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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the Transition period from ..................... to ......................
COMMISSION FILE NUMBER 0-20328
AMTROL INC
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
RHODE ISLAND 05-0246955
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1400 DIVISION ROAD, WEST WARWICK, RI 02893
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (401) 884-6300
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 30, 1999, the aggregate market value of the Registrant's voting
stock held by non-affiliates was none.
As of March 30, 1999, 100 shares of Common Stock $0.01 par value, of the
Registrant were outstanding.
Documents Incorporated by Reference: NONE
The Exhibit Index for this document appears on page 59 hereof.
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PART I
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ITEM 1. BUSINESS
OVERVIEW
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AMTROL Inc ("AMTROL" or the "Company"), is a leading designer,
manufacturer and marketer of expansion and pressure control products used
in the water systems markets and selected sectors of the HVAC market. The
Company's principal products include well water accumulators, hot water
expansion controls, water treatment products, indirect-fired water
heaters, returnable and non-returnable pressure-rated cylinders used
primarily to store, transport and dispense refrigerant, heating and
cooking gases. Many of these products are based on a technology originated
and developed by the Company, which uses a pre-pressurized vessel with an
internal diaphragm to handle fluids under pressure.
The Company believes that its leading market positions in its key product
categories are attributable to the strength of AMTROL's brand names and
product breadth, quality and innovation, as well as its marketing,
distribution and manufacturing expertise. In addition, AMTROL's principal
markets are highly replacement-oriented, with 60% to 70% of the Company's
core business coming from replacement sales. These factors, combined with
the Company's large installed base of products, have enabled AMTROL to
demonstrate sales and earnings stability, even during periods of weak
domestic economic activity.
AMTROL's brand names are among the most widely known in its markets. For
example, the Company's EXTROL is widely recognized by customers as the
leading hot water expansion control tank. Other well-known brand names of
the Company include Well-X-Trol, Therm-X-Trol, Hot Water Maker and
CHAMPION. The Company also believes that it is the recognized technology
leader in virtually all of its core product lines. In many of the
Company's major product lines, AMTROL's products are considered the
industry standard, a key marketing advantage.
The Company's strong reputation and brand recognition ensure that nearly
every significant plumbing, pump specialty and HVAC wholesaler carries at
least one AMTROL product. This facilitates new product introduction,
effectively "pulling" the Company's new products through its distribution
system. AMTROL also offers a broad range of products. This broad product
offering allows AMTROL's customers to consolidate their suppliers and to
purchase and manage inventory more efficiently. These factors have
established the Company's products as a preferred brand and allow the
Company to realize premium pricing on most of its branded products. During
its 50-year history, the Company has built a strong partnership with
wholesalers and OEMs, resulting in a broad distribution network serving
approximately 2,000 customers throughout North America. In addition, the
Company continues to increase its sales to the Do-it-Yourself (DIY)
market, a rapidly growing channel of distribution, primarily through
private label arrangements with Lowe's Companies, Menards, Tru*Serv
Corporation and Ace Hardware.
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The Company's subsidiary, AMTROL-ALFA Metalomecanica S.A. ("ALFA"),
located in Guimaraes, Portugal, is Europe's largest manufacturer of
reusable steel gas cylinders and supplies Europe, the Middle East and
Africa, as well as the Far East, with containers for storing cooking,
heating and refrigerant gases. ALFA provides the Company with a low-cost
international manufacturing base for all of AMTROL's products and is an
important source of supply for the Company's international customers. In
1998, in order to take advantage of lower production costs in Portugal,
the Company completed the relocation of its non-returnable gas cylinder
production line from Singapore to ALFA. The Company's European and Asian
non-returnable gas cylinder customers, who had previously been supplied
from the United States, are now supplied from Alfa.
In June 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany. NOVA manufactures high-end residential
and commercial water heaters which are marketed primarily in Germany,
Switzerland and Austria. This acquisition provides AMTROL with expanded
manufacturing and distribution capabilities in central Europe, in addition
to the opportunity to offer many of AMTROL's complementary hydronic
heating and water systems products in the European market. Furthermore,
the acquisition of NOVA provides the Company with greater product
diversification and the ability to penetrate certain markets in the United
States in which it currently has a limited presence.
With the acquisition of ALFA and NOVA, approximately 36.2% of the
Company's net sales in 1998 were derived from international markets,
compared to 22.3% in 1997.
MERGER AND ACQUISITION
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On August 28, 1996, AMTROL entered into a merger agreement (the "Merger
Agreement") with AMTROL Holdings, Inc. ("Holdings") and its wholly-owned
subsidiary, AMTROL Acquisition, Inc. ("Acquisition"), providing for the
merger of AMTROL with Acquisition, with AMTROL continuing as the surviving
corporation (the "Surviving Corporation"). The Merger Agreement was
approved at a special meeting of shareholders of AMTROL held on November
12, 1996, and Acquisition was merged with and into AMTROL on November 13,
1996 (the "Merger"). Each share of common stock of Acquisition was
converted into and exchanged into one share of common stock of the
Surviving Corporation, with the result that AMTROL became a wholly-owned
subsidiary of Holdings, a Delaware corporation controlled by The Cypress
Group L.L.C. ("Cypress").
The Company was incorporated in Rhode Island in 1973, and is the successor
to all of the assets and liabilities of a predecessor Rhode Island
corporation which was incorporated in 1946. The Company's principal
executive offices are located at 1400 Division Road, West Warwick, Rhode
Island 02893 (telephone number: (401) 884-6300).
BUSINESS STRATEGY
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Since the Merger, the Company's strategic focus has been on reducing costs
and capitalizing on AMTROL's position as a technological and market
leader. This strategy consists of the following key elements: (i) reduce
operating expenses, (ii) enhance sales
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and profitability of core product offerings, and (iii) grow
internationally and introduce new products.
REDUCE OPERATING EXPENSES
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Since the merger, the Company initiated a series of actions designed to
reduce operating expenses and to establish new managerial and
organizational accountability. These actions are expected to continue to
generate significant cost savings. The cost savings estimates described
herein are forward-looking statements based on management budgets.
Realization of these savings depends upon the effectiveness and timing of
the planned actions and there can be no assurance that such cost savings
can be achieved.
Reduce Corporate Overhead Expenses. Selling, general and administrative
expenses as a percentage of sales have decreased from 17.8% in 1996 to
13.8% in 1998. The reduction in SG&A is largely attributable to the
elimination of redundant and unnecessary functions, particularly at the
Company's corporate headquarters. Headcount reductions undertaken since
the merger have decreased the number of persons employed at corporate
headquarters by approximately 25% since January 1, 1996.
Continue To Rationalize Manufacturing Facilities. Since 1996, the Company
has closed four manufacturing facilities, integrating production into
other facilities, and has sold two non-core business units. These plant
closures and divestitures have resulted in both cost savings and improved
asset utilization. Most recently, in December 1997, the Company closed its
production facility in Nashville, Tennessee and relocated most of the
Nashville production to the Company's West Warwick, R.I. facility. Much of
the production in Nashville represented excess capacity which, due to
improvements in manufacturing efficiency and productivity, the West
Warwick plant was able to absorb. Costs involved in closing the Nashville
facility and starting production in West Warwick were higher than
anticipated due to unexpected retrofitting and reconditioning required for
the relocated equipment, damage to equipment during shipment, and delays
in preparing the Nashville building for sale.
In connection with the plant closures, the Company recorded a $5.5 million
pre-tax charge in 1997 and a $4.5 million pre-tax charge in 1998, and
incurred incremental costs due to manufacturing inefficiencies of $3.3
million in 1998. By the end of 1998, incremental manufacturing
inefficiencies were substantially eliminated and production levels had
returned to normal.
Reduce Manufacturing Costs. The Company will continue to reduce labor
costs through automating certain labor-intensive manufacturing processes,
redesigning existing product lines and outsourcing certain operations
where appropriate. In 1999, the Company expects to begin realizing the
benefits anticipated in connection with the relocation of the Nashville
production lines. The Company has identified and intends to implement
several other manufacturing improvement projects in its North American and
European plants which are expected to yield additional annual savings in
1999.
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ENHANCE SALES AND PROFITABILITY OF CORE PRODUCT OFFERINGS
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The Company continues to look at initiatives to grow sales and increase
profitability of its core product offerings. To accomplish this, the
Company seeks agreements with major OEMs to incorporate AMTROL products
into complete systems solutions and modifies current products to enhance
appearance, facilitate installation or meet the requirements of specific
domestic and international markets. The Company's marketing programs are
aimed at informing customers about the benefits of AMTROL products. These
actions increase demand for AMTROL's products and allow AMTROL to realize
premium pricing.
EXPAND INTERNATIONALLY AND INTRODUCE NEW PRODUCTS
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By establishing an international presence through acquisitions and
strategic alliances, management believes the Company's strong brand names,
broad product offerings and core water systems expertise will allow it to
capitalize on growing global demand for enhanced water pressure control
and improved water quality and refrigerant systems. The 1998 acquisition
of NOVA and the 1997 acquisition of ALFA increased the Company's presence
overseas significantly: international net sales were 36.2% of total net
sales in 1998, compared to 22.3% in 1997 and 12.6% in 1996. ALFA presents
the Company with a low-cost platform from which it can expand distribution
of its wide variety of products in Europe, the Middle East/Africa and the
Far East. NOVA provides the Company with expanded manufacturing and
distribution capabilities in central Europe, in addition to the
opportunity to offer many of AMTROL's complementary hydronic heating and
water systems products in the European market. Through a strategic
alliance with an existing large, international oil company, the Company
will begin operating a cylinder refurbishing plant in Poznan, Poland in
the second quarter of 1999. This represents the Company's first entry into
the fast growing Eastern European market.
The Company will continue to selectively pursue OEM alliances and
strategic acquisitions, such as the acquisitions of ALFA and NOVA. The
Company believes that establishing local manufacturing and distribution
facilities in international markets significantly enhances the Company's
ability to build strong customer relationships, understand local product
preferences and be price competitive while maintaining appropriate profit
margins. Strategic acquisitions, both domestic and international, provide
the Company with an effective means of identifying and introducing new
products and technologies in markets where it already has a strong
presence. The Company will focus its international expansion on the target
markets of Western Europe, Latin America, and to a lesser extent, the
regions of Asia Pacific and Eastern Europe.
EUROPE. In Europe, the large hydronic heating market (believed by the
Company to be ten times the size of the U.S. market) and the general lack
of adequate water pressure in municipal systems represent excellent
opportunities for the Company in light of its core products expertise. The
Company's brand names are already well recognized in Europe. The Company
plans to apply its technical expertise to the special needs of the
European market and to build on ALFA's product and distribution presence
in the market for returnable pressure-rated cylinders for heating and
cooking gases and on NOVA's reputation for quality, innovation and
engineering expertise in the water heater market.
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The new cylinder refurbishing plant in Poland provides the Company with a
manufacturing platform in Eastern Europe and the potential to supply cost
effectively that region with its water system and hydronic heating
products. The Company plans to accelerate European growth through
selective acquisitions, strategic joint ventures and distribution
agreements.
LATIN AMERICA, Latin America was the Company's fastest growing sales
region in 1997 and 1998. The Company will build on its local sales,
distribution and service capability to better serve its customers in this
region and to achieve continued growth.
ASIA/PACIFIC. The economic instability in this region decreased demand for
the Company's products in the past two years, and the Company's 1999 plans
do not anticipate a significant rebound in demand. The Company continues
to maintain its sales presence in the region, and is prepared to pursue
opportunities in the Asia Pacific region when economic conditions improve.
PRODUCTS AND MARKETS
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The EXTROL, the first product to utilize the technology developed by
AMTROL for handling fluid under pressure in hydronic heating systems,
redefined the standards for controlling the expansion of water in these
systems. Older systems consisted simply of a vessel containing air,
resulting in excessive pressure, less efficiency and excessive corrosion.
AMTROL developed a technology which uses a flexible diaphragm inside a
pre-pressurized vessel to maintain the separation of air and water in the
vessel, and has applied this technology in both HVAC products and water
systems products.
HVAC PRODUCTS
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AMTROL's sales to selected sectors of the HVAC market, which include sales
of products such as expansion accumulators, water heaters and
pressure-rated cylinders for heating and refrigerant gases, accounted for
approximately 60% of the Company's total sales in 1998. AMTROL's
residential HVAC products include expansion vessels for heated water,
potable water heaters and other accessories used in residential HVAC
systems. AMTROL's commercial HVAC products are substantially identical in
function to those used in residential applications, with the most
significant difference being variations required by design codes to meet
the higher operating pressures of larger systems. AMTROL's pressure-rated
cylinders for refrigerant gases are used in the storage, transport and
dispensing of gases used in air conditioning and refrigeration systems. In
addition, with the acquisition of ALFA, the Company's products include
returnable pressure-rated cylinders for storing gas used in residential
and commercial heating and cooking applications.
EXTROLS. EXTROL expansion accumulators, the first AMTROL product line to
incorporate the Company's diaphragm technology for handling fluid under
pressure, are used in conjunction with hydronic heating systems, which
provide heat by circulating hot water through baseboard piping and
radiators. The EXTROL product controls pressure in the heating system and
eliminates problems related to hot water expansion by allowing the volume
of water to increase as the temperature of the water increases within a
closed system, preventing operating problems.
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THERM-X-TROLS. Therm-X-Trols accumulate expanded hot water escaping from
potable water heaters that has been prevented from flowing back into the
public water supply by backflow prevention devices. In response to the
Clean Water Act of 1984, certain jurisdictions established local codes to
require owners of commercial and residential buildings to install backflow
prevention devices in order to prevent the contamination of the public
water supply. Local codes adopted by organizations that set standards for
approximately 90% of the United States also require a separate device to
handle the expanded water prevented from flowing back into the public
water supply. The principal alternatives are relief valves, which permit
water to drain inside the building, and thermal expansion accumulators,
such as the Therm-X-Trol, which capture the water. Therm-X-Trol satisfies
these code requirements, as well as the codes of cities that specifically
require a thermal expansion accumulator. Additionally, the two largest
domestic water heater manufacturers will void their warranties if thermal
expansion accumulators are not used in conjunction with their products
where backflow prevention devices are installed.
INDIRECT-FIRED WATER HEATERS. In response to market demands for an
abundant supply of hot water and energy conservation, AMTROL has developed
a line of indirect-fired residential and commercial water heaters, which
it manufactures and distributes under the brand name Hot Water Maker. Used
in conjunction with a new or existing boiler installed to heat living and
work areas, these water heaters offer an alternative to conventional gas
and electric potable water heaters and tankless coils. Hot water is
generated through the use of heat exchangers and circulators which
circulate heated water from the boiler through a coil in the core of the
water heater's reservoir. Hot Water Makers are sold for use in both
commercial and residential applications. The recent acquisition of NOVA,
which specializes in water heating products for a wide range of
applications from very small residential units up to 10,000 liter
commercial units, provides the Company with greater product
diversification and the ability to penetrate certain markets in which it
currently has a limited presence. The Company has recently introduced a
new line of large capacity stainless steel Hot Water Makers designed for
light commercial and residential customers who require large amounts of
hot water and rapid recovery time.
PRESSURE-RATED CYLINDERS. The Company's ALFA subsidiary, located in
Portugal, produces and distributes reusable liquid propane gas ("LPG") and
reusable and non-returnable refrigerant cylinders. It is the largest
producer of reusable steel gas cylinders in Europe. Reusable LPG cylinders
are typically purchased by major gas companies or their distributors who
fill the cylinders for customers who use the gas for heating and cooking
in residential and commercial applications. In 1998, the Company
transferred to ALFA the non-returnable cylinder production line previously
located in Singapore and began supplying its European and Asian
non-returnable gas cylinder customers from ALFA. AMTROL, together with
ALFA, is one of two of the world's most significant manufacturers of
non-returnable pressure-rated cylinders used in the storage, transport and
dispensing of refrigerant gases for air conditioning and refrigeration
systems.
WATER SYSTEMS PRODUCTS
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AMTROL's sales of its water systems products accounted for approximately
40% of the Company's total net sales in 1998. These products consist
primarily of water accumulators for residential and commercial well water
systems and systems and components for residential water softening and
purification.
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WELL WATER SYSTEMS. AMTROL produces and sells well water accumulators for
both residential and commercial applications under the brand names
Well-X-Trol and CHAMPION, as well as under several private label programs.
Virtually all of the water accumulators sold by the Company incorporate an
internally mounted rubber diaphragm that seals an air charge and allows
pressure to increase as water fills the plastic lined vessel. This design
serves to control pressure while maintaining the separation of air and
water in the vessel, thereby eliminating water logging (absorption of air
into water) as well as reducing wear on switches, pump motors and other
system components caused by unnecessary on/off cycling. A typical well
water system consists of a submersible or jet pump located in the well
that pumps water to an AMTROL pre-pressurized vessel.
The pre-pressurized vessel is connected to the plumbing system in order to
provide water on demand at a constant pressure. As the water level and
pressure in the vessel lowers, the diaphragm flexes, which in turn causes
the pump to cycle on until a sufficient level of water pressure is
achieved in the system.
WATER TREATMENT/FILTRATION PRODUCTS. AMTROL offers a range of products to
meet increasing global demand for improved water quality and water
pressure. AMTROL manufactures and markets water softeners, reverse osmosis
accumulators and other related systems that may be utilized to purify or
treat residential municipal-supplied and well water. The Company also
manufactures and markets products that address the need to boost water
pressure in many domestic and international locations where the available
pressure is not adequate.
DISTRIBUTION AND MARKETING
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AMTROL's principal channel of distribution is plumbing, heating and pump
specialty wholesalers. The Company maintains its presence in the United
States and Canadian wholesale markets through a network of approximately
45 independent firms that represent multiple manufacturers, arranging
sales on a commission basis, as well as approximately 10 salaried direct
sales professionals. To service its customers with greater efficiency, the
Company has streamlined its representative network and, through
consolidation of multiple lines of business, has brought a broader range
of products to its wholesalers. The Company also provides certain of its
products to the rapidly growing DIY market segment through a separate
sales force. AMTROL has private label arrangements with Lowe's Companies,
Menards, Tru*Serv Corporation and Ace Hardware.
At its Education Center, which is an integral part of the Company's
marketing organization, and at Company-sponsored seminars throughout the
United States and selected international locations, AMTROL provides
education and training to wholesalers, contractors and engineers,
independent sales representatives and their employees to assist them in
understanding the technical aspects of their respective customers'
requirements and AMTROL's product lines. By educating customers about the
benefits of AMTROL's products, the Company's products are effectively
"pulled" through its distribution system.
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AMTROL's major customers for reusable refrigerant gas cylinders are
wholesale distributors who sell the products to service providers and
refrigerant recovery equipment manufacturers. Non-returnable refrigerant
pressure-rated cylinders are also sold to major chemical companies, which
produce and package refrigerant gases, and to independent contractors that
purchase bulk refrigerants and fill the cylinders. ALFA's major customers
for reusable LPG cylinders are the major European gas companies or their
distributors.
With the exception of one customer to whom sales were approximately 7.2%,
no individual customer represented more than 5% of the Company's net sales
in 1998.
INTERNATIONAL SALES
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Sales in geographic regions outside of the United States and Canada,
primarily Mexico, Asia and Western Europe, accounted for 12.6%, 22.3% and
36.2% of the Company's total net sales in fiscal years 1996, 1997 and 1998
respectively. The significant increase in foreign sales was driven largely
by the 1997 acquisition of Alfa and the 1998 acquisition of NOVA. In
addition, over the last three years AMTROL has opened international sales
offices in Asia and Europe and has built distribution networks in the
Asia/Pacific region and Latin America/Mexico.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
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The Company manufactures water systems and HVAC products using components
produced in its own facilities, as well as those of outside suppliers. To
assure quality in its product lines and to enable the Company to respond
quickly to changing market demands, AMTROL manufactures most critical
components in its own facilities. The Company has a "Continuous
Improvement Program" for quality control directed at producing higher
yields, lower controllable costs per unit, higher order fill rates, better
on-time delivery and decreased warranty claims. AMTROL believes it has
developed substantial manufacturing expertise related to its technology
and its expertise in high quality, low cost manufacturing. This expertise,
combined with its extensive knowledge of the manufacturing tolerances
required to handle fluids under pressure, provides a competitive
advantage. Principal manufacturing processes include thin-wall steel deep
drawing, welding and rubber injection molding.
The Company's engineering and development efforts are focused on improving
the performance, quality and manufacturing cost of its products. In
addition, the Company pursues opportunities to develop new products and
processes, and adapt existing products for new applications.
In September 1997, the Company ceased production operations in Singapore
and transferred production equipment to its production facility in
Portugal. The unanticipated high cost structure in Singapore and the
flexibility provided by the ALFA acquisition were the prime factors
leading to this decision. In addition, as a result of productivity gains
achieved at its West Warwick, Rhode Island production facility and as part
of the Company's strategic initiative to reduce manufacturing costs and
optimize the utilization of its worldwide manufacturing capacity, the
Company decided in December 1997 to
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close its Nashville, Tennessee production facility and relocate production
to the Rhode Island facility.
In addition to its ongoing facilities rationalization program, AMTROL has
implemented a significant capital improvement program with the intention
of further reducing manufacturing costs. During 1998 and 1997, the Company
spent approximately $9.9 million and $8.5 million, respectively on capital
expenditures.
AMTROL's three principal North American manufacturing facilities and its
Guimaraes, Portugal facility hold ISO 9001 Certification, the most
complete certification in the ISO 9000 Series from the International
Organization for Standardization ("ISO"). ISO certification requires
periodic audits of AMTROL's systems for product design, development,
production, installation and servicing, and has become the international
standard of quality required for manufacturers serving the European
Economic Community, Southeast Asia, the Middle East and Latin America.
Raw material suppliers generally offer commodities used by the Company,
such as steel, synthetic rubber and plastic resins, to all manufacturers
on substantially similar terms. Significant increases in raw material
prices can adversely impact margins if the Company is unable to pass on
such increases to its customers. Manufacturers of component parts also
generally offer their products to others on substantially similar terms.
Although certain components are only available from a limited number of
manufacturers, the Company anticipates that it will be able to purchase
all of the components it requires without disruption. The Company believes
that its relationships with its suppliers are good.
SEASONALITY; BACKLOG
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Although AMTROL's sales are related to general economic activity and sales
of certain of its products are seasonal, its overall business is not
seasonal to any significant extent. Due to the generally short lead time
in orders, the Company historically has not carried any material backlog.
PATENTS, TRADEMARKS AND LICENSES
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While the Company owns a number of patents that are important to its
business, the Company believes that its position in its markets depends
primarily on factors such as manufacturing expertise, technological
leadership, superior service and quality and strong brand name
recognition, rather than on patent protection. The Company believes that
foreign and domestic competitors have been unable to match the quality of
AMTROL's branded products.
The Company also has a number of registered and unregistered trademarks
for its products. The Company believes the following registered
trademarks, which appear on its products and are widely recognized in its
markets, are material to its business: Well-X-Trol(R), Therm-X-Trol(R),
EXTROL(R), Hot Water Maker(R) and CHAMPION(R).
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COMPETITION
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The Company experiences substantial competition from a number of
competitors in each of its markets. The Company believes that it is a
market leader in its core products. The principal means of competition in
the water systems products and HVAC markets are technology, quality,
service and price. AMTROL brand name products generally compete on the
basis of technology, quality, service and product line breadth and
generally do not compete on the basis of price. No single company competes
with AMTROL over a significant number of its product lines. As the Company
expands into international markets, it may experience competition from
local companies.
EMPLOYEES
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As of December 31, 1998, the Company had approximately 1,875 employees,
none of whom were represented by collective bargaining units. AMTROL
considers relations with its employees to be good.
ENVIRONMENTAL MATTERS
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Some of the Company's operations generate waste materials that may give
rise to liability under environmental laws. Some risk of environmental and
other damage is inherent in these operations, and in the past, certain of
the Company's operations have been named a party in private actions
associated with hazardous waste sites. Based upon the Company's experience
in matters that have been resolved and the amount of hazardous waste
shipped to off-site disposal facilities by the Company, the Company
believes that any share of costs attributable to it will not be material.
There can be no assurance that any liability arising from, for example,
contamination at facilities the Company (or an entity or business the
Company has acquired or disposed of) owns or operates or formerly owned or
operated, or locations at which waste or contaminants generated by the
Company (or an entity or business the Company has acquired or disposed of)
have been disposed of, will not arise or be asserted against the Company
or entities for which the Company may be responsible in a manner that
could materially and adversely affect the Company.
The Company monitors and reviews its procedures and policies for
compliance with environmental laws. Based upon the Company's experience to
date, the Company operates in substantial compliance with environmental
laws, and the cost of compliance with existing regulations is not expected
to have a material adverse effect on the Company's results of operations,
financial condition or competitive position. However, future events, such
as changes in existing laws and regulations or enforcement policies, may
give rise to additional compliance costs which could have a material
adverse effect on the Company's results of operations, financial condition
or competitive position.
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ITEM 2. PROPERTIES
The following table sets forth information regarding the Company's principal
properties each of which is owned by the Company unless otherwise indicated:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE PRINCIPAL USE
- -------- -------------- -------------
(approximate)
<S> <C> <C>
West Warwick, RI 270,000 Corporate Headquarters, Manufacturing
All AMTROL Product Lines, Education Center
Guimaraes, Portugal 196,000 Manufacturing Pressure-rated Cylinders
North Kingstown, RI (a) 126,000 Distribution Center for all AMTROL Products
North Kingstown, RI (a) 80,000 Warehouse for Raw Materials And Finished Goods
Donaueschingen, Germany 70,000 Manufacturing Water Heaters
Paducah, KY 46,300 Manufacturing Pressure-rated Cylinders
Mansfield, OH (a) 45,000 Manufacturing and Distribution Center
Baltimore, MD 37,000 Manufacturing Metal Stampings
Kitchener, Ontario(a) 18,400 Distribution
Singapore (a) 600 Sales Office for Southeastern Asia
England (a) 400 Administrative Office for Europe and Middle East
Plano, TX 40,000 Held for Sale
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TOTAL 929,700
</TABLE>
(a) Leased facilities
AMTROL believes that its properties and equipment are generally well maintained,
in good operating condition and adequate for its present needs. The Company
regularly evaluates its manufacturing requirements and believes that it has
sufficient capacity to meet its current and anticipated needs. The inability to
renew any short-term real property lease would not have a material adverse
effect on AMTROL's results of operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is named as a defendant in legal
actions. These include commercial disputes, agency proceedings and
product liability and other claims. Recently, a group of customer
plaintiffs commenced a suit on their own behalf and a class of
others "similarly situated," captioned KEN'S OIL & BURNER SERVICE,
INC., B.F. MURPHY PLUMBING AND HEATING, INC., EARL ALLISON, JOHN
WHALEN AND ALL OTHERS SIMILARLY SITUATED VS. AMTROL, INC., filed
February 17, 1999 in Essex Superior Court in Massachusetts seeking
injunctive relief and unspecified monetary damages alleging breach
of warranty, product defects and related claims arising from the
sale of certain of the Company's products. The court has not yet
determined whether the case may proceed as a class action, and
management believes that there is a significant likelihood that the
case will not be certified as a class action. In addition,
management believes that none of the pending legal actions will have
a material adverse effect on the Company's results of operations or
its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
Not applicable.
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<PAGE> 13
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the Common Stock of the Company is owned by Holdings; thus,
no trading market exists for such stock. Similarly, all of the
common stock of Holdings is held by affiliates of Cypress and
certain officers of the Company, and no trading market exists for
such stock. See Item 12, "Security Ownership of Certain
Beneficial Owners and Management".
13
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for and as of each of
the years and periods in the five-calendar-year period ended December 31, 1998
have been derived from the Consolidated Financial Statements of the Company,
including the related notes thereto, which have been audited by Arthur Andersen
LLP, independent certified public accountants. The selected consolidated balance
sheet data for November 12, 1996 have been derived from unaudited consolidated
financial statements of the Company which, in the opinion of management, include
all adjustments (consisting only of normal recurring items) necessary for a fair
and consistent presentation of such data. The information set forth below should
be read in conjunction with "Management's Discussion and Analysis of Results of
Operations and of Financial Condition" and with the Consolidated Financial
Statements of the Company, including the related notes thereto, appearing
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996(B) 1997 1998
--------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 173,472 $ 172,454 $ 152,193 $ 18,628 $ 176,432 $ 202,142
Cost of goods sold 123,184 124,303 110,582 16,809(c) 131,180 158,607
Provision for abnormal warranty costs -- -- -- -- -- 4,500
--------- --------- --------- --------- --------- ---------
Total cost of goods sold 123,184 124,303 110,582 16,809 131,180 163,107
Gross profit 50,288 48,151 41,611 1,819 45,252 39,035
Selling, general and
administrative expenses 30,402 29,943 25,796 3,508 25,723 27,827
Plant closing and reorganization costs -- 3,825 -- -- 5,500 4,450
Management restructuring -- -- -- -- -- 3,693
Amortization of goodwill -- -- -- 313 3,995 4,446
Other operating expenses -- -- -- 1,000 -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from operations 19,886 14,383 15,815 (3,002) 10,034 (1,381)
Interest (expense) income, net (7) 60 53 (2,224) (18,256) (20,344)
License and distributorship fees 254 258 181 25 245 242
Other income (expense), net (179) 65 (175) (99) 299 1,384
--------- --------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes 19,954 14,766 15,874 (5,300) (7,678) (20,099)
Provision (benefit) for income taxes 7,683 5,681 6,152 (1,956) (30) (6,728)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 12,271 $ 9,085 $ 9,722 $ (3,344) $ (7,648) $ (13,371)
========= ========= ========= ========= ========= =========
Other Data:
Depreciation and amortization $ 4,330 $ 4,673 $ 4,586 $ 598 $ 11,541 $ 13,147
Capital expenditures 4,902 5,492 9,260 1,662 8,489 9,858
EBITDA (a) 24,470 23,139 20,582 (2,379) 26,886 29,804
Balance sheet data (at period end):
Working capital $ 37,293 $ 43,303 $ 41,778 $ 33,346 $ 22,675 $ 6,642
Total assets 91,634 93,909 96,280 253,828 291,945 300,667
Long-term debt, less current maturities 2,381 -- -- 159,175 184,164 173,023
Shareholders' equity 64,174 70,206 75,783 65,982 58,049 65,948
</TABLE>
(a) EBITDA represents income (loss) from operations before plant closing
charges, plus depreciation and amortization and license and
distributorship fees. EBITDA shown in 1998 excludes costs associated with
the restructuring and reorganization plan, incremental production
inefficiencies and the abnormal warranty provision. EBITDA is presented
because it is a widely accepted indicator of a company's ability to incur
and service indebtedness. EBITDA (subject to certain adjustments) will be
used to determine compliance with certain covenants in the Indenture.
EBITDA, however, should not be considered as an alternative to net income,
as a measure of the Company's operating results, or as an alternative to
cash flow as a measure of liquidity.
(b) Adjusted to reflect a change in the method of determining inventory cost
from the LIFO method to the FIFO method.
(c) Reflects a $1.0 million charge related to the upward revision of the
Company's Workers' Compensation reserve estimate.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The discussion in this section should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere
herein.
This Annual Report includes "forward-looking statements" within the
meaning of the securities laws. All statements other than statements of
historical facts included in this Annual Report regarding the Company's
financial position and cost cutting and strategic plans are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ
materially from such expectations include, but are not limited to, the
Company's ability to successfully implement its new business strategy and
to achieve the estimated cost savings, the availability and cost of raw
materials, changes in government regulation or enforcement policies,
particularly related to refrigerant gases, development of competing
technologies, acceptance of the Company's existing and planned new
products in international markets, competition in the Company's markets,
the rate of growth of developing economies and demand for the Company's
products, the ability of the Company and its vendors to successfully
implement their year 2000 compliance initiatives, the ultimate cost of
future warranties and claims and general economic, financial and business
conditions, both domestically and internationally.
SIGNIFICANT DEVELOPMENTS
- --------------------------------------------------------------------------------
Following the acquisition of the Company by affiliates of Cypress in 1996,
management began the execution of a new strategic plan to reduce costs and
capitalize on AMTROL's position as a technological and market leader.
Consistent with this strategy, in 1997 the Company sold its less
profitable American Granby accessory business and its Peru, Indiana
production facility and the related pump business. In addition, the
Company closed manufacturing facilities in Singapore and Nashville,
Tennessee and consolidated manufacturing activities at those plants into
other AMTROL facilities.
In July 1997, AMTROL acquired Petroleo Mecanica ALFA, S.A. ("ALFA") based
in Guimaraes, Portugal. ALFA is Europe's largest manufacturer of reusable
steel gas cylinders used to store cooking, heating and refrigerant gases.
The acquisition of ALFA provides the Company with a significant low-cost
manufacturing base for AMTROL products for distribution in Europe and the
Far East.
In June 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany. NOVA manufactures high-end residential
and commercial water heaters which are marketed primarily in Germany,
Switzerland and Austria. This acquisition provides AMTROL with expanded
manufacturing and distribution capabilities in central Europe, in addition
to the opportunity to offer many of AMTROL's complementary hydronic
heating and water systems products in the European market.
The Company expects to integrate its international water and HVAC systems
business with the manufacturing and distribution operations of ALFA and
NOVA. For example,
15
<PAGE> 16
in 1998, the Company transferred to ALFA the non-returnable gas cylinder
production line previously located in Singapore and began supplying from
ALFA certain European and Asian gas cylinder customers previously supplied
from the United States. The Company is exploring opportunities for NOVA to
manufacture new lines of water heaters designed specifically for certain
markets in North America.
During the second quarter of 1998, the Company adopted a plan of
restructuring and reorganization (the "Plan") to address several adverse
developments in its North American operations. The Plan addresses
necessary changes in the Company's West Warwick, Rhode Island facility to
improve the productivity of the production lines transferred from its
Nashville, Tennessee facility in 1997, discontinuance of certain product
lines and recognition of the resulting decline in inventory value for the
products impacted, and replacement of certain senior executives and others
on the management team. The Company also determined that mitigating
actions intended to reduce the level of warranty returns associated with a
product manufactured in 1995/1996 had not reduced warranty claims relating
to this product to the extent expected and that an additional warranty
provision was required. Costs associated with the Plan, manufacturing
inefficiencies related to the relocated production lines, and the
additional warranty provision aggregated $17.4 million and have been
reflected in the accompanying financial statements.
The Company recently completed the implementation of an Enterprise
Resource Planning ("ERP") system, based on an Oracle database platform, to
support its North American operations. This new system will provide the
Company with a wide range of operational and administrative efficiencies,
will enable the Company to deliver world class service to its customers,
and will provide much improved daily, weekly and monthly operational and
financial information to help the Company monitor and react to
developments in its business.
OVERVIEW
- --------------------------------------------------------------------------------
AMTROL's principal markets are highly replacement-oriented with 60% to 70%
of the Company's core business coming from replacement sales. The
installed base of AMTROL's products in these core markets, combined with
their stable nature, provide the Company with a consistent and predictable
base business. Although generally stable, sales are affected by weather,
as well as general economic activity. The Company monitors well water pump
sales, existing home sales and boiler shipments in order to gauge activity
in its markets. Although sales of certain of AMTROL's product lines are
seasonal in nature, its overall business is not seasonal to any
significant extent, as seasonal variations of individual product lines
tend to offset each other.
SALES. Sales of the Company's HVAC products accounted for approximately
60% of the Company's total sales in 1998, with the balance represented by
sales of water systems products. While the percentage of North American
HVAC sales to total North American sales has been fairly constant, the
acquisition of ALFA and NOVA, which supply the HVAC market, and the
disposition of American Granby, which supplied the water systems market,
caused a decrease in the percentage of the Company's business represented
by water systems sales starting in 1997.
16
<PAGE> 17
The Company's HVAC products include indirect-fired water heaters and water
expansion accumulators for hydronic heating systems, non-returnable
pressure-rated cylinders for refrigerant gas and returnable cylinders for
cooking, heating and refrigeration gases. AMTROL believes it has
opportunities to increase its sales in Europe, currently the world's
largest hydronic heating market, through a combination of new products and
strategic acquisitions, such as the 1997 acquisition of ALFA and the 1998
acquisition of NOVA. ALFA, based in Guimaraes, Portugal, provides the
Company with a low-cost manufacturing base conveniently situated for
distribution of AMTROL's products in Europe, the Middle East and Africa.
NOVA provides the Company with the opportunity to distribute its hydronic
heating and water systems products in the European market.
AMTROL's well water accumulators, marketed under the brand names
Well-X-Trol and CHAMPION, account for approximately two-thirds of the
Company's total water systems net sales and generally carry higher gross
profit margins than other product sales. These pre-pressurized vessels are
distributed through a network of pump specialty and plumbing and heating
wholesalers and the DIY retail network. The market is continuing to
experience a modest shift in the channels of distribution from wholesalers
to DIY retailers, which generally generate slightly lower gross margins.
Sales of water system accumulators are generally correlated to shipments
of well water pumps.
COST OF GOODS SOLD. The principal elements comprising the Company's cost
of goods sold are raw materials, labor and manufacturing overhead. The
major raw materials used by the Company in its production process are
steel, corrugated paper, plastic resins and synthetic rubber. Significant
increases in raw material prices can adversely impact margins if the
Company is unable to pass on such increases to its customers. The Company
has an infrastructure of capital equipment, buildings and related support
costs and, accordingly, decreases in volume can have a significant adverse
effect on margins. Cost of goods sold can also be significantly affected
by changes in product mix.
The Company has significantly reduced its manufacturing cost base in
recent years by closing less efficient plants or plants with redundant,
excess capacity. Production at the closed facilities has been transferred
to other existing production plants with the anticipated effect of
lowering the Company's total cost structure and increasing the absorption
of fixed manufacturing overhead through higher production volume at the
remaining plants. The Company closed plants in Singapore and Nashville,
Tennessee in 1997. Production of water systems products at the Nashville
facility has been transferred to the Company's West Warwick, Rhode Island
facility, and production of disposable gas containers at the Singapore
facility has been transferred to the Company's ALFA facility in Portugal.
In the past, and particularly in 1998, the Company has experienced certain
inefficiencies and additional costs as it assimilates the transferred
production into other facilities, and such costs have often delayed the
realization of expected savings associated with the transfer. The costs
involved in closing the Nashville facility and starting production in West
Warwick were higher than anticipated due to unexpected retrofitting and
reconditioning required for the relocated equipment, damage to equipment
during shipment, and delays in preparing the Nashville building for sale.
The Company recorded charges in 1998 relating to the incremental costs
associated with the Nashville closure and production relocation
approximating $7.8 million (including $3.3 million of
17
<PAGE> 18
production inefficiencies included in cost of goods sold). The additional
costs and inefficiencies associated with relocating the Nashville
production to the West Warwick facility were substantially eliminated by
the end of 1998 and the Company expects significant improvement in
efficiencies in 1999 and beyond as a result of the consolidation of these
facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Part of the Company's
strategic focus has been to reduce operating costs. As a result, selling,
general and administrative expenses as a percentage of sales have
decreased from 17.8% in 1996 to 13.8% in 1998. A significant portion of
the cost decrease has been achieved through personnel reductions
associated with the elimination of redundant and unnecessary functions.
Position eliminations at the Company's corporate headquarters have
resulted in an approximate 25% headcount reduction since 1996. The Company
will continue to rationalize operating costs to take advantage of improved
information systems and technology.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items included in the Company's
statement of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----- -------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 74.6 74.4 78.5
Provision for Abnormal Warranty Costs -- -- 2.2
----- ----- -----
Total Cost of Goods Sold 74.6 74.4 80.7
Gross Profit 25.4 25.6 19.3
Selling, General and Administrative Expenses 17.8 14.6 13.8
Plant Closing and Reorganization Costs -- 3.1 2.2
Management Restructuring -- -- 1.8
Amortization of Goodwill 0.1 2.3 2.2
----- ----- -----
Income (Loss) from Operations 7.5 5.6 (0.7)
Interest Expense (1.3) (10.3) (10.2)
Interest Income -- -- --
Other Income, net -- 0.4 1.0
----- ----- -----
Income (Loss) before Provision (Benefit)
for Income Taxes 6.2 (4.3) (9.9)
Provision (Benefit) for Income Taxes 2.5 -- (3.3)
===== ===== =====
Net Income (Loss) 3.7% (4.3%) (6.6%)
===== ===== =====
</TABLE>
The comparability of results for the above years is impacted by certain
acquisitions and disposals, plant closings and restructuring and
reorganization in 1997 and 1998. Where possible, the impact of these items
on particular areas of operating results has been explained in the
remainder of this section.
18
<PAGE> 19
The percentage of sales, adjusted to exclude American Granby sales in all
years, comprised by the Company's water systems and HVAC products for the
periods indicated is listed below:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
HVAC Total 49.7% 53.8% 60.5%
Water Systems 50.3% 46.2% 39.5%
----- ----- -----
Gross Sales 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The amounts and percentage relationships in the above tables for 1996
combine the results of the predecessor for the period ended November 12,
1996 and the results of the successor for the period ended December 31,
1996. The increase in the HVAC percentage of total sales in 1998 is due to
the inclusion of NOVA sales since June 8, 1998 and a full year of ALFA
sales.
COMPARABILITY OF FINANCIAL STATEMENTS. The consolidated financial
statements of the Company for the periods prior to November 13, 1996 have
been prepared on the historical cost basis. The Merger was accounted for
as a purchase transaction. Operating results subsequent to the Merger are
comparable to prior periods, with the exception of cost of sales (due to a
$ 1.0 million charge in 1996 related to the reserve estimate and a $2.7
million inventory charge), and purchase accounting related changes due to
depreciation expense, amortization of intangible assets and capitalized
in-process research and development.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997.
NET SALES. Net sales increased $25.7 million or 14.6% in 1998 to $202.1
million from $176.4 million in 1997. This increase is mainly attributable
to the full year inclusion of ALFA and the addition of NOVA in June 1998,
both of which are partially offset by the sale in 1997 of American Granby.
Net 1998 sales in North America, adjusted for certain markets transferred
to ALFA in 1998 and the sale of American Granby in 1997, were essentially
even with 1997. Water systems sales recovered in the last half of 1998
after being lower earlier in the year due to production disruptions caused
by unanticipated delays in relocating water system production from
Nashville to West Warwick, Rhode Island.
GROSS PROFIT. Gross profit declined $6.2 million in 1998 to $39.0 million
from $45.2 million in 1997. As noted earlier in this section, the
comparison of gross profit from 1998 to 1997 is impacted by the recent
acquisitions of ALFA and NOVA and the 1997 disposition of American Granby.
Excluding these acquisitions and disposition, gross profit would have
decreased $9.9 million primarily due to: (i) special warranty charges
recorded in 1998 and (ii) manufacturing inefficiencies associated with
relocating production of large water systems. The Company recorded
abnormal warranty costs of $4.5 million relating primarily to a product
manufactured in 1995/1996. The circumstances creating the abnormal
warranty costs have since been corrected but the Company is still
experiencing higher than normal warranty claims for these products sold in
previous periods. Furthermore, the Company incurred increased production
costs of
19
<PAGE> 20
approximately $3.3 million resulting from difficulties in achieving
efficient production levels on the production lines relocated to West
Warwick from Nashville. Increased production costs include higher labor,
maintenance and scrap, as well as factory overhead. The Company believes
that incremental manufacturing inefficiencies associated with the
relocation of the Nashville production were essentially eliminated by the
end of 1998.
As a percentage of sales, gross profit in 1998 decreased to 19.3% from
25.6% in 1997. Without the acquisitions and disposition, warranty charges
and manufacturing inefficiencies, the 1998 gross profit percentage would
have been approximately even with 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.1 million or 8.2% in 1998 to $27.8
million from $25.7 million in 1997. As a percentage of sales, SG&A
expenses were 13.8% in 1998 compared to 14.6% in 1997. As noted earlier in
this section, the comparison of 1998 to 1997 is impacted by the recent
acquisitions of ALFA and NOVA and the 1997 disposition of American Granby.
Also, SG&A includes $0.4 million of expenses incurred in 1998 relating to
an acquisition which was not completed and consulting costs of $0.9
million relating to outside consultants engaged to help facilitate and
execute the Plan of Restructuring and Reorganization. Without ALFA and
NOVA, the cost of the failed acquisition and additional consulting
charges, SG&A would have decreased $2.4 million or 9.8%.
PLANT CLOSING AND REORGANIZATION COSTS. The Company transferred certain
production lines from its Nashville facility to its West Warwick, Rhode
Island facility in December 1997. In connection with the relocation, the
Company incurred incremental plant closing costs in 1998 of $4.5 million
resulting from unexpected retrofitting and reconditioning required for the
relocated equipment, damage to equipment during shipment, and delays in
preparing the Nashville building for sale. This amount has been reflected
in the accompanying financial statements.
MANAGEMENT RESTRUCTURING. The Company, in connection with its Plan of
Restructuring and Reorganization, has discontinued certain product lines
and has taken actions to reduce the number of variations offered on many
of its products, thereby reducing inventory levels. Certain members of
senior management have left the Company in connection with the Plan. The
unrecoverable cost of discontinued inventory and the cost of programs to
reduce the number of product offerings, combined with the cost of post
employment benefits for departing executives, aggregates $3.7 million and
has been reflected in the accompanying financial statements. Included in
selling, general and administrative costs are $0.9 million relating to
outside consultants engaged to assist with the execution of the Plan.
INCOME (LOSS) FROM OPERATIONS. For the reasons set forth above,
income/(loss) from operations decreased $11.4 million to ($1.4) million in
1998 from $10.0 million in 1997. As noted earlier in this section, the
comparison of 1998 to 1997 is impacted by the recent acquisitions of ALFA
and NOVA and the 1997 disposition of American Granby, as well as the plant
closing and reorganization costs, management restructuring and abnormal
20
<PAGE> 21
warranty costs. Excluding the effects of these items, income from
operations would have increased approximately $4.5 million.
EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA in 1998, before costs associated with the restructuring
and reorganization plan, incremental production inefficiencies and the
abnormal warranty provision, amounted to $29.8 million, compared to $26.9
million in 1997, an increase of $2.9 million or 10.8%.
EBITDA represents income (loss) from operations plus depreciation and
amortization, license and distributorship fees, and other income related
to operations. EBITDA is presented because it is a widely accepted
indicator of a company's ability to incur and service indebtedness. EBITDA
(subject to certain adjustments) will be used to determine compliance with
certain covenants in the Indenture governing the Company's Senior
Subordinated Notes. (See "Liquidity and Capital Resources"). EBITDA,
however, should not be considered as an alternative to net income, as a
measure of the Company's operating results or as an alternative to cash
flow as a measure of liquidity.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased $2.1
million in 1998 from 1997 due to higher debt levels earlier in 1998, the
inclusion of a full year of ALFA in 1998 and the inclusion of NOVA for
seven months in 1998.
INCOME TAXES. Income tax benefit increased $6.7 million in 1998 as
compared to 1997.
NET INCOME. The net loss in 1998 of $13.4 million compares to a net loss
of $7.6 million in 1997.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996.
NET SALES. Net sales in 1997 increased $5.6 million or 3.3% to $176.4
million from $170.8 million in 1996. This increase was primarily due to
$17.8 million of sales attributable to ALFA, partially offset by the
absence of American Granby's sales for eight months in 1997. Excluding the
impact of the sale of American Granby, net comparable sales attributable
to the Company's water systems products were virtually flat in 1997. Net
sales of HVAC products, with ALFA included in 1997, increased $17.3
million compared to 1996. Without ALFA, HVAC sales would have been
essentially the same in both years. Container product sales for the year
increased approximately $1.2 million, resulting from higher volumes, while
net sales of other HVAC products decreased $1.7 million. The decrease was
partly caused by a high level of hot water maker product returns resulting
from an abnormal warranty problem, the causes of which have since been
corrected. In addition, the sale of the Company's Peru, Indiana production
facility and the related pump business in May 1997 resulted in the
discontinuation of a number of products, further contributing to the
decline HVAC net sales.
GROSS PROFIT. Excluding the impact of the retroactive LIFO adjustment of
$1.7 million (see Note 8 to the Financial Statements), gross profit
increased $0.1 million or 0.2% in 1997 to $45.2 million from $45.1 million
in 1996. As a percentage of sales, gross profit in 1997 decreased to 25.6%
from 26.4% in 1996. The inclusion of the operating results of ALFA
deflated the gross margin percentage in 1997 as the margins on reusable
steel
21
<PAGE> 22
gas cylinders produced at this facility are lower than many other AMTROL
products. Excluding ALFA and American Granby, gross profit in 1997
decreased $1.3 million (or 3.2%) to $41.2 million from $42.5 million in
1996, and as a percentage of sales decreased to 27.3% from 28.1% in 1996.
The lower margin percentage this year was the result of: (i) unusually
high warranty returns associated with an abnormal warranty problem that
has since been corrected; (ii) unanticipated higher costs associated with
the Singapore production facility through the end of August (when the
facility was closed); and (iii) inefficiencies associated with the
disruption of the manufacturing process during installation of certain
major upgrades to manufacturing equipment and processes in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $4.6 million (or 15.1%) in 1997 to $25.7
million from $30.3 million in 1996. As a percentage of net sales, selling,
general and administrative expenses decreased in 1997 to 14.6% as compared
to 17.7% in 1996. The decrease would have been even greater, $5.7 million
(or 18.9%) if the results of ALFA were excluded. The decrease in selling,
general and administrative expenses was primarily due to reductions in
corporate overhead and restructuring of the Company's general and
administrative staff, in connection with implementing the Company's new
business strategy. In addition, expenses in 1996 included a one-time
purchase accounting charge related to capitalized in-process research and
development of $1.0 million.
PLANT CLOSING CHARGES. In 1997, the Company recorded a $5.5 million
pre-tax charge to operating expenses for severance and other costs
associated with the closures of its plants in Nashville, Tennessee and
Singapore.
INCOME FROM OPERATIONS. For the reasons set forth above, income from
operations decreased $2.8 million in 1997 ($4.5 million excluding the
retroactive LIFO adjustment) to $10.0 million (after plant closing charges
of $5.5 million) from $12.8 million in 1996. The inclusion of ALFA in the
results for 1997 increased operating income by $1.9 million. Excluding the
effects of goodwill amortization, plant closing charges and the
acquisition of ALFA on 1997 results, and the retroactive LIFO adjustment,
the effect of the write-off of capitalized in-process research and
development and goodwill on 1996 results, operating income in 1997 would
have increased $1.8 million (or 11.4%) to $17.6 million from $15.8 million
in 1996.
EARNINGS BEFORE INTEREST EXPENSE, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA) EBITDA in 1997 was $26.9 million compared to $19.9 million in
1996 (excluding the $1.7 million retroactive LIFO adjustment), an increase
of $7.0 million.
INTEREST INCOME (EXPENSE), NET. Net interest expense increased $16.1
million in 1997 from 1996 due to borrowing costs related to the financing
of the Merger.
INCOME TAXES. Income tax expense decreased $4.2 million in 1997 ($4.9
million excluding the retroactive LIFO adjustment) as compared to 1996.
NET INCOME (LOSS). The net loss in 1997 of $7.6 million compares to net
income in 1996 of $6.4 million, an absolute change of $14.0 million ($15.1
million excluding the retroactive LIFO adjustment).
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company's cash flows from operating activities were approximately
$14.7 million, $3.7 million and $1.5 million for the years ended December
31, 1996, 1997 and 1998, respectively.
The Company's cash balance increased $0.6 million at December 31, 1998 to
$1.1 million from $0.5 million in 1997. Although the Company has available
up to $30 million from its revolving credit facility to meet short-term
working capital needs, it uses its excess cash to keep borrowing under the
revolver to a minimum. Amounts available under the revolver approximated
$27.0 million at December 31, 1998.
Working capital at December 31, 1998 was $6.6 million and the ratio of
current assets to current liabilities was 1.1 to 1.0. This compares with
working capital of $22.7 million in 1997 and a current ratio of 1.5 to
1.0. The decrease in working capital was the result of a working capital
optimization program implemented in 1998 which focused on, in the area of
inventory, eliminating redundant, low volume products and maintaining
optimum levels of high volume products and, in the area of accounts
receivable, increasing the collection effort on customers who exceed their
payment terms and eliminating non-standard terms offered to a number of
customers. The decrease in working capital was primarily comprised of
lower accounts receivable of $1.2 million, a decrease in inventory of $5.3
million, an increase in accounts payable of $5.5 million and an increase
in notes payable to banks of $6.3 million. The Company achieved lower
inventory and accounts receivable in 1998 even with significantly higher
operations at its ALFA facility and the addition of NOVA in 1998.
Capital expenditures were $10.9 million, $8.5 million and $9.9 million in
the years ended December 31, 1996, 1997 and 1998, respectively. These
expenditures related primarily to ongoing maintenance and upgrading of the
Company's manufacturing technology. Significant expenditures in 1998
included approximately $2.0 million at ALFA to improve productivity and
approximately $3.0 million to improve the productivity of the production
lines relocated to West Warwick, Rhode Island from Nashville. Total
capital expenditures are expected to be approximately $8.5 million in 1999
and $8.0 million in 2000.
Upon consummation of the Merger on November 13, 1996, the Company became
party to the Bank Credit Facility. The Bank Credit Facility was amended in
June and December 1997, primarily to permit the acquisition of ALFA, to
convert borrowings under the Company's revolving credit facility in
connection with the ALFA acquisition to additional Tranche B Term Loans
and to permit the closure of the Nashville, Tennessee production facility.
It was amended again in July 1998 to allow for the early repayment of a
portion of the principal outstanding and to modify certain covenants to be
more in line with the Company's business plans. In connection with the
amendment to the bank Credit Facility, the company repaid $20.5 million on
August 3, 1998. The Bank Credit Facility, as amended, (the "Facility")
consists of $54.4 million of senior term loans (the "Term Loans") and a
$30.0 million revolving credit facility (the "Revolving Credit Facility").
A portion ($10.2 million) of the Term Loans (the "Tranche A Term Loans")
will mature on May 13, 2002, with quarterly amortization payments during
the term of
23
<PAGE> 24
such loans. The remainder ($44.2 million) of the Term Loans (the "Tranche
B Term Loans") will mature on May 13, 2004, with nominal quarterly
amortization prior to the maturity of the Tranche A Term Loans and with
the remaining amounts amortizing on a quarterly basis thereafter. The
Revolving Credit Facility includes a sublimit providing for up to $20.0
million of availability on a revolving credit basis to finance permitted
acquisitions. The commitments under the Revolving Credit Facility and the
acquisition sublimit will each reduce by $5.0 million on November 13, 2000
and $10.0 million on November 13, 2001. The Revolving Credit Facility will
mature on May 13, 2002. The Bank Credit Facility is secured by
substantially all assets of the Company and its domestic subsidiaries.
In connection with the Merger, AMTROL issued $115.0 million of Senior
Subordinated Notes due 2006 (the "Notes") issued under an Indenture dated
as of November 13, 1996. The Notes are unsecured obligations of AMTROL.
The Notes bear interest at a rate of 10.625% per annum and are payable
semi-annually on each June 30 and December 31 commencing on June 30, 1997.
The Notes are redeemable at the option of AMTROL on or after December 31,
2001. From and after December 31, 2001, the Notes will be subject to
redemption at the option of AMTROL, in whole or in part, at various
redemption prices, declining from 105.313% of the principal amount to par
on and after December 31, 2003. In addition, on or prior to December 31,
1999, the Company may use the net cash proceeds of one or more public
equity offerings to redeem up to 35% of the aggregate principal amount of
the Notes originally issued at a redemption price of 110.625% of the
principal amount thereof plus accrued interest to the date of redemption.
Upon a "Change of Control" (as defined in the Indenture), each Note holder
has the right to require the Company to repurchase such holder's Notes at
a purchase price of 101% of the principal amount plus accrued interest.
The Indenture contains certain affirmative and negative covenants and
restrictions. As of December 31, 1998, AMTROL is in compliance with the
various covenants of the Indenture.
The Company intends to fund its future working capital, capital
expenditures and debt service requirements through cash flows generated
from operations and borrowings under the Revolving Credit Facility
(described above). Management believes that cash generated from
operations, together with borrowings available under the Revolving Credit
Facility, will be sufficient to meet the Company's working capital and
capital expenditure needs in the foreseeable future. The Company may
consider other options available to it in connection with funding future
working capital and capital expenditure needs, including the issuance of
additional debt and equity securities.
On July 31, 1998, the Cypress Group L.L.C. and members of senior
management contributed an additional $20.5 million of new equity into the
Company's parent, AMTROL Holdings, Inc. In turn, AMTROL Holdings, Inc.
contributed a like amount to the Company. The Company used the additional
capital contribution primarily to repay borrowings under the Company's
Bank Credit Agreement.
24
<PAGE> 25
INFLATION
- --------------------------------------------------------------------------------
The Company believes that inflation does not have a material effect on its
results of operations or financial condition. To insulate against
fluctuating prices, the Company has negotiated annual contracts with
suppliers of certain key raw materials (primarily steel) for a significant
percentage of its expected usage through 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
There are no recent accounting pronouncements not yet implemented by the
Company which will materially impact the Company's financial position or
results of operations.
YEAR 2000 COMPLIANCE
- --------------------------------------------------------------------------------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may
recognize a date using "00" as the Year 1900 rather than the Year 2000.
The Company has recently completed the implementation of a new Enterprise
Resource Planning System ("ERP") in its West Warwick, Rhode Island
corporate headquarters. The ERP, in addition to providing the Company with
a wide-range of operational and administrative efficiencies, supports most
of the Company's North American operations and ensures that virtually all
of the Company's core business systems are Year 2000 compliant. All
remaining business software programs are expected to be made Year 2000
compliant by mid-1999, including those supplied by vendors, or they will
be retired. The cost to remediate possible exposures resulting from the
Year 2000 problem cannot be distinguished from the overall cost of the ERP
which approximated $3.0 million as of the end of 1998. Costs to remediate
Year 2000 exposures other than costs incurred in connection with the ERP
are not material.
The Company communicated with its most significant suppliers to determine
the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
Company has also communicated with its large customers to assess the same
issue. While there can be no guarantee that the systems of other companies
on which the Company's system rely will be timely converted and will not
have an adverse effect on the Company's systems, the Company does not
believe that its operations are materially vulnerable to the failure of
any vendor or customer to properly address the Year 2000 issue. The
Company believes it has no exposure to contingencies related to the Year
2000 issue for the products it has sold.
The Company has also initiated formal communications with the vendors
supplying manufacturing equipment utilizing hardware, software and
associated embedded computer chips. It estimates that this portion of its
Year 2000 compliance program will be completed by the third quarter of
1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. The
Company believes that the successful implementation of the ERP
25
<PAGE> 26
supporting the Company's North American operations in 1998 has
substantially mitigated the most pervasive risks to the Company resulting
from Year 2000 related computer failures. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and customers, the
Company is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The aforementioned steps
being undertaken by the Company are expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
suppliers and customers.
The Company has developed a contingency plan to address exposures to its
business resulting from possible Year 2000 problems. Because its core
systems have been made Year 2000 compliant already, the Company's
contingency plan primarily addresses identifying alternate sources for key
materials and supplies in the event that the Company's primary vendors are
not able to supply the Company in a timely fashion. For most such
materials and supplies, alternate sources have already been identified.
The Company believes that, with the recent implementation of the ERP and
the other steps being taken, the possibility of significant interruptions
of normal operations should be reduced.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk related to foreign currency exchange
rates and changes in interest rates, but the impact on 1998 and the
expected impact on 1999 operating results is not material. The Company
currently does not use financial or other derivative instruments to hedge
its foreign currency exposures, which relate primarily to its operations
in Portugal and Germany. Because a significant portion of its Portuguese
revenues are denominated in U.S. dollars, the Company's net earnings from
its Portuguese operation, when translated into U.S. dollars, are not
significantly exposed to currency fluctuations. While its German
operations are primarily denominated in German Marks which, when
translated into U.S. Dollars, can result in higher or lower earnings due
to currency fluctuations, a 10% fluctuation in the exchange rate between
Marks and Dollars would have less than a .5% impact on expected 1999
EBITDA. The Company believes that its cash flow exposure resulting from
its net foreign currency denominated asset positions in both Portugal and
Germany is not material.
The rate of interest on borrowings under the Company's Bank Credit
Agreement is variable and ranges from: (i) a base rate which is equal to
the higher of the federal funds rate plus .5% or the bank's prime lending
rate plus an applicable spread of .75% to 2.0% to (ii) a Eurodollar rate
plus an applicable spread of from 1.75% to 3.0% (in both cases based on
the type of loan and the Company's leverage ratio at the time). The
Company has the option of selecting the interest period (one, two, three,
six, nine or twelve months) for Eurodollar based loans. The following
table summarizes the interest rates in effect for the various facilities
under the Company's Bank Credit Agreement as of December 31, 1998 (in
thousands):
26
<PAGE> 27
<TABLE>
<CAPTION>
1999
------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr.
<S> <C> <C> <C>
Tranche A $10,200 $ 9,896 $ 9,594
Applicable interest rate 7.44% 7.44% 7.44%
Tranche B $44,238 $44,123 $44,008
Applicable interest rate 7.94% 7.94% 7.94%
Revolver $ 3,000
Applicable interest rate 7.44%
</TABLE>
The interest rate has not been determined for any amounts due under the
Bank Credit Agreement beyond the third quarter of 1999. The Company has
entered into an interest rate swap agreement to limit a portion of its
exposure to fluctuating interest rates. Under the agreement, the Company
will pay or receive the difference between the floating three month LIBOR
rate and a fixed LIBOR rate, applied to a notional amount of $15 million.
The fixed LIBOR rate is 5.65% in 1999, 5.75% in 2000 and 5.85% thereafter
until maturity of the agreement on June 30, 2004. The Company's $115
million of Senior Subordinated Debentures are not subject to market risk
since the rate of interest on these securities is fixed until maturity in
2006.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The index to financial statements is included on page 35 of this
report.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
27
<PAGE> 28
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John P. Cashman 58 Chairman of the Board
Albert D. Indelicato 48 President, Chief Executive Officer
and Director
Edward J. Cooney 51 Executive Vice President, Sales and
Marketing
Thomas Sturiale 62 Executive Vice President,
Operations and Technology
Larry T. Guillemette 43 Executive Vice President, Marketing
and Business Development
Christopher A. Laus 40 Vice President, Quality and
Reengineering
Donald W. Reilly 40 Vice President, Chief Financial
Officer and Treasurer
Andrew M. Massimilla 57 Director
David P. Spalding 44 Director
James A. Stern 48 Director
Anthony D. Tutrone 34 Director
</TABLE>
John P. ("Jack") Cashman became Chairman of the Board upon the Merger and served
also as Chief Executive Officer and President until Mr. Indelicato joined the
Company in July 1998. From 1989 until March 1996, Mr. Cashman served as Chairman
and Co-Chief Executive Officer of R. P. Scherer Corporation ("R. P. Scherer").
Mr. Cashman joined R. P. Scherer concurrent with that company's leveraged buyout
in 1989.
Albert D. Indelicato, President and Chief Executive Officer, joined the Company
in July 1998. From 1996 to 1998, he was President of Litorale Holdings, Inc., a
consulting firm specializing in acquisitions. From 1970 to 1996, Mr. Indelicato
served in various managerial capacities of Power Control Technologies and its
predecessor companies, including most recently as Chief Executive Officer and
Director.
28
<PAGE> 29
Edward J. Cooney, Executive Vice President-Sales and Marketing, joined the
Company in 1978. Mr. Cooney served as Chief Financial Officer from 1991 to 1998
and as Treasurer from 1982 to 1998, as Senior Vice President-Operations from
1988 to 1991, and as Vice President from 1985 to 1988.
Thomas Sturiale, Executive Vice President-Operations and Technology, joined the
company in 1998. From 1992-1998, he was President of Neles-Jamesbury, Inc.
Donald W. Reilly, Vice President, Chief Financial Officer, and Treasurer, joined
the Company in 1997 serving as Vice President-Finance from 1997 to 1998. From
May 1992 to October 1997, he was Director of Finance and Corporate Controller of
the A. T. Cross Company.
Larry T. Guillemette, Executive Vice President-Marketing and Business
Development, joined the Company in 1998. From 1991 to 1998, Mr. Guillemette was
President and Chief Executive Officer of Balcrank Products, Inc.
Andrew M. Massimilla became a director of the Company in June 1998. Mr.
Massimilla has been the sole proprietor of a consulting firm providing
management consulting services to various businesses since 1991. He also serves
as a director of Standard Motor Products Company, a New York Stock Exchange
Company.
David P. Spalding became a director of the Company upon the Merger. Mr. Spalding
has been Vice Chairman of Cypress since its formation in April 1994. Prior to
joining Cypress, he was Managing Director in the Merchant Banking Group of
Lehman Brothers Inc. since February 1991. Mr. Spalding is also a director of
Lear Corporation, William Scotsman, Inc., and Frank's Nursery & Craft, Inc.
James A. Stern became a director of the Company upon the Merger. Mr. Stern has
been Chairman of Cypress since its formation in April 1994. Prior to joining
Cypress, Mr. Stern spent his entire career with Lehman Brothers Inc., most
recently as head of the Merchant Banking Group. Mr. Stern is a director of Noel
Group, Inc., Lear Corporation, Cinemark USA, Inc., R.P. Scherer, Genesis
ElderCare Corp., Wesco International Inc. and Frank's Nursery & Craft, Inc.
Anthony D. Tutrone became a director of the Company upon the Merger. Mr. Tutrone
is a managing director of Cypress and has been a member of the firm since its
formation in April 1994. Prior to joining Cypress, he was a member of the
Merchant Banking Group of Lehman Brothers, Inc. Mr. Tutrone is also a director
of Wesco International Inc.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
- --------------------------------------------------------------------------------
Not applicable
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by the Company
to its Chief Executive Officer and the four other most highly compensated
executive officers who earned
29
<PAGE> 30
more than $100,000 in salary and bonus in 1998 in each case for services
rendered in all capacities to the Company during the three year period ended
December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
LONG TERM
ANNUAL COMPENSATION
COMPENSATION (a) AWARDS
---------------- ------
SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY UNDERLYING COMPENSATION
POSITION YEAR (b) BONUS OPTIONS/SARS (c)
-------- ---- --- ----- ------------ ---
<S> <C> <C> <C> <C> <C>
John P. Cashman 1998 $453,200 -- -- $15,215
Chairman (d) 1997 440,000 49,720 44,796 (e) 17,000
1996 -- -- -- --
Albert D. Indelicato (h) 1998 132,692 130,000 -- 1,406
President and Chief 1997 -- -- -- --
Executive Officer 1996 -- -- -- --
Edward J. Cooney 1998 185,400 10,000 -- 3,940
Executive Vice President- 1997 180,000 20,340 6,838 (f) 8,862
Sales and Marketing 1996 169,329 44,010 12,000 (g) 8,795
Thomas Sturiale (h) 1998 113,336 25,000 -- --
Executive Vice 1997 -- -- -- --
President-Operations and 1996 -- -- -- --
Technology
Donald W. Reilly (h) 1998 134,615 25,000 -- 1,483
Vice President- 1997 22,500 20,000 -- 47
Chief Financial Officer 1996 -- -- -- --
</TABLE>
(a) Any prequisites or other personal benefits received from the Company by
any of the named executives were substantially less than the reporting
thresholds established by the Securities and Exchange Commission (the
lesser of $50,000 or 10% of the individual's cash compensation).
(b) Includes portion of salary deferred under the Company's 401(k) Plan.
(c) Amounts paid in 1998 include the Company's contributions under the
Company's 401(k) Plan in the amount of $15,215, $1,038, $2,500 and $1,194
for Messrs. Cashman, Indelicato, Cooney, and Reilly, respectively, and
premiums paid by the Company with respect to term life insurance purchased
for such executive officers in the amount of $368, $1,440 and $289 for
Messrs. Indelicato, Cooney and Reilly, respectively.
(d) Mr. Cashman joined the Company on November 13, 1996, upon consummation of
the Merger, but received no compensation until 1997.
30
<PAGE> 31
(e) These are non-qualified options to purchase common stock of Holdings, the
parent corporation of AMTROL. These options are immediately exercisable.
Shares purchased under the options are subject to repurchase by Holdings
at the exercise price upon certain circumstances. Options for 22,398
shares are released from restrictions based upon continued employment,
with 7,454 shares released immediately and 14,944 shares released in 32
equal monthly installments through August 2000. As of December 31, 1998,
share options released from restrictions amounted to 13,058. As of
December 31, 1998, vested incentive stock options amounted to 1,999.
Options for 22,398 shares are released from restrictions based upon
relative achievement of management's business plan for fiscal years 1997
through 2001. One-half of such performance-based options are released from
restriction based upon annual performance and one-half based upon
cumulative performance. Restrictions lapse upon a public offering or sale
of Holdings, AMTROL or substantially all of the assets of AMTROL (a
"Triggering Event").
(f) These represent options to purchase common stock of Holdings. One-half
(3,419 shares) of these options are incentive stock options which vest
1,000 shares in December 1997, 218 shares in January 1998 and the balance
in 31 equal monthly installments of 71 shares through August 2000.
One-half (3,419 shares) of these options are non qualified stock options
which are immediately exercisable, provided that purchased shares are
subject to repurchase by Holdings at the exercise price until such shares
vest based upon relative achievement of management's business plan for
fiscal years 1997 through 2001. One-half of such performance based options
vest based upon annual performance and one-half based upon cumulative
performance. Options vest and restrictions lapse upon a Triggering Event.
(g) These represent options to purchase common stock of AMTROL, which, in
connection with the Merger, were either canceled in exchange for cash
equal to the spread between the option exercise price and $28.25 per share
(the per share Merger consideration) or exchanged for options exercisable
for Holdings' common stock based on a conversion ratio of .2825 per share
of Holdings' common stock for each share of AMTROL common stock.
(h) Mr. Indelicato joined the Company in July 1998, Mr. Sturiale in April 1998
and Mr. Reilly in October 1997.
31
<PAGE> 32
OPTION PLANS
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding currently
outstanding options held by the named executive officers as of December 31,
1998. No options were granted to or exercised by the named executives in 1998:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
YEAR-END OPTION/SAR VALUES
-------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTION/SARS
NUMBER OF AT FISCAL
SECURITIES YEAR END VALUE OF
UNDERLYING 1998 (a) UNEXERCISED
OPTIONS/SARS VALUE EXERCISABLE/ IN-THE-MONEY
NAME EXERCISED REALIZED($) UNEXERCISABLE OPTIONS/SAR($)(b)
- ---- --------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
John P. Cashman 0 0 44,796/0 0/0
Edward J. Cooney 0 0 8,257/1,420 100,003/0
</TABLE>
(a) Immediately prior to the Merger, Mr. Cooney exchanged options exercisable
for AMTROL common stock for options exercisable for Holdings common stock
("Amended Options") based on a conversion ratio of .2825 share of Holdings
common stock for each share of AMTROL common stock subject to the option.
Includes 2,839 shares of Holdings common stock subject to Amended Options
received by Mr. Cooney in the exchange. The Amended Options are fully
exercisable.
(b) Based on the market value of $100 per share (determined by the Holdings
Board of Directors to be the purchase price of Holdings common stock
issued in connection with the Merger) less the exercise price of the
options.
SUPPLEMENTAL RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Company maintains two Supplemental Retirement Plans: Supplemental
Retirement Plan I which covers a former officer and director and
Supplemental Retirement Plan II which covers Mr. Cooney and two former
officers. Under Supplemental Retirement Plan I, the former officer is
entitled to receive an annual benefit of $150,000 per year for 15 years
following his retirement. In January 1997, he began to receive the annual
benefit in equal quarterly installments. Mr. Cooney is entitled to receive
an annual benefit of $50,000 per year for a period of 15 years upon
retirement on or after age 62. The retirement benefit is forfeited in its
entirety if he terminates employment or dies prior to age 62. The Company
has purchased a split-dollar life insurance policy on Mr. Cooney to
provide a death benefit not to exceed $300,000. If his employment is
terminated prior to retirement he may purchase the policy from the
Company. In the event a participant in either Supplemental Retirement Plan
dies after retirement, his beneficiary will receive any remaining benefits
which such participant was entitled to receive at the time of his death.
32
<PAGE> 33
EMPLOYMENT AGREEMENTS AND OTHER TRANSACTIONS
- --------------------------------------------------------------------------------
The Company, either directly or through its subsidiaries, has entered into
employment agreements (each referred to individually as an "Agreement" and
collectively as the "Agreements"), with Messrs. Cashman, Cooney,
Indelicato and Reilly to secure their continued employment with the
Company. The Agreements provide for an annual base salary, subject to
annual adjustments, of $440,000, $180,000, $300,000 and $130,000 for
Messrs. Cashman, Cooney, Indelicato and Reilly, respectively. In addition,
the executives are entitled to participate in incentive compensation plans
and all employee benefit arrangements generally appropriate to such
executive's responsibilities. In the event the executive's employment is
terminated without cause by the Company or, for Messrs. Cashman and
Cooney, with Good Reason by the executive, such executive after
termination is entitled to: continuation of monthly salary, including the
pro rata portion of any bonus or other incentive compensation otherwise
payable for the fiscal period in which such termination occurs, and
maintenance of all life, disability, medical and health insurance benefits
to which the executive was entitled immediately prior to termination. The
duration of such benefits is 24 months, 24 months, 18 months and 15 months
for Messrs. Cashman, Cooney, Indelicato and Reilly, respectively. In the
case of Mr. Cashman, the Agreement provides that in the event of his
death, his estate is entitled to receive an amount equal to the monthly
termination benefit for 24 months, reduced by any amounts payable under
any insurance or other plan providing a death benefit which is maintained
by the Company. In the case of Messrs. Cashman and Cooney, the Agreements
also prohibit the executive, for a period of two years after the
termination of his employment, from directly or indirectly, advising,
assisting or being connected with any enterprise which competes with the
Company.
In addition, under separate Management Stockholder's Agreements between
Holdings and Messrs. Cashman and Cooney if, prior to a public offering of
the common stock of Holdings, the executive dies or becomes disabled while
employed by the Company or following normal retirement or the executive's
employment is terminated without Cause by the Company or with Good Reason
by the executive (as such terms are defined in the agreements), the
executive has the right to require Holdings to purchase all or any portion
of Holdings common stock then held by the executive at the repurchase
price specified in the agreement and to pay the executive the amount by
which the repurchase price exceeds the exercise price of any options then
held by the executive. If there exists and is continuing an event of
default on the part of the Company under any loan guarantee or other
agreement under which the Company has borrowed money or such repurchase
would result in an event of default, the Company shall not be obligated to
repurchase any of the common stock. The repurchase price is $100 if the
repurchase occurs prior to November 13, 1999, and the market price of the
Holdings common stock thereafter. If an executive's employment is
terminated for Cause by the Company or without Good Reason by the
executive, Holdings has the right to purchase all, but not less than all,
Holdings common stock then held by the executive at a price equal to the
lesser of $100 or the market price of the Holdings common stock, provided
that if the executive's employment is terminated by the executive without
Good Reason following a public offering, the repurchase price is the
market price of the Holdings common stock. If Holdings exercises its
repurchase right it must also pay the executive an amount equal to the
excess of the repurchase price over the exercise price of any options held
by the
33
<PAGE> 34
executive in cancellation of such options. Good Reason includes certain
significant changes in the nature of the executive's employment including
certain reductions in compensation and changes in responsibilities and
powers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company is a direct, wholly owned subsidiary of Holdings. The
following table sets forth information with respect to the
beneficial ownership of Holdings common stock or preferred stock as
of March 15 by (i) each person known to the Company to beneficially
own more than 5% of Holdings' outstanding common stock, (ii) each of
the Company's directors and named executive officers and (iii) all
directors and executive officers of the Company as a group. Each
share of Holdings preferred stock is convertible at any time into
one share of Holdings common stock. Unless otherwise indicated
below, the persons and entities named in the table have sole voting
and investment power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ ---------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF TOTAL SHARES OF TOTAL
- ------------------------------------ ------ -------- ------ --------
<S> <C> <C> <C> <C>
Cypress Merchant Banking Partners L.P. (a)
c/o The Cypress Group L.L.C
65 East 55th Street, 19th Floor
New York, NY 10022 733,033 93.0% 95,076 92.8%
Cypress Offshore Partners L.P. (a)
c/o The Cypress Group L.L.C
65 East 55th Street, 19th Floor
New York, NY 10022 37,967 4.8% 4,924 4.8%
John P. Cashman(c) 62,032 7.4% 2,235 2.2%
Edward J. Cooney(b)(c) 8,771 1.1% 250 0.2%
Albert D. Indelicato -- -- -- --
Andrew Massimilla -- -- -- --
David P. Spalding(a) -- -- -- --
James A. Stern(a) -- -- -- --
Thomas Sturiale -- -- -- --
Anthony D. Tutrone -- -- -- --
Donald W. Reilly -- -- -- --
All directors and executive officers as a
group (consisting of 12 persons) 70,823 8.4% 4,924 4.8%
</TABLE>
(a) Cypress Merchant Banking Partners L.P. and Cypress Offshore
Partners L.P. are affiliates of The Cypress Group L.L.C.
Messrs. Spalding and Stern are executives of The Cypress Group
L.L.C. and may be deemed to share beneficial ownership of the
shares shown as beneficially owned by such Cypress entities.
Each of such individuals disclaims beneficial ownership of
such shares. See Item 10, "Directors and Executive Officers of
the Registrant."
(b) Immediately prior to the Merger, Mr. Cooney exchanged options
exercisable for AMTROL Common Stock for options exercisable
for Holdings common stock. Includes 2,839 shares of common
stock issuable upon exercise of such options by Mr. Cooney,
respectively. See Item 11, "Executive Compensation".
34
<PAGE> 35
(c) Includes 44,796 and 8,541 shares of Common Stock issuable upon
exercise of options granted to Messrs. Cashman and Cooney,
respectively, which will become exercisable within 60 days.
See Item 11, "Executive Compensation".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A director of the Company, Mr. Massimilla, provides management consulting
services to the Company for which he is paid by the Cypress Group L.L.C.
The Company reimburses Cypress for its payments to Mr. Masimilla. During
1998, the amount of such payments was $439,000.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE & 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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 37
Consolidated Balance Sheets as of December 31, 1997 and 1998 39
Consolidated Statements of Operations for the Period Ended
November 12, 1996 (Predecessor), Period Ended December 31, 1996 and
Fiscal Years Ended December 31, 1997 and 1998 (Successor) 40
Consolidated Statements of Shareholders' Equity for the Period Ended
November 12, 1996 (Predecessor), Period Ended December 31, 1996 and
Fiscal Years Ended December 31, 1997 and 1998 (Successor) 41
Consolidated Statements of Cash Flows for the Period Ended
November 12, 1996 (Predecessor), Period Ended December 31, 1996 and
Fiscal Years ended December 31, 1997 and 1998 (Successor) 42
Notes to Consolidated Financial Statements 43
(A)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves for the
Period Ended November 12, 1996 (Predecessor), Period Ended December
31, 1996 and Fiscal Years Ended December 31, 1997 and 1998
(Successor) 57
</TABLE>
35
<PAGE> 36
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
See List of Exhibits
(B) REPORTS FILED ON FORM 8-K
None
36
<PAGE> 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO AMTROL INC.:
We have audited the accompanying consolidated balance sheets of AMTROL Inc. (the
Successor), (a Rhode Island corporation and wholly-owned subsidiary of AMTROL
Holdings Inc.), and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and for the period from
November 13, 1996 to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AMTROL Inc. and subsidiaries as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1998 and
the period from November 13, 1996 to December 31, 1996 in conformity with
generally accepted accounting principles.
As explained in Note 8 to the financial statements, the Company has given
retroactive effect to the change in accounting for the cost of inventories from
the LIFO method to the FIFO method.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financials statements taken as a whole. The financial statement
schedule listed in item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 19, 1999
37
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO AMTROL INC.:
We have audited the accompanying consolidated statement of operations,
shareholders' equity and cash flows of AMTROL Inc. (the Predecessor), (a Rhode
Island corporation), and subsidiaries for the period from January 1, 1996 to
November 12, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of AMTROL Inc. and subsidiaries' operations
and their cash flows for the period from January 1, 1996 to November 12, 1996,
in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedule listed in item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 6, 1997
38
<PAGE> 39
AMTROL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
Assets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 544 $ 1,088
Accounts receivable, less allowance for doubtful accounts of
$1,088 and $1,594 in 1997 and 1998, respectively 30,180 28,938
Inventories 29,584 24,319
Income tax refund receivable 323 930
Prepaid income taxes 2,495 2,271
Prepaid expenses and other 1,089 2,311
Assets held for sale 1,533 572
--------- ---------
Total current assets 65,748 60,429
--------- ---------
Property, Plant and Equipment, at cost
Land 5,000 6,186
Buildings and improvements 9,799 13,530
Machinery and equipment 34,875 40,537
Furniture and fixtures 1,192 1,098
Construction-in-progress and other 1,818 4,817
--------- ---------
52,684 66,168
Less: accumulated depreciation and amortization 6,997 14,385
--------- ---------
45,687 51,783
--------- ---------
Other Assets:
Goodwill 169,784 171,166
Deferred financing costs 7,762 6,770
Deferred income taxes 1,065 8,205
Other 1,899 2,314
--------- ---------
180,510 188,455
--------- ---------
$ 291,945 $ 300,667
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 3,498 $ 4,043
Notes payable to banks 4,397 10,660
Accounts payable 15,718 21,193
Accrued expenses 15,779 14,242
Accrued interest 608 777
Accrued income taxes 3,073 2,872
--------- ---------
Total current liabilities 43,073 53,787
--------- ---------
Other Noncurrent Liabilities 6,659 7,909
Long-Term Debt, less current maturities 184,164 173,023
Commitments and Contingencies -- --
Shareholders' Equity
Capital stock $.01 par value - authorized 1,000 shares,
100 shares issued -- --
Additional paid-in capital 69,326 89,823
Retained deficit (10,992) (24,363)
Accumulated other comprehensive (loss) income (285) 488
--------- ---------
Total shareholders' equity 58,049 65,948
--------- ---------
$ 291,945 $ 300,667
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
39
<PAGE> 40
AMTROL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
--------- -------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
NOVEMBER 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 152,193 $ 18,628 $ 176,432 $ 202,142
Cost of goods sold 110,582 16,809 131,180 158,607
Provision for abnormal warranty costs -- -- -- 4,500
--------- --------- --------- ---------
Total Cost of Goods Sold 110,582 16,809 131,180 163,107
Gross Profit 41,611 1,819 45,252 39,035
Operating Expenses:
Selling 14,236 1,997 13,175 11,951
General and administrative 11,560 1,511 12,548 15,876
Plant closing and reorganization costs -- -- 5,500 4,450
Management restructuring -- -- -- 3,693
Amortization of goodwill -- 313 3,995 4,446
Other operating expenses -- 1,000 -- --
--------- --------- --------- ---------
Income (loss) from operations 15,815 (3,002) 10,034 (1,381)
Other Income (Expense):
Interest expense (151) (2,263) (18,684) (20,554)
Interest income 204 39 428 210
License and distributorship fees 181 25 245 242
Other, net (175) (99) 299 1,384
--------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes 15,874 (5,300) (7,678) (20,099)
Provision (Benefit) for Income Taxes 6,152 (1,956) (30) (6,728)
--------- --------- --------- ---------
Net Income (Loss) $ 9,722 $ (3,344) $ (7,648) $ (13,371)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
40
<PAGE> 41
AMTROL INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED TREASURY STOCK
ADDITIONAL RETAINED OTHER ---------------------
COMMON PAID-IN EARNINGS COMPREHENSIVE NUMBER OF
STOCK CAPITAL (DEFICIT) (LOSS) INCOME SHARES COST
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance, December 31, 1995 $ 76 $ 29,083 $ 44,313 $ -- 213 $ 3,266
Net income -- -- 9,722 -- -- --
Dividend -- -- (6,694) -- -- --
Exercise of stock options 191 -- -- -- --
Repurchase of common stock -- -- -- -- 1 15
-------- -------- -------- -------- -------- --------
Balance, November 12, 1996 76 29,274 47,341 -- 214 3,281
======== ======== ======== ======== ======== ========
SUCCCESSOR COMPANY
Net loss as previously reported -- -- (2,289) -- -- --
Issuance of common stock in
connection with Merger, net -- 69,326 -- -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 as
previously reported -- 69,326 (2,289) -- -- --
Adjustment for applying retroactively
the new method of valuing inventories
net of tax benefit (Note 8) (1,055)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 as adjusted -- 69,326 (3,344) -- -- --
Net loss -- -- (7,648) -- -- --
Currency translation adjustment -- -- -- (285) -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 -- 69,326 (10,992) (285) -- --
Capital contribution -- 20,497 -- -- -- --
Net loss -- -- (13,371) -- -- --
Currency translation adjustment -- -- -- 773 -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 -- 89,823 (24,363) 488 -- --
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
41
<PAGE> 42
AMTROL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
--------- -------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
NOVEMBER 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash Flows Provided by Operating Activities:
Net income (loss) $ 9,722 $ (3,344) $ (7,648) $ (13,371)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 4,586 598 11,541 13,147
Provision for losses on accounts receivable 172 91 370 526
Loss (gain) on sale of fixed assets 92 (106) 2 --
Capitalized in-process research and development -- 1,000 -- --
Non-cash reorganization and other charges -- -- -- 10,077
Changes in operating assets and liabilities:
Accounts receivable, net (1,215) 3,199 (2,376) 2,753
Income tax refund receivable -- (2,000) 2,581 (566)
Inventory (3,573) 4,334 (1,474) 4,696
Prepaid income taxes 1,090 (31) (761) 224
Prepaid expenses and other current assets 577 736 (331) (135)
Other assets (520) (93) (838) (3,963)
Accounts payable 2,443 (3,175) 4,547 3,661
Accrued expenses and other current liabilities (1,990) 3,085 (1,152) (5,838)
Other noncurrent liabilities (283) (287) (71) (2,575)
Deferred income taxes (389) -- (641) (7,140)
--------- --------- --------- ---------
Net cash provided by operating activities 10,712 4,007 3,749 1,496
--------- --------- --------- ---------
Cash Flows Used in Investing Activities:
Acquisition of Alfa, net of cash acquired -- -- (25,500) --
Cash paid for Merger -- (218,200) -- --
Proceeds from sale of property, plant and equipment 1,991 9 681 2,025
Acquisition of NOVA, net of cash acquired -- -- -- (5,855)
Capital expenditures (9,260) (1,662) (8,489) (9,858)
--------- --------- --------- ---------
Net cash used in investing activities (7,269) (219,853) (33,308) (13,688)
--------- --------- --------- ---------
Cash Flows (Used in) Provided by Financing Activities:
Cash dividends (6,694) -- -- --
Repayment of long-term debt (3,500) -- (5,367) (52,872)
Issuance of long-term debt 3,500 -- 29,150 40,600
Repayment of short-term debt -- -- -- (16,476)
Issuance of short-term debt -- -- -- 20,959
Proceeds from sale of notes -- 115,000 -- --
Proceeds from term loan -- 45,000 -- --
Payment of transaction financing costs -- (13,100) -- --
Issuance of common stock in connection with Merger -- 69,326 -- --
Issuance of common stock - exercise of stock options 191 -- -- --
Repurchase of treasury stock (15) -- -- --
Capital contribution -- -- -- 20,497
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (6,518) 216,226 23,783 12,708
--------- --------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (3,075) 380 (5,776) 516
Effect of exchange rate changes on cash and cash equivalents -- -- (63) 28
Cash and Cash Equivalents, beginning of period 9,078 6,003 6,383 544
--------- --------- --------- ---------
Cash and Cash Equivalents, end of period $ 6,003 $ 6,383 $ 544 $ 1,088
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
42
<PAGE> 43
(1) BASIS OF PRESENTATION
For the period prior to November 13, 1996, the accompanying financial
statements represent the consolidated results and financial position of
AMTROL Inc. and Subsidiaries (the Predecessor). On November 13, 1996, the
Predecessor merged with AMTROL Acquisition, Inc., a wholly-owned
subsidiary of AMTROL Holdings, Inc., a Delaware corporation organized by
The Cypress Group L.L.C. as more fully described in Note 3 (the Merger).
Financial statements for periods subsequent to November 12, 1996 represent
the consolidated financial statements of AMTROL Inc. and Subsidiaries (the
Successor) after giving effect to the Merger. References to the Company
refer to the Predecessor prior to the Merger and the Successor
post-Merger.
(2) ORGANIZATION AND OPERATIONS
The Company designs, manufactures and markets products used principally in
flow control, storage, heating and other treatment of fluids in the water
systems market and selected sectors of the heating, ventilating and air
conditioning ("HVAC") market. The Company offers a broad product line of
quality fluid handling products and services marketed under widely
recognized brand names.
(3) MERGER AND FINANCING
AMTROL Acquisition Inc. ("Acquisition") and AMTROL Holdings, Inc.
("Holdings") were formed by The Cypress Group L.L.C. ("Cypress") in 1996
to effect the acquisition of all of the outstanding common stock of the
Predecessor through the Merger of Acquisition with and into the Successor.
Upon consummation of the Merger on November 13, 1996, all of the
outstanding common stock of Acquisition was converted into common stock of
the Successor and the Successor became a wholly-owned subsidiary of
Holdings. The Successor, as the surviving entity, continues to be named
AMTROL Inc. Holdings has no other material assets, liabilities or
operations other than those that result from its ownership of the common
stock of the Successor.
The Merger was accounted for as a purchase transaction effective as of
November 13, 1996, in accordance with Accounting Principles Board Opinion
No. 16, Business Combinations, and EITF Issue No. 88-16, Basis in
Leveraged Buyout Transactions and, accordingly, the consolidated financial
statements for the periods subsequent to November 12, 1996 reflect the
purchase price, including transaction costs, allocated to tangible and
intangible assets acquired and liabilities assumed, based on their
estimated fair values as of November 12, 1996. The excess of the purchase
price over the fair value of net assets acquired has been allocated to
goodwill.
43
<PAGE> 44
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
AMTROL Inc. and its wholly owned subsidiaries (the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FISCAL YEAR
The Company uses a calendar fiscal year and four quarterly interim periods
ending on Saturday of the thirteenth week of the quarter.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments
that are readily convertible into cash with an original maturity to the
Company of three months or less.
DEPRECIABLE PROPERTY AND EQUIPMENT
The Company provides for depreciation by charges to income (computed on
the straight-line method) in amounts estimated to depreciate the cost of
properties over their estimated useful lives which generally fall within
the following ranges:
<TABLE>
<S> <C>
Building and improvements 10-40 years
Machinery and equipment 3-12 years
Furniture and fixtures 5-20 years
Other 3-10 years
</TABLE>
Leasehold improvements are amortized over the life of the lease or the
estimated useful life of the improvement, whichever is shorter.
Interest costs, during the construction period, on borrowings used to
finance construction of buildings and related property are included in the
cost of the constructed property.
44
<PAGE> 45
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
The Company's inventories are stated at the lower of cost or market
including material, labor and manufacturing overhead (see Note 8.)
GOODWILL
The excess of purchase price over the fair value of net assets acquired is
allocated to goodwill and is included in other assets. Goodwill is being
amortized over 40 years. The Company accounts for long-lived and
intangible assets in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The Company continually reviews its intangible assets for events or
changes in circumstances which might indicate the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
the assets by determining whether the amortization of such intangibles
over their remaining lives can be recovered through projected undiscounted
future cash flows. The amount of impairment, if any, is measured based on
the fair value of the impaired asset. At December 31, 1998, no such
impairment of assets was indicated.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, the Company has determined the estimated fair value of its
financial instruments using appropriate market information and valuation
methodologies. Considerable judgment is required to develop the estimates
of fair value; thus, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash, accounts receivable, accounts
payable, senior subordinated notes and bank debt. The carrying value of
these assets and liabilities is a reasonable estimate of their fair market
value at December 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSES
All costs for research and development, which amounted to approximately
$0.8 million, $0.1 million, $1.3 million and $0.9 million for the periods
ended November 12 and December 31, 1996, and fiscal years ended December
31, 1997 and 1998, respectively, are charged to general and administrative
expenses as incurred.
45
<PAGE> 46
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to manage interest rate
cost and the risks associated with changing interest rates. The
differential to be paid or received is accrued as interest rates change
and is recognized in interest expense over the life of the contract. The
counter-party to the interest rate swap agreements is a major financial
institution. Credit loss from counter-party non-performance is not
anticipated.
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets
and amortized over the life of the related debt using the effective
interest method. Amortization of deferred financing costs is included in
interest expense.
ACCRUED EXPENSES
Certain customers are allowed a rebate if agreed upon sales targets are
achieved for a given year. At December 31, 1997 and 1998, the Company has
accrued $3.3 million and $3.2 million, respectively, for such volume
allowances. These amounts are included in accrued expenses in the
accompanying consolidated balance sheets.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of comprehensive
income and its components. The adoption of this Statement had no impact on
the Company's net loss or shareholders' equity. Statement 130 requires
certain items which previously had been reported separately in
shareholders' equity to be included in other comprehensive income. For the
Company, the only such item was the foreign currency cumulative
translation adjustment. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
INTERNATIONAL SALES
For the periods ended November 12 and December 31, 1996, and in fiscal
1997 and 1998, net sales to customers in various geographic areas outside
the United States and Canada, primarily Mexico, Western Europe and Asia,
amounted to $19.7 million, $1.9 million, $39.4 million and $73.2 million,
respectively.
46
<PAGE> 47
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The accounts of AMTROL-ALFA, Metalomecanica S.A. and NOVA Wassererwarmer
GmbH (see Note 5) have been translated into United States Dollars. Assets
and liabilities have been translated at the year-end rate of exchange,
shareholders' equity at historical rates and income statement accounts at
the average exchange rates prevailing during the year. The cumulative
effect of the resulting translation is reflected as a separate component
of shareholders' equity.
STOCK OPTIONS
The Company accounts for employee stock options in accordance with SFAS
No. 123, Accounting for Stock Based Compensation. As permitted under SFAS
No. 123, the Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees to account for its stock option
plans.
RECLASSIFICATION
Certain prior year balances have been reclassified to conform with the
current year presentation.
(5) ACQUISITIONS
On June 30, 1997, the Company entered into a Promissory Agreement and a
Complementary Document to the Promissory Agreement (collectively, the
"Purchase Agreements") to acquire all the outstanding capital shares of
Petroleo Mecanica ALFA, S.A., a corporation organized under the laws of
Portugal ("ALFA"), for $25.5 million (United States Dollars) plus assumed
debt of $8.7 million. The Company assumed immediate management control of
ALFA and, accordingly, the operating results and financial position of
ALFA are included in the Company's consolidated results of operations and
consolidated balance sheets from July 1, 1997. The Company paid $20
million of the purchase price on June 30, 1997 from borrowings available
under its revolving credit facility and paid the remaining $5.5 million
upon final closure of the transaction in December 1997. The Company's 1997
income from operations includes $1.9 million relating to the operations of
ALFA subsequent to July 1, 1997. The following represents proforma net
sales and net loss as though the acquisition of ALFA occurred as of
January 1, 1997 (in thousands): Net sales $192,068, net loss $8,600.
ALFA's name was changed to AMTROL-ALFA, Metalomecanica S.A. following the
acquisition.
On June 9, 1998, the Company acquired NOVA Wassererwarmer GmbH ("NOVA")
located in Donaueschingen, Germany for approximately $6.0 million (United
States Dollars) plus assumed debt of $2.0 million. NOVA manufactures
high-end residential and commercial water heaters which are marketed
primarily in Germany, Switzerland and Austria. This acquisition provides
AMTROL with expanded manufacturing and distribution capabilities in
central Europe, in addition to the opportunity to offer many of AMTROL's
complementary hydronic heating and water systems products in the European
47
<PAGE> 48
market. AMTROL assumed immediate management control of NOVA and,
accordingly, the operating results and financial position of NOVA are
included in the consolidated results of operations and consolidated
balance sheets of AMTROL from the acquisition date. The Company's 1998
income from operations include approximately $0.4 million relating to the
operations of NOVA. The following represents proforma net sales and net
income as though the acquisition of NOVA occurred as of January 1, 1998
(in thousands): Net sales $207,861, net loss $13,277.
(6) DIVESTITURES
In May 1997, the Company sold all of the assets, subject to substantially
all liabilities, of its American Granby Inc. subsidiary. Accordingly, the
results of American Granby included in the accompanying consolidated
statements of operations are as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
--------- -------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
NOVEMBER 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 17,980 $ 1,592 $ 7,576 $ -
Operating Income $ 130 $ 1 $ 23 $ -
</TABLE>
Also in May 1997, the Company sold its Peru, Indiana production facility
and the related pump business. AMTROL transferred certain production
activities performed in Peru to the Company's West Warwick, Rhode Island
facility.
The Company utilized the net proceeds of the sales of approximately $6.0
million to fund seasonal working capital demands as well as the
acquisition of ALFA (see Note 5).
(7) PLANT CLOSINGS, REORGANIZATION AND RESTRUCTURING CHARGES
In September 1997, the Company ceased operations of its Singapore
production facility and transferred production of its non-returnable
chemical containers to its ALFA facility in Guimaraes, Portugal. The
Company closed its Nashville, Tennessee production facility in December
1997 and transferred certain production lines to its West Warwick, Rhode
Island facility. The Company's 1997 results include a pretax charge to
operating expense of $5.5 million in connection with these plant closures.
Costs involved in closing the Nashville facility and starting production
in West Warwick have been higher than anticipated due to unexpected
retrofitting and reconditioning required for the relocated equipment,
damage to equipment during shipment, and delays in preparing the Nashville
building for sale. The Company recorded charges in 1998 relating to the
incremental costs associated with the Nashville closure and production
relocation approximating $7.8 million (including $3.3 million of
production inefficiencies included in cost of goods sold). In addition,
the Company recorded management restructuring charges of $3.7 million in
connection with the discontinuation and reduction of certain product lines
and a reorganization of its management group.
48
<PAGE> 49
The Company has been experiencing an unusually high level of warranty
claims for a particular product manufactured in 1995-1996, the cause of
which has since been corrected. Actions taken by the Company to mitigate
the level of returns for products manufactured during that time period
have not reduced the return rate to the extent expected. Accordingly, the
Company recorded an additional loss provision in the second quarter of
1998 $4.5 million for abnormal warranty costs relating to this product.
(8) INVENTORIES
Inventories were as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Raw materials and work in process $13,670 $14,548
Finished goods 15,914 9,771
------- -------
$29,584 $24,319
======= =======
</TABLE>
During the fourth quarter of 1998, the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO
method. Under the current environment of strict cost control combined with
increased capacity utilization resulting from the consolidation of plants,
the Company believes that the FIFO method will result in a better
measurement of operating results. Also, the FIFO inventory valuation
method is the more commonly used method among the other companies serving
the markets in which AMTROL operates. This change has been applied by
retroactively restating the accompanying consolidated financial
statements. Although this change in method did not impact the 1998 or 1997
net loss, it increased the net loss for the period ended December 31, 1996
by approximately $1.1 million. The retained deficit balances for the years
ended December 31, 1997 and 1998 have been adjusted for the effect, net of
income tax benefit, of applying retroactively the new method of valuing
inventories.
(9) LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
Long-term debt consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Revolving credit facility $ 4,000 $ 3,000
Tranche A Term Loan 19,425 10,200
Tranche B Term Loan 44,698 44,237
Senior subordinated notes, due 2006, 10.625% 115,000 115,000
Other 4,539 4,629
-------- --------
187,662 177,066
Less: Current maturities of long-term debt 3,498 4,043
-------- --------
$184,164 $173,023
======== ========
</TABLE>
49
<PAGE> 50
REVOLVING CREDIT AND TERM LOANS
The Company is party to a Bank Credit Agreement (the "Agreement"), which
provides for secured borrowings from a syndicate of lenders. The Agreement
was amended on July 31, 1998 to allow for the early repayment of a portion
of the principal outstanding and to modify certain covenants to be more in
line with the Company's business plans. The Agreement, as amended,
provides for senior term loans (the "Term Loans") and a Revolving Credit
Facility. In connection with the amendment to the Agreement, the Company
repaid $20.5 million on August 3, 1998. A portion ($10.2 million) of the
Term Loans (the "Tranche A Term Loans") will mature on May 13, 2002, with
quarterly amortization payments during the term of such loans. As a result
of the August 3, 1998 repayment, no further amortization payments on
Tranche A term loans were required in 1998. The remainder ($44.2 million)
of the Term Loans (the "Tranche B Term Loans") will mature on May 13,
2004, with nominal quarterly amortization prior to the maturity of the
Tranche A Term Loans and with the remaining amounts amortizing on a
quarterly basis thereafter. The Revolving Credit Facility of $30.0 million
includes a sublimit providing for up to $20.0 million of availability on a
revolving credit basis to finance permitted acquisitions. The highest
amount outstanding during 1998 was $22.7 million. The commitments under
the Revolving Credit Facility and the acquisition sublimit will reduce by
$5.0 million on November 13, 2000 and $10.0 million on November 13, 2001.
The Revolving Credit Facility will mature on May 13, 2002. The Agreement
is secured by substantially all of the assets of the Company and its
domestic subsidiaries.
The loans under the Agreement bear interest, at the Company's option, at
either (A) a "base rate" equal to the higher of (i) the federal funds rate
plus 0.5% or (ii) the bank's prime lending rate plus (x) in the case of
Tranche A Term Loans and loans under the Revolving Credit Facility, an
applicable spread ranging from 0.75% to 1.50% (determined based on the
Company's leverage ratio) or (y) in the case of Tranche B Term Loans,
2.00%; or (B) a `Eurodollar rate" plus (x) in the case of Tranche A Term
Loans and loans under the Revolving Credit Facility, an applicable spread
ranging from 1.75% to 2.50% (determined based on the Company's leverage
ratio), or (y) in the case of Tranche B Term Loans, 3.00%. Swingline Loans
may only be "base rate" loans.
The Revolving Credit Facility also requires the Company to pay a
commitment fee on the average daily aggregate unutilized portion of the
Revolving Credit Facility at a rate of 0.5% per annum, payable quarterly
in arrears, as well as a commission on trade and standby letters of credit
of 1.25% per annum of the amount to be drawn under the Agreement. Amounts
outstanding under the Revolving Credit Facility are due on May 13, 2002.
The Agreement contains a number of covenants that, among other things,
restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guaranty obligations, repay
other indebtedness or amend other debt instruments, pay dividends, create
liens on assets, enter into leases, make investments, make acquisitions,
engage in mergers or consolidations, make capital expenditures, engage in
certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. In addition, the Agreement requires
compliance with certain financial covenants, including requiring the
Company to maintain a minimum level of earnings before income taxes,
depreciation and amortization (i.e., "EBITDA"), a minimum ratio of EBITDA
to interest
50
<PAGE> 51
expense and a maximum ratio of Indebtedness to EBITDA, in each case tested
at the end of each fiscal quarter of the Company.
The Company's obligations under the Agreement are guaranteed by Holdings
and each direct and indirect domestic subsidiary of the Company. The
Company's obligations under the Agreement are secured by substantially all
assets of the Company and its subsidiaries.
The company has entered into interest rate swap agreements which have
effectively converted $15.0 million of floating rate borrowings to fixed
borrowings through June 2004. The agreements are contracts to periodically
exchange floating interest rate payments for fixed rate payments over the
life of the agreements and are used to manage the Company's interest rate
exposure.
SENIOR SUBORDINATED NOTES
In connection with the Merger, the Company issued $115.0 million of Senior
Subordinated Notes due 2006 (the "Notes"). The Notes are unsecured
obligations of AMTROL. The Notes bear interest at a rate of 10.625% per
annum which is payable semi-annually on each June 30 and December 31
commencing on June 30, 1997.
The Notes are redeemable at the option of the Company on or after December
31, 2001. The Notes will be subject to redemption, in whole or in part, at
various redemption prices, declining from 105.313% of the principal amount
to par on and after December 31, 2003. In addition, on or prior to
December 31, 1999, the Company may use the net cash proceeds of one or
more equity offerings to redeem up to 35% of the aggregate principal
amount of the Notes originally issued at a redemption price of 110.625% of
the principal amount thereof plus accrued interest to the date of
redemption. Upon a "Change of Control" (as defined in the Indenture), each
Note holder has the right to require the Company to repurchase such
holder's Notes at a purchase price of 101% of the principal amount plus
accrued interest.
The Note Indenture contains certain affirmative and negative covenants and
restrictions.
As of December 31, 1998, the Company was in compliance with the various
covenants of the Bank Credit Agreement and the Note Indenture.
OTHER LONG-TERM DEBT
Other long-term debt represents borrowings assumed by the Company in
connection with the 1997 acquisition of ALFA and 1998 acquisition of NOVA.
The debt includes the equivalent of approximately $3.5 million of loans
payable to the Industrial Development Fund of Portugal as well as several
local Portuguese banks. The loans amortize in roughly equal installments
through 2000 and accrue interest at LIBOR plus a premium ranging from
1.25% to 1.5%, adjusted quarterly or semi-annually. The loans are secured
by substantially all property and equipment owned by ALFA. ALFA also has
available revolving credit facilities with local banks providing for
short-term working capital loans of up to the equivalent of approximately
$9.2 million. Borrowings under these agreements accrue interest at LIBOR
plus a premium ranging from 0.375% to 1.375%. The balance
51
<PAGE> 52
outstanding at December 31, 1998 was approximately $9.2 million, the
highest amount outstanding under these facilities in 1998. Other long-term
debt also includes the equivalent of approximately $1.1 million of loans
payable to two local German banks. These loans amortize in roughly equal
installments through 2002 and accrue interest at rates ranging from 6.0%
to 6.5%. The loans are secured by substantially all property and certain
equipment owned by NOVA. NOVA also has available revolving credit
facilities with a local bank providing for short-term working capital
loans of up to the equivalent of approximately $1.5 million. Borrowings
under the agreement accrue interest at prevailing market rates which
averaged approximately 7.4% during the period ended December 31, 1998. The
balance outstanding at December 31, 1998 was approximately $1.5 million,
the highest amount outstanding under the facility in 1998.
Cash paid for interest amounted to approximately $0.1 million, $0, $19.2
million and $19.0 million for the periods ended November 12, 1996 and
December 31, 1996, and fiscal years ended December 31, 1997 and 1998,
respectively.
(10) INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
--------- -------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
NOVEMBER 12, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal $ 5,233 $(1,376) $ -- $ --
State 258 (23) -- --
Foreign -- -- 714 188
------- ------- ------- -------
5,491 (1,399) 714 188
Deferred:
Federal 622 (564) (625) (5,854)
State 39 7 (119) (1,062)
------- ------- ------- -------
661 (557) (744) (6,916)
------- ------- ------- -------
$ 6,152 $(1,956) $ (30) $(6,728)
======= ======= ======= =======
</TABLE>
The deferred income tax provision resulted primarily from temporary
differences due to the use of accelerated depreciation for income tax
purposes and straight-line depreciation for financial statement purposes,
temporary differences related to deferred compensation and the reversal of
temporary differences related to safe-harbor lease transactions that had
previously transferred tax benefits to the Company.
The difference between a provision computed using the respective statutory
U.S. federal income tax rate and the provision for income taxes in the
accompanying consolidated financial statements is primarily the result of
state taxes, net of federal benefit.
52
<PAGE> 53
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Prepaid Income Taxes:
Warranty reserves - current $ 239 $ 96
Allowance for doubtful accounts 354 411
Plant closing reserve 744 302
Accrued vacation 187 122
UNICAP adjustment 365 285
Accrued management restructuring -- 405
Other 606 650
------- -------
$ 2,495 $ 2,271
======= =======
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred Income Taxes:
Net operating loss carryforward $ 1,617 $ 7,533
Accelerated depreciation (2,553) (2,847)
Safe harbor leases (163) (65)
Warranty reserves - long-term 780 1,683
Deferred compensation and restricted stock plan 676 700
LIFO revaluation 646 646
Other 62 555
------- -------
$ 1,065 $ 8,205
======= =======
</TABLE>
The difference between the Company's effective income tax rate and the
federal statutory income tax rate primarily results from state income tax,
net of federal tax benefit, and non-deductible goodwill amortization.
Cash paid for income taxes amounted to $4.3 million, $0, $0, and $0.3
million for the periods ended November 12, 1996 and December 31, 1996, and
fiscal years ended December 31, 1997 and 1998, respectively.
(11) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 401(k) plan covering substantially
all of its domestic employees. Under the Plan, eligible employees are
permitted to contribute up to 15% of gross pay, not to exceed the maximum
allowed under the Internal Revenue Code. The Company matches each employee
contribution up to 6% of gross pay at a rate of $0.25 per $1 of employee
contribution. The Company also contributes 3% of each employee's gross pay
up to the Social Security taxable wage base and 4% of amounts in excess of
that level up to approximately $0.2 million of wages. Company
contributions to the 401(k)
53
<PAGE> 54
plan totaled approximately $0.9 million and $0.1 million for the periods
ending November 12 and December 31, 1996, respectively, and $1.1 million
and $1.0 million for the years ended December 31, 1997 and 1998,
respectively.
(12) LEASE COMMITMENTS
The Company leases certain plant facilities and equipment. Total rental
expenses charged to operations approximated $1.0 million and $0.2 million
for the periods ended November 12 and December 31, 1996, and $1.5 million
and $1.9 million for the years ended December 31, 1997 and 1998,
respectively. Minimum rental commitments under all non-cancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 980
2000 866
2001 637
2002 372
2003 --
------
$2,855
</TABLE>
Certain of the leases provide for renewal options.
(13) COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Revolving Credit Facility contains a sublimit to
support the issuance of letters of credit in the amount of $5.0 million
with approximately $1.1 million outstanding.
The Company is involved in various legal proceedings which, in the opinion
of management, will not result in a material adverse effect on its
financial condition or results of operations.
(14) STOCK PLANS
On December 16, 1997, the board of directors of the Company's parent,
AMTROL Holdings, Inc., approved the Holdings 1997 Incentive Stock Plan and
immediately granted to certain key employees options to purchase 65,310
shares of the common stock of Holdings for $100 per share. As of December
31, 1998, options to purchase 51,634 shares were outstanding. The
outstanding options include 25,817 non-qualified options which are
exercisable immediately provided that purchased shares are subject to
repurchase by Holdings at the exercise price until such shares vest based
on relative achievement of management's business plan for fiscal years
1997 through 2001. An additional 22,398 non-qualified options are also
immediately exercisable but are subject to repurchase by Holdings, in
monthly diminishing amounts, if the holder terminates employment before
August 2000. The remaining 3,419 options are incentive stock options of
which 1,999 are vested at December 31, 1998 and the remainder are released
from restrictions ratably through August 2000. There were no options
issued under these plans in 1998.
54
<PAGE> 55
The Company applies APB opinion No. 25 to account for its stock option
plans. Accordingly, pursuant to the terms of the 1997 Holdings Incentive
Stock Plan, no compensation cost related to the issuance of stock options
has been recognized in the Company's financial statements. However, if the
Company had determined compensation cost for options issued in 1997 under
the provisions of SFAS No. 123, the Company's net loss in 1997 would have
increased by approximately $0.6 million. In 1998, adjustments to
compensation expense associated with the options issued in 1997 would have
approximated $.1 million as a result of forfeitures by certain individuals
who left the Company. The fair value of the options granted in 1997 were
estimated using the Black-Scholes option pricing model. The following key
assumptions were used to value the options granted in 1997: volatility, 0;
weighted average risk free rate, 5.00%; average expected life, 3 years.
The weighted average fair value per share of the stock options granted in
1997 amounted to $13.62. It should be noted that the option pricing model
used was designed to value readily tradeable stock options with relatively
short lives. The options granted are not tradeable. However, management
believes that the assumptions used and the model applied to value the
awards yield a reasonable estimate of the fair value of the options grants
under the circumstances.
In connection with the Merger, certain holders of options to purchase
shares of the common stock of the predecessor exchanged such options for
Amended Options to purchase an aggregate of 17,041 shares of Holdings
common stock with weighted average exercise price of $57.38 per share. All
such options are immediately exercisable. No options from any source were
exercised in 1997 or 1998.
(15) BUSINESS SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, in 1998. AMTROL's reportable segments
are delineated geographically. The segments are managed separately because
of their different product offerings, markets served, manufacturing
processes and cost structures. As the Company rationalizes its
manufacturing capacity and manages its markets, the frequency of overlap
of products and markets between segments has increased.
The Company's North American segment operates manufacturing facilities in
Rhode Island, Kentucky, Maryland and Ohio, and operates a distribution
facility in Ontario, Canada. This segment manufactures and markets
products used principally in flow control, storage, heating, and other
treatment of fluids in the water system and HVAC markets. These products
are marketed throughout the world but primarily in North America, Western
Europe, Asia and Mexico.
The Company's European segment includes the Company's facilities in
Guimaraes, Portugal and Donaueschingen, Germany. The Guimaraes facility
manufactures returnable and non-returnable steel gas cylinders for storing
cooking, heating and refrigerant gases which are marketed throughout
Europe, the Middle East and Africa, as well as the Far East, with sales of
$49.6 million. The Donaueschingen facility manufactures and distributes
residential and commercial water heaters which are marketed primarily in
Switzerland, Austria and Germany with sales of $8.7 million.
55
<PAGE> 56
The primary criteria by which financial performance is evaluated and
resources are allocated include revenues and operating income. The
following is a summary of key financial data by segment (prior to 1997,
North America was the Company's only segment):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
SALES TO EXTERNAL CUSTOMERS
North America $170,821 $158,627 $143,817
Europe -- 17,805 58,325
-------- -------- --------
Consolidated $170,821 $176,432 $202,142
======== ======== ========
INCOME FROM OPERATIONS
North America $ 12,813 $ 8,127 $ 8,280
Europe -- 1,907 3,382
-------- -------- --------
Consolidated $ 12,813 $ 10,034 $ 11,662
======== ======== ========
DEPRECIATION AND AMORTIZATION
North America $ 5,184 $ 10,396 $ 10,143
Europe -- 1,145 3,004
-------- -------- --------
Consolidated $ 5,184 $ 11,541 $ 13,147
======== ======== ========
CAPITAL EXENDITURES
North America $ 10,922 $ 6,437 $ 7,807
Europe -- 2,052 2,051
-------- -------- --------
Consolidated $ 10,922 $ 8,489 $ 9,858
======== ======== ========
IDENTIFIABLE ASSETS
North America $184,645 $178,926 $176,639
Europe -- 36,545 46,310
-------- -------- --------
Consolidated $184,645 $215,471 $222,949
======== ======== ========
</TABLE>
Operating income above is shown before the provision for abnormal warranty
costs, plant closing and restructuring charges and management
restructuring charges, all of which relate to the North American business
segment. The following table summarizes sales by product classification:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
HVAC 49.7% 53.8% 60.5%
Water Systems 50.3% 46.2% 39.5%
----- ----- -----
Consolidated 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The percentages above exclude sales by the American Granby subsidiary
which was sold by the Company in 1997.
56
<PAGE> 57
ITEM 14(A)(2) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CONSOLIDATED PERIOD PROVISION RECOVERIES WRITE-OFFS END OF PERIOD
- --------------------------------- ------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
Period ended November 12, 1996
Allowance for doubtful accounts 990 172 21 (108) 1,075
Inventory 174 1,792 -- (894) 1,072
SUCCESSOR
Period ended December 31, 1996
Allowance for doubtful accounts 1,075 91 4 (115) 1,055
Inventory 1,072 238 -- -- 1,310
Year ended December 31, 1997
Allowance for doubtful accounts 1,055 370 3 (340)* 1,088
Inventory 1,310 516 -- (622) 1,204
Year ended December 31, 1998
Allowance for doubtful accounts 1,088 526 42 (62) 1,594
Inventory 1,204 2,000 -- (1,033) 2,171
</TABLE>
* Includes $135 related to the disposition of the Company's American Granby
subsidiary in May 1997.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 5(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in West Warwick, Rhode
Island, on the 30th day of March 1999.
AMTROL Inc.
By: /s/ Donald W. Reilly
-----------------------------------
Donald W. Reilly
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John P. Cashman Chairman of the Board March 30, 1999
- ---------------------------
John P. Cashman
/s/ Albert D. Indelicato President, Chief Executive Officer March 30, 1999
- --------------------------- and Director
Albert D. Indelicato
/s/ Donald W. Reilly Vice President, Chief Financial Officer, March 30, 1999
- --------------------------- and Treasurer (principal
Donald W. Reilly financial officer)
/s/ Paul Kawa Controller, Director of Finance March 30, 1999
- --------------------------- (principal accounting officer)
Paul Kawa
/s/ Andrew M. Massimilla Director March 30, 1999
- ---------------------------
Andrew M. Massimilla
/s/ David P. Spalding Director March 30, 1999
- ---------------------------
David P. Spalding
/s/ James A. Stern Director March 30, 1999
- ---------------------------
James A. Stern
/s/ Anthony D. Tutrone Director March 30, 1999
- ---------------------------
Anthony D. Tutrone
</TABLE>
58
<PAGE> 59
EXHIBIT INDEX
EXHIBIT # DOCUMENT DESCRIPTION
- --------- --------------------
3.1 Restated Articles of Incorporation of AMTROL Inc. (incorporated by
reference from the Company's Registration Statement on Form S-4,
Registration No. 333-18075, declared effective by the Securities and
Exchange Commission on January 2, 1997).
3.2 Bylaws of AMTROL Inc. (incorporated by reference from the Company's
Registration Statement on Form S-4, Registration No. 333-18075,
declared effective by the Securities and Exchange Commission on
January 2, 1997).
4.1 Indenture, dated as of November 1, 1996 between AMTROL Acquisition,
Inc. and The Bank of New York (incorporated by reference from the
Company's Registration Statement on Form S-4, Registration No.
333-18075, declared effective by the Securities and Exchange
Commission on January 2, 1997).
4.2 Form of 10-5/8% Senior Subordinated Notes due 2006 (included in
Exhibit 4.1) (incorporated by reference from the Company's
Registration Statement on Form S-4, Registration No. 333-18075,
declared effective by the Securities and Exchange Commission on
January 2, 1997).
4.3 First Supplemental Indenture, dated as of November 13, 1996, between
AMTROL Inc. and The Bank of New York (incorporated by reference from
the Company's Registration Statement on Form S-4, Registration No.
333-18075, declared effective by the Securities and Exchange
Commission on January 2, 1997).
10.1 Credit Agreement, dated as of November 13, 1996, among AMTROL
Acquisition, Inc. and AMTROL Holdings, Inc., various lending
institutions party thereto, Morgan Stanley Senior Funding, Inc. as
documentation agent, and Bankers Trust Company, as administrative
agent (incorporated by reference from the Company's Registration
Statement on Form S-4, Registration No. 333-18075, declared
effective by the Securities and Exchange Commission on January 2,
1997).
10.1.1 First Amendment to Credit Agreement, dated as of June 24, 1997
(incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended July 5, 1997).
10.1.2 Second Amendment to Credit Agreement, dated as of December 12, 1997
(incorporated by reference to Exhibit 7(c) in the Company's Current
Report on Form 8-K dated December 22, 1997).
10.1.3 Third amendment to the Credit Agreement dated as of June 24, 1998
(incorporated by reference to the Company's Quarterly report on Form
10-Q for the quarter ended July 4, 1998).
10.1.4 Fourth amendment to the Credit Agreement dated as of July 13, 1998
(incorporated by reference to the Company's Quarterly report on Form
10-Q for the third quarter ended October 3, 1998).
10.2 AMTROL Inc. Pension Plan and Trust (incorporated by reference from
the Company's Registration Statement on Form S-1, Registration No.
33-48413, declared effective by the Commission on March 18, 1993).*
59
<PAGE> 60
10.3 Amendments to AMTROL Inc. Pension Plan and Trust (incorporated by
reference from the Company's Registration Statement on Form S-1,
Registration No. 33-48413, declared effective by the Securities and
Exchange Commission on March 18, 1993).*
10.4 AMTROL Inc. Executive Cash Bonus Plan (incorporated by reference
from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).*
10.5 AMTROL Inc. Supplemental Retirement Plan II (incorporated by
reference from the Company's Registration Statement on Form S-1,
Registration No. 33-48413, declared effective by the Commission on
March 18, 1993).*
10.6 First Amendment to AMTROL Inc. Supplemental Retirement Plan II
(incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).*
10.8 Employment Agreement dated June 22, 1998 by and between AMTROL Inc.
and Donald W. Reilly.*
10.9 Employment Agreement dated January 19, 1997 by and between AMTROL
Inc. and Edward J. Cooney. (incorporated by reference to the
Company's Annual Report on Form 10-K for the period ended December
31, 1996).*
10.10 Employment Agreement dated June 24, 1998 by and between AMTROL Inc.
and Albert D. Indelicato.*
10.11 AMTROL Holdings Inc. 1997 Incentive Stock Plan dated December 16,
1997.* (incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended December 31, 1997).
18 Preferability letter regarding change in accounting policy from LIFO
to FIFO
21 Subsidiaries of AMTROL Inc.
27 Financial Data Schedule
* Management contract or compensatory plan arrangement.
60
<PAGE> 1
Exhibit 10.8
June 22, 1998
Donald W. Reilly
Vice President of Finance
AMTROL Inc.
1400 Division Road
West Warwick, RI 02893
Dear Donald:
This letter is intended to serve as an agreement between you and AMTROL Inc.
(the "Company") as to your severance benefits in the event of the termination of
your employment with the Company under the circumstances set forth herein.
In the event that the Company terminates your employment without Cause (as
defined herein) or causes a material reduction of your duties, responsibilities
or titles, the Company shall:
(1) pay you for fifteen (15) consecutive months after termination a
monthly amount equal to one twelfth of your current salary at
termination (the "Termination Benefit");
(2) pay, on the date otherwise due and payable, the pro-rata portion of
any bonus or incentive compensation otherwise payable to you without
regard to your termination with respect to the fiscal period in
which such termination occurs; and
(3) provide you, until the Termination Benefit is paid in full, with the
participation in such group life, disability, accident, hospital and
medical insurance plans ("Welfare Plans") in accordance with the
terms thereof, as from time to time may be in effect; provided, that
benefits and terms of participation under the Welfare Plans may be
changed by the Company from time to time in its sole discretion. To
the extent stock options are to be granted in accordance with a
Company stock option plan for the Company fiscal year ending within
the year your employment with the Company terminates, you shall be
entitled to such options in accordance with the plan's terms.
<PAGE> 2
Donald W. Reilly
June 22, 1998
Page 2
"Cause" as used within this Agreement means:
(i) any act or acts by you constituting a felony (or its
equivalent) under the laws of the United States, any state
thereof or any foreign jurisdiction;
(ii) any material breach by you of any employment agreement with
the Company or the policies of the Company or any of its
subsidiaries or the willful and persistent (after written
notice to you) failure or refusal to perform your duties of
employment or comply with any lawful directives of the Board
of Directors of the Company;
(iii) a course of conduct amounting to gross neglect, willful
misconduct or dishonesty.
The existence and terms of this Agreement shall be held confidential.
Please signify your acceptance of the terms hereof by executing this Letter
Agreement in the space provided below and returning it to the Company.
Very truly yours,
AMTROL Inc.
By:
-----------------------------------
Andrew M. Massimilla,
Director
AGREED TO AND ACCEPTED:
- ----------------------------
Donald W. Reilly
Dated:
----------------------
<PAGE> 1
Exhibit 10.10
June 24, 1998
Mr. Al Indelicato
118 Woodland Road
Hampton, NH 03842
Dear Al:
I am pleased that you have made the decision to join us at Amtrol, Inc. on
July 27, 1998. This letter confirms your employment.
* POSITION: President and CEO of Amtrol Inc., as well as a director.
* SALARY: $300,000 per annum. Guaranteed bonus for the first twelve (12) months
of employment of $200,000 payable one-half on 12/31/98 and the balance on
6/30/99. This would be in addition to any earned bonus for 1999 performance.
* Participation in any company bonus/incentive/stock option plans subsequently
offered by Amtrol, Inc.
* Cypress LLC/Amtrol Inc. will allow Al Indelicato and management team to
purchase up to seven percent (7%) of the equity of Amtrol Inc. at the current
valuation based on the recent purchase of stock by Cypress LLC. This option
extends until 1/31/99.
* The opportunity of the management team to earn an additional seven percent
(7%) of the full equity ownership based on the approved operating statistics,
such statistics to be mutually agreed upon by 10/31/98. ?Amtrol Inc. will rent
an apartment and supply an automobile to you.
* Amtrol Inc. will gross up earnings for any Rhode Island state income tax
liability until such time as you establish residency in Rhode Island.
* When relocation to Rhode Island is contemplated, Amtrol Inc. agrees to
negotiate a comprehensive relocation allowance package.
* Should you be severed (except for cause) or should there be a change of
control during your period of employment, you shall be entitled to eighteen (18)
months of the annual compensation (salary and bonus) payable monthly.
* You will be reporting to Andrew M. Massimilla.
<PAGE> 2
Al, we at Cypress have heard many good things about you and your career
and are very pleased that you have chosen to join us. I am sure we will enjoy a
cordial and mutually beneficial relationship.
Sincerely,
<PAGE> 1
Exhibit 18
March 19, 1999
AMTROL Inc.
1400 Division Road
West Warwick, RI 02893
Re: Form 10-K Report for the year ended December 31, 1998.
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of October 4, 1998, the Company changed from the last-in-first-out (LIFO)
method of accounting for inventory to the first-in-first-out (FIFO) method.
According to the management of the Company, this change will result in a better
measurement of operating results. In addition, the FIFO method is the more
commonly used method among the other companies serving the markets in which the
Company operates.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
Very truly yours,
/s/ Arthur Andersen LLP
Arthur Andersen LLP
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF AMTROL INC.
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY PLACE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
AMTROL-ALFA Metalomecanica, S.A. Guimaraes, Portugal
AMTROL Asia Pacific Ltd. Hong Kong
AMTROL Canada Ltd. Ontario, Canada
AMTROL Export Sales Inc. Barbados
AMTROL International Investments Inc. Rhode Island
AMTROL Ltd. Delaware
Water Soft Inc. Rhode Island
AMTROL Holdings Portugal, SGPS, Unipessoal, Lda. Guimaraes, Portugal
AMTROL Management International Inc. Rhode Island
AGI Holdings Inc. Rhode Island
AMTROL Europe Ltd. United Kingdom
AMTROL Holdings Netherlands B.V. Netherlands
AMTROL Holding GmbH Donaueschingen, Germany
Honer Wassererwarmer Beteiligungs GmbH Donaueschingen, Germany
Nova Wassererwarmer GmbH & Co. K.G. Donaueschingen, Germany
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,088
<SECURITIES> 0
<RECEIVABLES> 30,532
<ALLOWANCES> (1,594)
<INVENTORY> 24,319
<CURRENT-ASSETS> 60,429
<PP&E> 66,168
<DEPRECIATION> (14,385)
<TOTAL-ASSETS> 300,667
<CURRENT-LIABILITIES> 53,787
<BONDS> 177,066
0
0
<COMMON> 89,823
<OTHER-SE> (23,875)
<TOTAL-LIABILITY-AND-EQUITY> 300,667
<SALES> 0
<TOTAL-REVENUES> 202,142
<CGS> 163,107
<TOTAL-COSTS> 163,107
<OTHER-EXPENSES> 40,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,554
<INCOME-PRETAX> (20,099)
<INCOME-TAX> (6,728)
<INCOME-CONTINUING> (13,371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,371)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
