sales from continuing operations for the twelve months
ended June 30, 1998 decreased by $5,158,000 or 1.1%, from $447,235,000 to
$442,077,000 compared to fiscal year ended June 30, 1997. The decrease in net
sales is attributable to the following:
(Revenue $'s 1998-1997)
Internal Growth $10,133,000 2.3%
Acquisitions $15,473,000 3.5%
Divestiture ($20,244,000) (4.5%)
Impact of Foreign Exchange ($10,520,000) (2.4%)
----------------------------------------------------------
Total change ($5,158,000) (1.1%)
==========================================================
The increase in net sales from internal growth is primarily attributable to
increased unit shipments in the North American segment. The growth in net sales
due to acquired companies is primarily attributable to the inclusion for a full
year of the net sales of Ames Company, Inc. ("Ames") of Woodland, CA acquired in
January 1997. Fiscal 1997 sales included $13,415,000 for certain product lines
of the Jameco business, imported vitreous china and faucets, in which the
Company now owns a 49% minority interest, thereby eliminating these sales from
the fiscal 1998 results. The Company also divested three international product
lines which impacted fiscal 1998 sales by $6,829,000. The Company's net sales
during fiscal 1998 were also adversely impacted by changes in foreign exchange
rates primarily associated with the Company's European operations.
Gross profit from continuing operations increased $2,651,000, or 1.7%, to
$159,925,000 in fiscal year ended June 30, 1998 and gross margin increased as a
percentage of sales from 35.2% to 36.2% compared to fiscal year ended June 30,
1997. This percentage increase is primarily attributable to improved gross
margins in the North American segment and the full year inclusion of Ames which
operates at a higher gross margin than the Company average. These improvements
were partially offset by manufacturing inefficiencies associated with the
relocation of the Jameco product line into a Watts Regulator factory in
Spindale, North Carolina.
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<PAGE>
Selling, general and administrative expenses increased $4,201,000, or
3.9%, to $112,854,000. This increase is primarily attributable to the inclusion
of the expenses of acquired companies and increased variable selling expenses.
This increase is partially offset by the effect of the change in foreign
exchange rates.
Operating income from continuing operations decreased $1,550,000 or
3.2%, from $48,621,000 to $47,071,000 and decreased as a percentage of sales
from 10.9% in fiscal 1997 to 10.7% in fiscal 1998. This decrease is primarily
attributable to increased variable selling expenses.
The Company's effective tax rate for continuing operations decreased from
36.5% in fiscal 1997 to 32.0% in fiscal 1998 primarily due to the implementation
of tax planning strategies and utilization of net operating loss carryforwards.
Income from continuing operations increased by approximately $1,608,000,
or 6.1%, to $28,123,000. This increase is primarily attributable to the
increased net sales and improved gross margins.
The Company's consolidated results of operations are impacted by the
effect that changes in foreign exchange rates have on its international
subsidiaries operating results. Changes in foreign exchange rates had an
immaterial impact on net income in fiscal 1998.
Net sales from discontinued operations increased $14,784,000 (5.4%) to
$287,889,000 in the year ended June 30, 1998. This increase is due to the
inclusion of net sales from acquisitions and the increased unit shipments of
international oil and gas valves as well as increased unit shipments of domestic
instrumentation valves. Income from discontinued operations net of taxes
increased $3,222,000 or 14.6% from the period ended June 30, 1997. The increase
is due to earnings generated by acquisitions and the increased net sales and
gross margins on international oil and gas valves.
LIQUIDITY AND CAPITAL RESOURCES
During the twelve month period ended June 30, 1999 the Company generated
$48,286,000 in cash flow from continuing operations, which was principally used
to fund capital expenditures of $21,532,000 and finance acquisitions. These
capital expenditures were primarily for manufacturing machinery and equipment
and information technology as part of the Company's commitment to continuously
improve its manufacturing capabilities. The Company's capital expenditure budget
for the remaining calendar year 1999 is $10,000,000.
On March 9, 1999, a wholly owned subsidiary of the Company acquired the
stock of Cazzaniga S.p.A. whose last twelve (12) months' sales were
approximately $35 million. Cazzaniga, is an integrated manufacturer of plumbing
and heating products including water distribution manifolds, zone valves,
radiator air purge valves, and their principle line of thermostatic radiator
valves. The manufacturing plant features a yellow brass forging foundry, high
speed chucking machines with robotics, automatic screw machines, and extensive
automated assembly contained within a 211,000 square foot facility.
During the year ended June 30, 1999, the Company entered into a syndicated
credit facility with a group of European banks in the amount of 40 million
Euros. This credit facility has several tranches which provide credit to the
Company for a period up to five (5) years. The purpose of this credit facility
is to fund acquisitions in Europe, support the working capital requirements of
acquired companies, and for general corporate purposes. As of June 30, 1999,
19,600,000 Euro's ($20,223,000) were borrowed under this line of credit.
As of June 30, 1999 Watts has an unsecured $125 million line of credit
which will remain in effect until the Company executes the spin-off of CIRCOR.
On the effective date of the spin-off, the Company will execute an amended $100
million line of credit facility to support the Company's acquisition program,
working capital
14
<PAGE>
requirements of acquired companies, and for general corporate purposes. At June
30, 1999 the Company had $104 million outstanding on the line of credit and was
in compliance with all banking covenants related to this facility.
In anticipation of the spin-off of CIRCOR from the Company, CIRCOR is
negotiating with financial institutions for both lines of credit and private
placement debts totaling approximately $150 million. Proceeds will be used to
fund allocated debt from the Company and for future potential strategic
activities.
Working capital at June 30, 1999 was $267,912,000 compared to $237,373,000
at June 30, 1998. The ratio of current assets to current liabilities was 2.7:1
at both June 30, 1999 and June 30, 1998. Cash and short term investments were
$12,774,000 at June 30, 1999 and $10,767,000 at June 30, 1998. Debt as a
percentage of total capital employed was 38.9% at June 30, 1999 compared to
24.8% at June 30, 1998. This increase is attributable to the borrowings
associated with acquisitions.
The Company anticipates that available funds and those funds provided from
current operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.
The Company from time to time is involved with product liability,
environmental proceedings and other litigation proceedings and incurs costs on
an ongoing basis related to these matters. The Company has not incurred material
expenditures in fiscal 1999 in connection with any of these matters. See Part I,
Item 3, "Legal Proceedings."
YEAR 2000 Compliance
The Company has developed a comprehensive program to address its potential
exposure to the Year 2000 issue. The Company manages the program by having each
subsidiary and operating unit identify their own Year 2000 issues and develop
appropriate corrective action steps, while instituting a series of management
processes that coordinate and manage the program across the Company. The
Company's Corporate Vice President of Administration has been assigned
responsibility for the overall coordination and monitoring of the program,
including establishment of policies, tracking progress, and leveraging solutions
across the Company.
A significant portion of the Company's Year 2000 issues relative to its
information technology systems are being addressed as part of the Company-wide
initiative to upgrade and replace its information systems which began in fiscal
1997. At June 30, 1999, approximately 90% of the Company's critical information
technology systems and approximately 95% of its other information technology
systems have been replaced or upgraded and are Year 2000 compliant. The Company
expects to complete the replacement or upgrade of the remaining systems in the
fall of 1999.
Inventories, assessments and remediation activities for non-information
technology systems, including manufacturing equipment, have been completed at
June 30, 1999.
The Company has identified critical vendors, suppliers of information
processing services, customers, financial institutions and other third parties
and surveyed their Year 2000 remediation efforts. Additionally, the Company has
contacted all vendors and third party suppliers in this regard. A preponderant
majority of vendors responded. Vendors not responding and those determined not
to be Year 2000 compliant have been replaced. This vendor survey and review
process is complete. The cost of the program was immaterial. The Company did not
utilize any independent verification processes to confirm that these vendor
responses were reliable. However, the Company's Purchasing Department personnel
communicate regularly with its critical vendors. This communication includes
Year 2000 compliance confirmation.
The Company has developed contingency plans for those few vendors it
considers critical. These are essentially vendors that supply base raw materials
and certain component parts. The contingency plans include
15
<PAGE>
increasing levels of on-site and consigned inventory. Additionally, raw
materials are readily available and most can be supplied by a number of
alternate vendors. These contingency plans for vendors are complete.
In addition, the Company's operations depend on infrastructure in a number
of foreign countries in which it operates, and, therefore, a failure of any of
those infrastructures could adversely affect its operations. The Company's most
significant foreign markets are Canada, China, Germany, Italy, and the United
Kingdom. In these countries, the Company is not aware of any significant
weaknesses in their infrastructure.
The Company continues to develop detailed contingency plans to deal with
unexpected issues which may occur. These plans include the identification of
appropriate resources and response teams. Individual business managers at each
of the Company's subsidiaries and operating units are responsible to ensure
their business functions continue to operate normally. While the specifics vary
by operation, the general contingency planning strategies include: increasing
the on-hand supply of raw materials and finished goods; identifying alternate
suppliers of raw materials; ensuring key personnel (both business and technical)
are physically on-site; backing up critical systems just before year-end; and
identifying alternative methods of doing business with customers as necessary.
Despite the Company's comprehensive program the Company cannot be
completely sure that issues will not develop or events occur that could have
material adverse effects on the Company's results of operation or financial
condition. Nevertheless, the Company does not expect a material failure. The
Company's Year 2000 program is designed to minimize the likelihood of any
failure occurring. The most reasonably likely worse case scenario is that a
short-term disruption will occur with a small number of customers or suppliers
requiring an appropriate response.
Spending for the program is budgeted, expensed as incurred, and not
expected to be material.
CONVERSION TO THE EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The
introduction of the Euro will affect the Company as the Company has
manufacturing and distribution facilities in several of the member countries and
trades extensively across Europe. The long-term competitive implications of the
conversion are currently being assessed by the Company, however, the Company
will experience an immediate reduction in the risks associated with foreign
exchange. At this time, the Company is not anticipating that any significant
costs will be incurred due to the introduction and conversion to the Euro.
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain intercompany purchase transactions
that will occur within the fiscal year and other known foreign currency
exposures. The notional amount of such contracts and the related realized and
unrealized gains and losses as of June 30, 1999 are not material.
OTHER
Certain statements contained herein are forward looking. Many factors
could cause actual results to differ from these statements, including loss of
market share through competition; introduction of competing products by other
companies; pressure on prices from competitors, suppliers, and/or customers;
regulatory obstacles; lack of acceptance of new products; changes in the
plumbing and heating markets; changes in global demand for the Company's
products; changes in distribution of the Company's products; interest rates;
foreign exchange fluctuations; cyclicality of industries in which the Company
markets certain of its products and general and
16
<PAGE>
economic factors in markets where the Company's products are sold, manufactured
or marketed; and other factors discussed in the Company's reports filed with the
Securities and Exchange Commission.
In 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits," and
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company has adopted SFAS 132. The Company will adopt SFAS 133 on January 1,
2001. The impact of SFAS 133 on the combined financial statements is still being
evaluated, but is not expected to be material.
Also in 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." The Company will adopt SOP 98-1 and SOP 98-5 in fiscal 2000. These
statements are not expected to have a material effect on the combined financial
statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in foreign exchange rates and prices of certain
raw materials used in the manufacturing process. The Company does not enter into
derivative financial instruments for trading purposes. As a matter of policy all
derivative positions are used to reduce risk by hedging underlying economic
exposure. The derivatives the Company uses are straightforward instruments with
liquid markets.
The Company manages most of its foreign currency exposures on a
consolidated basis. The Company identifies all of its known exposures. As part
of that process, all natural hedges are identified. The Company then nets these
natural hedges from its gross exposures.
The Company's consolidated earnings are subject to fluctuations due to
changes in foreign currency exchange rates. However, its overall exposure to
such fluctuations is reduced by the diversity of its foreign operating locations
which encompass a number of different European locations, Canada, and China.
The Company's foreign subsidiaries transact most business, including
certain intercompany transactions, in foreign currencies. Such transactions are
principally material purchases or sales and are denominated in European
currencies or the U.S. or Canadian dollar. The Company uses foreign currency
forward exchange contracts to manage the risk related to intercompany purchases
that occur during the course of a fiscal year and certain open foreign currency
denominated commitments to sell products to third parties. At June 30, 1999 the
Company had forward contracts to buy foreign currencies with a notional value of
$9 million and a fair value of $8.4 million. At June 30, 1998, there were no
significant amounts of open foreign currency forward exchange contracts or
related unrealized gains or losses.
The Company has historically had a very low exposure to changes in
interest rates. Additionally, the Company historically has strong cash flows,
and any amounts of variable rate debt could be paid down through cash generated
from operations. At June 30, 1999, the Company was primarily exposed to the
Eurodollar interest rate on the outstanding borrowings under its Euro line of
credit facility. Information about the Company's long-term debt including
principal amounts and related interest rates appears in Note 9 to the
consolidated financial statements included herein.
The Company purchases significant amounts of bronze ingot, brass rod,
stainless steel, cast iron, and carbon steel which are utilized in manufacturing
its many product lines. The Company's operating results can be adversely
affected by changes in commodity prices if it is unable to pass on related price
increases to its customers. The Company manages this risk by monitoring related
market prices, working with its suppliers to achieve the maximum level of
stability in their costs and related pricing, seeking alternative supply sources
when necessary and passing increases in commodity costs to its customers, to the
maximum extent possible, when they occur. Additionally, on a
17
<PAGE>
limited basis, the Company uses commodity futures contracts to manage this risk.
At June 30, 1999, the Company had outstanding commodity futures contracts with a
notional value of $3.5 million and a fair value of $3.7 million.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The index to financial statements is included in page 17 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
Information required by this Item 10 will be filed in an amendment to this
report not later than 120 days after the Company's fiscal year ended June 30,
1999.
Executive Officers
Certain information with respect to the executive officers of the Company
is set forth in Item 1 of this report under the caption "Executive Officers".
Item 11. EXECUTIVE COMPENSATION.
Information required by this Item 11 will be filed in an amendment to this
report not later than 120 days after the Company's fiscal year ended June 30,
1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item 12 will be filed in an amendment to this
report not later than 120 days after the Company's fiscal year ended June 30,
1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item 13 will be filed in an amendment to this
report not later than 120 days after the Company's fiscal year ended June 30,
1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are included in a separate section of
this Report commencing on the page numbers specified below:
18
<PAGE>
Report of Independent Auditors .................................... 21
Consolidated Statements of Operations for each of the Three Years
in the Period Ended June 30, 1999 ........................... 22
Consolidated Balance Sheets as of June 30, 1999 and 1998 .......... 23
Consolidated Statements of Stockholders' Equity for each of the
Three Years in the Period Ended June 30, 1999 ............... 24
Consolidated Statements of Cash Flows for each of the Three Years
in the Period Ended June 30, 1999 ........................... 25
Notes to Consolidated Financial Statements ........................ 26
(a)(2) Schedules
Schedule II - Valuation and Qualifying Accounts for each of the
Three Years in the Period Ended June 30, 1999 ............... 41
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
(a)(3) Exhibits
Exhibits 10.1-10.6, 10.8, 10.22, and 10.29 constitute all of the
management contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report. Upon written request of
any stockholder to the Chief Financial Officer at the Company's principal
executive office, the Company will provide any of the Exhibits listed below.
Exhibit No. Description and Location
- ----------- ------------------------
2.1 Distribution Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. (20)
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws, as amended May 11, 1999. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31,
1991 (2), Amendments dated November 19, 1996 (18), February 24, 1997
(18), June 5, 1997 (18), August 26, 1997 (18), and October 17,
1997. (21)
9.2 The Amended and Restated George B. Horne Voting Trust Agreement-1997
dated as of September 14, 1999 *.
10.1 Employment Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September 1, 1996
between the Registrant and Timothy P. Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and Timothy P.
Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated
December 30, 1994, as amended and restated effective as of January 1,
1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment No.
3 (14), Amendment No. 4 dated September 4, 1996. (18), Amendment No.
5 dated January 1, 1998 *, Amendment No. 6 dated May 3, 1999, and
Amendment No. 7 dated June 7, 1999*.
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
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<PAGE>
10.9 Indenture dated as of December 1, 1991 between the Registrant and The
First National Bank of Boston, as Trustee, including form of 8-3/8%
Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co. and
Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and
Franklin, New Hampshire, facilities) financing dated December 31,
1985. (4)
10.12 Sale Agreement between Village of Walden Industrial Development
Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1,
1994 by and among the Registrant, Spence Engineering Company, Inc.
and First Union National Bank of North Carolina. (11), Amendment No.
1 (14), Amendment No. 2 dated October 1, 1996. (18)
10.14 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1, 1994.
(11)
10.15 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994. (11)
10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1,
1994 by and among the Registrant, Leslie Controls, Inc. and First
Union National Bank of North Carolina (11), Amendment No. 1 (14),
Amendment No. 2 dated October 1, 1996. (18)
10.17 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated
July 1, 1994. (11)
10.18 Loan Agreement between The Rutherford County Industrial Facilities
and Pollution Control Financing Authority and Watts Regulator Company
dated September 1, 1994. (12)
10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina (12),
Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996. (18)
10.20 Trust Indenture from The Rutherford County Industrial Facilities and
Pollution Control Financing Authority to The First National Bank of
Boston,as Trustee, dated September 1, 1994. (12)
10.21 Amended and Restated Stock Restriction Agreement dated October 30,
1991 (2), Amendment dated August 26, 1997. (18)
10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified
Stock Option Plan (7), Amendment No. 1. (14)
10.23 Letters of Credit relating to retrospective paid loss insurance
programs. (10)
10.24 Form of Stock Restriction Agreement for management stockholders. (5)
10.25 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and
related Guaranty of Watts Industries, Inc. and Watts Regulator Co.
dated December 14, 1987. (6)
10.26 Loan Agreement dated September 1987 with, and related Mortgage to,
N.V. Sallandsche Bank. (6)
10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding
A.G. and the participations in Multiscope Due S.R.L. dated November
6, 1992. (9)
10.28 Amended and Restated Revolving Credit Agreement dated March 27, 1998
between and among Watts Investment Company, certain financial
institutions, BankBoston N.A., as Administrative Agent, and the
Registrant, as Guarantor. (17)
10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October
17, 1995 (13), Amendment No. 1 dated August 5, 1997. (18)
10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among
Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco
International Ltd. and Watts Industries, Inc. (16)
11 Statement Regarding Computation of Earnings per Common Share. (19)
21 Subsidiaries. *
23 Consent of KPMG LLP. *
27 Financial Data Schedule-Fiscal 1999. *
27.1 Restated Financial Data Schedule - June 30, 1997. *
27.2 Restated Financial Data Schedule - September 30, 1997. *
20
<PAGE>
Incorporated By Reference To:
(1) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1999.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993
to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November
29, 1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August 1,
1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
(17) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1998.
(18) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1997.
(19) Notes to Consolidated Financial Statements, Note 2 of this Report.
(20) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 1 to its
registration statement on Form 10 filed on September 22, 1999. (File No.
000-26961).
(21) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1998.
* Filed as an exhibit to this Report with the Securities and Exchange
Commission
(b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the fourth
quarter of the period covered by this Annual Report.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WATTS INDUSTRIES, INC.
By: /s/ Timothy P. Horne
----------------------------
Timothy P. Horne
Chairman of the Board and
Chief Executive Officer
DATED: September 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Timothy P. Horne Chairman of the Board and September 27, 1999
- ------------------------- Chief Executive Officer
Timothy P. Horne (Principal Executive
Officer) and Director
/s/ Kenneth J. McAvoy Chief Financial Officer September 27, 1999
- ------------------------- and Treasurer (Principal
Kenneth J. McAvoy Financial and Accounting Officer),
Secretary, and Director
/s/ David A. Bloss, Sr. President and Chief Operating September 27, 1999
- ------------------------- Officer, and Director
David A. Bloss, Sr.
/s/ Gordon W. Moran Director September 27, 1999
- -------------------------
Gordon W. Moran
/s/ Daniel J. Murphy, III Director September 27, 1999
- -------------------------
Daniel J. Murphy, III
/s/ Roger A. Young Director September 27, 1999
- -------------------------
Roger A. Young
22
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Watts Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Watts
Industries, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1999. In connection
with our audits of the consolidated financial statements, we also audited the
accompanying financial statement schedule of valuation and qualifying accounts.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Watts Industries,
Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for the each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Boston, Massachusetts
August 13, 1999
23
<PAGE>
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales .................................................. $ 474,458 $ 442,077 $ 447,235
Cost of goods sold ......................................... 302,745 282,152 289,961
--------- --------- ---------
GROSS PROFIT .......................................... 171,713 159,925 157,274
Selling, general and administrative expenses ............... 119,875 112,854 108,653
--------- --------- ---------
OPERATING INCOME ...................................... 51,838 47,071 48,621
--------- --------- ---------
Other (income) expense:
Interest income ....................................... (923) (1,228) (616)
Interest expense ...................................... 6,150 6,514 7,072
Other ................................................. 1,688 432 420
--------- --------- ---------
6,915 5,718 6,876
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................................... 44,923 41,353 41,745
Provision for income taxes ................................. 15,469 13,230 15,230
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ..................... 29,454 28,123 26,515
Income from discontinued operations, net of taxes .......... 6,502 25,246 22,024
Gain on disposal of discontinued operations, net of taxes .. -- -- 3,208
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX ....... 6,502 25,246 25,232
--------- --------- ---------
NET INCOME ............................................ $ 35,956 $ 53,369 $ 51,747
========= ========= =========
Basic EPS
Income per share:
Continuing operations ................................. $ 1.10 $ 1.04 $ 0.97
Discontinued operations ............................... 0.24 0.93 0.93
--------- --------- ---------
NET INCOME ............................................ $ 1.34 $ 1.97 $ 1.90
========= ========= =========
Weighted average number of shares .......................... 26,736 27,109 27,181
========= ========= =========
Diluted EPS
Income per share:
Continuing operations ................................. $ 1.10 $ 1.03 $ 0.97
Discontinued operations ............................... 0.24 0.92 0.92
--------- --------- ---------
NET INCOME ............................................ $ 1.34 $ 1.95 $ 1.89
========= ========= =========
Weighted average number of shares .......................... 26,799 27,423 27,347
========= ========= =========
Dividends per share .................................... $ 0.350 $ 0.330 $ 0.295
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
Watts Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share information)
<TABLE>
<CAPTION>
June 30
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................ $ 12,774 $ 10,767
Trade accounts receivable, less allowance for doubtful
accounts of $7,747 in 1999 and $6,821 in 1998 ....................... 89,315 77,325
Inventories .............................................................. 110,552 104,198
Prepaid expenses and other assets ........................................ 10,193 9,857
Deferred income taxes .................................................... 21,271 17,963
Net current assets of discontinued operations ............................ 122,971 100,844
--------- ---------
Total Current Assets ................................................ 367,076 320,954
PROPERTY, PLANT AND EQUIPMENT, NET ............................................. 129,163 105,487
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $10,921 in 1999 and $8,389 in 1998 ............................... 96,285 79,837
Other .................................................................... 9,027 9,765
Net noncurrent assets of discontinued operations ......................... 36,191 36,853
--------- ---------
TOTAL ASSETS ................................................................... $ 637,742 $ 552,896
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 35,579 $ 28,327
Accrued expenses and other liabilities ................................... 48,843 37,100
Accrued compensation and benefits ........................................ 12,692 11,150
Income taxes payable ..................................................... -- 1,993
Current portion of long-term debt ........................................ 2,050 5,011
--------- ---------
Total Current Liabilities ........................................... 99,164 83,581
LONG-TERM DEBT, NET OF CURRENT PORTION ......................................... 118,916 71,647
DEFERRED INCOME TAXES .......................................................... 13,070 9,209
OTHER NONCURRENT LIABILITIES ................................................... 11,450 6,798
MINORITY INTEREST .............................................................. 7,487 7,646
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding ......................... -- --
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; issued and outstanding, 16,158,807
shares in 1999 and 16,859,027 shares in 1998 ........................ 1,616 1,686
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; issued and outstanding, 10,285,247
shares in 1999 and 10,296,827 shares in 1998 ....................... 1,029 1,030
Additional paid-in capital ............................................... 36,069 47,647
Retained earnings ........................................................ 364,089 337,565
Treasury stock, at cost, 100,000 shares in 1998 ......................... -- (2,583)
Accumulated Other Comprehensive Income (Loss) ............................ (15,148) (11,330)
--------- ---------
Total Stockholders' Equity .......................................... 387,655 374,015
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 637,742 $ 552,896
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share information)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
----------------------------------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ............................... 16,856,838 $1,686 11,365,627 $1,136 67,930 $249,415
Comprehensive income:
Net income ....................................... 51,747
Cumulative translation adjustment ................
Comprehensive income ..........................
Shares of Class B Common Stock
converted to Class A Common Stock ................ 150,000 15 (150,000) (15)
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 111,922 11 2,145
Purchase and retirement of treasury stock ........... (1,321,300) (132) (25,432)
Common Stock cash dividends (7,992)
------------------------------------------------------------------------
Balance at June 30, 1997 ............................... 15,797,460 1,580 11,215,627 1,121 44,643 293,170
Comprehensive income:
Net income ....................................... 53,369
Cumulative translation adjustment ................
Comprehensive income ..........................
Shares of Class B Common Stock
converted to Class A Common Stock ................ 918,800 91 (918,800) (91)
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 153,400 16 2,998
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired. ....................... (10,633) (1) (265)
Purchase of treasury stock, 100,000 shares @ cost ...
Net change in restricted stock units ................ 271
Common Stock dividends .............................. (8,974)
------------------------------------------------------------------------
Balance at June 30, 1998 ............................... 16,859,027 1,686 10,296,827 1,030 47,647 337,565
Comprehensive income:
Net income ....................................... 35,956
Cumulative translation adjustment ................
Comprehensive income ..........................
Shares of Class B Common Stock
converted to Class A Common Stock ................ 11,580 1 (11,580) (1)
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 3,700 1 60
Purchase of treasury stock, 615,500 shares @ cost ...
Retirement of treasury stock ........................ (715,500) (72) (11,926)
Net change in restricted stock units ................ 288
Common Stock dividends .............................. (9,432)
------------------------------------------------------------------------
Balance at June 30, 1999 ............................... 16,158,807 $1,616 10,285,247 $1,029 $ 36,069 $364,089
========================================================================
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income Stock Equity
---------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1996 ............................... $ (584) $ -- $319,583
Comprehensive income:
Net income ....................................... 51,747
Cumulative translation adjustment ................ (6,291) (6,291)
---------
Comprehensive income .......................... 45,456
---------
Shares of Class B Common Stock
converted to Class A Common Stock ................
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 2,156
Purchase and retirement of treasury stock ........... (25,564)
Common Stock cash dividends ......................... (7,992)
---------------------------------------
Balance at June 30, 1997 ............................... (6,875) -- 333,639
Comprehensive income:
Net income ....................................... 53,369
Cumulative translation adjustment ................ (4,455) (4,455)
---------
Comprehensive income .......................... 48,914
---------
Shares of Class B Common Stock
converted to Class A Common Stock ................
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 3,014
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired. ....................... (266)
Purchase of treasury stock, 100,000 shares @ cost ... (2,583) (2,583)
Net change in restricted stock units ................ 271
Common Stock dividends .............................. (8,974)
---------------------------------------
Balance at June 30, 1998 ............................... (11,330) (2,583) 374,015
Comprehensive income:
Net income ....................................... 35,956
Cumulative translation adjustment ................ (3,818) (3,818)
---------
Comprehensive income .......................... 32,138
---------
Shares of Class B Common Stock
converted to Class A Common Stock ................
Shares of Class A Common Stock
issued upon the exercise of
stock options .................................... 61
Purchase of treasury stock, 615,500 shares @ cost ... (9,415) (9,415)
Retirement of treasury stock ........................ 11,998
Net change in restricted stock units ................ 288
Common Stock dividends .............................. (9,432)
---------------------------------------
Balance at June 30, 1999 ............................... $(15,148) $ -- $387,655
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations ......................................... $ 29,454 $ 28,123 $ 26,515
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operating activities:
Depreciation ...................................................... 14,745 12,908 11,570
Amortization ...................................................... 2,711 2,433 2,104
Deferred income taxes (benefit) ................................... (2,823) 884 3,874
Gain on disposal of property, plant and equipment ................. (19) (1,152) (2,796)
Equity in undistributed earnings (loss) of affiliates ............. 712 (192) (5)
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Accounts receivable ......................................... (876) (2,493) (5,567)
Inventories ................................................. (532) (8,959) 9,721
Prepaid expenses and other assets ........................... (1,050) 408 (208)
Accounts payable, accrued expenses and other liabilities .... 5,964 6,275 (13,510)
--------- --------- ---------
48,286 38,235 31,698
Net cash provided by discontinued operations ......................... 16,794 19,660 21,064
--------- --------- ---------
Net cash provided by operating activities ............................ 65,080 57,895 52,762
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment ................................ (21,532) (23,056) (24,285)
Proceeds from sale of property, plant and equipment ....................... 2,337 7,253 1,715
Increase in other assets .................................................. (415) (578) (1,097)
Business acquisitions, net of cash acquired ............................... (28,422) (1,129) (36,772)
Discontinued operations:
Business acquisitions, net of cash acquired ........................... (74,176) (22,503) (933)
Proceeds from disposal of discontinued operations ..................... -- 146 88,164
Additions to property, plant and equipment ............................ (9,499) (6,115) (3,135)
--------- --------- ---------
Net cash provided by (used in) investing activities .................. (131,707) (45,982) 23,657
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from long-term borrowings ........................................ 81,121 68,779 105,412
Payments of long-term debt ................................................ (47,138) (85,971) (128,720)
Proceeds from exercise of stock options ................................... 61 2,715 1,935
Dividends ................................................................. (9,358) (8,936) (7,992)
Purchase of treasury stock ................................................ (9,415) (2,583) (25,564)
Discontinued operations:
Proceeds from long-term borrowings .................................... 79,289 25,484 934
Payments of long-term debt ............................................ (28,546) (19,084) (11,942)
--------- --------- ---------
Net cash provided by (used in) financing activities ................... 66,014 (19,596) (65,937)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents .............. 2,620 (207) 739
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 2,007 (7,890) 11,221
Cash and cash equivalents at beginning of year ............................ 10,767 18,657 7,436
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................................... $ 12,774 $ 10,767 $ 18,657
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Description of Business
The Company designs, manufactures and sells an extensive line of valves
for the plumbing and heating and water quality markets located
predominately in North America, Europe, and Asia. On December 15, 1998,
the Company announced its intention to spin-off its businesses that
produce valves for the industrial, oil and gas markets as a separate
publicly traded company.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Watts
Industries, Inc. and its majority and wholly-owned subsidiaries (the
Company). Upon consolidation, all significant intercompany accounts and
transactions are eliminated. The financial statements of the Company have
been restated to reflect the industrial, oil and gas businesses as
discontinued operations as a result of the planned spin-off transaction.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of original issuance.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
of businesses acquired. This balance is amortized over 40 years using the
straight-line method. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
assets, which range from 10 to 40 years for buildings and improvements and
3 to 15 years for machinery and equipment.
Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. In such instances, the carrying value of long-lived
assets is reduced to their estimated fair value, as determined using an
appraisal or a discounted cash flow approach, as appropriate.
Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities.
(Continued)
28
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Foreign Currency Translation
Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year-end exchange rates. Operating accounts are
translated at weighted average exchange rates for each year. Net
translation gains or losses are adjusted directly to a separate component
of stockholders' equity. The Company does not provide for U.S. income taxes
on foreign currency translation adjustments since it does not provide for
such taxes on undistributed earnings of foreign subsidiaries.
Stock Based Compensation
As allowed under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees.
Earnings Per Share
Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding. Diluted earnings
per share assumes the conversion of all dilutive securities (see Note 11).
Net income and shares used to compute net income per share from continuing
operations, basic and assuming full dilution, are reconciled below:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------- ----------------------------------- -----------------------------------
Income from Income from Income from Per
continuing Per Share continuing Per Share continuing Share
operations Shares Amount operations Shares Amount operations Shares Amount
------------ --------- ---------- ------------ ---------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $29,454 26,736 $1.10 $28,123 27,109 $1.04 $26,515 27,181 $0.97
Dilutive securities,
principally common
stock options 63 314 166
Diluted EPS $29,454 26,799 $1.10 $28,123 27,423 $1.03 $26,515 27,347 $0.97
</TABLE>
Derivative Financial Instruments
The Company uses financial instruments, principally forward contracts and
options to hedge foreign currency and commodity exposures. These contracts
hedge transactions and balances for periods consistent with their
committed exposures, and do not constitute investments independent of
these exposures. The Company does not hold or issue financial instruments
for trading purposes, nor is it a party to any leveraged contracts.
Realized and unrealized foreign exchange gains and losses on financial
instruments are recognized and offset foreign exchange gains and losses on
the underlying exposures. Any gain or loss from a financial instrument
that ceases to be an effective hedge is recognized in the income
statement.
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.
(Continued)
29
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits,"
and SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has adopted SFAS 132. The Company will adopt SFAS
133 on January 1, 2001. The impact of SFAS 133 on the consolidated
financial statements is still being evaluated, but is not expected to be
material.
Also in 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The Company will adopt SOP 98-1 and SOP 98-5 in
fiscal 2000. These statements are not expected to have a material affect
on the consolidated financial statements.
(3) Discontinued Operations
On December 15, 1998, the Company announced that it plans to spin-off its
industrial, oil and gas businesses as a separate publicly traded company,
CIRCOR International, Inc. ("CIRCOR"). Under the terms of the planned
spin-off transaction, which is expected to be completed in October 1999,
the Company will distribute to the holders of its common stock one share
of CIRCOR common stock for every two shares of Watts common stock. In
connection with this transaction, the Company will enter into several
agreements with CIRCOR that will cover such matters as technology
transfers and transition services. Additionally, the Company expects to
enter into a tax sharing agreement with CIRCOR effectively providing that
the Company will be responsible for the United States tax liability of
CIRCOR for the years CIRCOR was included in the Company's consolidated
United States tax returns.
In September of 1996, the Company divested itself of its municipal water
group of businesses, which included Henry Pratt Company, James Jones
Company and Edward Barber & Company Ltd. by selling the stock of each
entity and realizing a $3.2 million after tax gain.
The historical operating results of these businesses are shown net of tax
as discontinued operations in the consolidated statements of operations.
Net assets of discontinued operations in the consolidated balance sheet
include those assets and liabilities attributable to the CIRCOR
businesses.
The historical operating results of the discontinued operations include an
allocation of the Company's interest expense based on an allocation of the
Company's debt to discontinued operations. Income taxes have been
allocated to discontinued operations based on their pretax income and
calculated on a separate company basis pursuant to the requirements of
Statement of Financial Accounting Standards No. 109.
(Continued)
30
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Condensed historical balance sheet and operating statement data of the
discontinued operations is summarized below:
June 30,
--------
1999 1998
---- ----
(in thousands)
Balance Sheet:
Total current assets $ 185,028 $ 157,847
Total current liabilities (62,057) (57,003)
--------- ---------
Net current assets $ 122,971 $ 100,844
========= =========
Total non-current assets $ 178,153 $ 99,067
Total non-current liabilities (141,962) (62,214)
--------- ---------
Net non-current assets $ 36,191 $ 36,853
========= =========
Year ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Statement of Operations:
Net sales:
Municipal Water Group $ -- $ -- $ 14,027
CIRCOR 321,711 287,889 273,105
-------- -------- --------
Total net sales 321,711 287,889 287,132
-------- -------- --------
Costs and expenses:
Municipal Water Group 5,000 -- 13,898
CIRCOR 299,385 248,161 239,265
-------- -------- --------
Total costs and expenses 304,385 248,161 253,163
-------- -------- --------
Income before income taxes 17,326 39,728 33,969
Provision for income taxes 10,824 14,482 11,945
-------- -------- --------
Income from discontinued operations,
net of taxes $ 6,502 $ 25,246 $ 22,024
======== ======== ========
Costs and expenses related to the Municipal Water Group for 1999 relate to
legal costs associated with the State of California litigation (see Note
13).
(4) Business Acquisitions
On July 22, 1998, Watts acquired Hoke, Inc., a multinational manufacturer
of industrial valves and fittings, for $85 million, including assumption
of debt. As allowed in the purchase agreement, the Company has initiated
arbitration proceedings against the former shareholders of Hoke to recover
a portion of the purchase price. At this time, the Company cannot
determine how much, if any, of the purchase price will be recovered. Hoke
is included as part of the industrial, oil and gas businesses which are
being spun off into a separate publicly traded company, CIRCOR. Any
amounts recovered as a result of the arbitration proceedings will go to
CIRCOR.
(Continued)
31
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
During fiscal 1999, the Company also acquired SSI Equipment, Inc. of
Burlington, Ontario, Canada; Go Regulator, Inc. of San Dimas, California
and Cazzaniga S.p.A. located in Biassono, Italy. In fiscal 1998, the
Company acquired Telford Valve and Specialties, Inc. of Edmonton,
Alberta, Canada, Atkomatic Valve Company, located in Indianapolis, Indiana
and Aerodyne Controls Corp. of Ronkonkoma, New York. All of these acquired
companies are valve manufacturers and the aggregate purchase price of
these acquisitions, including Hoke, was approximately $102.6 million. The
goodwill which resulted from these acquisitions is being amortized on a
straight-line basis over a 40 year period.
All acquisitions have been accounted for under the purchase method and the
results of operations of the acquired businesses have been included in the
consolidated financial statements from the date of acquisition. Had these
acquisitions occurred at the beginning of fiscal year 1999, 1998 or 1997,
the effect on operating results would not have been material.
(5) Inventories
Inventories consist of the following:
June 30,
-------------------------
1999 1998
---- ----
(in thousands)
Raw materials $ 36,901 $ 34,057
Work in process 7,493 6,128
Finished goods 66,158 64,013
--------- ---------
$ 110,552 $ 104,198
========= =========
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following:
June 30,
-------------------------
1999 1998
---- ----
(in thousands)
Land $ 7,964 $ 5,582
Building and improvements 53,867 48,676
Machinery and equipment 148,952 128,339
Construction in progress 7,932 10,861
--------- ---------
218,715 193,458
Accumulated depreciation (89,552) (87,971)
--------- ---------
$ 129,163 $ 105,487
========= =========
(Continued)
32
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(7) Income Taxes
The significant components of the Company's deferred income tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Deferred income tax liabilities:
Excess tax over book depreciation $ 11,386 $ 5,809
Inventory 1,027 1,991
Other 657 1,409
-------- --------
Total deferred income tax liabilities 13,070 9,209
-------- --------
Deferred income tax assets:
Accrued expenses 13,037 9,120
Net operating loss carryforward 10,918 12,625
Other 3,441 3,979
-------- --------
Total deferred income tax assets 27,396 25,724
Valuation allowance for deferred income tax assets (6,125) (7,761)
-------- --------
Net deferred income tax assets 21,271 17,963
-------- --------
Net deferred income tax asset $ 8,201 $ 8,754
======== ========
</TABLE>
The provision for income taxes from continuing operations is based on the
following pre-tax income:
Fiscal Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Domestic $ 33,787 $ 34,609 $ 31,323
Foreign 11,136 6,744 10,422
-------- -------- --------
$ 44,923 $ 41,353 $ 41,745
======== ======== ========
The provision for income taxes from continuing operations consists of the
following:
Fiscal Year Ended June 30,
--------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Current tax expense (benefit):
Federal $ 12,698 $ 10,551 $ 10,497
Foreign 2,820 2,164 (57)
State 385 1,416 (146)
-------- -------- --------
15,903 14,131 10,294
-------- -------- --------
Deferred tax expense (benefit):
Federal (577) (129) 1,013
Foreign 212 (750) 3,746
State (69) (22) 177
-------- -------- --------
(434) (901) 4,936
-------- -------- --------
$ 15,469 $ 13,230 $ 15,230
======== ======== ========
(Continued)
33
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Actual income taxes reported from continuing operations are different than
would have been computed by applying the federal statutory tax rate to
income from continuing operations before income taxes. The reasons for
this difference are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Computed expected federal income tax
expense $ 15,723 $ 14,474 $ 14,612
State income taxes, net of federal tax benefit 366 1,614 202
Nondeductible goodwill and amortization 1,058 714 584
Foreign tax rate and regulation differential (664) (1,830) (568)
Other, net (1,014) (1,742) 400
-------- -------- --------
$ 15,469 $ 13,230 $ 15,230
======== ======== ========
</TABLE>
At June 30, 1999, the Company has foreign net operating loss carryforwards
of $16.4 million for income tax purposes that expire in fiscal years 2000
through 2003. In addition, foreign net operating losses of $10.7 million
can be carried forward indefinitely. Undistributed earnings of the
Company's foreign subsidiaries amounted to approximately $45 million, $33
million and $28 million at June 30, 1999, 1998 and 1997, respectively.
Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
recorded thereon. Upon distribution of those earnings, in the form of
dividends or otherwise, the Company will be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the
amount of U.S. income tax liability that would be incurred is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits would be available
to reduce some portion of any U.S. income tax liability. Withholding taxes
of approximately $5.4 million would be payable upon remittance of all
previously unremitted earnings at June 30, 1999.
The Company made income tax payments of $24.8 million, $17.2 million and
$20.2 million in fiscal years 1999, 1998 and 1997, respectively.
(8) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
June 30,
------------------
1999 1998
---- ----
(in thousands)
Commissions and sales incentives payable $11,401 $ 8,990
Accrued insurance costs 10,801 9,394
Professional fees 6,154 908
Other 20,487 17,808
------- -------
$48,843 $37,100
======= =======
(Continued)
34
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(9) Financing Arrangements
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
8-3/8% Notes, due December 2003 $ 75,000 $ 75,000
$125 million revolving line of credit, accruing interest at a variable
rate (5.37% and 6.79% at June 30, 1999 and 1998, respectively) of
either Eurodollar rate plus .185%, Prime Rate or a competitive money
market rate to be specified by the Lender, and expiring March 2003 104,000 19,000
40 million Euro line of Credit, accruing interest at a variable rate of
EURIBOR plus .75% (3.7% at June 30, 1999), and expiring September 2004 20,223 --
Industrial Revenue Bonds, maturing September 2002 accruing interest at a
variable rate based on weekly tax-exempt interest rates (3.96% and
3.60% at June 30, 1999 and 1998, respectively) 5,000 5,400
Other 13,740 8,217
Allocation to discontinued operations (96,997) (30,959)
--------- --------
120,966 76,658
Less: current portion 2,050 5,011
--------- --------
$ 118,916 $ 71,647
========= ========
</TABLE>
At the time of the distribution for the spin-off transaction, CIRCOR will
repay intercompany loans and advances from Watts based on a formula which
allocates borrowings between Watts and CIRCOR based on their relative
levels of business acquisition activity. The amount received from CIRCOR
will be used to reduce outstanding borrowings under the revolving credit
facility. Based on this methodology, borrowings amounting to $96,997 and
$30,959 have been allocated to discontinued operations at June 30, 1999
and 1998, respectively.
On March 1, 1999, a wholly owned subsidiary of the Company entered into a
syndicated revolving credit facility with a group of European banks that
provides for borrowings up to 40 million Euro at an interest rate of
EURIBOR plus 75 basis points. This credit facility expires on September 1,
2004.
Principal payments during each of the next five fiscal years are due as
follows (in thousands): 2000 - $2,050; 2001 - $1,303; 2002 - $5,763; 2003
- $184,358; and 2004 - $19. Interest paid for all periods presented in the
accompanying combined financial statements approximates interest expense.
Certain of the Company's loan agreements contain covenants that require,
among other items, the maintenance of certain financial ratios and net
worth, and limit the Company's ability to enter into secured borrowing
arrangements. Under its most restrictive loan covenant, which requires the
Company to maintain a net worth of not less than the sum of $295 million
and 50% of cumulative consolidated net income for complete fiscal years
subsequent to June 30, 1996, the Company had $22.1 million available at
June 30, 1999 for the payment of dividends.
(Continued)
35
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(10) Common Stock
Since 1997, the Company's Board of Directors has authorized the repurchase
of 3,880,200 shares of the Company's common stock in the open market and
through private purchases. Since the inception of this repurchase program,
3,495,700 shares of the Company's common stock have been repurchased and
retired.
The Class A Common Stock and Class B Common Stock have equal dividend and
liquidation rights. Each share of the Company's Class A Common Stock is
entitled to one vote on all matters submitted to stockholders and each
share of Class B Common Stock is entitled to ten votes on all such
matters. Shares of Class B Common Stock are convertible into shares of
Class A Common Stock, on a one-to-one basis, at the option of the holder.
The Company has reserved a total of 5,998,308 shares of Class A Common
Stock for issuance under its stock-based compensation plans and 10,285,247
shares for conversion of Class B Stock to Class A Common Stock.
(11) Stock-Based Compensation
The Company has several stock option plans under which key employees and
outside directors have been granted incentive (ISOs) and nonqualified
(NSOs) options to purchase the Company's Class A common stock. Generally,
options become exercisable over a five-year period at the rate of 20% per
year and expire ten years after the date of grant. ISOs and NSOs granted
under the plans have exercise prices of not less than 100% and 50% of the
fair market value of the common stock on the date of grant, respectively.
At June 30, 1999, 4,517,514 shares of Class A common stock were authorized
for future grants of options under the Company's stock option plans.
The following is a summary of stock option activity and related
information:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------ --------------------
Weighted Weighted Weighted
average average average
(Options in thousands) exercise exercise exercise
Options price Options price Options price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,362 $ 21.08 1,348 $ 20.01 1,137 $ 21.04
Granted 201 18.36 284 25.12 378 16.38
Canceled (78) 21.39 (117) 20.72 (55) 21.79
Exercised (a) (4) 16.38 (153) 19.43 (112) 17.28
----- -------- ----- -------- ----- --------
Outstanding at end of year 1,481 $ 20.71 1,362 $ 21.08 1,348 $ 20.01
===== ======== ===== ======== ===== ========
Exercisable at end of year 808 $ 20.52 619 $ 20.19 552 $ 20.39
===== ======== ===== ======== ===== ========
</TABLE>
(a) Includes 13,100 options in 1998 exercised in exchange for 10,633
shares of outstanding Class A common shares which were contributed to
Treasury and subsequently retired.
(Continued)
36
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes information about options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted
average Weighted Weighted
(Options in thousands) remaining average average
Number contractual exercise Number exercise
Range of Exercise Prices outstanding life (years) price exercisable price
------------------------ ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$10.69 - $11.38 13 1.4 $ 10.84 13 $ 10.84
$14.25 - $16.38 317 6.6 16.18 159 16.64
$16.60 - $18.44 363 6.4 17.86 170 17.21
$22.13 - $25.38 788 6.0 23.98 466 23.52
-------- -----
$10.69 - $25.38 1,481 5.1 20.71 808 20.52
======== =====
</TABLE>
The Company has a Management Stock Purchase Plan which allows for the
granting of Restricted Stock Units (RSUs) to key employees to purchase up
to 1,000,000 shares of Class A common stock at 67% of the fair market
value on the date of grant. RSUs vest annually over a three-year period
from the date of grant. The difference between the RSU price and fair
market value at the date of award is amortized to compensation expense
ratably over the vesting period. At June 30, 1999, 178,688 RSUs were
outstanding. Dividends declared for RSU's which remain unpaid at June 30,
1999 total $107,000.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123 for awards granted after June 30, 1995 as if the
Company had accounted for its stock-based awards to employees under the
fair value method of SFAS 123. The weighted average grant date fair value
of options granted during fiscal years 1999, 1998 and 1997 was $3.82,
$5.52 and $3.72, respectively. The fair value of the Company's stock-based
awards to employees was estimated using a Black-Scholes option pricing
model and the following assumptions:
1999 1998 1997
---- ---- ----
Expected life (years) 5.0 5.0 5.0
Expected stock price volatility 15.0% 15.0% 15.0%
Expected dividend yield 1.9% 1.3% 1.8%
Risk-free interest rate 5.92% 5.54% 6.56%
The Company's pro forma information follows:
Fiscal Year
Ended June 30,
---------------------------------
1999 1998 1997
---- ---- ----
(in thousands, except
per share information)
Net income - as reported $35,956 $53,369 $51,747
Net income - pro forma 34,863 52,443 51,132
Basic EPS - as reported 1.34 1.97 1.90
Basic EPS - pro forma 1.30 1.93 1.88
Diluted EPS - as reported 1.34 1.95 1.89
Diluted EPS - pro forma 1.30 1.91 1.87
Because SFAS 123 is applicable only to awards granted subsequent to June
30, 1995, its pro forma effect will not be fully reflected until fiscal
year 2000.
(Continued)
37
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(12) Employee Benefit Plans
The Company sponsors defined benefit pension plans covering substantially
all of its domestic non-union employees. Benefits are based primarily on
years of service and employees' compensation. The funding policy of the
Company for these plans is to contribute annually the maximum amount that
can be deducted for federal income tax purposes.
The components of net pension expense follow:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Change in projected benefit obligation
Balance at beginning of year $ 31,786 $ 24,026 $ 22,060
Service costs 1,485 953 798
Interest costs 2,221 2,081 1,812
Actuarial loss / (gain) (904) 5,244 416
Amendments / curtailments -- 764 (97)
Benefits paid (1,068) (1,281) (964)
-------- -------- --------
Balance at end of year $ 33,520 $ 31,787 $ 24,025
======== ======== ========
Change in fair value of plan assets
Balance at beginning of year $ 29,446 $ 23,230 $ 21,611
Actual return on assets 933 5,703 1,811
Employer contributions 476 1,794 770
Benefits paid (1,068) (1,281) (964)
-------- -------- --------
Fair value of plan assets at end of year $ 29,787 $ 29,446 $ 23,228
======== ======== ========
Funded Status
Unrecognized transition asset $ (1,322) $ (1,594) $ (1,856)
Unrecognized prior service cost 1,388 1,535 919
Unrecognized net actuarial loss / (gain) 1,604 870 (526)
Accrued benefit cost (2,072) (1,528) (2,258)
Net accrued pension cost included in consolidated
balance sheets
Accrued minimum liability $ (446) $ (862) $ (203)
Intangible asset 446 862 203
Accrued benefit cost (2,072) (1,528) (2,258)
Weighted Average Assumptions used
Discount rate 7.00% 7.00% 8.00%
Expected return on plan assets 9.00% 9.00% 8.00%
Rate of compensation 5.00% 5.00% 5.00%
</TABLE>
The Company sponsors a 401(k) Savings Plan for substantially all domestic
non-union employees. Under the Plan, the Company matches a specified
percentage of employee contributions, subject to certain limitations.
Company expense incurred in connection with this plan was $214,828,
$222,174 and $161,708 in fiscal years 1999, 1998 and 1997, respectively.
(Continued)
38
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Subsequent to the spin-off of CIRCOR which is expected to take place in
October 1999, CIRCOR will become liable for the payment of all pension
plan benefits earned by CIRCOR employees prior to and following the
spin-off who retire after the spin-off. The Watts pension plan will
transfer assets to the CIRCOR International pension plan and the amount of
the assets will be calculated based on the relative percentage of the
Projected Benefit Obligation. Such amount may be adjusted to comply with
the asset allocation methodology set forth in section 4044 of the Employee
Retirement Income Security Act of 1974, as amended, if necessary.
(13) Contingencies and Environmental Remediation
Contingencies
In April 1998, the Company became aware of a complaint that was filed
under seal in the State of California alleging violations of the
California False Claims Act. The complaint alleges that a former
subsidiary of the Company sold products utilized in municipal water
systems which failed to meet contractually specified standards and falsely
certified that such standards had been met. The complaint further alleges
that the municipal entities have suffered tens of millions of dollars in
damages as a result of defective products and seeks treble damages,
reimbursement of legal costs and penalties. The Company intends to
vigorously contest this matter but cannot presently determine whether any
loss will result from it. Other lawsuits and proceedings or claims,
arising from the ordinary course of operations, are also pending or
threatened against the Company and its subsidiaries.
The Company has established reserves which it presently believes are
adequate in light of probable and estimable exposure to pending and
threatened litigation of which it has knowledge. However, resolution of
any such matters during a specific period could have a material effect on
quarterly or annual operating results for that period.
Environmental Remediation
The Company has been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies
significantly from site to site as do the related levels of remediation
efforts. Environmental liabilities are recorded based on the most probable
cost, if known, or on the estimated minimum cost of remediation. The
Company's accrued estimated environmental liabilities are based on
assumptions which are subject to a number of factors and uncertainties.
Circumstances which can affect the reliability and precision of these
estimates include identification of additional sites, environmental
regulations, level of cleanup required, technologies available, number and
financial condition of other contributors to remediation and the time
period over which remediation may occur. The Company recognizes changes in
estimates as new remediation requirements are defined or as new
information becomes available. The Company estimates that its accrued
environmental remediation liabilities will likely be paid over the next
five to ten years.
(Continued)
39
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(14) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, short-term investments,
trade receivables and trade payables approximate fair value because of the
short maturity of these financial instruments.
The fair value of the Company's 8-3/8% notes, due December 2003, is based
on quoted market prices. The fair value of the Company's variable rate
debt approximates its carrying value. The carrying amount and the
estimated fair market value of the Company's long-term debt, including the
current portion and amounts allocated to discontinued operations, are as
follows:
June 30,
------------------------
1999 1998
---- ----
(in thousands)
Carrying amount $217,963 $107,617
Estimated fair value 222,441 114,907
Derivative Instruments
The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated intercompany
purchase transactions that are expected to occur within the fiscal year
and certain other foreign currency transactions. Related gains and losses
are recognized when the contracts expire, which is generally in the same
period as the underlying foreign currency denominated transaction. These
contracts do not subject the Company to significant market risk from
exchange movement because they offset gains and losses on the related
foreign currency denominated transactions. At June 30, 1999, the Company
had forward contracts to buy foreign currencies with a face value $9
million. These contracts mature on various dates between July 1999 and
January 2000 and have a fair market value of $8.4 million at June 30,
1999. The counterparties to these contracts are major financial
institutions. The risk of loss to the Company in the event of
non-performance by a counterparty is not significant.
The Company uses commodity futures contracts to fix the price on a certain
portion of certain raw materials used in the manufacturing process. These
contracts highly correlate to the actual purchases of the commodity and
the contract values are reflected in the cost of the commodity as it is
actually purchased. At June 30, 1999, the Company had outstanding
commodity futures contracts with a notional value of $3.5 million and a
fair value of $3.7 million.
(Continued)
40
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(15) Segment Information
The following table presents certain operating segment information:
<TABLE>
<CAPTION>
North Corporate
(Thousands of dollars) America Europe Asia Adjustments Consolidated
------- ------ ---- ----------- ------------
1999
<S> <C> <C> <C> <C> <C>
Net Sales $369,193 $ 92,247 $13,018 $ -- $474,458
Operating income 38,536 11,228 1,608 466 51,838
Identifiable assets 484,784 133,720 22,374 (3,136) 637,742
Capital expenditures 17,987 3,471 74 -- 21,532
Depreciation and amortization 12,851 3,921 684 -- 17,456
1998
Net Sales 345,346 82,837 13,894 -- 442,077
Operating income 36,754 8,258 1,984 75 47,071
Identifiable assets 443,224 87,463 23,719 (1,510) 552,896
Capital expenditures 19,839 2,621 596 -- 23,056
Depreciation and amortization 11,491 3,182 668 -- 15,341
1997
Net Sales 336,568 94,359 16,308 -- 447,235
Operating income 36,539 10,641 1,717 (276) 48,621
Identifiable assets 411,736 93,696 22,519 (1,585) 526,366
Capital expenditures 19,274 3,842 1,169 -- 24,285
Depreciation and amortization 9,458 3,623 593 -- 13,674
</TABLE>
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker.
All intercompany transactions have been eliminated, and intersegment
revenues are not significant.
(Continued)
41
<PAGE>
Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(16) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share information)
<S> <C> <C> <C> <C>
Fiscal year ended June 30, 1999:
Net sales $ 113,269 $114,310 $116,972 $129,907
Gross profit 41,086 40,833 41,888 47,906
Net income from continuing operations 7,893 7,332 6,905 7,324
Net income 12,388 11,256 6,905 5,407
Per common share:
Basic
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Diluted
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Dividends per common share .0875 .0875 .0875 .0875
Fiscal year ended June 30, 1998:
Net sales $ 111,839 $111,844 $108,166 $110,228
Gross profit 41,163 40,496 39,028 39,238
Net income from continuing operations 7,326 7,613 7,259 5,925
Net income 13,620 13,609 14,041 12,099
Per common share:
Basic
Income from continuing operations .27 .28 .27 .22
Net income .50 .50 .52 .45
Diluted
Income from continuing operations .27 .28 .26 .22
Net income .50 .50 .51 .44
Dividends per common share .0775 .0775 .0875 .0875
</TABLE>
(Continued)
42
<PAGE>
Schedule II-Valuation and Qualifying Accounts
Watts Industries, Inc. Continuing Operations
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------------------------------------------------------------------------
Balance at Charged to Costs Charged to Other Deductions-- Balance at End of
Description Beginning of Period and Expenses Accounts--Describe Describe(1) Period
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999
Deducted from asset
account:
Allowance for doubtful
accounts $6,821 $1,728 $747 (2) $1,549 $7,747
Year ended June 30, 1998
Deducted from asset
account:
Allowance for doubtful
accounts $6,236 $2,201 $1,616 $6,821
Year ended June 30, 1997
Deducted from asset
account:
Allowance for doubtful
accounts $6,862 $2,191 $30 (2) $2,847 $6,236
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Balance acquired in connection with acquisition of Cazzaniga in 1999 and
Ames in 1997.
(Continued)
43
<PAGE>
EXHIBIT INDEX
Exhibit No. Description and Location
- ----------- ------------------------
2.1 Distribution Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. (20)
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws, as amended May 11, 1999. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31,
1991 (2), Amendments dated November 19, 1996 (18), February 24, 1997
(18), June 5, 1997 (18), August 26, 1997 (18), and October 17,
1997. (21)
9.2 The Amended and Restated George B. Horne Voting Trust Agreement-1997
dated as of September 14, 1999 *.
10.1 Employment Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September 1, 1996
between the Registrant and Timothy P. Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and Timothy P.
Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees dated
December 30, 1994, as amended and restated effective as of January 1,
1994, (12), Amendment No. 1 (14), Amendment No. 2 (14), Amendment No.
3 (14), Amendment No. 4 dated September 4, 1996. (18), Amendment No.
5 dated January 1, 1998 *, Amendment No. 6 dated May 3, 1999, and
Amendment No. 7 dated June 7, 1999 *.
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
44
<PAGE>
10.9 Indenture dated as of December 1, 1991 between the Registrant and The
First National Bank of Boston, as Trustee, including form of 8-3/8%
Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co. and
Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and
Franklin, New Hampshire, facilities) financing dated December 31,
1985. (4)
10.12 Sale Agreement between Village of Walden Industrial Development
Agency and Spence Engineering Company, Inc. dated June 1, 1994. (11)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated June 1,
1994 by and among the Registrant, Spence Engineering Company, Inc.
and First Union National Bank of North Carolina. (11), Amendment No.
1 (14), Amendment No. 2 dated October 1, 1996. (18)
10.14 Trust Indenture from Village of Walden Industrial Development Agency
to The First National Bank of Boston, as Trustee, dated June 1, 1994.
(11)
10.15 Loan Agreement between Hillsborough County Industrial Development
Authority and Leslie Controls, Inc. dated July 1, 1994. (11)
10.16 Letter of Credit, Reimbursement and Guaranty Agreement dated July 1,
1994 by and among the Registrant, Leslie Controls, Inc. and First
Union National Bank of North Carolina (11), Amendment No. 1 (14),
Amendment No. 2 dated October 1, 1996. (18)
10.17 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated
July 1, 1994. (11)
10.18 Loan Agreement between The Rutherford County Industrial Facilities
and Pollution Control Financing Authority and Watts Regulator Company
dated September 1, 1994. (12)
10.19 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina (12),
Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996. (18)
10.20 Trust Indenture from The Rutherford County Industrial Facilities and
Pollution Control Financing Authority to The First National Bank of
Boston,as Trustee, dated September 1, 1994. (12)
10.21 Amended and Restated Stock Restriction Agreement dated October 30,
1991 (2), Amendment dated August 26, 1997. (18)
10.22 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified
Stock Option Plan (7), Amendment No. 1. (14)
10.23 Letters of Credit relating to retrospective paid loss insurance
programs. (10)
10.24 Form of Stock Restriction Agreement for management stockholders. (5)
10.25 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and
related Guaranty of Watts Industries, Inc. and Watts Regulator Co.
dated December 14, 1987. (6)
10.26 Loan Agreement dated September 1987 with, and related Mortgage to,
N.V. Sallandsche Bank. (6)
10.27 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding
A.G. and the participations in Multiscope Due S.R.L. dated November
6, 1992. (9)
10.28 Amended and Restated Revolving Credit Agreement dated March 27, 1998
between and among Watts Investment Company, certain financial
institutions, BankBoston N.A., as Administrative Agent, and the
Registrant, as Guarantor. (17)
10.29 Watts Industries, Inc. Management Stock Purchase Plan dated October
17, 1995 (13), Amendment No. 1 dated August 5, 1997. (18)
10.30 Stock Purchase Agreement dated as of June 19, 1996 by and among
Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco
International Ltd. and Watts Industries, Inc. (16)
11 Statement Regarding Computation of Earnings per Common Share. (19)
21 Subsidiaries. *
23 Consent of KPMG LLP. *
27 Financial Data Schedule-Fiscal 1999. *
27.1 Restated Financial Data Schedule - June 30, 1997. *
27.2 Restated Financial Data Schedule - September 30, 1997. *
45
<PAGE>
Incorporated By Reference To:
(1) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1999.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22, 1993
to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1994.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November
29, 1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August 1,
1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
(17) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1998.
(18) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1997.
(19) Notes to Consolidated Financial Statements, Note 2 of this Report.
(20) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 1 to its
registration statement on Form 10 filed on September 22, 1999. (File No.
000-26961).
(21) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1998.
* Filed as an exhibit to this Report with the Securities and Exchange
Commission
46
THE AMENDED AND RESTATED GEORGE B. HORNE
VOTING TRUST AGREEMENT - 1997
THIS AGREEMENT, amended and restated as of the 14 day of September, 1999
(this "Agreement"), by and among Timothy P. Horne, as trustee (together with his
successors in trust as provided herein, the "Trustees"), WATTS INDUSTRIES, INC.,
a Delaware corporation (the "Company"), Timothy P. Horne, individually, Timothy
P. Horne, as Trustee of the George B. Horne Trust - 1982, as currently
republished, Timothy P. Horne, as Trustee of the Daniel W. Horne Trust - 1980,
Timothy P. Horne, as Trustee of the Deborah Horne Trust - 1976, Timothy P.
Horne, as Trustee of the George B. Horne Grandchildren's Trust - 1995 F/B/O Tara
V. Horne, Timothy P. Horne, as Trustee of the George B. Horne Grandchildren's
Trust - 1995 F/B/O Tiffany Horne, Tara V. Horne, Judith Rae Horne, as Trustee of
the Tiffany Horne Trust - 1984 and Judith Rae Horne as custodian for Tiffany
Horne (together with any other person or persons who hereafter might deposit
shares in this voting trust and thereby become holders of voting trust
certificates hereunder, individually as a "Depositor" and collectively as the
"Depositors"), and GEORGE B. HORNE individually (in such capacity hereinafter
sometimes referred to, together with the Depositors and any other person or
persons who are or hereafter become parties hereto as "Beneficiaries" hereunder
or subject hereto as holders of voting trust certificates, individually as a
"Beneficiary" and collectively as the "Beneficiaries").
WITNESSETH:
WHEREAS, the parties hereto entered into the George B. Horne Voting Trust
Agreement-1997 dated as of August 26, 1997, as amended by the Amendment (the
"First Amendment") to The George B. Horne Voting Trust Agreement-1997 dated as
of October 30, 1997 (the "Existing Agreement"), with a view toward promoting and
enhancing the long-term stability and growth of the Company; and
WHEREAS, the Trustees and the registered holders of greater than a
majority of voting trust certificates outstanding under the Voting Trust
Agreement, desire to amend and restate the Voting Trust Agreement to incorporate
the First Amendment and to further amend the Voting Trust Agreement to provide,
among other things, that any capital stock or other equity interest of a
corporation or other entity, other than the Company, received by a Beneficiary
as a result of a dividend or other distribution or issuance in respect of any
capital stock of the Company held by such Beneficiary will become subject to the
Voting Trust Agreement; and
WHEREAS, the parties hereto agree that, pursuant to this Agreement and on
the terms and conditions set forth herein, the Trustees shall be granted the
sole and exclusive voting power in all matters with respect to those shares of
capital stock of the Company and other securities which are subject to this
Agreement as set forth herein, together with the other rights and powers
specified herein; and
<PAGE>
WHEREAS, the parties hereto intend that this Agreement will satisfy the
requirements of Section 218(a) of the Delaware General Corporation Law, as
amended (the "DGCL"), and be treated as a voting trust thereunder; and
WHEREAS, the Trustees have consented to act under this Agreement for the
purposes hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto mutually promise, covenant,
undertake and agree as follows:
1. Transfer of Stock to Trustees. The Depositor is, contemporaneously with the
execution of this Agreement, depositing with the Trustees one or more
certificates representing that number of shares of the Class B Common Stock of
the Company held by such Depositor as set forth opposite such Depositor's name
on Schedule A attached hereto, and each Beneficiary shall deposit with the
Trustees immediately upon receipt certificates representing (a) any shares of
capital stock of the Company having voting powers, (b) any shares of capital
stock or other equity interest or rights of a corporation (other than the
Company) or other entity having voting powers that are issued as a result of a
dividend or other distribution or issuance in respect of any shares of capital
stock of the Company (such corporation or other entity, an "Additional Issuer")
and (c) any shares of capital stock or other equity interest or rights of an
Additional Issuer having voting powers that are issued as a result of a dividend
or other distribution or issuance in respect of any shares of capital stock or
other equity interest of such Additional Issuer, in each case which shares or
other equity interest or rights are acquired or received by such Beneficiary
during the term of this Agreement other than (i) shares of Class A Common Stock
of the Company or shares of capital stock or other equity interest of an
Additional Issuer acquired by such Beneficiary under any stock purchase,
savings, option, bonus, stock appreciation, profit-sharing, thrift, incentive,
pension or similar plan of the Company or an Additional Issuer, or acquired by
such Beneficiary in any open market purchase, (ii) any shares of Class B Common
Stock listed on Schedule A as not being held pursuant to and subject to this
Agreement, if any, and (iii) shares of capital stock or other equity interest of
the Company or an Additional Issuer issued as a stock dividend or pursuant to a
stock split in respect of any shares of capital stock or other equity interest
of the Company or an Additional Issuer held by such Beneficiary which are not
subject to this Agreement. All such stock certificates shall be so endorsed, or
accompanied by such instruments of transfer, as to enable the Trustees to cause
such certificates to be transferred into the names of the Trustees after the
filing of this Agreement as required by law, which the Trustees shall forthwith
cause to be done as hereinafter provided. Upon receipt by the Trustees of the
certificates for any such shares of stock and the transfer of the same into the
names of the Trustees, the Trustees shall hold the same subject to the terms of
this Agreement and shall issue and deliver to the depositors of shares of stock
hereunder voting trust certificates representing their interests in such stock
deposited pursuant to this Agreement. Except as specifically provided in this
Agreement, and without limitation of the voting rights of the Trustees including
in
<PAGE>
connection with any merger or other sale of the Company or any Additional
Issuer, the Trustees shall not sell, assign, donate, pledge, encumber, grant any
security interest with respect to, hypothecate, or otherwise transfer or dispose
of any of the capital stock or other equity interest of the Company or any
Additional Issuer held pursuant to this Agreement.
During the term of this Agreement, no shares subject to this voting trust
may be withdrawn except in the manner provided below in this Section 1. Any such
withdrawal by a registered holder of voting trust certificates shall be effected
only by a written amendment to this Agreement in the form of Schedule B attached
hereto executed by the requisite number of Trustees then serving as such
hereunder then required to take action under Section 10. The Trustee having the
Determination Power shall have the right to consent to such amendment and
withdrawal in his sole discretion and approval by such Trustee having the
Determination Power with respect to such amendment and withdrawal shall be
deemed to constitute approval of all Trustees at any time serving. If TIMOTHY P.
HORNE is not then serving as a Trustee hereunder, then consent to such amendment
and withdrawal shall be by the holders of at least a majority vote of the
outstanding voting trust certificates issued in respect of capital stock or
other securities of the Company or any Additional Issuer, as the case may be, as
to which the proposed withdrawal relates. Upon the surrender by such holder to
the Trustees of the voting trust certificate or certificates designated in such
amendment, the Trustees are authorized to deliver or cause to be delivered to
such holder (i) a certificate or certificates for the shares of the capital
stock or other equity interest of the Company or the Additional Issuer so
withdrawn, with any appropriate restrictive legends, and (ii) a new voting trust
certificate in respect of the remaining shares held hereunder, if any signed in
the manner contemplated by the terms of this Agreement. Shares withdrawn from
this voting trust, when so withdrawn, shall be free of any restrictions imposed
by this Agreement, but shall remain subject to any and all restrictions imposed
by other agreements or by law. Nothing in this Section 1 or in any such
amendment shall modify, amend, limit or terminate any other restrictions
contained in, or be construed as a consent to any transfer of shares subject to
this Agreement under, any other agreement or instrument, unless such amendment
specifically refers to such other agreement or instrument and satisfies all
requirements for amendment or waiver thereof (including execution and delivery
by appropriate parties).
The other provisions of this Section 1 notwithstanding, removal of shares
from this Voting Trust shall be required if the removal and liquidation of such
shares is needed to enable the Estate of a deceased holder of voting trust
certificates to pay its federal and/or state death or estate tax, and the other
assets of such estate are insufficient to pay such tax.
Any depositor may request that he or she be allowed to withdraw one or
more shares of stock from the trust by filing a written request for withdrawal
with the Trustee of the Trust. Such written request shall set forth the number
of shares that the depositor wishes to withdraw from the trust and shall state
the intended purpose for the requested withdrawal of shares from the trust. Any
request for withdrawal of shares may be
<PAGE>
approved by the Trustee, within the Trustee's absolute discretion, provided that
the Trustee in his discretion shall have determined that approval of the request
for withdrawal shall not be adverse to the best interests of Watts Industries,
Inc. ("Watts") or its successors or the Additional Issuer or its successors, as
applicable, and provided that the Trustee shall have determined that a request
for withdrawal of any shares of Class B Common Stock of Watts, if approved,
shall be in the best interests of the Class B Stockholders of Watts. Shares of
Class B Common Stock of Watts so withdrawn for any reason in accordance with
these provisions shall be subject to any restrictions imposed upon the said
shares of Class B Common Stock of Watts in accordance with any Stock Restriction
Agreement entered by or on behalf of such Holder during his or her lifetime.
2. Agreement. Copies of this Agreement and of every agreement supplemental
hereto or amendatory hereof shall be provided to the Trustees, the Company, and
any Additional Issuer and shall, prior to the issuance of voting trust
certificates hereunder, be filed with and maintained in the registered office of
the Company in Delaware, in the registered office of any Additional Issuer in
its state of incorporation or organization and at such other place as the
Trustees shall designate, and shall be open to inspection daily during business
hours by any Beneficiary. All voting trust certificates shall be issued,
received and held subject to all of the terms of this Agreement. All persons and
entities who accept a voting trust certificate issued hereunder shall be bound
by the provisions of this Agreement with the same effect as if they were parties
to this Agreement.
All certificates for the Company's or any Additional Issuer's capital
stock or other equity interest transferred and delivered to the Trustees
pursuant hereto shall be surrendered by the Trustees to the Company or such
Additional Issuer, as applicable, and canceled and new certificates therefor
shall be issued to and held by the Trustees in their own names in their
capacities as Trustees hereunder and shall bear a legend indicating that the
shares represented by such certificate are subject to this Agreement (which fact
shall also be stated in the stock ledger of the Company or the Additional
Issuer, as applicable).
3. Voting Trust Certificates. Each voting trust certificate to be issued and
delivered by the Trustees in respect of the capital stock or other equity
interest of the Company or any Additional Issuer, as hereinbefore provided,
shall state the number of shares which it represents, shall be signed by the
Trustees then in office, and shall be in substantially the form of Schedule C
attached hereto and bear the restrictive legend set forth thereon, it being
understood that during any period in which a Trustee has the Determination Power
(as hereinafter defined), voting trust certificates issued hereunder may be
signed by that Trustee alone and such Trustee's signature shall be deemed for
all purposes to constitute the signature and authorization of all Trustees
hereunder and to evidence conclusively that the issuance of the related
certificate is the act of all Trustees then serving. In connection with the
issuance of voting trust certificates in respect of shares of capital stock or
other equity interest in an Additional Issuer, the voting trust certificate may
include changes to the form of certificate included herewith as Schedule C to
reflect such Additional Issuer.
<PAGE>
4. Transfer of Certificates; Restrictions. The transfer of any voting trust
certificate (including without limitation any sale, assignment, donation,
pledge, encumbrance, grant of a security interest, hypothecation or other
transfer or disposition) (a) shall be effected only with the written consent of
all of the Trustees then serving hereunder (acting together, or, if all such
Trustees do not agree, by the Trustee, if any, having the Determination Power
with respect to such transfer under Section 10 hereof) and (b) shall be subject
to any restrictions, conditions and other provisions to the extent applicable to
it or to the stock which it represents, whether imposed by law, specified on the
relevant certificate or specified in the Restated Certificate of Incorporation
of the Company, as amended (the "Restated Certificate") (provided that any
transfer of voting trust certificates without a transfer of the underlying stock
held in this voting trust shall in no way affect the voting rights of such
underlying stock, consistent with the terms of the Restated Certificate), the
Certificate of Incorporation or other organizational documents of the applicable
Additional Issuer, as in effect from time to time, this Agreement or any other
agreement, including without limitation the Stock Restriction Agreement dated as
of August 28, 1986, as the same may have been or may hereafter be amended and/or
restated, among parties hereto. Any attempted transfer in violation of such
restrictions, conditions and other provisions shall be void ab initio and the
Trustees shall not register such transfer or recognize the intended transferee
as the holder of the voting trust certificate for any purpose. To the extent
permitted by law, voting trust certificates shall not be subject to attachment,
garnishment, judicial order, levy, execution or similar process, however
instituted, for satisfaction of a judgment or otherwise.
Subject to the foregoing provisions, the voting trust certificates shall
be transferable on the books of the Trustees, at such office as the Trustees may
designate, by the registered owner thereof, either in person or by attorney duly
authorized, upon surrender thereof, according to the rules established for that
purpose by the Trustees, and the Trustees may treat the registered holder as the
owner thereof for all purposes whatsoever, but they shall not be required to
deliver new voting trust certificates hereunder without the surrender of such
existing voting trust certificates for cancellation by the Trustees at the time
of their issuance of new voting trust certificates.
If a voting trust certificate is lost, stolen, mutilated or destroyed, the
Trustees, in their discretion, may issue a duplicate of such certificate upon
receipt of (a) evidence of such fact satisfactory to them; (b) indemnity
satisfactory to them; (c) the existing certificate, if mutilated; and (d) their
reasonable fees and expenses in connection with the issuance of a new trust
certificate.
5. Termination Procedure. Upon the termination of the voting trust at any time,
as hereinafter provided, the Trustees shall mail written notice of such
termination to the registered owners of the outstanding voting trust
certificates at the address appearing on the transfer books of the Trustees.
From the date specified in any such notice (which date shall be fixed by the
Trustees) the voting trust certificates shall cease to have any effect, and the
holders of such voting trust certificates shall have no further rights under
this voting trust other than to receive certificates for shares of stock of
<PAGE>
the Company or any Additional Issuer or other property distributable under the
terms hereof upon the surrender of such voting trust certificates.
Within 30 days after the termination of this voting trust, the Trustees
shall deliver to the registered holders of all voting trust certificates
outstanding as of the date of such termination, stock certificates for the
number of shares of such class or classes of the Company's or any Additional
Issuer's capital stock or other equity interest represented thereby as to which
they shall be entitled upon the surrender for cancellation of such voting trust
certificates, properly endorsed or accompanied by properly endorsed instruments
of transfer, if appropriate, at the place designated by the Trustees, and after
payment, if the Trustees so require, by the persons entitled to receive such
stock certificates, of a sum sufficient to cover any stamp tax or governmental
charge in respect of the transfer or delivery of such stock certificates. Such
certificates or shares shall bear such legend referring to the restrictions on
transfer of such shares as may be required by this Agreement, by law or
otherwise. Thereupon, all liability of the Trustees for delivery of such
certificates of shares shall terminate, and the voting trust certificates
representing the beneficial interest in the shares so delivered by the Trustees
shall be null and void.
If upon such termination, one or more registered holders of outstanding
voting trust certificates shall fail to surrender such voting trust
certificates, or the Trustees for any reason shall be unable to comply with the
provisions of the preceding paragraph, the Trustees may, at any time subsequent
to 30 days after the termination of this Agreement, deposit (x) with the Company
stock certificates representing the number of shares of capital stock or other
equity interest represented by such voting trust certificates, together with
written instructions authorizing the Company to deliver to the applicable
registered holder such stock certificates representing stock in the Company in
exchange for voting trust certificates representing a like interest in the
capital stock of the Company and (y) with each Additional Issuer stock
certificates representing the number of shares of capital stock or other equity
interest in such Additional Issuer represented by such voting trust
certificates, together with written instructions authorizing such Additional
Issuer to deliver to the applicable registered holder such stock certificates
representing capital stock or other equity interest in such Additional Issuer in
exchange for voting trust certificates representing a like interest in the
capital stock or other equity interest of such Additional Issuer; and upon such
deposit, all further liability of the Trustees for the delivery of such stock
certificates and the delivery or payment of dividends upon surrender of the
voting trust certificates shall cease, and the Trustees shall not be required to
take any further actions hereunder.
Notwithstanding anything herein to the contrary, upon any extension of
this voting trust as contemplated by Section 13 hereof, the shares of stock held
herein with respect to which this voting trust is being extended shall continue
to be held by the Trustees and/or their successor Trustees rather than being
transferred to the registered holders of voting trust certificates in respect
thereof for recontribution, and in such event no transfer of such shares shall
be deemed to have occurred for any purpose.
<PAGE>
6. Dividends. If any dividend in respect of the stock deposited with the Trustee
is paid, in whole or in part, in stock of the Company or an Additional Issuer
having voting powers, the Trustees shall likewise hold, subject to the terms of
this Agreement, the stock certificates which are received by them on account of
such dividend, and the holder of each outstanding voting trust certificate
representing stock on which such dividend has been paid shall be entitled to
receive a voting trust certificate issued under this Agreement for the number of
shares and class of stock received as such dividend with respect to the shares
represented by such voting trust certificate. Holders entitled to receive the
voting trust certificates issued in respect of such dividends shall be those
registered as such on the transfer books of the Trustees at the close of
business on the record date for such dividend.
If any dividend in respect of the stock deposited with the Trustees
is paid other than in capital stock or other equity interest having voting
powers of the Company or any Additional Issuer, then the Trustees shall promptly
distribute the same to the holders of outstanding voting trust certificates
registered as such at the close of business on the record date for such
distribution. Such distribution shall be made to such holders of voting trust
certificates ratably, in accordance with the number of shares represented by
their respective voting trust certificates.
In lieu of receiving cash dividends upon the capital stock or other
equity interest of the Company or any Additional Issuer deposited with the
Trustees and paying the same to the holders of outstanding voting trust
certificates pursuant to the preceding paragraph, the Trustees may instruct the
Company or the Additional Issuer in writing to pay such dividends directly to
the holders of the voting trust certificates specified by the Trustees. Such
instructions are deemed given hereby and until receipt of written instructions
to the contrary from the Trustees, the Company or the applicable Additional
Issuer agrees to pay such dividends directly to the holders of the voting trust
certificates. The Trustees may at any time revoke such instructions and by
written notice to the Company or the applicable Additional Issuer direct it to
make dividend payments to the Trustees. Neither the Company nor any Additional
Issuer shall be liable to any holder of a voting trust certificate or any person
claiming to be entitled to any such dividends by reason of adhering to any
written instructions of the Trustees.
7. Subscription Rights. If any stock or other equity interest of the Company or
any Additional Issuer are offered for subscription to all of the holders of any
class of the Company's or such Additional Issuer's capital stock or other equity
interest deposited hereunder, the Trustees promptly, upon receipt of notice of
such offer, shall mail a copy thereof to each registered holder of the
outstanding voting trust certificates representing such class of capital stock
or other equity interest. Upon receipt by the Trustees, at least five days prior
to the last day fixed by the Company or such Additional Issuer, as applicable,
for subscription and payment, of a request for any such registered holder of
voting trust certificates to subscribe for such shares on behalf of such
registered holder, accompanied by the sum of money required to pay for such
stock or other equity interest, the Trustees shall make such subscription and
payment, and upon receipt from the Company or such Additional Issuer, as
applicable of the certificates for shares or
<PAGE>
other equity interest so subscribed for, shall issue to such registered holder a
voting trust certificate representing such shares if the same be stock of the
Company or such Additional Issuer, as applicable, having voting powers, but if
the same be shares or securities other than stock having voting powers, the
Trustees shall mail or deliver such securities to the voting trust certificate
holder in whose behalf the subscription was made, or may instruct the Company or
such Additional Issuer, as applicable to make delivery directly to the voting
trust certificate holder entitled thereto.
8. Dissolution of the Company. In the event of the dissolution or total or
partial liquidation of the Company or an Additional Issuer (other than in the
event of a transaction described in Section 9 below), whether voluntary or
involuntary, the Trustees shall receive the moneys, securities, rights or
property to which the holders of outstanding shares of the Company's or such
Additional Issuer's capital stock or other equity interest, as applicable,
deposited hereunder are entitled, and shall distribute the same among the
registered holders of voting trust certificates in proportion to their
interests, as shown by the transfer books of the Trustees, or the Trustees may
in their discretion deposit such moneys, securities, rights or property with any
bank or trust company with authority and instructions to distribute the same as
above provided, and upon such deposit, all further obligations or liabilities of
the Trustee in respect of such moneys, securities, rights or property so
deposited shall cease.
9. Reorganization or Sale of the Company. In the event that there occurs (i) any
merger or consolidation transaction involving the Company or an Additional
Issuer and one or more other entities, or a transaction in which all or
substantially all of the assets of the Company or an Additional Issuer are
transferred to another entity or (ii) a transaction in which stockholders of the
Company or an Additional Issuer transfer or exchange shares held by them wholly
or partially for capital stock or other equity interest of another entity having
voting powers, and in any such transaction securities of such entity having
voting powers are received by the Trustees in respect of the shares subject to
this voting trust, it being understood that in connection with any such
transaction or otherwise all voting powers in respect of shares subject to this
voting trust shall be exercised by the Trustees in accordance with the terms
hereof and that shares may be removed from this voting trust only in accordance
with Section 1, thus giving the Trustees all power and authority to vote all
shares subject hereto in connection with any such transaction, then (x) in
connection with any such transaction involving the Company the term "Company"
for all purposes of this Agreement shall include the successor entity to the
Company, (y) in connection with any such transaction involving an Additional
Issuer the term "Additional Issuer" for all purposes of this Agreement shall
include the successor entity to such Additional Issuer and (z) the Trustees
shall receive and hold under this Agreement any such capital stock or other
equity interest of such successor entity received on account of the ownership,
as Trustees hereunder, of the stock held hereunder immediately prior to such
transaction. Voting trust certificates issued and outstanding under this
Agreement at the time of such transaction may remain outstanding or the Trustees
may, in their discretion, substitute for such voting trust certificates new
voting trust certificates in appropriate form and with appropriate modifications
to reflect the number of shares of other securities then held, and the terms,
"stock" and "capital
<PAGE>
stock" as used herein shall be taken to include any securities, including any
other type of equity interest, which may be received by the Trustees in lieu of
all or any part of the capital stock or other securities of the Company or an
Additional Issuer, as applicable.
In the event that there occurs any transaction described in the preceding
paragraph and in connection therewith the Trustees receive assets other than
capital stock or other equity interest having voting powers, the Trustees shall
distribute such assets to the registered holders of the outstanding voting trust
certificates hereunder pro rata on the basis of their respective interests in
the shares held hereunder and, if such consideration shall consist wholly of
such assets, this Agreement shall thereafter terminate.
10. Rights, Powers and Duties of Trustees. Until the actual delivery to the
holders of voting trust certificates issued hereunder of stock certificates in
exchange therefor, and until the surrender of such voting trust certificates for
cancellation, in each case in accordance with the terms of this Agreement, title
to all of the Company's and each Additional Issuer's stock deposited hereunder
shall be vested in the Trustees, who shall be deemed the holders of record of
such shares for all purposes, and the Trustees shall have the sole and exclusive
right, acting as hereinafter provided and subject to such limitations as are set
forth herein, to exercise, in person or by their nominees or proxies, all of the
rights and powers in respect of all stock deposited hereunder, including the
right to vote such stock and to take part in or consent to any corporate or
stockholders' action of any kind whatsoever, whether ordinary or extraordinary,
subject to the provisions hereinafter set forth. The right to vote shall include
the right to vote in connection with the election of directors and other
resolution or proposed action of any character whatsoever which may be presented
at any meeting or require the consent of stockholders of the Company or any
Additional Issuer. It is expressly understood and agreed that the holders of
voting trust certificates in their capacities as such shall not have any right,
either under said voting trust certificates or under this Agreement, or under
any agreement or doctrine or concept of law, express or implied, or otherwise,
with respect to any shares held by the Trustees hereunder to vote such shares or
to take part in or consent to any corporate action, or to do or perform any
other act or thing which the holders of the Company's or any Additional Issuer's
common stock of any class are now or may hereafter become entitled to do or
perform.
No Trustee shall incur any responsibility in his capacity as trustee,
individually or otherwise, in voting the shares held hereunder or in any matter
or act committed or omitted to be done under or in connection with this
Agreement, or for any vote or act committed or omitted to be done by any
predecessor or successor Trustee, except for such Trustee's willful malfeasance.
The Trustees shall at all times keep, or cause to be kept, complete and
accurate records of all stock deposited with them hereunder, the identity,
addresses and ownership of the Depositors and Beneficiaries, and all voting
trust certificates issued by the Trustee. Such records shall be open to
inspection by any Depositor or Beneficiary under this Agreement on reasonable
notice given to the Trustees at their usual place of business during their
normal business hours.
<PAGE>
Whenever action is required of the Trustees, such action may be taken by
written consent signed by the requisite number of Trustees or by vote of the
requisite number of Trustees at a meeting of the Trustees. So long as there are
two (2) or more Trustees hereunder, the concurrence of both (if there are two
(2) Trustees) or a majority (if there are more than two (2) Trustees) of the
Trustees then serving shall be necessary and sufficient for the validity of any
action taken by the Trustees, and if at any time there is one Trustee hereunder
(subject to Section 11) such Trustee's action shall be necessary and sufficient
for the validity of any action taken by the Trustees. Notwithstanding the
foregoing, if at any time TIMOTHY P. HORNE and or any other person shall serve
as co-Trustees hereunder, and if for any reason the Trustees shall fail to
concur with respect to any action proposed to be taken by the Trustees under or
pursuant to this Agreement (including without limitation any voting decision,
any amendment in connection with the withdrawal of shares as contemplated by
Section 1, any other trust amendment or trust termination), then TIMOTHY P.
HORNE, for so long as he is serving as a Trustee hereunder, shall have the power
(such power being herein called the "Determination Power") to determine in his
sole discretion, whether or not such proposed action is to be taken and upon his
approval such action when and if taken shall have the same force and effect as
if both or all of the Trustees had agreed with respect thereto. Any and all
documents or instruments executed by or on behalf of the Trustees hereunder
(including without limitation voting trusting certificates) may be executed by
Timothy P. Horne alone and his signature shall evidence conclusively the
authorization and all of the Trustees hereunder.
In the event that TIMOTHY P. HORNE shall cease to serve as a Trustee
hereunder, then no Trustee hereunder shall have the Determination Power, except
in accordance with a duly-published amendment to this Agreement adopted in
accordance with the terms hereof, provided, however, that the foregoing shall
not be deemed to limit the authority of any person serving as a sole Trustee
under and in accordance with this Agreement.
11. Remaining Trustees; Successor Trustees, Successors' Determination Power. At
least one (1) individual shall serve as a Trustee hereunder during any period in
which TIMOTHY P. HORNE serves as a Trustee hereunder. The said TIMOTHY P. HORNE
shall have full discretionary authority to serve as the sole Trustee until such
time as he shall determine that he is unwilling or unable to so serve and shall
have resigned by written instrument, or until his death or permanent incapacity
or disability. During any period following TIMOTHY P. HORNE's service as a
Trustee hereunder (subject to the further provisions of this Section 11 as set
forth in the second paragraph hereof), there shall be at least two (2) Trustees
hereunder. Notwithstanding the preceding two sentences or any other provisions
of this Agreement or otherwise to the contrary, if at any time no Trustee shall
be serving hereunder for any reason (as a result, for example, of the deaths of
the Trustees), then this Agreement and the voting trust created hereby shall
nevertheless remain in existence and in full force and effect until a new
Trustee shall be appointed in accordance with this Section 11. All Trustees
hereunder shall be individuals. Trustees shall in no event be subject to removal
for any reason and any Trustee hereunder shall serve until his or her
resignation, death,
<PAGE>
permanent disability or incapacity (as hereinafter defined). Any Trustee
hereunder may resign by a signed instrument delivered to the remaining Trustee
or Trustees, if any, or otherwise to the registered holders of the outstanding
voting trust certificates.
The following provisions shall govern the succession of Trustees
hereunder. In the event TIMOTHY P. HORNE shall cease to serve as a Trustee
hereunder, then Attorney WALTER J. FLOWERS, Attorney DAVID F. DIETZ and DANIEL
J. MURPHY, III shall thereupon become Co-Trustees hereunder if they are then
living and willing and able to serve as such. In the event that any of WALTER J.
FLOWERS, DAVID F. DIETZ or DANIEL J. MURPHY, III shall be unwilling or unable to
serve as a Co-Trustee, then a Primary Designee or a Secondary Designee (as
defined hereinbelow) shall be appointed to serve in the stead of any such named
Co-Trustee who shall be unwilling or unable to serve in that capacity. In the
event that any of WALTER J. FLOWERS, DAVID F. DIETZ or DANIEL J. MURPHY, III or
any Primary Designee or Secondary Designee is unable or unwilling or shall
otherwise fail to serve as a Trustee hereunder at the time he would otherwise
become such, or after becoming a Co-Trustee shall cease to serve as such for any
reason, then there shall continue to be two (2) trustees hereunder, and a person
or the persons indicated below (if available) shall become a Co-Trustee or
Co-Trustees in accordance with the following line of succession in order that
there will ultimately be three (3) Co-Trustees to serve in such office in
accordance with the terms of this Trust:
(1) First, any individual designated as the "Primary Designee" in
accordance with the following paragraph of this Section 11;
(2) Next, any individual designated as the "Secondary Designee" in
accordance with the following paragraph of this Section 11; and
(3) Then, one (1) or two (2) individuals (as applicable) appointed
by the holders of a majority in interest of the voting trust
certificates issued in respect of capital stock of the Company then
outstanding
such that in the event the individual or individuals contemplated to serve as a
Trustee or Trustee(s) hereunder for any reason fail or are unable to serve as
such at the time they would otherwise be a Trustee or Trustees hereunder or
thereafter cease to serve as such for any reason, or if no designation of a
Primary Designee and/or a Secondary Designee shall be in effect, then the next
available individual in the line of succession shall become a Trustee hereunder,
provided, however, that if for any reason there shall ever be a single Trustee
hereunder during any period following Timothy P. Horne's service as a Trustee
hereunder, then such sole Trustee shall be authorized to take all actions on
behalf of the Trustee until such time as another Trustee shall be appointed,
provided that the party or parties authorized to designate a successor or
successors shall endeavor to do so promptly. In the event of any disagreement
between the Co-Trustees with regard to any issue involving the Trust, the
majority vote of the Trustees then in office shall be determinative of any issue
which shall be considered by the Trustees.
<PAGE>
At any time TIMOTHY P. HORNE, if then living and not then subject to any
incapacity (as hereinafter defined) may by written instrument signed and filed
with the registered office of the Company in Delaware and with the registered
office of each Additional Issuer in its state of incorporation or organization,
designate (i) an individual to serve as Primary Designee in the line of
succession contemplated by this Section 11 (the "Primary Designee"), and (ii) if
he so elects, an additional individual to succeed, or to serve in lieu of or
with the Primary Designee as a trustee hereunder (the "Secondary Designee") as
also contemplated by this Section 11. Any such designation shall also be
revocable by a written instrument signed by TIMOTHY P. HORNE if then living and
not then subject to any incapacity (as hereinafter defined), and filed with the
registered office of the Company in Delaware and with the registered office of
each Additional Issuer in its state of incorporation or organization at any time
prior to the time at which a designated successor becomes a Trustee hereunder.
It is understood that the provisions of this Section 11 are intended to permit
the designation of up to two individuals to become Trustees in accordance with
the line of succession as Trustees hereunder, and while designations of
particular individuals may be revoked and a new individual designated in his or
her place (such as in the case of a designee's death, for example), no more than
two individuals may become Trustees hereunder pursuant to a designation as a
Primary or Secondary Designee absent an amendment to this Agreement, it being
understood that in event a Secondary Designee becomes a Trustee hereunder
because a Primary Designee shall have failed to serve as a Trustee hereunder,
then the individual who becomes a Trustee hereunder shall be deemed the Primary
Designee and the individuals so empowered in this paragraph may thereafter name
a new Secondary Designee in accordance with the terms hereof. In the event that
TIMOTHY P. HORNE dies or becomes subject to any incapacity (as hereinafter
defined), the power designated in this paragraph shall become personal to and
may be exercised only by the individuals named in this paragraph in accordance
with the terms hereof. The provisions of this paragraph are intended to be
permissive and shall authorize, but not require, the appointment of a Primary or
Secondary Designee.
In the event of the permanent disability or incapacity of a Trustee, he
shall cease to serve in that capacity as provided in this paragraph. For
purposes of this Agreement, "permanent disability" shall mean any physical or
mental disability or incapacitation that precludes a Trustee from performing his
responsibilities under this Agreement and which is not capable of cure or
correction, and "incapacity" shall mean any mental state by reason of which the
individual in question would not be deemed competent under the law of his state
of principal residence. If permanent disability or incapacity is claimed with
respect to a Trustee or other person, said permanent disability or incapacity
shall be evidenced by a written certification (a "Certification") signed by two
doctors attending such Trustee or other person, which doctors shall be licensed
to practice medicine in the state of the relevant person's principal residence,
and , in the case of a Trustee, such Trustee shall cease to serve in such
capacity upon receipt by a co-Trustee, successor Trustee or the registered
holders of the voting trust certificates then outstanding, as the case may be,
of a Certification. Absent a Certification, the individual in question shall be
presumed to be not subject to any permanent disability or incapacity and he
shall be recognized as a duly-appointed Trustee of this Trust.
<PAGE>
The rights, powers and privileges of each of the Trustees named hereunder
shall be possessed by any successor Trustee with the same effect as though such
successor had originally been a party to this Agreement; provided, however, that
no Trustee or successor Trustee hereunder shall possess the Determination Power
referred to in Section 10 unless it is specifically conferred upon such Trustee
pursuant to the provisions hereof.
In any other circumstance, no Trustee hereunder other than TIMOTHY P.
HORNE shall have the Determination Power. In the event that there shall be more
than one Trustee serving at any time, and in the event that the Trustees shall
not concur on matters not specifically contemplated by the terms of this
Agreement, the Trustees shall consider such matter and they shall vote among
them to determine the disposition of the issue among them, (bearing in mind the
relative interests of the Shareholders, the Company, and the Depositors into
this Trust). The majority vote of the Trustees shall be determinative and shall
resolve the matter after giving due consideration to the purposes of this Trust.
Each Trustee shall affix his signatures to this Agreement and each
successor Trustee appointed pursuant to this Section 11 shall accept appointment
or election hereunder by affixing his signature to this Agreement at the time he
becomes a Trustee hereunder. By affixing their signatures to this Agreement, the
Trustees and each successor Trustee agree to be bound by the terms hereof.
Reference in this Agreement to "Trustees" means the Trustee or Trustees at
the time acting in that capacity, whether an original Trustee or any additional
or successor Trustee, as the context requires.
12. Compensation and Reimbursement of Trustees. Each Trustee shall serve without
compensation. The Trustees shall have the right to incur and to pay such
reasonable expenses and charges and to employ and pay such agents, attorneys and
counsel as they may deem necessary and proper. Any such expenses or charges
incurred by and due to the Trustees may be deducted from the dividends, proceeds
or other moneys or property received by the Trustees in respect of the stock
deposited hereunder or may be payable by the Company or any Additional Issuer in
their discretion. Nothing herein contained shall disqualify any Trustee or any
successor Trustee, including without limitation any person named as a Primary or
Secondary Designee, or any firm in which he is interested, from serving the
Company, any Additional Issuer or any of their respective subsidiaries as an
officer or director or in any other capacity (including without limitation as
legal counsel, financial adviser or lender), holding any class of stock in the
Company or any Additional Issuer, becoming a creditor of the Company or any
Additional Issuer or otherwise dealing with it in good faith, depositing his
stock in trust pursuant to this Agreement, voting for himself as a director of
the Company or any Additional Issuer in any election thereof, or taking any
other action as a Trustee hereunder in connection with any matter in which such
Trustee has any direct or indirect interest. The provisions of the foregoing
notwithstanding, each Trustee shall be entitled to be fully indemnified by the
assets of the voting trust and the holders of outstanding voting trust
certificates, pro rata in accordance with their interests at the time of the
relevant payment, against all costs,
<PAGE>
charges, expenses, loss, liability and damage (except for damage caused by his
own willful malfeasance) incurred by him in the administration of this trust or
in the exercise of any power conferred upon the Trustees by this Agreement.
13. Amendment, Termination. This Agreement may be amended by a written amendment
signed by the number of Trustees authorized to take action at the relevant time
under Section 10, or, if the Trustees (if more than one) do not concur with
respect to any proposed amendment at any time when any Trustee holds the
Determination Power, then by the Trustee having the Determination Power, which
approval shall constitute approval of all of the Trustees then serving and,
except as contemplated by Section 1, by registered holders of at least a
majority vote of the outstanding voting trust certificates issued in respect of
capital stock or other equity interest of the Company or any Additional Issuer,
as the case may be, as to which the matter relates; provided, however, that no
such amendment shall modify or amend the provisions of the following two
paragraphs without the written consent of each individual Depositor or the
Trustee of each Trust Depositor who is living at the time of such proposed
amendment. For all purposes of this Agreement, references to percentages of
voting trust certificates outstanding shall refer to, (x) in the case of a
matter relating to the Company, the number of votes represented by the shares of
stock of the Company represented by voting trust certificates issued in respect
of shares of stock of the Company and, (y) in the case of a matter relating to
an Additional Issuer, the number of votes represented by the shares of stock of
the applicable Additional Issuer represented by voting trust certificates issued
in respect of the capital stock or other equity interest of such Additional
Issuer.
This Agreement may be terminated only by a written instrument signed by
the number of Trustees authorized to take action at the relevant time under
Section 1 or, if the Trustees (if more than one) do not concur with respect to
any proposed termination at any time when any Trustee holds the Determination
Power, then by the Trustee having the Determination Power, which approval shall
constitute approval of all of the Trustees, the registered holders of a majority
of the voting trust certificates issued in respect of the capital stock of the
Company then outstanding and each individual Depositor or the Trustee of each
Trust Depositor who is living at the time of the proposed termination.
If not previously terminated in accordance with the terms hereof
(including under the circumstances contemplated by the provisions of Section 9)
this Agreement shall terminate on August 26, 2021; provided, however, that at
any time within two (2) years prior to such date (or prior to any subsequent
date of termination fixed in accordance with the provisions hereof and of
applicable law), one or more of the persons designated in the following
provisions of this Section 13 may, by written agreement, extend the duration of
this Agreement for an additional term not exceeding twenty-four (24) years from
the expiration date as originally fixed or as last extended. The foregoing right
of extension shall be exercisable in respect of particular shares subject hereto
by (i) the individual Depositor who originally deposited the relevant shares, if
the Depositor is then living and is not subject to any incapacity at the time of
the proposed extension, and if so exercised such extension shall be binding upon
any and all holders of voting trust certificates in respect of the shares
deposited hereunder by such individual Depositor, (ii) the trustee of
<PAGE>
any trust Depositor which deposited the relevant shares, including without
limitation any trust Depositor which is a revocable trust, which trustee is then
living and not subject to any incapacity at the time of the proposed extension,
and regardless of whether such trust is then still in existence, and if so
exercised shall be binding upon any and all holders of voting trust certificates
in respect of shares deposited hereunder by such trust Depositor and any and all
beneficiaries thereof or successors in interest thereto, and (iii) the holder of
any voting trust certificate representing shares not covered by either of the
preceding clauses (i) or (ii), and if so exercised shall be effective with
respect to all shares represented by such voting trust certificate, it being
understood that the provisions only of clauses (i) or (ii) of this paragraph and
not of clause (iii) shall govern any extension with respect to shares referred
to therein if and to the extent a Depositor referred to therein is available to
consent to such extension. Any such action to extend this Agreement shall be
binding upon the Trustees and Depositor and upon all holders of the related
voting trust certificates (including without limitation trustees, officers,
beneficiaries and owners of any trust or other entity which is such a holder
thereof) and any and all successors in interest of any of the foregoing
(including without limitation any holder of voting trust certificates
representing shares deposited by any Depositor consenting or on whose behalf
consent is given by the relevant trustee to such extension in the manner
provided above, and any Beneficiary or successor of a Beneficiary of any trust
Depositor. Extensions in accordance with this Section 13 (i) shall not be deemed
to constitute the commencement of a new voting trust for purposes of the DGCL or
the law governing the incorporation or organization of any Additional Issuer,
(ii) shall be filed with the registered offices of the Company in Delaware and
with the registered offices of each Additional Issuer in its state of
incorporation or organization, as provided by law, and (iii) shall not involve
or require any transfer of shares as contemplated by the last provisions of
Section 5.
14. Notices, Distributions. Unless otherwise specifically provided in this
Agreement, any notice to or communication with any holder of any voting trust
certificate or other party hereunder shall be deemed to be sufficiently given or
made if mailed, postage prepaid, to such holder at his or her address appearing
on the books of the trust, which shall in all cases be deemed to be the address
of such holder for all purposes under this Agreement, without regard to what
other or different addresses of which the Trustees may have notice. Every notice
so given shall be effective, whether or not received, and the date of mailing
shall be the date such notice is deemed given for all purposes.
Any notice to any Trustee hereunder shall be sufficient if mailed, postage
prepaid, by certified or registered mail to him, with a copy sent to the Company
at Watts Industries, Inc., Route 114 and Chestnut Street, North Andover,
Massachusetts 01845.
Subject to Section 6 hereof, all distributions of cash, securities, or
other property hereunder by the Trustees to the holders of voting trust
certificates may be made, in the discretion of the Trustees, by mail (regular,
registered or certified mail, as the Trustees may deem advisable), in the same
manner as hereinabove provided for the giving of notices to the holders of
voting trust certificates.
<PAGE>
15. Construction. This Agreement is to be construed as a Delaware contract, is
to take effect as a sealed instrument, and is binding upon and inures to the
benefit of the parties hereto and their heirs, executors, administrators,
representatives, successors and permitted assigns. In case any one or more of
the provisions or parts of a provisions contained in this Agreement or in any
voting trust certificate hereunder shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceablitity shall not affect any other provision or part of a provision
hereof or thereof, but this Agreement and such voting trust certificates shall
be construed as if such invalid or illegal or unenforceable provision or part of
a provision had never been contained herein, and the parties will use their best
efforts to substitute a valid, legal and enforceable provision which, insofar as
practicable, implements the purposes and intents thereof.
16. Gender. Words used in this Agreement, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural (and all references to the `Trustees' shall refer to the
Trustee then serving if only one Trustee is then serving), and any other gender,
masculine, feminine, or neuter, as the context requires.
17. Execution. This Agreement may be executed in any number of counterparts,
each of which, when executed, shall be deemed to be an original and all of which
together shall constitute but one and the same instrument. Any Additional Issuer
shall become a party to this Agreement by executing a counterpart signature page
hereto and shall file a copy of this Agreement with the Secretary of State or
other appropriate office of its state of incorporation or organization.
<PAGE>
IN WITNESS WHEREOF, the parties hereof have executed this Agreement under
seal, all as of this day and year first above written.
Timothy P. Horne, as Trustee
Timothy P. Horne, individually
Timothy P. Horne, as Trustee of the
George B. Horne Trust--1982
Timothy P. Horne, as Trustee of the
Deborah Horne Trust--1976
Timothy P. Horne, as Trustee of the
Daniel W. Horne Trust--1980
Timothy P. Horne, as Trustee of the
Grandchildren's Trust f/b/o
Tara V. Horne
Timothy P. Horne, as Trustee of the
Grandchildren's Trust f/b/o
Tiffany R. Horne
<PAGE>
SCHEDULE A
- ------------------------------------------------------------------------
No. of Shares No. of Shares
Subject to Not Subject
Depositor (if any) Trust to Trust
- ------------------------------------------------------------------------
Timothy P. Horne as Trustee of The 2,124,600
George B. Horne Trust - 1982 as
Currently Published
- ------------------------------------------------------------------------
Timothy P. Horne 2,751,220
- ------------------------------------------------------------------------
Timothy P. Horne as Trustee of the 1,335,840
Daniel W. Horne Trust - 1980
- ------------------------------------------------------------------------
Timothy P. Horne as Trustee of the 1,335,840
Deborah Horne Trust - 1980
- ------------------------------------------------------------------------
Tara V. Horne 40,000
- ------------------------------------------------------------------------
Timothy P. Horne as Trustee of The 30,200
George B. Horne Grandchildren's Trust -
1995 f/b/o Tara V. Horne
- ------------------------------------------------------------------------
Timothy P. Horne as Trustee of The 22,600
George B. Horne Grandchildren's Trust -
1995 f/b/o Tiffany Horne
- ------------------------------------------------------------------------
Judith Rae Horne as Trustee of The 163,520
Tiffany Horne Trust - 1984
- ------------------------------------------------------------------------
Judith Rae Horne as Custodian for 44,220
Tiffany Horne
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<PAGE>
SCHEDULE B
AMENDMENT TO VOTING TRUST AGREEMENT
WHEREAS, [____________] and [____________] ] are Trustees under a Voting
Trust Agreement dated as of August 1997, such Voting Trust Agreement, being
referred to herein as the "Agreement"); and
WHEREAS, [_________________] desires to withdraw [________________
(_____)] [shares of Class B Common Stock of Watts Industries, Inc., a Delaware
corporation/shares of common stock of [Additional Issuer] (the "Company")]
WHEREAS, the Trustees and the holders of not less than a majority in
interest of the voting trust certificates issued in respect of the capital stock
or other equity interest of the Company outstanding hereunder desire to consent
and agree to the above-described transactions.
NOW, THEREFORE, the parties hereto do hereby agree as follows: The parties
hereto do hereby consent to the withdrawal of such shares and to amend Schedule
A to the Agreement by amending and restating Schedule A in its entirety to read
as follows:
<PAGE>
SCHEDULE A
- -------------------------------------------------------------------------------
Class B Stock
Name Number of Shares Certificate No.
- -------------------------------------------------------------------------------
Name of Registered Holder
- -------------------------------------------------------------------------------
Name of Registered Holder
- -------------------------------------------------------------------------------
2. Except as hereinabove provided, the parties ratify and confirm the
Agreement in all respects.
The parties hereto have executed this Amendment to the Agreement in one or
more counterparts under seal as of the ____ day of _______, 19__.
[Signatures to be added per the terms of the
Agreement]
<PAGE>
SCHEDULE C
FORM OF VOTING TRUST CERTIFICATE
This Voting Trust Certificate has not been registered under the Securities
Act of 1933, as amended, and may not be sold or otherwise transferred unless (a)
covered by an effective registration statement under the Securities Act of 1933,
as amended, or (b) the trustees and the Company have been furnished with an
opinion of counsel satisfactory to them to the effect that no registration is
legally required for such transfer.
This Voting Trust Certificate has been issued under, and is subject to, a
certain Voting Trust Agreement, dated as of August 26, 1997, by and among the
Company and Timothy P. Horne as Trustee, and certain other persons, (as
identified on Schedule A of said Agreement as amended), a copy of which will be
furnished by the Company to the holder of this Voting Trust Certificate upon
written request and without charge, and this Voting Trust Certificate can only
be transferred subject to, and in accordance with, such Agreement.
This Voting Trust Certificate is subject to restrictions on transfer
contained in the Company's Restated Certificate of Incorporation, as amended, a
copy of which restrictions will be provided to the holder of this Voting Trust
Certificate upon request and without charge.
The shares represented by this Voting Trust Certificate are subject to
restrictions on transfer pursuant to a Stock Restriction Agreement, a copy of
which will be furnished by the Company to the holder of this Voting Trust
Certificate upon written request and without charge.
No. Shares:
This certificate that the undersigned trustee has received a certificate
or certificates in the name of evidencing ownership of shares of the [Class B
Common Stock of Watts Industries, Inc., a Delaware corporation (the
"Company"),/Additional Issuer] and that said shares are held subject to all of
the terms and conditions of a certain Voting Trust Agreement dated as of the day
of August, 1997 (the "Agreement"), and are entitled to all of the benefits set
forth in the Agreement. Copies of the Agreement and of every amendment and
supplement thereto are on file at the office of the Company and shall be
available for the inspection of every Beneficiary thereof or party thereto
during normal business hours. The holder of this Certificate, which is issued,
received and held under the Agreement, by acceptance hereof, assents to and is
bound by the Agreement with the same effect as if the Agreement has been signed
by him in person.
The shares of stock represented by this Certificate bear the legend:
<PAGE>
"These shares are subject to a certain Voting Trust Agreement,
dated as of August 26, 1997, by and among the Company and Timothy P.
Horne as trustee, and certain other persons, [as amended] a copy of
which will be furnished by the Company to the holder of this
Certificate upon written request and without charge, and these
shares can only be transferred subject to, and in accordance with,
such Agreement."
Subject to the provisions of the foregoing and the Agreement, this
Certificate is transferable only on the books of the Trustees by the registered
holder in person or his duly authorized attorney, and the holder hereof, by
accepting this certificate, manifests his consent that the trustees may treat
the registered holder hereof as the true owner for all purposes, except the
delivery of stock certificates, which delivery shall not be made without the
surrender of this certificate or otherwise pursuant to the Agreement.
IN WITNESS WHEREOF, ___________________ [and _________________], trustee,
[have] [has] executed this certificate as of this ____ day of ________________,
19__.
, as Trustee
AMENDMENT NUMBER FIVE
WATTS INDUSTRIES, INC.
RETIREMENT PLAN FOR SALARIED EMPLOYEES
WHEREAS, Watts Industries, Inc. (the "Sponsoring Employer") established the
Watts Industries, Inc. Retirement Plan For Salaried Employees (the "Plan")
for the benefit of its eligible Employer which was most recently restated
effective as of January 1, 1994;
WHEREAS, pursuant to Section 13.01 of the Plan, the Sponsoring Employer
reserved the right to amend the Plan; and
WHEREAS, the Sponsoring Employer desires to amend the Plan to clarify and
reflect certain administrative matters and to reflect certain legislative
changes.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Effective January 1, 1998, Sections 1.02(d) and (e) are revised to make
certain clarifying changes as follows:
"(d) For purposes of Section 8.05, the Actuarial Equivalent will be
determined as follows:
(i) for annuity starting dates commencing prior to October 1,
1995, by using the rates and mortality table described in (c)
above, except that the interest rate for immediate annuities
set by the Pension Benefit Guaranty Corporation for the month
of payment will be used; and
(ii) for annuity starting dates commencing on or after October 1,
1995 and ending on or before December 31, 1995 by using
mortality rates based on a fixed blend of 50% of the male
mortality rates and 50% of the female mortality rates from the
1983 Group Annuity Mortality Table and by using an interest
rate specified in (A) or (B), whichever results in a greater
benefit:
(A) the interest rate on 30-year Treasury Constant
Maturities for the month of November, 1994 or
(B) the interest rate on 30-year Treasury Constant
Maturities for the month which is two months prior to
the month in which the Participant's annuity starting
date occurs;
<PAGE>
(iii) for annuity starting dates commencing on or after January 1,
1996 and ending on or before September 30, 1996, by using
mortality rates based on a fixed blend of 50% of the male
mortality rates and 50% of the female mortality rates from the
1983 Group Annuity Mortality Table and by using an interest
rate specified in (C) or (D) whichever results in a greater
benefit:
(C) the interest rate on 30-year Treasury Constant
Maturities for the month of November, 1995 or
(D) the interest rate on 30-year Treasury Constant
Maturities for the month in which the Participant's
annuity starting date occurs;
(iv) for annuity starting dates commencing on or after October 1,
1996 by using mortality rates based on a fixed blend of 50% of
the male mortality rates and 50% of the female mortality rates
from the 1983 Group Annuity Mortality Table and by using the
interest rate on 30-year Treasury Constant Maturities for the
month of November prior to the Plan Year in which the annuity
starting date occurs.
(e) For purposes of Section 12.01 (except as provided in (g) below), the
Actuarial Equivalent will be determined as follows:
(i) for annuity starting dates commencing prior to October 1,
1995, by using the interest rate and mortality table described
in (c) above, except for lump sum payments the interest rate
for immediate annuities set by the Pension Benefit Guaranty
Corporation for the month of payment will be used;
(ii) for annuity starting dates commencing on or after October 1,
1995 and ending on or before December 31, 1995 by using
mortality rates based on a fixed blend of 50% of the male
mortality and 50% of the female mortality rates from the 1983
Group Annuity Mortality Table and by using an interest rate
specified in (A) or (B), whichever results in a greater
benefit:
(A) the interest rate on 30-year Treasury Constant
Maturities for the month of November, 1994 or
(B) the interest rate on 30-year Treasury Constant
Maturities for the month which is two months prior to
the month in which the Participant's annuity starting
date occurs;
(iii) for annuity starting dates commencing on or after January 1,
1996 and ending on or before September 30, 1996, by using
mortality rates based on a fixed blend of 50% of the male
mortality rates and 50% of the female
2
<PAGE>
mortality rates from the 1983 Group Annuity Mortality Table
and by using an interest rate specified in (C) or (D)
whichever results in a greater benefit:
(C) the interest rate on 30-year Treasury Constant
Maturities for the month of November, 1995 or
(D) the interest rate on 30-year Treasury Constant
Maturities for the month in which the Participant's
annuity starting date occurs;
(iv) for annuity starting dates commencing on or after October 1,
1996 by using mortality rates based on a fixed blend of 50% of
the male mortality rates and 50% of the female mortality rates
from the 1983 Group Annuity Mortality Table and by using the
interest rate on 30-year Treasury Constant Maturities for the
month of November prior to the Plan Year in which the annuity
starting date occurs."
2. Effective January 1, 1998, Section 1.02 is amended to rename "subsection
(f)" as subsection (g) and to add a new subsection (f) as follows:
"(f) For purposes of subsections (d) and (e) above, the term annuity
starting date means the date as of which an amount is paid, except
with respect to payments under Section 12.01, in which case, it
means the first day of the month following the month in which the
Participant terminates employment."
3. Effective January 1, 1997, Section 1.09 is amended to delete the fourth
paragraph in its entirety.
4. Effective January 1, 1997, Section 1.20 of is amended to read as follows:
"1.20 "Highly Compensated Employee" means any Employee who performed
services for the Employer or an Affiliated Employer during the
Determination Year and who:
(a) was a 5% owner (within the meaning of Section 416(i)(l)(B)(i)
of the Code at any time during the Determination Year or the
Look-Back Year; or
(b) received compensation from the Employer or an Affiliated
Employer in excess of $80,000 (as adjusted pursuant to 415(d)
of the Code) during the Look-Back Year, and was among the top
20% of Employees when ranked on the basis of compensation paid
during the Look-Back Year.
For purpose of determining an Employee's compensation under this Section
1.20, compensation shall mean the Employee's total compensation reportable
on Form W-2,
3
<PAGE>
plus all contributions made on behalf of the Employee by the Employer or
an Affiliated Employer pursuant to a salary deferral agreement maintained
by the Employer or an Affiliated Employer under any cash or deferred
arrangement described in Section 401(k) of the Code or any salary
reduction agreement pursuant to a cafeteria plan established under Section
125 of the Code by the Employer or Affiliated Employer.
For purposes of this Section, the "Look-Back Year" means the period of the
twelve consecutive months immediately preceding the Determination Year.
Also for purposes of this Section, `Determination Year" means the Plan
Year that is being tested for purposes of determining if an Employee is a
Highly Compensated Employee."
5. Effective January 1, 1998, Section 1.22 is amended to read as follows:
"1.22 "Maximum Offset Allowance" means at Social Security Retirement Age,
(i), (ii), or (iii) below, whichever is applicable, (i) if a
Participant's Social Security Retirement Age is 65, .0075 of his
Social Security Compensation; (ii) if a Participant's Social
Security Retirement Age is 66, .0068 of his Social Security
Compensation; or (iii) if a Participant's Social Security Retirement
Age is 67 or higher, .00625 of his Social Security Compensation,
multiplied by his years of Benefit Service (up to a maximum of 25
years)."
Notwithstanding the foregoing, the Maximum Offset Allowance shall
not exceed 1/2 of the benefit determined without regard to the
offset, based on the lessor of Social Security Compensation or Final
Average Compensation."
6. Effective as of January 1, 1998, Section 2.02 is amended to read as
follows:
"2.02 CREDITING OF SERVICE ON OR AFTER JANUARY 1, 1985
An Employee must accumulate at least 1,000 Hours of Service during a
12-month computation period in order to be credited with a year of
Service. The 12-month computation period for purposes of determining
a year of Service for vesting under Section 6.02 is the Plan Year.
The 12-month computation period for purposes of determining a Year
of service for eligibility under Section 3.01 is the 12-month period
beginning when the Employee first performs an Hour of Service and
the subsequent computation periods shall be the Plan Year beginning
with the Plan Year that includes the first anniversary of the date
the Participant first performs an Hour of Service. The 12-month
computation period for purposes of determining a year of Service for
Benefit Service purposes as set forth in Section 2.05 is the Plan
Year. During any computation period during which an Employee's Hours
of Service cannot be determined, the Employee shall be credited with
190 Hours of Service for each month during such period in which he
or she completes one Hour of Service."
4
<PAGE>
7. Effective as of January 1, 1998, Section 2.022 is deleted and Section
2.023 is renumbered as Section 2.022.
8. Effective as of the January 1, 1998 , Section 2.05 is amended in its
entirety to make certain clarifications as follows:
"2.05 BENEFIT SERVICE ON OR AFTER JANUARY 1, 1985
With respect to employment on and after January 1, 1985, Benefit
Service, for purposes of determining a Participant's benefit under
the Plan means his years of Service earned as an Eligible Employee
excluding any service prior to such Eligible Employee's twenty first
birthday. For purposes of this Section 2.05, a year of Service is
any Plan Year in which the Participant is credited with 1000 Hours
of Service. During any computation period in which an Eligible
Employee's Hours of Service cannot be determined, the Eligible
Employee shall be credited with 190 Hours of Service for each month
during such period in which he or she completes one Hour of Service.
However, if an Eligible Employee does not have 1,000 Hours of
Service in a Plan Year because he or she enters or, following a
Break in Service, re-enters employment with the Employer after the
first day of a Plan Year or terminates his or her employment or
retires prior to the end of a Plan Year, he or she shall be deemed
to have accrued a partial year of service for such Plan Year equal
to the ratio that his or her credited Hours of Service for such Plan
Year bears to 1,000."
9. Effective December 12, 1994, Article 2 is amended to add the following
provision as Section 2.06:
"2.06 VETERAN'S BENEFITS
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Section 414(u)
of the Internal Revenue Code."
10. Effective April 1, 1998, Section 3.01 is amended to add the following
subparagraph (x) to subsection (b) thereof:
"(x) Effective April 1, 1998, an employee of Aerodyne Controls
Corporation who became an Eligible Employee of Circle Seal
Corporation on January 5, 1998 shall be eligible to participate
in the Plan on the first day of the month coinciding with or next
following the date he attains age 21 and completes one year of
Service. Service with Aerodyne Controls Corporation prior to
January 5, 1998 shall be taken into account for eligibility and
vesting purposes. However, such Eligible Employee's Benefit
Service shall be taken into account only with regard to service
with the Employer commencing April 1, 1998."
5
<PAGE>
11. Effective January 1, 1997, Section 5.03 is amended to add subsection (f)
as follows:
"(f) This subsection (f) shall apply to any Participant who had his
retirement benefit determined under Part B of the Plan and who after
January 1, 1997, transferred to Regtrol Inc. (hereinafter referred
to as a "Transferred Jameco Participant").
A Transferred Jameco Participant's Normal Retirement Benefit shall
be an amount based on a maximum of 25 years of "Combined Total
Benefit Service" and equal to the sum of (i) and (ii) where:
(i) is the Transferred Jameco Participant's accrued benefit based
on the formula under Part B of the Plan in effect as of the
transfer date and determined based upon (1) his years of
Service under Part B of the Plan as of the transfer date and
(2) his Average Monthly Compensation under Section 1.05 of Part
B and his Covered Compensation under Section 1.16 of Part B as
of his retirement or termination date.
(ii) is the Transferred Jameco Participant's accrued benefit, if
any, determined in accordance with Section 5.03(c) for years of
Benefit Service earned on or after transfer date.
For purposes of this Section 5.03(f), "Combined Total Benefit
Service" means benefit service earned under Part B of this Plan and
Benefit Service earned under subsection (ii) above. In the event a
Participant's Combined Total Benefit Service exceeds twenty-five
(25) on his date of retirement or termination of employment with the
Employer, the Transferred Jameco Participant's retirement benefit
shall be determined by decreasing his years of service under
subsection (i) by the number of years of service which exceeds
twenty-five and substituting such benefit service with years of
Benefit Service under subsection (ii).
However, in no event shall a Transferred Jameco Participant's
accrued benefit be less than his accrued benefit based upon his
years of benefit Service as of his transfer date as calculated under
Part B."
12. Effective January 1, 1998, Section 5.06(b) is amended to read as follows:
"(b) The Deferred Retirement Benefit payable to a Participant who attains
age 70 1/2 and who continues to be an Employee shall be equal to the
Participant's accrued benefit determined as of the last day of the
Plan Year in which the Participant attains age 70 1/2. The Deferred
Retirement Benefit payable under this paragraph (b) shall be
determined in accordance with Section 5.03 or 5.031, whichever is
applicable, and shall be payable in the form of a single life
annuity. The Deferred
6
<PAGE>
Retirement Benefit shall commence no later than the January 1
immediately following the Plan Year in which the Participant attains
age 70 1/2.
The monthly benefit of a Participant who has begun receiving
benefits and who continues to be an Employee after his attainment of
age 70 1/2 shall be adjusted, effective on the January 1 following
the Plan Year in which the Participant's benefit commenced and on
each succeeding January 1 prior to the Participant's Deferred
Retirement Date, to reflect the effect of changes in the
Participant's accrued benefit since the previous January 1. The
final adjustment shall be made as of the Participant's Deferred
Retirement Date. Adjustments required by this paragraph shall
include a reduction equal to the Actuarial Equivalent of any benefit
payments already made with respect to the Participant. In no event,
however, will the benefit payable to the Participant be reduced as a
result of this paragraph. Furthermore, the operation of this
paragraph will not affect the form of benefit payment previously
elected by the Participant.
Upon such Participant's actual Deferred Retirement Date, he shall
then be eligible to make the election as described in Section
5.022."
13. Effective January 1, 1998, Article 5 is amended to renumber existing
"Section 5.11" as Section 5.12 and to add a new Section 5.11 as follows:
"5.11 DISABILITY RETIREMENT BENEFIT
In the event a Participant becomes disabled while employed with the
Employer so that he is receiving disability benefits under the
Employer's long term disability program and is eligible for and is
receiving disability benefits under Title II of the Social Security
Act, such Participant shall continue to be credited with years of
Service for vesting and years of Benefit Service for the period he
remains disabled and such crediting shall cease upon the earlier of
the Participant's recovery from disability, death, election of Early
Retirement or Normal Retirement Date. During the period of
disability such Participant's shall be credited with Compensation
equal to the greater of his Compensation credited in the Plan Year
he becomes disabled or the Compensation credited for the immediately
preceding Plan Year. In addition, such disabled Participant's
Maximum Offset Allowance shall be determined as of the date he
becomes disabled. If a Participant's disability continues until his
Normal Retirement Date, his Normal Retirement Benefit shall commence
as of the date elected by the Participant in accordance with the
normal form of benefit described as Section 5.01 or 5.02, whichever
is applicable, or the optional retirement benefit, if elected by the
Participant, as set forth in Article 5."
14. Effective January 1, 1998, Section 7.04(c) is amended to read as follows:
"(c) If a Participant dies after attaining his Normal Retirement
Age but before his Deferred Retirement Date, the Spouse Joint
and Survivor Annuity as
7
<PAGE>
described in Section 5.02 shall be deemed to be in effect on
behalf of such Participant, provided he has not made an
election under Section 5.022 to receive his benefits under
another form of payment."
15. Effective January 1, 1998, Section 12.01 of Part A is amended to read as
follows:
"12.01 PAYMENT OF SMALL AMOUNTS
In the event that the Actuarial Equivalent of the Participant's
accrued benefit is $3,500 or less on the determination date, the
accrued benefit shall be automatically paid in a lump sum.
Notwithstanding this above, if the Actuarial Equivalent of the
Participant's accrued benefit derived from Employer contributions is
$3,500 or less, after distribution of the Participant's Accumulated
Contribution Account, a Participant may elect to receive
distribution of his remaining Employer provided accrued benefit
provided the appropriate spousal consent as set forth in Section
5.024 is obtained.
No distribution may be made under this Section 12.01 after a
Participant's Benefit Commencement Date, unless the Participant and
the Participant's spouse, or where the Participant has died, the
surviving spouse consents in writing to such distribution."
IN WITNESS WHEREOF, Watts Industries, Inc. has caused this Amendment to be
executed by its authorized officer and its seal affixed hereto this _________
day of ______________, 1998.
WATTS INDUSTRIES, INC.
By: _________________________
Title: ______________________
(Seal)
8
<PAGE>
AMENDMENT NUMBER SIX
WATTS INDUSTRIES, INC.
RETIREMENT PLAN FOR SALARIED EMPLOYEES
WHEREAS, Watts Industries, Inc. (the "Sponsoring Employer") established
the Watts Industries, Inc. Retirement Plan for Salaried Employees (the "Plan")
for the benefit of its eligible employees which was most recently amended and
restated effective as of January 1, 1994;
WHEREAS, pursuant to Section 13.01 of the Plan, the Sponsoring Employer
reserved the right to amend the Plan; and
WHEREAS, the Sponsoring Employer desires to amend the Plan to reflect the
inclusion of certain eligible employees;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Effective January 1, 1997, Section 3.01(b) is amended to add the following
subsection (xi) as follows:
"(xi) Effective January 1, 1997, an employee of Consolidated Precision
Corp. who became an employee of Circle Seals Controls shall become
an Eligible Employee for purposes of the Plan and shall become a
Participant in the Plan as of the later of January 1, 1997 or the
date the Eligible Employee meets the requirements of Section
3.01(a). An Eligible Employee's service with Consolidated Precision
Corp. prior to its acquisition by the Employer shall be taken into
account for eligibility and vesting purposes. However, such
Eligible Employee's Benefit Service shall be taken into account
only with regard to service with the Employer commencing January 1,
1997."
2. Effective January 1, 1998, Section 3.01(b) is amended to add the following
subsection (xii) as follows:
"(xii) Effective January 1, 1998, an employee of Ames Company, Inc. shall
become an Eligible Employee under this Plan and shall become a
Participant in the Plan as of the later of January 1, 1998 or the
date the Eligible Employee meets the requirements of Section
3.01(a). Such Eligible Employee's service with Ames Company, Inc.
prior to its acquisition by the Employer shall be taken into
account for eligibility and vesting. However, such Eligible
Employee's Benefit Service shall be taken into account only with
regard to service with the Employer commencing January 1, 1998."
1
<PAGE>
IN WITNESS WHEREOF, Watts Industries, Inc. has caused this Amendment to be
executed by its duly authorized officer and its seal affixed hereto this
____________________ day of ________________, 19__.
WATTS INDUSTRIES, INC.
By: _________________________
Title: ______________________
[Seal]
2
<PAGE>
AMENDMENT NUMBER SEVEN
WATTS INDUSTRIES, INC.
RETIREMENT PLAN FOR SALARIED EMPLOYEES
WHEREAS, Watts Industries, Inc. (the "Sponsoring Employer") established
the Watts Industries, Inc. Retirement Plan for Salaried Employees (the "Plan")
for the benefit of its eligible employees which was most recently amended and
restated effective as of January 1, 1994;
WHEREAS, pursuant to Section 13.01 of the Plan, the Sponsoring Employer
reserved the right to amend the Plan; and
WHEREAS, the Sponsoring Employer desires to amend the Plan to reflect the
inclusion of certain eligible employees and certain employers;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Effective January 1, 1998, Section 1.16 is amended to add the following
sentence:
"Effective January 1, 1998, the term "Employer" includes "Ames Company,
Inc.""
2. Effective August 31, 1995, Section 3.01(b) is amended to add the following
subsection (xiii) as follows:
"(xiii) A salaried employee of Keane Controls Corporation who became an
employee of Circle Seal Controls, Inc. shall become an Eligible
Employee for purposes of the Plan and shall become a Participant
in the Plan as of the later of August 31, 1995 or the date such
Eligible Employee meets the requirements of Section 3.01(a). An
Eligible Employee's service with Keane Controls Corporation, prior
to its acquisition by the Employer, shall be taken into account
for eligibility and vesting purposes. However, such Eligible
Employee's Benefit Service shall be taken into account only with
regard to service with the Employer commencing August 31, 1995."
3. Effective March 17, 1998, Section 3.01(b) is amended to add the following
subsection (xiv) as follows:
"(xiv) A salaried employee of Atkomatic Valve Company who became an
employee of Circle Seal Controls, Inc. shall become an Eligible
Employee for purposes of the Plan and shall become a Participant
in the Plan as of the later of March 17, 1998 or the date the
Eligible Employee meets the requirements of Section 3.01(a). An
Eligible Employee's service with Atkomatic Valve Company, prior to
its acquisition by the Employer, shall be taken into account for
eligibility and vesting. However, such Eligible Employee's
.Benefit Service shall be taken into account only with regard to
service with the Employer commencing March 17, 1998."
<PAGE>
IN WITNESS WHEREOF, Watts Industries, Inc. has caused this Amendment to be
executed by its duly authorized officer and its seal affixed hereto this
_________ day of _______________, 1999.
WATTS INDUSTRIES, INC.
By: _________________________
Title: _________________________
[Seal]
-2-
Exhibit 21
DIRECT AND INDIRECT SUBSIDIARIES OF WATTS INDUSTRIES, INC.
DOMESTIC:
Watts Finance Company [Delaware]
Watts International Sales Corp. [Massachusetts]
Watts Investment Company [Delaware]
Watts Regulator Company [Massachusetts]
Watts Securities Corp. [Massachusetts]
Circle Seal Controls, Inc. [Delaware]
Green County Castings, Inc. [Oklahoma]
KF Industries, Inc. [Oklahoma]
KF Sales Corp. [Delaware]
Rudolph Labranche, Inc. [New Hampshire]
Leslie Controls, Inc. [New Jersey]
Spence Engineering Company, Inc. [Delaware]
Watts Drainage Products, Inc. [Delaware] [formerly Ancon U.S.A.]
Anderson-Barrows Metals Corp. [California]
Circle Seal Corporation [Delaware][formerly Jameco Acquisition]
Jameco Industries, Inc. [New York]
Webster Valve, Inc. [New Hampshire]
Ames Holdings, Inc. [Delaware]
Ames Company, Inc. [California]
Yolo-Ames Leasing Company, Inc. [California]
Hoke, Inc. [New York]
Ajax Screw Machine Co., Inc. [Connecticut]
Hoke-International, Ltd. [New York]
Go-Regulator, Inc. [California]
SSI Equipment, Inc. [New York]
INTERNATIONAL:
IOG Canada, Inc. [Canada]
SSI Equipment, Inc. [Canada]
Watts Industries (Canada) Inc. [Canada]
Watts Investment Company Canada Ltd. [Canada]
Hoke Controls, Limited [Canada]
Watts Cazzaniga S.p.A. [Italy]
Cazzaniga Immobiliare S.r.l.
Watts Industries Europe B.V. [the Netherlands]
Watts Industries France S.A. [France]
Watts Industries Germany GmbH [Germany]
<PAGE>
Hoke Handelsgesellschaft, GmbH [Germany]
Hoke Overseas Sales Corp. [U.S. Virgin Islands]
Wattsco International [U.S. Virgin Islands]
Watts Ocean BV [the Netherlands]
Watts Eurotherm SA [France]
Watts UK Ltd. [United Kingdom]
Watts G.R.C. SA [Spain]
Watts Intermes AG [Switzerland]
Watts Intermes GmbH [Austria]
Watts Intermes SpA [Italy]
*Intermes UK Ltd [United Kingdom]
Watts Europe Services BV [the Netherlands]
Leslie International V.I. [Virgin Islands]
Watts M.T.R. GmbH [Germany]
Anderson Barrows B.V. [the Netherlands]
Pibiviesse SpA [Italy]
B.V. Philabel [the Netherlands]
Watts AG [Switzerland]
Watts Ocean NV [Belgian]
WIG Armaturen Vertriebs, GmbH [Germany]
WSA Heizungs und Sanitartechnik GmbH [Germany]
WIC Verwaltungs und Beteiligungs GmbH [Germany]
WLI S.r.L. [Italy][formerly ISI SpA]
Watts Londa SpA [Italy][formerly Watts ISI SpA]
In addition to the foregoing, the Company holds and 80% interest in De Martin
Srl [Italy], a 60% interest in Tianjin Tanggu Watts Valve Company Limited, a
Chinese joint venture, and a 60% interest in Suzhou Watts Valve Co., Ltd., a
Chinese joint venture. The Company also holds a 49% interest in Jameco
International LLC.
* dissolution pending
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Watts Industries, Inc.
We consent to the incorporation by reference in the following registration
statements of Watts Industries, Inc. and any amendments thereto (1) No.
333-32685 on Form S-8, (2) No. 33-37926 on Form S-8, (3) No. 33-69422 on Form
S-8, (4) No. 33-64627 on Form S-8, (5) No. 33-30377 on Form S-8 of our report
dated August 13, 1999, relating to the consolidated balance sheet of Watts
Industries, Inc. and subsidiaries as of June 30, 1999 and 1998, the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1999, and the
Valuation and Qualifying Account Schedule, which reports appear in the June 30,
1999 annual report on Form 10-K of Watts Industries, Inc.
Boston, Massachusetts
September 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,682
<SECURITIES> 2,092
<RECEIVABLES> 97,062
<ALLOWANCES> 7,747
<INVENTORY> 110,552
<CURRENT-ASSETS> 367,076
<PP&E> 218,715
<DEPRECIATION> 89,552
<TOTAL-ASSETS> 637,742
<CURRENT-LIABILITIES> 99,164
<BONDS> 120,966 <F1>
<COMMON> 2,645
0
0
<OTHER-SE> 385,010
<TOTAL-LIABILITY-AND-EQUITY> 637,742
<SALES> 474,458
<TOTAL-REVENUES> 474,458
<CGS> 302,745
<TOTAL-COSTS> 422,620 <F2>
<OTHER-EXPENSES> 6,915 <F3>
<LOSS-PROVISION> 1,728
<INTEREST-EXPENSE> 6,150
<INCOME-PRETAX> 44,923
<INCOME-TAX> 15,469
<INCOME-CONTINUING> 29,454
<DISCONTINUED> 6,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,956
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.34
<FN>
<F1> INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2> INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL
STATEMENTS. THIS SCHEDULE HAS BEEN RESTATED TO REFLECT THE ACCOUNTING CHANGES TO
DISCONTINUED OPERATIONS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 18,139
<SECURITIES> 518
<RECEIVABLES> 85,169
<ALLOWANCES> 6,237
<INVENTORY> 99,097
<CURRENT-ASSETS> 308,803
<PP&E> 174,525
<DEPRECIATION> 76,543
<TOTAL-ASSETS> 533,328
<CURRENT-LIABILITIES> 84,100
<BONDS> 94,842 <F1>
<COMMON> 2,701
0
0
<OTHER-SE> 330,938
<TOTAL-LIABILITY-AND-EQUITY> 533,328
<SALES> 447,235
<TOTAL-REVENUES> 447,235
<CGS> 289,960
<TOTAL-COSTS> 398,613 <F2>
<OTHER-EXPENSES> 6,876 <F3>
<LOSS-PROVISION> 581
<INTEREST-EXPENSE> 7,072
<INCOME-PRETAX> 41,476
<INCOME-TAX> 15,230
<INCOME-CONTINUING> 26,517
<DISCONTINUED> 22,022
<EXTRAORDINARY> 3,208
<CHANGES> 0
<NET-INCOME> 51,747
<EPS-BASIC> 1.89
<EPS-DILUTED> 1.89
<FN>
<F1> INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2> INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL
STATEMENTS. THIS SCHEDULE HAS BEEN RESTATED TO REFLECT THE ACCOUNTING CHANGES
RELATED TO DISCONTINUED OPERATIONS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 10,198
<SECURITIES> 11,641
<RECEIVABLES> 90,745
<ALLOWANCES> 6,980
<INVENTORY> 105,567
<CURRENT-ASSETS> 326,353
<PP&E> 179,051
<DEPRECIATION> 79,196
<TOTAL-ASSETS> 579,011
<CURRENT-LIABILITIES> 89,290
<BONDS> 117,469 <F1>
<COMMON> 2,704
0
0
<OTHER-SE> 343,006
<TOTAL-LIABILITY-AND-EQUITY> 579,011
<SALES> 111,839
<TOTAL-REVENUES> 111,839
<CGS> 70,676
<TOTAL-COSTS> 98,366 <F2>
<OTHER-EXPENSES> 2,475 <F3>
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 1,727
<INCOME-PRETAX> 10,998
<INCOME-TAX> 3,672
<INCOME-CONTINUING> 7,326
<DISCONTINUED> 6,294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,620
<EPS-BASIC> .50
<EPS-DILUTED> .50
<FN>
<F1> INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2> INCLUDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3> INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
</FN>
</TABLE>
