SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
|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.
----------------------
(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 October 21, 1999 was $242,426,800.
As of October 21, 1999, 16,988,507 shares of Class A Common Stock, $.10
par value, and 9,485,247 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.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
Set forth below is the name and age of each director, his or her principal
occupation for the past five years, the year each became a director of the
Company and certain other information. The information is as of October 21,
1999.
<TABLE>
<CAPTION>
Present Principal Employment and Director
Name Age Prior Business Experience (1)(2) Since (1)
---- --- -------------------------------- ---------
<S> <C> <C> <C>
Timothy P. Horne..........61 Chairman of the Board since 1986 and Chief Executive Officer since 1962
1978; President since October, 1999 and from 1994 to April 1997.
Mr. Horne joined the Company in 1959.
Kenneth J. McAvoy.........59 Chief Financial Officer and Treasurer since 1986; Vice President 1994
of Finance from 1984 to 1994; Executive Vice President of European
Operations from 1994 to 1996; Secretary since 1985. Mr. McAvoy
joined the Company in 1981.
Gordon W. Moran...........61 Chairman of Hollingsworth & Vose Company, a paper manufacturer, 1990
since 1997, and served as its President and Chief Executive Officer from
1983 to 1998. Mr. Moran is a director of Associated Industries of
Massachusetts, the American Paper Institute and the South Norfolk
County Association for Retarded Citizens, Inc.
Daniel J. Murphy, III.....57 Chairman of Northmark Bank, a commercial bank, since August 1986
1987. Prior to forming Northmark Bank in 1987, Mr. Murphy was a
Managing Director of Knightsbridge Partners, Inc., a venture
capital firm, from January to August 1987 and President and a
director of Arltru Bancorporation, a bank holding company, and its
wholly owned subsidiary, Arlington Trust Company, from 1980 to
1986. Mr. Murphy is a director of Bay State Gas Company.
Roger A. Young............53 Chairman of the Board of Directors of Bay State Gas Company, 1999
a wholly owned subsidiary of NiSource Inc., since 1996 and serving
on its Board since 1975, and elected its President and Chief Operating
Officer in 1981 and Chief Executive Officer in 1990, serving in such
position until 1999. Mr. Young is also a director of NiSource, Inc.,
and the Utility Business Education Coalition.
</TABLE>
(1) All positions with the Company indicated for periods prior to January 1,
1986 were held with Watts Regulator Co. The Company became the parent
company of Watts Regulator Co. and its various subsidiaries pursuant to a
reorganization effective as of January 1, 1986.
(2) David A. Bloss, Sr. resigned as President, Chief Operating Officer and
Director on October 18, 1999 in order to assume his position as Chairman of
the Board, President and Chief Executive Officer of CIRCOR International,
Inc.
2
<PAGE>
Fees To Certain Directors
Each non-employee Director receives a fee of $18,000 per year and $500 per Board
of Directors or committee meeting attended and also receives reimbursement for
out-of-pocket expenses incurred in connection with attending such meetings. In
addition, each non-employee Director is eligible to receive grants of stock
options under the Company's 1991 Non-Employee Directors' Nonqualified Stock
Option Plan. Directors of the Company who are employees of the Company receive
no compensation for their services as Directors.
Meetings Of The Board Of Directors And Committees
The Watts Board held 10 meetings during the fiscal year ended June 30,
1999. Each of the Directors of the Company attended at least three-quarters of
the meetings of the Watts Board and of the committees on which such Director
served. The Watts Board has a standing Audit Committee and a standing Stock
Option and Compensation Committee. The Audit Committee held 3 meetings, and the
Stock Option and Compensation Committee held 1 meeting, during the fiscal year
ended June 30, 1999. The Audit Committee reviews audit performance, recommends
appropriate action on the basis of audit results and receives and reviews the
auditors' "management letters" and management's responses thereto. The Stock
Option and Compensation Committee is responsible for administering the Company's
1996 Stock Option Plan, its 1989 Nonqualified Stock Option Plan, its 1986
Incentive Stock Option Plan (the 1986 and 1989 Plans have expired, but there
remain outstanding previously granted options) and its Management Stock Purchase
Plan pursuant to authority delegated to it by the Watts Board and for approving
the compensation arrangements of the principal executive officers of the
Company. Messrs. Moran, Murphy, and Young comprise the Audit Committee and
Messrs. Murphy and Moran comprise the Stock Option and Compensation Committee.
Executive Officers
Information with respect to the Registrant's Executive Officers is
contained in Item 1., Business, of this Report. David A. Bloss, Sr. resigned as
President and Chief Operating Officer on October 18, 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors, and more than 10% shareholders to file
with the Securities and Exchange Commission reports on prescribed forms of their
ownership and changes in ownership of Company stock and provide copies of such
forms to the Company. Based on a review of the copies of such forms provided to
the Company, the Company believes that during the fiscal year ended June 30,
1999, all reports on forms required by Section 16(a) to be filed by the
aforementioned persons were filed on a timely basis.
3
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
COMPENSATION ARRANGEMENTS
Summary Compensation Table
The following table contains information with respect to the compensation for
the past three fiscal years of the Company's Chief Executive Officer and the
four other most highly compensated executive officers (the "named executive
officers") serving in such capacity at June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
Restricted Stock
Name and Fiscal Salary Bonus Units Options
Principal Position Year ($) ($)(1) ($)(2)(3) (#)(4)
- ------------------ ---- --- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Timothy P. Horne
Chairman of the Board 1999 701,666 0 0 (5) 40,000 (10)
and Chief 1998 685,000 0 159,852 (5) 40,000 (10)
Executive Officer...............1997 656,666 0 281,586 (5) 45,000 (10)
David A. Bloss, Sr.
President 1999 326,667 0 78,790 (6) 45,000 (10)
and Chief 1998 305,000 0 163,227 (6) 45,000 (10)
Operating Officer...............1997 276,667 134,400 179,198 (6) 45,000 (10)
Michael O. Fifer
Corporate 1999 184,417 0 152,941 (9) 15,000 (11)
Vice 1998 162,500 6,622 39,493 (9) 12,500 (11)
President.......................1997 147,500 10,628 56,662 (9) 15,000 (11)
Kenneth J. McAvoy
Chief Financial Officer, 1999 218,333 30,000 0 (7) 30,000 (10)
Treasurer and 1998 206,667 0 96,742 (7) 30,000 (10)
Secretary.......................1997 188,333 79,040 105,382 (7) 35,000 (10)
William C. McCartney 1999 151,250 3,823 17,055 (8) 8,000 (11)
Vice President of 1998 142,500 7,996 35,787 (8) 10,500 (11)
Finance.........................1997 128,333 41,600 55,444 (8) 10,500 (11)
</TABLE>
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(1) Amounts awarded under the Executive Incentive Bonus Plan, as amended.
(2) Represents the dollar value (net of any consideration paid by the named
executive officer) of Restricted Stock Units (RSUs) received under the
Management Stock Purchase Plan (the "Management Plan") determined by
multiplying the number of RSUs received by the closing market prices of
the Company's Class A Common Stock of $19.25, $18.4375, and $25.375 on the
RSU grant dates of August 9, 1999, August 11, 1998, and August 4, 1997
respectively.
(3) Each of the named executive officers made an election under the Management
Plan in December 1996,
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<PAGE>
1997 and 1998 to receive RSUs (i) in lieu of a specified percentage or
dollar amount of his actual annual incentive cash bonus or (ii) for a
specified dollar amount, up to 100% of his targeted maximum cash bonus,
for fiscal years ended June 30, 1997, 1998 and 1999 respectively. With
respect to fiscal years 1999, 1998 and 1997, RSUs were awarded as of
August 9, 1999, August 11, 1998, and August 4, 1997, respectively, (the
dates actual annual incentive bonuses were determined) by dividing the
named executive officer's election amount by the RSU Cost. The RSU Cost
was $12.8975, $12.35313, and $19.03125 per RSU for fiscal years 1999, 1998
and 1997, respectively, which was 67% of $19.25, $18.4375, and 75% of
$25.375, the closing market prices of the Company's Class A Common Stock
on August 9, 1999, August 11, 1998, and August 4, 1997, respectively
("1999 RSU Cost", "1998 RSU Cost" and "1997 RSU Cost"). Each RSU is 100%
vested three years after the date of grant, and at the end of a deferral
period, if one had been specified by the named executive officer under the
Management Plan, the Company will issue one share of Class A Common Stock
for each vested RSU. Cash dividends, equivalent to those paid on the
Company's Common Stock, will be credited to the named executive officer's
account for each nonvested RSU and will be paid in cash to such person
when such RSUs become vested. Such dividends will also be paid in cash to
individuals for each vested RSU held during any deferral period.
(4) Awarded under the 1989 Nonqualified Stock Option Plan (the "1989 Plan"),
or the 1996 Stock Option Plan (the "1996 Plan").
(5) Mr. Horne did not receive a bonus for fiscal year 1999. Therefore, no RSUs
were awarded. For fiscal year 1998, Mr. Horne's election under the
Management Plan was to receive RSUs equal to $171,250, which was his
targeted maximum bonus. Since Mr. Horne's actual bonus was $75,521, Mr.
Horne was required to pay out of pocket the difference of $95,729. Mr.
Horne received 13,862 RSUs which was determined by dividing $171,250 by
the 1998 RSU Cost. For fiscal year 1997, Mr. Horne received 11,097 RSUs in
lieu of receiving all of his annual incentive bonus which was $211,200.
This number of RSUs was determined by dividing $211,200 by the 1997 RSU
Cost. Mr. Horne held 35,382 RSUs at June 30, 1999 with a net value of
$455,163 as determined in accordance with Note (2) above, except based on
a closing market price of the Company's Class A Common Stock of $19.1875
on June 30, 1999.
(6) For fiscal year 1999, Mr. Bloss received 4,093 RSUs in lieu of receiving
all of his annual incentive bonus of $52,800. This number of RSUs was
determined by dividing $52,800 by the 1999 RSU Cost. For fiscal year 1998,
Mr. Bloss received 8,853 RSUs in lieu of receiving all of his annual
incentive bonus of $109,363. This number of RSUs was determined by
dividing $109,363 by the 1998 RSU Cost. For fiscal year 1997, Mr. Bloss
received 7,062 RSUs in lieu of receiving 50% of his total annual incentive
bonus of $268,800, or $134,400. This number of RSUs was determined by
dividing $134,400 by the 1997 RSU Cost. Mr. Bloss held 22,436 RSUs at June
30, 1999 with a value of $430,491 as determined in accordance with Note
(2) above, except based on a closing market price of the Company's Class A
Common Stock of $19.1875 on June 30, 1999.
(7) Mr. McAvoy did not elect to receive any RSUs for fiscal year 1999. For
fiscal year 1998, Mr. McAvoy received 5,247 RSUs in lieu of receiving all
of his annual incentive bonus of $64,817. This number of RSUs was
determined by dividing $64,817 by the 1998 RSU Cost. For fiscal year 1997,
Mr. McAvoy received 4,153 RSUs in lieu of receiving 50% of his total
annual incentive bonus of $158,080, or $79,040. This number of RSUs was
determined by dividing $79,040 by the 1997 RSU Cost. Mr. McAvoy held
13,269 RSUs at June 30, 1999 with a value of $254,599 as determined in
accordance with Note (2) above, except based on a closing market price of
the Company's Class A Common Stock of $19.1875 on June 30, 1999.
(8) For fiscal year 1999, Mr. McCartney received 886 RSUs in lieu of receiving
75% of his annual incentive bonus of $15,261, or $11,438. This number of
RSUs was determined by dividing $11,438 by the 1999 RSU Cost. For fiscal
year 1998, Mr. McCartney received 1,941 RSUs in lieu of receiving 75% of
his annual incentive bonus of $31,973 or $23,977. This number of RSUs was
determined by dividing $23,977 by the 1998 RSU Cost. For fiscal year 1997,
Mr. McCartney received 2,185 RSUs in lieu of receiving 50% of his
5
<PAGE>
total annual incentive bonus of $83,200, or $41,600. This number of RSUs
was determined by dividing $41,600 by the 1997 RSU Cost. Mr. McCartney
held 5,201 RSUs at June 30, 1999 with a value of $99,794 as determined in
accordance with Note (2) above, except based on a closing market price of
the Company's Class A Common Stock of $19.1875 on June 30, 1999
(9) For fiscal year 1999, Mr. Fifer received 7,945 RSUs in lieu of receiving
all of his annual incentive bonus of $102,471. The number of RSUs was
determined by dividing $102,471 by the 1999 RSU Cost. For fiscal year
1998, Mr. Fifer received 2,142 RSUs in lieu of receiving 80% of his total
annual incentive bonus of $33,083, or $26,461. This number of RSUs was
determined by dividing $26,461 by the 1998 RSU Cost. For fiscal year 1997,
Mr. Fifer received 2,233 RSUs in lieu of receiving 80% of his total annual
incentive bonus of $53,125, or $42,497. This number of RSUs was determined
by dividing $42,497 by the 1997 RSU Cost. Mr. Fifer held 9,261 RSUs at
June 30, 1999 with a value of $177,695 as determined in accordance with
Note (2) above, except based on a closing market price of the Company's
Class A Common Stock of $19.1875 on June 30, 1999.
(10) Amount awarded under the 1989 Plan.
(11) Amount awarded under the 1996 Plan.
Stock Option Grants
The following table shows information concerning options to purchase the
Company's Class A Common Stock granted in fiscal 1999 to the named executive
officers.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(3)
----------------- ------------------
% of Total
Options
Granted to Exercise Market Price
Options Employees or Base on Date of
Granted in Fiscal Price Grant Expiration
Name (#)(1)(2) Year ($/Sh) ($/Sh) Date 5%($) 10%($)
- ---- --------- ---- ------ ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy P. Horne...............40,000(4) 20.7 18.4375(6) 18.4375 8-11-2008 463,700 1,175,300
David A. Bloss, Sr.............45,000(4) 23.3 18.4375(6) 18.4375 8-11-2008 521,663 1,322,213
Michael O. Fifer...............15,000(5) 7.8 18.4375(7) 18.4375 8-11-2008 173,888 440,738
Kenneth J. McAvoy..............30,000(4) 15.5 18.4375(6) 18.4375 8-11-2008 347,775 881,475
William C. McCartney............8,000(5) 4.1 18.4375(7) 18.4375 8-11-2008 92,740 235,060
</TABLE>
(1) All options were granted as of August 11, 1998.
(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted
and generally terminate upon the earlier of the termination of employment,
subject to certain exceptions, or ten years from the date of grant. Under
the terms of the 1996 Stock Option Plan, the incentive stock options
granted to optionees who hold more than 10% of the combined voting power
of all classes of stock of the Company have a maximum duration of five
years from the date of grant.
(3) Based upon the market price on the date of grant and an annual
appreciation at the rate stated on such market price through the
expiration date of such options. The dollar amounts in these columns are
the result of calculations at the 5% and 10% rates set by the SEC and
therefore are not intended to forecast possible future appreciation, if
any, of the Company's stock price. The Company did not use an
6
<PAGE>
alternative formula for a grant date valuation, as the Company is not
aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors.
(4) Awarded under the 1989 Plan.
(5) Awarded under the 1996 Plan.
(6) Under the terms of the 1989 Plan, the exercise price of options cannot be
less than 50% of fair market value.
(7) Under the terms of the 1996 Plan, the exercise price of incentive stock
options cannot be less than 110% of fair market value for optionees who
hold more than 10% of the combined voting power of all classes of stock of
the Company and 100% of fair market value for all other optionees.
Aggregated Option Exercises and Option Values
The following table shows information concerning the exercise of stock
options during fiscal year 1999 by each of the named executive officers and the
fiscal year-end value of unexercised options.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year End(#)(2) at Fiscal Year End ($)(3)
--------------------- --------------------------
Shares Acquired Value
Name on Exercise (#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy P. Horne 0 0 196,894 123,000 394,205 105,938
David A. Bloss, Sr. 0 0 96,000 129,000 119,875 109,687
Michael O. Fifer 0 0 18,600 39,900 8,438 36,562
Kenneth J. McAvoy 0 0 67,000 93,000 44,738 81,563
William C. McCartney 0 0 50,200 30,200 21,663 27,093
</TABLE>
- ------------
(1) Represents the difference between the market price on the date of exercise
and the exercise price of the options before income taxes.
(2) Options vest over five years at the rate of 20% per year on successive
anniversaries of the respective dates on which the options were granted
and shall generally terminate upon the earlier of the termination of
employment, subject to certain exceptions, or ten years from the date of
grant.
(3) Represents the difference between the market price on the last day of the
fiscal year and the exercise price of the options before income taxes.
1991 Non-Employee Directors' Nonqualified Stock Option Plan. Stock options
granted under the 1991 Non-Employee Directors' Nonqualified Stock Option Plan
(the "Directors' Plan") are granted automatically and without any further action
on the part of the Board of Directors as of November 1 in each year commencing
in 1991 (with respect to each year, the "Grant Date"). The Directors' Plan
provides that options to purchase 2,000 shares of Class A Common Stock (or such
lesser amount as shall enable each non-employee Director then in office to
receive an equal grant in the event that there are not sufficient shares of
Class A Common Stock for each such non-employee Director to receive a grant of
2,000 shares) shall be granted to each non-employee Director duly elected and
serving as such on each Grant Date. The Directors' Plan was amended on August 6,
1996 to change the purchase price of shares which may be purchased under the
Directors' Plan from $22.75 to $16.375, effective for option grants made on or
after November 1, 1996. Also, see Item 10. Directors and Executive Officers of
the Registrant, Fees to Certain Directors.
Options granted under the Directors' Plan are exercisable when granted,
but no option is exercisable after the earlier of (a) the date ten years after
the Grant Date or (b) the date on which the Director to whom such options
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<PAGE>
were granted ceases for any reason to serve as a Director of the Company;
provided, however, that in the event of termination as a result of disability or
death, the Director or his/her personal representative may exercise any
outstanding options not theretofore exercised during the 90-day period following
such disability or death.
The Directors' Plan is administered by the Board of Directors or an
authorized committee thereof in accordance with Rule 16b-3 under the Exchange
Act. The Board of Directors or an authorized committee thereof determines the
form of options granted under the Directors' Plan and makes other determinations
and interpretations concerning the Directors' Plan and options granted
thereunder.
During fiscal 1999 on the Grant Date, each non-employee Director was
granted options to purchase 2,000 shares of Class A Common Stock under the
Directors' Plan.
Compensation Committee Interlocks and Insider Participation
The members of the Company's compensation committee are Messrs. Murphy and
Moran, neither of whom is an executive officer of the Company. Mr. Murphy also
serves on the compensation committee of CIRCOR International, Inc. and neither
he nor anyone who is an executive officer of the Company is an executive officer
of CIRCOR.
Pension Plan
The Company maintains a qualified noncontributory defined benefit pension
plan (the "Pension Plan") for eligible salaried employees of the Company and its
subsidiaries, including the named executive officers specified in the "Summary
Compensation Table" above and it maintains a nonqualified noncontributory
defined benefit supplemental plan (the "Supplemental Plan") generally for
certain highly compensated employees. The eligibility requirements of the
Pension Plan are attainment of age 21 and one year of service of 1,000 or more
hours. The assets of the Pension Plan are maintained in a trust fund at State
Street Bank and Trust Company. The Pension Plan is administered by the Pension
Plan Committee, which is appointed by the Board of Directors of the Company.
Annual contributions to the Pension Plan are computed by an actuarial firm based
on normal pension costs and a portion of past service costs. The Pension Plan
provides for monthly benefits to, or on behalf of, each covered employee at age
65 and has provisions for early retirement after ten years of service and
attainment of age 55 and surviving spouse benefits after five years of service.
Covered employees who terminate employment prior to retirement with at least
five years of service are vested in their accrued retirement benefit. The
Pension Plan is subject to the Employee Retirement Income Security Act of 1974,
as amended.
The annual normal retirement benefit for employees under the Pension Plan
is 1.67% of Final Average Compensation (as defined in the Pension Plan)
multiplied by years of service (maximum 25 years), reduced by the Maximum Offset
Allowance (as defined in the Pension Plan). For the 1997, 1998 and 1999 Pension
Plan years, Annual Compensation in excess of $160,000 per year is disregarded
under the Pension Plan ($150,000 for years prior to 1997) for all purposes.
However, benefits accrued prior to the 1994 plan year may be based on
compensation in excess of $150,000. Compensation recognized under the Pension
Plan includes base salary and annual bonus.
The Supplemental Plan provides additional monthly benefits to (i) a select
group of key executives, (ii) to individuals who were projected to receive
reduced benefits as a result of changes made to the Pension Plan to comply with
the Tax Reform Act of 1986 and (iii) to executives who will be affected by IRS
limits on Pension Plan Compensation. Tier one benefits are provided to a select
group of key executives. The annual benefit under this tier payable at normal
retirement is equal to the difference between (1) 2% of the highest three year
average pay multiplied by years of service up to ten years, plus 3% of average
pay times years of service in excess of ten years, to a maximum of 50% of
average pay and (2) the annual benefit payable under the Pension Plan described
above. Normal retirement under this tier is age 62.
Tier two benefits are provided to individuals not covered under Tier one
who were projected to receive reduced benefits as a result of changes made to
the Pension Plan to comply with the Tax Reform Act of 1986. The annual normal
retirement benefit payable
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<PAGE>
under this tier is equal to the difference between (1) the pre-Tax Reform Act
formula of 45% of Final Average Compensation less 50% of the participant's
Social Security Benefit, the result prorated for years of service less than 25,
and (2) the Pension Plan formula above with Annual Compensation in excess of
$186,667 disregarded for 1997, 1998, and 1999 ($175,000 for years prior to
1997). For the 1999 Plan Year, Annual Compensation in excess of $339,475 is
disregarded for all purposes under Tier two of the Supplemental Plan. Tier three
benefits are provided to individuals not covered under Tier one or Tier two who
will be affected by IRS limits on Pension Plan compensation. The annual normal
retirement benefit payable under this tier is based on the Pension Plan formula
set forth above, with Annual Compensation in excess of $271,580 disregarded.
Compensation recognized under the Supplemental Plan is W-2 pay, including
amounts deferred under the Management Stock Purchase Plan and pursuant to
Sections 401 and 125 of the Internal Revenue Code, but excluding income realized
upon the exercise of stock options.
The following table illustrates total annual normal retirement benefits (payable
from both the Pension Plan and from the Supplemental Plan and assuming
attainment of age 62 during 1999) for various levels of Final Average
Compensation and years of benefit service under Tier one of the Supplemental
Plan, prior to application of the Social Security offset, which is an integral
part of the benefits payable under the Supplemental Plan.
Estimated Total Annual Retirement Benefit
(Pension Plan plus Supplemental Plan, Tier one)
<TABLE>
<CAPTION>
Final Average Compensation for Based on Years of Service(1)
Three Highest Consecutive Years
in Last 10 Years: 5 Years 10 Years 15 Years 20 Years
<S> <C> <C> <C> <C>
$100,000.................................$10,000 $20,000 $35,000 $50,000
150,000..................................15,000 30,000 52,500 75,000
200,000..................................20,000 40,000 70,000 100,000
250,000..................................25,000 50,000 87,500 125,000
300,000..................................30,000 60,000 105,000 150,000
350,000..................................35,000 70,000 122,500 175,000
400,000..................................40,000 80,000 140,000 200,000
450,000..................................45,000 90,000 157,500 225,000
500,000..................................50,000 100,000 175,000 250,000
550,000..................................55,000 110,000 192,500 275,000
600,000..................................60,000 120,000 210,000 300,000
</TABLE>
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(1) The annual Pension Plan benefit is computed on the basis of a straight
life annuity.
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<PAGE>
The following table illustrates total annual normal retirement benefits (payable
from both the Pension Plan and from the Supplemental Plan and assuming
attainment of age 65 during 1999) for various levels of Final Average
Compensation and years of benefit service under Tier two of the Supplemental
Plan, prior to application of the Social Security offset, which is an integral
part of the benefits payable under the Supplemental Plan.
Estimated Total Annual Retirement Benefit
(Pension Plan plus Supplemental Plan, Tier two)
<TABLE>
<CAPTION>
Final Average Compensation for Based on Years of Service(1)
Five Highest Consecutive Years 25 Years
in Last 10 Years: 10 Years 15 Years 20 Years or more
<S> <C> <C> <C> <C>
$100,000..........................................$18,000 $27,000 $36,000 $45,000
150,000...........................................27,000 40,500 54,000 67,500
200,000...........................................31,714 47,570 63,427 79,284
250,000...........................................40,714 61,070 81,427 101,784
300,000...........................................49,714 74,570 99,427 124,284
350,000...........................................52,989 79,484 105,978 132,473
</TABLE>
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(1) The annual Pension Plan benefit is computed on the basis of a straight
life annuity.
Messrs. Timothy P. Horne, Bloss, Fifer, McAvoy, and McCartney have 40, 6,
6, 18, and 14 years, respectively, of benefit service under the Pension Plan.
Messrs. Bloss, McAvoy and Fifer are eligible for Tier one benefits, and Messrs.
Horne and McCartney are eligible for Tier two benefits. Eligible employees are
currently limited to a maximum annual benefit under the Pension Plan of $130,000
(subject to cost of living adjustments) under Internal Revenue Code requirements
regardless of their years of service or Final Average Compensation. Accordingly,
under current salary levels and law, Mr. Timothy P. Horne's annual benefit would
be limited to such amount.
Employment, Termination, Supplemental and Deferred Compensation Agreements
On September 1, 1996 the Company and Timothy P. Horne entered into a new
Employment Agreement (the "1996 Employment Agreement") that terminated and
superseded all prior employment agreements between the Company and Mr. Horne.
The 1996 Employment Agreement provides for annual base salary of at least
$660,000 plus other benefits and bonuses generally available to senior
executives of the Company. The 1996 Employment Agreement provides for the
employment of Mr. Horne as Chairman of the Board and Chief Executive Officer of
the Company for a period of three years until August 31, 1999 and thereafter for
consecutive one year period automatic renewals unless otherwise terminated. The
1996 Employment Agreement is terminable by Mr. Horne on thirty days notice.
Under the 1996 Employment Agreement, if Mr. Horne shall, without his consent,
cease to be, or cease to have the responsibilities and duties of, Chairman of
the Board of Directors of the Company and Chief Executive Officer other than for
a willful illegal act relating to the performance of his duties, or if he shall
be assigned duties inconsistent with those previously performed by him, he shall
be entitled to terminate his employment upon notice and, if so terminated, he
shall be entitled to receive a severance payment equal to two times the base
salary in effect on the date of termination.
On September 1, 1996 the Company and Timothy P. Horne entered into a new
Supplemental Compensation Agreement (the "1996 Supplemental Compensation
Agreement") that terminated and superseded a prior Supplemental Compensation
Agreement. Under the 1996 Supplemental Compensation Agreement, Timothy P. Horne
is entitled to receive annual payments during his lifetime following his
retirement or other termination of employment with the Company equal to the
greater of (a) one half of the average of his base salary for the three years
immediately preceding such retirement or termination or (b) $400,000. During
this period Mr. Horne will be
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available as a consultant to the Company for 300 to 500 hours per year.
Timothy P. Horne is also entitled under a Deferred Compensation Agreement
to retirement benefits aggregating $233,333 payable over a period of 28
consecutive months commencing upon the earliest of his retirement, attainment of
the age of 65 or other termination of employment. The Deferred Compensation
Agreement represents compensation which Mr. Horne deferred prior to the
Company's past three fiscal years. The Company has fully expensed its
obligations under this Deferred Compensation Agreement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Principal And Management Stockholders
The following table sets forth certain information concerning shares of
Class A Common Stock and Class B Common Stock held by (i) all beneficial owners
of 5% or more of either class of the Company's common stock, (ii) each Director
of the Company and (iii) the Chief Executive Officer, the four other most highly
compensated executive officers listed in the Summary Compensation Table and, as
a group, all executive officers, and Directors of the Company.
<TABLE>
<CAPTION>
Number of
Shares
Beneficially Total Percent(1)
Name of Beneficial Owner(2) Owned(1)(3) Equity Voting
<S> <C> <C> <C>
Timothy P. Horne(4)...............................................9,384,516 (5)(6)(7) 35.1% 81.3%
Gabelli Group Capital Partners, Inc...............................2,248,300 (14)(23) 8.5 2.0
George B. Horne(4)(9).............................................2,124,600 (6)(9)(10) 8.0 19.0
Frederic B. Horne.................................................1,840,473 (8) 7.0 3.6
Franklin Resources, Inc...........................................1,381,550 (14)(15) 5.2 1.2
Daniel W. Horne(4)(11)............................................1,335,840 (6)(10)(11) 5.0 11.9
Deborah Horne(4)(12)..............................................1,335,840 (6)(10)(12) 5.0 11.9
Peter W. Horne(4)(13).............................................1,335,840 (7)(13) 5.0 11.1
Daniel J. Murphy, III............................................ 1,256,321 (7)(16) 4.7 11.1
Gordon W. Moran......................................................17,000 (14)(16) * *
Roger A. Young............................................................0 - -
David A. Bloss, Sr....................................................9,000 (14)(17) * *
Kenneth J. McAvoy....................................................92,000 (14)(18) * *
Michael O. Fifer.....................................................32,001 (14)(22) * *
William C. McCartney.................................................60,600 (14)(19) * *
All executive officers and Directors as a group (10 persons)......9,687,948 (20)(21) 35.9 81.4
</TABLE>
*Less than one percent.
(1) The number of shares and the percentages have been determined as of
October 21, 1999 in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). At that date, a
total of 26,473,754 shares were outstanding, of which 9,485,247 were
shares of Class B Common Stock entitled to ten votes per share and
16,988,507 were shares of Class A Common Stock entitled to one vote per
share. Each share of Class B Common Stock is convertible into one share of
Class A Common Stock.
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<PAGE>
(2) The address of each stockholder in the table is c/o Watts Industries,
Inc., 815 Chestnut Street, North Andover, Massachusetts 01845, except that
Frederic B. Horne's address is c/o Conifer Ledges, Ltd., 219 Liberty
Square, Danvers, Massachusetts 01923 and Franklin Resources, Inc., address
is 777 Mariners Island Blvd., San Mateo, California 94403 and Gabelli
Group Capital Partners, Inc., address is One Corporate Center, Rye, New
York 10586.
(3) "Beneficial ownership" means the sole or shared power to vote, or to
direct the voting of, a security, or the sole or shared investment power
with respect to a security (i.e., the power to dispose of, or to direct
the disposition of, a security). A person is deemed, as of any date, to
have "beneficial ownership" of any security that such person has the right
to acquire within 60 days after such date.
(4) Timothy P. Horne, George B. Horne, Daniel W. Horne, Deborah Horne, Peter
W. Horne, Tara Horne, Judith Rae Horne, and Daniel J. Murphy, III may be
deemed a "group" as that term is used in Section 13(d)(3) of the Exchange
Act.
Shares of Class B Common Stock of the Company beneficially owned by each
member of the Horne family named in the above table and in footnote 4 and
any voting trust certificates in respect thereof are subject to a right of
first refusal in favor of the other Horne family members (other than
George B. Horne). The Company has granted registration rights with respect
to the shares of Class B Common Stock beneficially owned by such Horne
family members.
(5) Includes (i) 2,751,220 shares of Class B Common Stock and 62,742 shares of
Class A Common Stock, beneficially owned by Timothy P. Horne (for purposes
of this footnote, "Mr. Horne"), (ii) 1,335,840 shares held for the benefit
of Daniel W. Horne, Mr. Horne's brother, under a revocable trust for which
Mr. Horne serves as sole trustee, (iii) 1,335,840 shares held for the
benefit of Deborah Horne, Mr. Horne's sister, under a trust for which Mr.
Horne serves as sole trustee, which trust is revocable with the consent of
the trustee, (iv) 1,235,840 shares held for the benefit of Peter W. Horne,
Mr. Horne's brother, under a revocable trust for which Peter W. Horne
serves as sole trustee, (v) 2,124,600 shares held for the benefit of
George B. Horne, Mr. Horne's father, under a revocable trust for which Mr.
Horne serves as co-trustee, (vi) 40,000 shares owned by Tara V. Horne, Mr.
Horne's daughter, (vii) 207,740 shares held by Judith Rae Horne, Mr.
Horne's wife, as trustee or custodian for Mr. Horne's minor daughter,
(viii) 30,200 shares held for the benefit of Tara V. Horne, under an
irrevocable trust for which Mr. Horne serves as trustee, (ix) 22,600
shares held for the benefit of Mr. Horne's minor daughter, under an
irrevocable trust for which Mr. Horne serves as trustee and (x) 237,894
shares issuable upon the exercise of stock options exercisable currently
or within 60 days of October 21, 1999. The shares noted in clause (iv) are
held in a voting trust for which Mr. Horne serves as co-trustee. See
footnote 7. A total of 2,751,220 of the shares of Class B Common Stock
noted in clause (i), the shares noted in clauses (ii) and (iii), and (v)
through (ix) of this footnote (7,848,040 shares in the aggregate) are held
in a voting trust for which Mr. Horne serves as trustee. See footnote 6.
All shares beneficially owned or which may be deemed beneficially owned by
Mr. Horne are Class B Common Stock except 62,742 of the shares noted in
clause (i) and all of the shares noted in clause (x) of this footnote.
(6) All shares of Class B Common Stock held by Timothy P. Horne, individually,
all shares of Class B Common Stock held by trusts for the benefit of
Daniel W. Horne, Deborah Horne, Tara V. Horne and Timothy P. Horne's minor
daughter, George B. Horne, 207,740 shares of Class B Common Stock held by
Judith Rae Horne, as custodian and trustee for her minor daughter, and
40,000 shares of Class B Common Stock held by Tara V. Horne (7,848,040
shares in the aggregate) are subject to the terms of The George B. Horne
Voting Trust Agreement-1997 (the "1997 Voting Trust"). Under the terms of
the 1997 Voting Trust, the trustee (currently Timothy P. Horne) has sole
power to vote all shares subject to the 1997 Voting Trust. Timothy P.
Horne, for so long as he is serving as trustee of the 1997 Voting Trust,
has the power to
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<PAGE>
determine in his sole discretion whether or not proposed actions to be
taken by the trustee of the 1997 Voting Trust shall be taken, including
the trustee's right to authorize the withdrawal of shares from the 1997
Voting Trust (for purposes of this footnote, the "Determination Power").
In the event that Timothy P. Horne ceases to serve as trustee of the 1997
Voting Trust, no trustee thereunder shall have the Determination Power
except in accordance with a duly adopted amendment to the 1997 Voting
Trust. Under the terms of the 1997 Voting Trust, in the event Timothy P.
Horne ceases to serve as trustee of the 1997 Voting Trust, then Daniel J.
Murphy, III, a director of the Company, David F. Dietz, whose professional
corporation is a partner in the law firm of Goodwin, Procter & Hoar LLP,
and Walter J. Flowers, a partner in the law firm of Flowers and Lichtman
(each, a "Successor Trustee" and collectively, the "Successor Trustees"),
shall thereupon become co-trustees of the 1997 Voting Trust. At any time,
Timothy P. Horne, if then living and not subject to incapacity, may
designate up to two additional persons, one to be designated as the
primary designee (the "Primary Designee") and the other as the secondary
designee ("Secondary Designee"), to serve in the stead of any Successor
Trustee who shall be unable or unwilling to serve as a trustee of the 1997
Voting Trust. Such designations are revocable by Timothy P. Horne at any
time prior to the time at which such designees become a trustee. If any of
the Successor Trustees is unable or unwilling or shall otherwise fail to
serve as a trustee of the 1997 Voting Trust, or after becoming a
co-trustee shall cease to serve as such for any reason, then a third
person shall become a co-trustee with the remaining two trustees, in
accordance with the following line of succession: first, any individual
designated as the Primary Designee, next, any individual designated as the
Secondary Designee, and then, an individual appointed by the holders of a
majority in interest of the voting trust certificates then outstanding. In
the event that the Successor Trustees shall not concur on matters not
specifically contemplated by the terms of the 1997 Voting Trust, the vote
of a majority of the Successor Trustees shall be determinative. No trustee
or Successor Trustee shall possess the Determination Power unless it is
specifically conferred upon such trustee pursuant to the provisions of the
1997 Voting Trust.
The 1997 Voting Trust expires on August 26, 2021, subject to extension on
or after August 26, 2019 by stockholders (including the trustee of any
trust stockholder, whether or not such trust is then in existence) who
deposited shares of Class B Common Stock in the 1997 Voting Trust and are
then living or, in the case of shares in the 1997 Voting Trust the
original depositor of which (or the trustee of the original depositor of
which) is not then living, the holders of voting trust certificates
representing such shares. The 1997 Voting Trust may be amended by vote of
the holders of a majority of the voting trust certificates then
outstanding and by the number of trustees authorized to take action at the
relevant time 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.
In certain cases (i.e., changes to the extension, termination and
amendment provisions), each individual depositor must also approve
amendments. Shares may not be removed from the 1997 Voting Trust during
its term without the consent of the requisite number of trustees required
to take action under the 1997 Voting Trust. Voting trust certificates are
subject to any restrictions on transfer applicable to the stock which they
represent.
Timothy P. Horne holds 35.1% of the total beneficial interest in the 1997
Voting Trust (the "Beneficial Interest") individually, 17.0% of the
Beneficial Interest as trustee of a revocable trust, 17.0% of the
Beneficial Interest as trustee of a trust revocable with the consent of
the trustee, 26.8% of the Beneficial Interest as co-trustee of a revocable
trust and 0.7% of the Beneficial Interest as trustee of two irrevocable
trusts (representing an aggregate of 96.85% of the Beneficial Interest).
George B. Horne holds 26.8% of the Beneficial Interest as co-trustee of a
revocable trust. Tara V. Horne, individually and as beneficiary of an
irrevocable trust holds 0.9% of the Beneficial Interest, and Judith Rae
Horne, as trustee or custodian for Timothy P. Horne's minor daughter,
holds 2.7% of the Beneficial Interest.
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<PAGE>
7. Includes 1,235,840 shares of Class B Common Stock which are beneficially
owned by Peter W. Horne, as trustee and beneficiary of a revocable trust
for Peter W. Horne, which are subject to the terms of the Horne Family
Voting Trust Agreement-1991 (the "1991 Voting Trust"). Under the terms of
the 1991 Voting Trust, the two trustees (currently Timothy P. Horne and
Daniel J. Murphy, III) have sole power to vote all shares subject to the
1991 Voting Trust. However, as long as Timothy P. Horne is serving as a
trustee of the 1991 Voting Trust, Timothy P. Horne generally has the right
to vote all shares subject to such trust in the event that the trustees do
not concur with respect to any proposed action, including any exercise of
the trustee's right to authorize the withdrawal of shares from the 1991
Voting Trust (for purposes of this footnote, the "Determination Power").
The sole exception to the Determination Power is that the concurrence of
Timothy P. Horne and Daniel J. Murphy, III is required for the voting of
shares in connection with any vote involving the election or removal of
directors of the Company. Under the terms of the 1991 Voting Trust,
Timothy P. Horne has the authority to designate up to two successor
trustees. Timothy P. Horne has not designated any such successor trustee.
If each of Timothy P. Horne and Mr. Murphy ceases to serve as a trustee
for any reason, and no successor trustee has been designated, the holders
of a majority of the voting trust certificates then outstanding have the
right to designate successor trustees as necessary under the terms of the
1991 Voting Trust. Under the terms of the 1991 Voting Trust, Timothy P.
Horne, the Chairman of the Board of Directors and Chief Executive Officer
of the Company, and George B. Horne, the father of Timothy P. Horne, can
collectively agree to revoke the designation of any successor before he
begins to serve or to appoint a new designated successor. If one or more
of such Horne family members are unable to take such action, this power
rests in the survivor or survivors of them.
The 1991 Voting Trust expires on October 31, 2001, subject to extension on
or after October 31, 1999 by stockholders (including the trustee of any
trust stockholder, whether or nor such trust is then in existence) who
deposited shares of Class B Common Stock in the 1991 Voting Trust, are
then living and continue to hold voting trust certificates under the 1991
Voting Trust or, in the case of shares in the 1991 Voting Trust the
original depositor of which (or the trustee of the original depositor of
which) is not then living, the holders of voting trust certificates
representing such shares. The 1991 Voting Trust may be amended or
terminated by vote of the holders of a majority of the voting trust
certificates then outstanding and, while one or more of Timothy P. Horne
and their successor designated as described in the preceding paragraph is
serving as trustee, the trustees. Shares may not be removed from the trust
during its term without the consent of the trustees.
(8) The information relating to the number and nature of Frederic B. Horne's
beneficial ownership is based on a Schedule 13D filed with the Securities
and Exchange Commission on October 8, 1999 by Frederic B. Horne (for
purposes of this footnote, "Mr. Horne"). The equity and voting percentages
were calculated as of October 21, 1999. Includes (i) 215,323 shares of
Class B Common Stock and 1,391,550 shares of Class A Common Stock,
beneficially owned by Mr. Horne, (ii) 22,600 shares of Class B Common
Stock held for the benefit of Mr. Horne's minor daughter, under an
irrevocable trust for which Mr. Horne serves as trustee, (iii) 11,000
shares of Class B Common Stock beneficially owned by Mr. Horne's minor
daughter for which Mr. Horne is custodian, and (iv) 200,000 shares of
Class A Common Stock beneficially owned by Mr. Horne as trustee pursuant
to an irrevocable trust for the benefit of Mr. Horne, his minor daughter
and future descendants.
(9) Consists of 2,124,600 shares held in a revocable trust for which Timothy
P. Horne and George B. Horne serve as co-trustees. All of such shares are
subject to the 1997 Voting Trust. See footnote 6.
(10) All shares are Class B Common Stock.
(11) Shares are held in a revocable trust for which Timothy P. Horne serves as
sole trustee, and are subject to the 1997 Voting Trust. See footnote 6.
14
<PAGE>
(12) Shares are held in a trust for which Timothy P. Horne serves as sole
trustee, which trust is revocable with the consent of the trustee, and are
subject to the 1997 Voting Trust. See footnote 6.
(13) All shares are Class B Common Stock except for 100,000 shares of Class A
Common Stock. The shares of Class B Common Stock are held in a revocable
trust for which Peter W. Horne serves as sole trustee, and are subject to
the 1991 Voting Trust. See footnote 7.
(14) All shares are shares of Class A Common Stock or options to purchase Class
A Common Stock which are exercisable currently or within 60 days of
October 21, 1999.
(15) The information is based on a Schedule 13G filed with the Securities and
Exchange Commission by Franklin Resources, Inc., Franklin Advisory
Services, Inc., Charles B. Johnson and Rupert H. Johnson, Jr. reporting
their aggregate holdings of shares of Class A Common Stock as of December
30, 1998. Franklin Advisory Services, Inc., has stated in the Schedule 13G
that it is an investment adviser registered under the Investment Advisers
Act of 1940. Franklin Resources, Inc. has stated in its Schedule 13G that
its direct or indirect investment advisory subsidiaries have all
investment and/or voting power of the shares.
(16) Includes 16,000 shares of Class A Common Stock issuable upon the exercise
of stock options under the 1991 Non-Employee Directors' Nonqualified Stock
Option Plan.
(17) Includes (i) 1,000 shares of Class A Common Stock held by Mr. Bloss'
spouse and (ii) 8,000 shares of Class A Common Stock. Mr. Bloss resigned
as President, Chief Operating Officer and Director of the Company on
October 18, 1999. Mr. Bloss became Chairman of the Board, Chief Executive
Officer and President of CIRCOR International, Inc. on October 18, 1999
when CIRCOR was spun-off from the Company.
(18) Represents 92,000 shares of Class A Common Stock issuable upon the
exercise of stock options which are exercisable currently or within 60
days of October 21, 1999.
(19) Represents 60,600 shares of Class A Common Stock issuable upon the
exercise of stock options which are exercisable currently or within 60
days of October 21, 1999.
(20) Includes (i) 9,088,230 shares of Class B Common Stock, (ii) 78,324 shares
of Class A Common Stock, and (iii) 521,394 shares of Class A Common Stock
issuable upon the exercise of stock options which are exercisable
currently or within 60 days of October 21, 1999.
(21) Shares of Class B Common Stock of the Company held by members of
management other than Horne family members are subject to a right of first
refusal in favor of the Company.
(22) Includes (i) 801 shares of Class A Common Stock, (ii) 300 shares of Class
A Common Stock held by Mr. Fifer for three minor children and (iii) 30,900
shares of Class A Common Stock issuable upon the exercise of stock options
presently or within 60 days of October 21, 1999.
(23) The information is based on a Schedule 13D filed with the Securities and
Exchange Commission by Gabelli Group Capital Partners, Inc., Gabelli
Funds, LLC, Gabelli Asset Management, Inc., GAMCO Investors, Inc., Mario
J. Gabelli and Marc J. Gabelli reporting their aggregate holdings of
shares of Class A Common Stock as of October 19, 1999. Messrs. Mario J.
Gabelli and Marc J. Gabelli directly and indirectly control the entities
filing the Schedule 13D which entities are primarily investment advisers
to various institutional and individual clients, including registered
investment companies and pension plans, as broker/dealer and as general
partner of various private investment partnerships. The reporting persons
and other related entities have the sole power to vote or direct the vote
and sole power to dispose or to direct the disposition of the shares.
15
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Distribution was completed on October 18, 1999. After the
Distribution, the Company and CIRCOR will have continuing obligations to one
another as described below. See Item 1., Business, for a description of the
Distribution.
RELATIONSHIP BETWEEN CIRCOR AND WATTS
This section describes the primary agreement between CIRCOR and the
Company that will define the ongoing relationship between them and their
subsidiaries and affiliates after the Distribution and will provide for an
orderly separation of the two companies. The following description of the
Distribution Agreement summarizes the material terms of such agreement. The
agreement was filed as an exhibit to this report.
Distribution Agreement
The Company has entered into a distribution agreement with CIRCOR
providing for, among other things, the principal corporate transactions required
to effect the distribution, the conditions precedent to the distribution, the
allocation between the Company and CIRCOR of certain assets and liabilities, the
settlement of intercompany accounts between the Company and CIRCOR,
indemnification obligations of the Company and CIRCOR, and certain other
transition arrangements.
The distribution agreement provides generally that all assets and
liabilities that are associated exclusively with the business of CIRCOR will be
transferred to or retained by CIRCOR, including certain capitalized lease
obligations and obligations under industrial revenue bonds totaling
approximately $12.5 million. Under the distribution agreement, the Company will
retain sole responsibility for all other external debt for borrowed money and
other financings (including the Company's' publicly held bonds) with the
exception of approximately $96 million outstanding under the Company credit
facility, which will be assumed by CIRCOR. The distribution agreement provides
that all assets and liabilities of the Company that are not identified or
described as being the property or responsibility of CIRCOR will remain the
property or responsibility of the Company.
The Company and CIRCOR have each agreed to indemnify, defend and hold
harmless the other party and its subsidiaries and their respective directors,
officers, employees and agents from and against any and all damage, loss,
liability and expense arising out of or due to the failure of the indemnitor or
its subsidiaries to pay, perform or otherwise discharge any of the liabilities
or obligations for which it is responsible under the terms of the distribution
agreement, which include, subject to certain exceptions, all liabilities and
obligations arising out of the conduct or operation of their respective
businesses before, on or after the distribution date. The distribution agreement
includes procedures for notice and payment of indemnification claims and
provides that the indemnifying party may assume the defense of the claim or suit
brought by a third party.
The distribution agreement provides generally that a portion of the assets
of the tax-qualified retirement plans currently maintained by the Company will
be transferred after the distribution to similar qualified retirement plans
established by CIRCOR. In the case of the Company 401(k) plan, the amount
transferred will be the value of the accounts of employees of companies in the
instrumentation and fluid regulation and petrochemical businesses. In the case
of other Company pension plans, the portion of plan assets transferred will be
based generally on the percentage of plan liabilities attributable to plan
participants who will be CIRCOR employees after the distribution.
CIRCOR and its subsidiaries have historically been included with the
Company and its subsidiaries in a single consolidated group for United States
federal income tax purposes. Under United States federal income tax law, each
member of a consolidated group is jointly and severally liable for the United
States federal income tax liability of each other member of the consolidated
group. Accordingly, members of the CIRCOR group could be
16
<PAGE>
held liable by the IRS for federal income tax liabilities arising from periods
beginning before the distribution date.
The tax sharing provisions of the distribution agreement provide that the
Company will be responsible for all domestic income taxes attributable to
taxable periods beginning before the distribution date. For domestic income
taxes attributable to taxable periods beginning on or after the distribution
date, the tax sharing provisions of the distribution agreement provide that the
Company will be responsible for domestic income taxes of the Company group, and
that CIRCOR will be responsible for domestic income taxes of the CIRCOR group.
The tax sharing provisions also provide that taxes other than domestic income
taxes will be the responsibility of the Company or CIRCOR according to whether
the tax is attributable to the assets or business operations of the Company
group or the CIRCOR group.
In addition, the tax sharing provisions of the distribution agreement
provide that CIRCOR will indemnify the Company for taxes arising from any act or
omission by CIRCOR which causes the distribution to be taxable. The tax sharing
provisions of the distribution agreement also provide that the Company will
indemnify CIRCOR for taxes arising from any act or omission by the Company which
causes the distribution to be taxable.
CIRCOR has agreed in the tax sharing provisions of the distribution
agreement to engage in a public offering of a significant amount of CIRCOR stock
within one year of the distribution in accordance with statements and
representations made by the Company in its request for the ruling from the IRS
regarding the distribution. The timing, completion and size of any public
offering will be subject to market conditions. CIRCOR has also agreed in the tax
sharing provisions of the distribution agreement not to engage within two years
of the distribution in any merger, reorganization, acquisition, equity
restructuring or other transaction that results in one or more individuals or
entities acquiring a 50% or greater interest in CIRCOR. CIRCOR has also agreed
in the tax sharing provisions of the distribution agreement that it will not
take any action that is inconsistent with the statements and representations
made by the Company in its request for the ruling from the IRS regarding the
distribution. The Company has agreed in the tax sharing provisions of the
distribution agreement not to engage within two years of the distribution in any
merger, reorganization, acquisition, equity restructuring or other transaction
that results in one or more individuals or entities acquiring a 50% or greater
interest in the Company. The Company has also agreed in the tax sharing
provisions of the distribution agreement that it will not take any action that
is inconsistent with the statements and representations made by the Company in
its request for the ruling from the IRS regarding the distribution. The tax
sharing provisions of the distribution agreement provide, however, that CIRCOR
or the Company may act or fail to act in a way contrary to the commitments
referred to in this paragraph after first obtaining an opinion from Goodwin,
Procter & Hoar LLP (or other mutually acceptable law firm) or a ruling from the
IRS to the effect that such action (or inaction) will not cause the distribution
to be taxable to either the Company or the Company's shareholders.
Other Relationships and Related Transactions
Mr. Timothy P. Horne, a director of the Company, is also a director of
CIRCOR and after the Distribution, beneficially owns voting securities entitled
to approximately 81.3% of the voting power of the outstanding Company common
stock and approximately 29.9% of the voting power of the outstanding CIRCOR
common stock.
Mr. Daniel J. Murphy, III, a director of the Company, is also a director
of CIRCOR, and serves on each company's compensation committee. Mr. Murphy is
not an executive officer of either company.
Mr. David F. Dietz, a director of CIRCOR, has a professional corporation
which is a partner of Goodwin, Procter & Hoar LLP, a law firm which provides
legal services to both the Company and CIRCOR.
17
<PAGE>
George B. Horne, the father of Timothy P. Horne, receives monthly payments
of $7,959 ($95,505 annually) from the Watts Industries, Inc. Retirement Plan for
Salaried Employees.
18
<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/ Kenneth J. McAvoy
-------------------------------
Kenneth J. McAvoy
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer),
Secretary, and Director
DATED: October 28, 1999
19
