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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 3, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Transition period from  to Commission file number 0-20328 AMTROL Inc.  (Exact Name of Registrant as Specified in its Charter)
 Rhode Island

(State or Other Jurisdiction of
Incorporation or Organization)
    
    05-0246955

(I.R.S. Employer Identification No.)
 1400 Division Road, West
Warwick, RI 02893-1008  (Address of principal executive offices)
 Registrants telephone number, including area code: (401) 884-6300 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: $.01 Par Value: 100 shares
of Common stock as of May 14, 2004. 1




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AMTROL INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED APRIL 3, 2004 INDEX PAGEPART I Financial InformationItem 1. Condensed Consolidated Balance Sheets  April 3, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations  For the Quarters Ended April 3, 2004 and March 31, 2003
    
    
    4Condensed Consolidated Statements of Shareholders Equity  For the Quarters Ended April 3, 2004 and March 31, 2003
    
    
    5Condensed Consolidated Statements of Cash Flows  For the Quarters Ended April 3, 2004 and March 31, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II Other InformationItem 1. Legal Proceedings
    
    
    21Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    21Signatures
    
    
    22CertificationsEx-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 2




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AMTROL INC. AND SUBSIDIARIES 
 Condensed Consolidated Balance Sheets
(Unaudited  In thousands)
 April 3,
    
    December 31,2004
    
    2003AssetsCurrent Assets:Cash and cash equivalents
    
    $
    15,010
    
    
    $
    13,289Accounts receivable, less allowance for doubtful
accounts
    
    
    35,104
    
    
    
    27,211Inventories
    
    
    22,045
    
    
    
    24,345Tax refund receivable
    
    
    1,248
    
    
    
    1,838Deferred income taxes  short-term
    
    
    1,489
    
    
    
    1,489Prepaid expenses and other
    
    
    1,343
    
    
    
    1,127Assets of discontinued operations
    
    
    
    
    
    
    6,939Total current assets
    
    
    76,239
    
    
    
    76,238Property, plant and
equipment, net
    
    
    30,229
    
    
    
    30,511Other Assets:Goodwill
    
    
    119,205
    
    
    
    119,205Deferred financing costs
    
    
    2,638
    
    
    
    2,880Deferred income taxes  long-term
    
    
    7,459
    
    
    
    7,459Other
    
    
    682
    
    
    
    730Total other assets
    
    
    129,984
    
    
    
    130,274$
    236,452
    
    
    $
    237,023Liabilities and Shareholders EquityCurrent Liabilities:Current maturities of long-term debt
    
    $
    2,957
    
    
    $
    2,957Notes payable to banks
    
    
    9,070
    
    
    
    9,283Accounts payable
    
    
    22,989
    
    
    
    22,570Accrued expenses
    
    
    9,264
    
    
    
    10,519Accrued interest
    
    
    2,732
    
    
    
    241Accrued income taxes
    
    
    911
    
    
    
    856Liabilities of discontinued operations
    
    
    
    
    
    
    1,928Total current liabilities
    
    
    47,923
    
    
    
    48,354Other noncurrent liabilities
    
    
    4,365
    
    
    
    4,436Long term debt, less current maturities
    
    
    174,497
    
    
    
    167,022Shareholders Equity:Capital stock $.01 par value  authorized 1,000 shares,
100 shares issued
    
    
    
    
    
    
    Additional paid-in capital
    
    
    99,273
    
    
    
    99,273Retained deficit
    
    
    (93,111
    )
    
    
    (83,125
    )Accumulated other comprehensive loss
    
    
    3,505
    
    
    
    1,063Total shareholders equity
    
    
    9,667
    
    
    
    17,211$
    236,452
    
    
    $
    237,023
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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AMTROL INC. AND SUBSIDIARIES  
 Condensed Consolidated Statements of Operations
(Unaudited  in thousands)
 Quarter EndedApril 3,
    
    March 31,2004
    
    2003Net sales
    
    $
    52,655
    
    
    $
    48,958Cost of goods sold
    
    
    41,139
    
    
    
    38,371Gross profit
    
    
    11,516
    
    
    
    10,587Operating expenses:Selling, general and administrative
    
    
    7,266
    
    
    
    6,725Income from operations
    
    
    4,250
    
    
    
    3,862Other income (expense):Interest expense
    
    
    (5,478
    )
    
    
    (4,726
    )Interest income
    
    
    41
    
    
    
    27Gain on extinguishment of debt
    
    
    
    
    
    
    1,512Other, net
    
    
    66
    
    
    
    (62
    )Income/(loss) from continuing operations before
provision for income taxes
    
    
    (1,121
    )
    
    
    613Provision for income taxes
    
    
    145
    
    
    
    663Loss from continuing operations
    
    
    (1,266
    )
    
    
    (50
    )Discontinued operations:Loss from sale of subsidiary, net
    
    
    (8,331
    )
    
    
    Loss from discontinued operations, net
    
    
    (389
    )
    
    
    (732
    )Net loss
    
    $
    (9,986
    )
    
    $
    (782
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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AMTROL INC. AND SUBSIDIARIES  
 Condensed Consolidated Statements of Shareholders Equity
(Unaudited  in thousands)
 Quarter Ended April 3, 2004 Accumulated OtherAdditional Paid-
    
    
    
    
    
    Comprehensive
    
    ComprehensiveCommon Stock
    
    in Capital
    
    Retained Deficit
    
    Income/(Loss)
    
    LossBalance, December 31, 2003
    
    $
    
    
    
    $
    99,273
    
    
    $
    (83,125
    )
    
    $
    1,063
    
    
    $
    Net loss
    
    
    
    
    
    
    
    
    
    
    (9,986
    )
    
    
    
    
    
    
    (9,986
    )Derivative instrument valuation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    37Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,405
    
    
    
    2,405Balance,
April 3, 2004
    
    $
    
    
    
    $
    99,273
    
    
    $
    (93,111
    )
    
    $
    3,505
    
    
    $
    (7,544
    )
 Quarter Ended
March 31, 2003 Accumulated OtherAdditional Paid-
    
    
    
    
    
    Comprehensive
    
    ComprehensiveCommon Stock
    
    in Capital
    
    Retained Deficit
    
    Loss
    
    LossBalance, December 31, 2002
    
    $
    
    
    
    $
    99,273
    
    
    $
    (81,393
    )
    
    $
    (2,031
    )
    
    $
    Net loss
    
    
    
    
    
    
    
    
    
    
    (782
    )
    
    
    
    
    
    
    (782
    )Derivative instrument valuation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    185Balance, March 31, 2003
    
    $
    
    
    
    $
    99,273
    
    
    $
    (82,175
    )
    
    $
    (1,773
    )
    
    $
    (524
    )
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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AMTROL INC. AND SUBSIDIARIES  
 Condensed Consolidated Statements of Cash Flows
(Unaudited  in thousands)
 Quarter EndedApril 3,
    
    March 31,2004
    
    2003Cash Flows Provided by (Used in) Operating Activities:Loss from continuing operations
    
    $
    (1,266
    )
    
    $
    (50
    )Loss from discontinued operations
    
    
    (8,720
    )
    
    
    (732
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -Depreciation and amortization
    
    
    2,193
    
    
    
    2,258Provision for losses on accounts receivable
    
    
    18
    
    
    
    18Gain on purchase of senior subordinated notes
    
    
    
    
    
    
    (1,512
    )Net assets of discontinued operations
    
    
    5,011
    
    
    
    (418
    )Changes in operating assets and liabilities
    
    
    (1,076
    )
    
    
    (1,004
    )Net cash used in operating activities
    
    
    (3,840
    )
    
    
    (1,440
    )Cash Flows Provided by (Used in) Investing Activities:Capital expenditures
    
    
    (1,768
    )
    
    
    (410
    )Proceeds from sale of discontinued business
    
    
    125
    
    
    
    Net cash used in investing activities
    
    
    (1,643
    )
    
    
    (410
    )Cash Flows Provided by (Used in) Financing Activities:Repayment of debt
    
    
    (35,512
    )
    
    
    (37,424
    )Issuance of debt
    
    
    42,748
    
    
    
    38,243Net cash provided by financing activities
    
    
    7,236
    
    
    
    819Net increase
(decrease) in cash and cash equivalents
    
    
    1,753
    
    
    
    (1,031
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (32
    )
    
    
    44Cash and cash equivalents, beginning of period
    
    
    13,289
    
    
    
    1,699Cash and cash equivalents, end of period
    
    $
    15,010
    
    
    $
    712
 The accompanying notes are an integral part of these condensed consolidated financial statements. 6




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AMTROL INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  1.
    
    Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly, in
accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows of AMTROL Inc. and its
subsidiaries (the Company) for the interim periods presented. Such
adjustments consisted of only normal recurring items. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results for any future interim period or for the entire year.
These condensed consolidated financial statements do not include all
disclosures associated with annual consolidated financial statements and
accordingly should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys Annual Report on Form
10-K.  2.
    
    Use of Estimates The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.  3.
    
    Significant Accounting Policies Revenue Recognition and Related Costs In accordance with Staff Accounting Bulletin (SAB) No. 104, the Company
recognizes revenue only when there is a valid contract or purchase order, which
includes a fixed price; the goods have been delivered in accordance with the
shipping terms; and there is an expectation that the collection of the revenue
is reasonably assured. The Company generally recognizes revenue upon shipment of its products to
customers net of applicable provisions for discounts and allowances.
Allowances for cash discounts and volume rebates, among others, are recorded as
a reduction to revenue at the time of sale based upon the estimated future
outcome. Cash discounts and volume rebates are based upon certain percentages
and sales targets agreed to with the Companys customers, which are typically
earned by the customers over an annual period. The allowance for volume
rebates is consistent with the provisions of EITF 00-22, Accounting for
Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to Be Delivered in the Future. At
April 3, 2004 and March 31, 2003, the Company had accrued $1.2 million for 7




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such volume allowances. These amounts are included in accrued expenses in the
accompanying condensed consolidated balance sheets. 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. Allowance for Doubtful Accounts In circumstances where the Company is aware of a specific customers inability
to meet its financial obligations, an allowance is established. The majority
of accounts are individually evaluated on a regular basis and appropriate
allowances are established as deemed appropriate. The remainder of the
allowance is based upon historical trends and current market assessments. Concentration of Credit Risk The Company extends credit to almost all its customers on an uncollateralized
basis. Concentration of credit and geographic risk with respect to accounts
receivable is limited due to the large number of and general dispersion of
accounts that constitute the Companys customer base. The Company periodically
performs credit evaluations of its customers. At April 3, 2004 and March 31,
2003, there were no customers accounting for greater than ten percent of the
Companys accounts receivable. The Company has not experienced significant
credit losses on customers accounts. The Company invests its excess cash in highly liquid short-term investments.
The Company has established guidelines that maintain safety and liquidity and
reviews these guidelines as economic conditions change. The Company has not
experienced any losses on its cash equivalents or short-term investments. Inventories The Companys inventories are stated at the lower of cost or market including
material, labor and manufacturing overhead (see Note 6). The Company records
provisions, as appropriate, to write-down obsolete and excess inventory to
estimated net realizable value. The process for evaluating obsolete and excess
inventory often requires the Company to make subjective judgments and estimates
concerning future sales levels, quantities and prices at which such inventory
will be able to be sold in the normal course of business. Accelerating the
disposal process or incorrect estimates of future sales potential may cause the
actual results to differ from the estimates at the time such inventory is
disposed or sold. The Company believes that its procedures for estimating such
amounts are reasonable and historically have not resulted in material
adjustments in subsequent periods when the estimates are adjusted to the actual
amounts. Warranty The Company extends various warranties covering most of its products ranging
from a limited one-year warranty to a limited lifetime warranty against defects
in materials and workmanship. The specific terms and conditions of the
warranties depend on the type of product that is sold. The Companys
warranties are generally limited to the replacement of the defective parts or
products at the Companys option. The Company estimates the costs that may be
incurred under its warranty program and records a liability at the time of
sale. Factors that influence the 8




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Companys warranty liability include the amount of production, manufactured
cost of the product, historical warranty returns and anticipated returns based
upon engineering and material improvements. The Company periodically assesses
the adequacy of its warranty reserve through a detailed analysis and adjusts
the reserve accordingly. The following chart illustrates the changes in the Companys warranty reserve: (in thousands) April 3,
    
    March 31,2004
    
    2003Balance, beginning of period
    
    $
    3,065
    
    
    $
    2,269Warranties issued during year
    
    
    269
    
    
    
    321Claims during year
    
    
    (461
    )
    
    
    (321
    )Balance, end of period
    
    $
    2,873
    
    
    $
    2,269
 Goodwill Goodwill represents the excess of acquisition costs over the estimated fair
value of the net assets acquired. The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,which requires that amortization of
goodwill cease and that the Company evaluate the recoverability of goodwill and
other intangible assets annually, or more frequently if events or changes in
circumstances, such as a decline in sales, earnings or cash flows, or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds its estimated fair value. Fair values are established using a discounted cash flow methodology
(specifically, the income approach). The determination of discounted cash
flows is based on the Companys strategic plans and long-range forecasts. The
revenue growth rates included in the forecasts are the Companys best estimates
based on current and anticipated market conditions, and the profit margin
assumptions are projected based on the current and anticipated costs
structures. 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. Foreign Currency Translation Assets and liabilities of non-U.S. operations have been translated into United
States dollars using the quarter-end rate of exchange. Shareholders equity has
been converted using historical rates, and revenues and expenses at the average
exchange rates prevailing during the quarter. The cumulative effect of the
resulting translation was reflected as a separate component of shareholders
equity. 9




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During the current quarter, the Company used forward contracts, generally three
months in duration, to hedge the Companys foreign currency exposures. The foreign
currency exposures relate primarily to its operations in Portugal. A portion
of revenues from the Companys Portuguese operations were denominated in U.S.
dollars and British Pounds so as the Euro changed, the corresponding value of
these receivables also changed. At April 3, 2004, the Companys
Portuguese operations had forward contracts for the purchase of $2.4 million
and £800,000 with maturity dates through August 2004. The value of these
forward contracts was immaterial to the balance sheet of the Company. Recent Accounting Pronouncements In January 2003, the FASB issued FASB
Interpretation 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51(Interpretation 46). In December 2003, the FASB
issued a revision to Interpretation 46 to make certain technical corrections
and address certain implementation issues that had arisen. Interpretation 46,
as revised, provides a new framework for identifying variable interest entities
(VIEs) and determining when a company should include the assets, liabilities,
noncontrolling interests and results of activities of a VIE in its consolidated
financial statements. Interpretation 46 was effective immediately for VIEs
created after January 31, 2003. The provisions of Interpretation 46, as
revised, are required to be adopted by the Company in 2005. The adoption of this
Interpretation is not expected to have a material impact on the Companys overall financial position and
results of operations.  4.
    
    Long-Term Debt Revolving Credit and Term Loans The Company is a party to two credit facilities: a $52.5 million ($42.5 million
prior to the November 18, 2003 amendments discussed below) senior
first-priority secured credit facility arranged by Foothill Capital Corporation
(the Foothill Facility) and a $35.0 million ($25.0 million prior to the
November 18, 2003 amendments discussed below) senior second-priority secured
credit facility with affiliates of The Cypress Group L.L.C. (the Cypress
Facility). The Foothill Facility provides the Company (i) a term loan facility consisting
of (a) a five-year Term A Loan maturing in December 2006,
with an outstanding principal amount of $6.4 million at April 3,
2004, bearing interest at the Wells Fargo Reference Rate (approximates the
prime rate) plus 0.75% (4.75%), and (b) a four-year Term B Loan maturing December
2005, with an outstanding principal amount of $20.0 million as of April 3, 2004, bearing interest at the Wells Fargo
Reference Rate plus 3.5% and a paid-in-kind (PIK) component of 3.5% (11.0%)
(collectively the Term Loans) and (ii) a five-year Revolving Credit Facility
maturing December 2006, bearing interest at LIBOR plus 2.5% or the Wells Fargo
Reference Rate plus 0.5% (4.50%), providing the lesser of (a) $30.0 million
less the aggregate outstanding principal amount of the Term A Loan less letter
of credit usage and (b) borrowing base less letter of credit usage. At April 3,
2004, total availability and aggregate borrowings under the Revolving Credit
Facility were $13.7 million and $12.0 million, respectively. On November 18, 2003, the Company amended its Foothill Facility by entering
into the First Amendment and Waiver to Loan and Security Agreement (the First
Amendment) and also amended its Cypress Facility by entering into the Second
Amendment to Loan and Security Agreement (the Second
Amendment), (collectively the Amendments). The First
Amendment increased the Term B Loan by 10




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$15.0 million to $20.3 million and
extended the maturity date of Term B Loan to December 26, 2005. Commitments
under the Revolving Credit Facility and Term A Loan were reduced in the
aggregate from $35.0 million to $30.0 million. The additional funds provided
by the First Amendment will be used for capital investment programs, general
working capital purposes and may also be used to purchase the Companys Senior
Subordinated Notes in an aggregate amount not to exceed $5.0 million. The
First Amendment also revised certain covenants to be more
consistent with the Companys business plans. The amendments did not effect
the maturity date (December 26, 2006) of the Revolving Credit Facility, Term A
Loan and the Cypress Facility. Upon execution of the First Amendment and Second Amendment in 2003, the Company
was required per EITF 96-19, Debtors Accounting for a Modification or Exchange
of Debt Instruments, to record a loss of $0.5 million on extinguishment of debt
for unamortized costs associated with the original Term B Loan and any bank
related fees in relation to the recent Amendments. The Cypress Facility consists of term loans totaling $35.0 million (the Term C
Loan). The Term C Loan, with an outstanding principal amount of $41.3 million as of April 3, 2004, has a maturity
date of December 26, 2006, and bears Pay-In-Kind (PIK) interest fixed at 12%
per annum paid quarterly, which at the lenders option can be paid in common
stock of the Company. In connection with the Cypress Facility, AMTROL
Holdings, Inc issued the lenders under the Cypress Facility 60,000 warrants to
purchase approximately 5.2% of its common stock on a fully diluted basis. The
60,000 warrants, which have an exercise price of $.01 and are exercisable
immediately, were valued at $3.4 million using the Black-Scholes model. This
amount was recorded as a discount to the Term C Loan debt and included as a
component of shareholders equity. The Company expects that the effective
interest rate associated with the Term C Loan will be greater than 12% given
the additional interest expense associated with the warrants. The Foothill Facility and Cypress Facility contain certain affirmative and
negative covenants and restrictions, such as EBITDA and Fixed Charges Ratio on
a North America and Worldwide basis. As of April 3, 2004, the Company was in
compliance with the various covenants of the Cypress Facility and Foothill
Facility. Senior Subordinated Notes The Company has $97.8 million of Senior Subordinated Notes due November 2006
(the Notes), which are unsecured obligations of the Company and bear interest
at a rate of 10.625% per annum payable semi-annually on June 30 and December
31. The Notes are redeemable at the option of the Company on or after December 31,
2003, in whole or in part, at par. 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 April 3, 2004, the Company was in
compliance with the various covenants of the Notes. During the quarter ended March 2003, the Company purchased a portion of the
Notes with a face value of $2.6 million. The purchase was financed through the
issuance of additional Term C debt of $1.1 million. The extinguishment
resulted in a gain of $1.5 million that was included in Gain on extinguishment
of debt on the Companys condensed consolidated statement of operations. The
Company and/or affiliates of the Company, including entities related to Cypress 11




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may continue, from time to time, to purchase the Notes previously issued by the
Company in the open market or by other means.  5.
    
    Discontinued Operations The
Company, on February 27, 2004, completed the sale of the stock of AMTROL
Holdings GmbH (Holdings) to DTT NOVA Beteiligungen GmbH & Co. KG (DTT) for
approximately 300,000 Euros or $375,000. Holdings principal subsidiary is
AMTROL Nova GmbH & Co. KG, a German-based manufacturer of indirect fired water
heaters. DTT is a German-based company that operates as a manufacturer of
water heaters. Holdings results of operations were included within the Companys Europe
segment. The Company has treated the sale of Holdings as a discontinued
operation in this quarterly report on Form 10-Q for the period ended April 3,
2004 and accordingly the results of operations of Holdings will be excluded
from continuing operations for all periods presented. In addition, the assets
and liabilities of Holdings will be reflected as assets and liabilities from
discontinued operations for all condensed consolidated balance sheets
presented. There was no interest expense allocated to this
discontinued operation.  6.
    
    Inventories Inventories are stated at the lower of cost or market and were as follows (in
thousands): April 3,
    
    December 31,2004
    
    2003Raw materials and work in process
    
    $
    13,251
    
    
    $
    13,709Finished goods
    
    
    8,794
    
    
    
    10,636$
    22,045
    
    
    $
    24,345
  7.
    
    Accounting for Derivative Instruments and Hedging Activities The Company has an interest rate swap contract and an interest rate cap (the
Contract) outstanding as of April 3, 2004, with an initial notional amount of
$15 million. Under this arrangement, which will mature on June 30, 2004, the
Company receives the 90-day LIBOR rate and pays a fixed rate of 4.60% for the
period from January 1, 2001 through maturity, unless LIBOR increases to 7.1%.
If LIBOR increases to 7.1%, then the Company continues to receive the 90-day
LIBOR rate but then would pay the 90-day LIBOR rate for all subsequent periods capped
at a maximum of 7.1%. The LIBOR rate has not exceeded 7.1% since inception of
the Contract. The Contract was designated as a cash flow hedge of variable
future cash flows associated with the Foothill Agreement Term Loan A and B
Debt. As of April 3, 2004, the fair value of the instrument ($19 thousand) was
recorded in other non-current liabilities with a corresponding entry to
accumulated other comprehensive loss. Subsequent changes in the fair value of
the swap will be recorded through accumulated other 12




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comprehensive loss (except
for changes related to ineffectiveness, which will be recorded currently
through operations). The Company does not currently anticipate any material
ineffectiveness under the hedge for 2004. 8. Provision for Income Taxes The effective income tax rates used in the interim consolidated financial
statements are estimates of the full years rates. Net deferred tax assets
recognized on the Companys balance sheet continue to require managements
evaluation as to their realization. Although realization is not assured,
management believes it is more likely than not that the net deferred tax assets
will be realized. The amount expected to be realized is based upon estimates
derived from tax planning
strategies which the Company believes are currently prudent and feasible. A
valuation allowance has been provided for certain net operating loss
carryforwards as the realizability of the carryforwards is uncertain. Additions to the
valuation allowance may be required in the event that estimates are changed.  9.
    
    Business Segment Information The
Companys reportable segments are delineated geographically. In addition to the
geographic delineation, the segments are managed separately because of their
different product offerings, markets served and cost structures. 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 and Asia. The Companys European segment includes its facilities in Guimaraes, Portugal
and Swarzedz, Poland. The Guimaraes facility manufactures returnable and
non-returnable steel gas cylinders for storing cooking, heating and refrigerant
gases that are marketed worldwide. The Swarzedz facility refurbishes gas
cylinders. The primary criteria by which financial performance is evaluated and resources
are allocated include revenues and EBITDA. EBITDA is earnings (net
income/loss) before interest, taxes, depreciation and amortization. The method
of calculating EBITDA is consistent with the definition contained in the
Foothill Agreement and the Indenture. Readers of financial statements
frequently consider EBITDA a useful tool in evaluating a companys performance.
Therefore, the Company believes that inclusion of EBITDA is useful supplemental
information. However, EBITDA is not a measure of true cash flow since it does
not incorporate changes of other assets or liabilities that may generate or
require cash. EBITDA is not a generally accepted accounting measure. The
following is a summary of key financial data by segment: 13




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##### Table of Contents



April 3,
    
    March 31,2004
    
    2003Net Sales to external customersNorth AmericaUS
    
    $
    31,030
    
    
    $
    27,874Other
    
    
    1,808
    
    
    
    1,720EuropePortugal
    
    
    19,525
    
    
    
    18,878Other
    
    
    292
    
    
    
    486Consolidated
    
    $
    52,655
    
    
    $
    48,958Income from operationsNorth America
    
    $
    3,238
    
    
    $
    2,112Europe
    
    
    1,012
    
    
    
    1,750Consolidated
    
    $
    4,250
    
    
    $
    3,862EBITDANorth America
    
    $
    4,381
    
    
    $
    3,423Europe
    
    
    1,848
    
    
    
    2,415Consolidated
    
    $
    6,229
    
    
    $
    5,838
 April 3,
    
    December 31,2004
    
    2003Long-Lived assetsNorth AmericaUS
    
    $
    115,532
    
    
    $
    115,819Other
    
    
    10
    
    
    
    10EuropePortugal
    
    
    32,117
    
    
    
    31,999Other
    
    
    1,775
    
    
    
    1,888Consolidated
    
    $
    149,434
    
    
    $
    149,716
 10. Commitments and Contingencies At April 3, 2004, the Foothill Facility contained a sublimit to support the
issuance of letters of credit in the amount of $3.0 million. At April 3, 2004,
letters of credit outstanding amounted to $0.8 million. The Company is subject to contingencies, including legal proceedings and claims
arising out of its businesses that cover a wide range of matters, including,
among others, environmental 14




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matters, contract and employment claims, workers
compensation claims, product liability and warranty. The Company provides accruals for direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated. Costs accrued have been estimated and are based upon an
analysis of potential results. While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company
believes that the aggregate amount of such liabilities, if any, in excess of
amounts provided or covered by insurance, will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company. It is possible, however, that future results of operations for any
particular future period could be materially affected by changes in our
assumptions or strategies related to these contingencies or changes out of the
Companys control. 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview This section should be read in conjunction with the condensed Consolidated
Financial Statements of the Company included elsewhere herein and the Companys
Form 10-K for 2003. The Company and its representatives may from time to time make written or oral
statements, including statements contained in the Companys filings with the
Securities and Exchange Commission (SEC) and in its reporting to customers,
which constitute or contain forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995 or the SEC in
its rules, regulations and releases. All statements other than statements of historical fact included in this Form
10-Q and elsewhere relating to the Companys financial position, strategic
initiatives and statements addressing industry developments are forward-looking
statements. When incorporated in this discussion, the words expect(s),
feel(s), believe(s), anticipate(s) and similar expressions are intended
to identify some of these forward-looking statements. Forward looking
statements include those containing these phrases but also any other statements
that are not references to historical fact. Although the Company believes that
the expectations reflected in such forward-looking statements are expressed in
good faith and are believed to have a reasonable basis, there can be no
assurance that such expectations or beliefs will result or be achieved or
accomplished. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
following are some of the important factors that can vary or change or involve
substantial risk and cause actual results to differ materially from such
expectations: the Companys ability to successfully implement its business
strategy; the availability and cost of raw materials; changes in domestic or
foreign government regulation or enforcement policies, particularly related to
refrigerant gases or cylinders and building and energy efficiency requirements
or restrictions or limitations or general reduction in the use of domestic
wells; significant weather conditions adverse to the Companys business;
development of competing technologies; acceptance of the Companys existing and
planned new products in international markets; competition in the Companys
markets, particularly price competition; the rate of growth of developing
economies and demand for the Companys products; the ultimate cost of future
warranty and other claims relating to the Companys products and business;
whether the Company succeeds in acquiring new businesses; availability of
capital; foreign exchange rates; increases in interest rates; the business
abilities and judgment of personnel; and general economic, financial and
business conditions, both domestically and internationally. Results of Operations The following table sets forth, for the periods indicated, the percentages of
the Companys net sales represented by certain income and expense items in the
Companys Condensed Consolidated Statements of Operations. 16




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##### Table of Contents



For the Quarter EndedApril 3, 2004
    
    March 31, 2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    78.1
    
    
    
    78.4Gross profit
    
    
    21.9
    
    
    
    21.6Selling, general and administrative expenses
    
    
    13.8
    
    
    
    13.7Income from operations
    
    
    8.1
    
    
    
    7.9Interest expense
    
    
    (10.4
    )
    
    
    (9.7
    )Interest income
    
    
    0.1
    
    
    
    0.1Other income, net
    
    
    0.1
    
    
    
    3.0Income/(loss) from continuing operations before provision for income taxes
    
    
    (2.1
    )
    
    
    1.3Provision for income taxes
    
    
    0.3
    
    
    
    1.4Loss from continuing operations
    
    
    (2.4
    )
    
    
    (0.1
    )Loss from discontinued operations, net
    
    
    (16.6
    )
    
    
    (1.5
    )Net loss
    
    
    (19.0
    )%
    
    
    (1.6
    )%
 Net Sales.Net sales for the first quarter of 2004 increased $3.7 million or
7.6% compared to the same period in 2003. In North America, net sales in the
first quarter of 2004 increased $3.2 million or 11.0% as compared to the first
quarter of 2003 due principally to improving
economic conditions and increased well tank sales. Net sales in Europe
increased $0.5 million or 2.3% due principally to the strengthening of the Euro
against the U.S. dollar. If the value of the Euro had remained at the average
level of the first quarter of 2003, reported net sales in Europe for the first
quarter of 2004 would have decreased $2.3 million or 11.9% from the first
quarter of 2003. The decrease is attributable principally to the
curtailment of a major program with a U.S. based LPG Cylinder
customer as the U.S. dollar weakened. Gross Profit.Gross profit for the first quarter of 2004 increased $0.9
million or 8.8% from the first quarter of 2003. As a percentage of net sales,
the gross profit percentage increased to 21.9% in 2004 from 21.6% in 2003. This
increase was due principally to increased volume and product mix offset by
increased steel costs in both North America and Europe. Selling, General and Administrative Expenses.Selling, general and
administrative expenses for the first quarter of 2004 increased by $0.5 million
or 8.0% compared to 2003. The change was principally due to higher sales
commissions as a result of the increase in North American sales and the
strengthening of the Euro versus the U.S. dollar. Gain on Extinguishment of Debt, Net.The decrease was principally due to the
gain of $1.5 million recorded in 2003 on the extinguishment of a portion of the
Companys senior subordinated notes. Income Taxes.Income taxes during the first quarter of 2004 decreased $0.5
million as compared to 2003. The decrease was principally the result of
decreased operating profits in the Companys European operations. 17




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Net Loss.The net loss for the first quarter of 2004 of $10.0 million compares
to a net loss in the first quarter of 2003 of $0.8 million reflecting the loss
of $8.3 million incurred on the sale of the discontinued subsidiary. Liquidity and Capital Resources As of April 3, 2004, the Companys operating capital (defined as accounts
receivable and inventory, less accounts payable) increased $5.2 million from
$29.0 as of December 31, 2003 to $34.2 million. Accounts receivable increased
$7.9 million reflecting increased sales while inventories decreased $2.3
million due to aggressive inventory management. Accounts payable increased
$0.4 million consistent with increased sales. For the first three months of 2004, net cash used in operations of $3.8 million
was $2.4 million more than the first three months of 2003 due principally to
increased working capital requirements (defined as current assets less current
liabilities) attributable to the higher sales and the strengthening of the
Euro. Capital expenditures of $1.8 million were $1.4 million higher than in
the first three months of 2003. The increased capital expenditures are
attributable to specific productivity driven investments funded by a portion of
additional Term B proceeds described below. Cash provided by financing
activities during the quarter ended April 3, 2004 increased approximately $6.4
million to fund these increased working capital requirements and the additional
capital expenditures. The Company is a party to two credit facilities: a $52.5 million ($42.5 million
prior to the November 18, 2003 amendments discussed below) senior
first-priority secured credit facility arranged by Foothill Capital Corporation
(the Foothill Facility) and a $35.0 million ($25.0
million prior to the November 18, 2003 amendments discussed below) senior
second-priority secured credit facility with affiliates of The Cypress Group
L.L.C. (the Cypress Facility). The Foothill Facility provides the Company (i) a term loan facility consisting
of (a) a five-year Term A Loan maturing in December 2006,
with an outstanding principal amount of $6.4 million at April 3,
2004, bearing interest at the Wells Fargo Reference Rate (approximates the
prime rate) plus 0.75% (4.75%), and (b) a four-year Term B Loan maturing December
2005 with outstanding principal amount of $20.0 million as of April 3, 2004, bearing interest at the Wells Fargo
Reference Rate plus 3.5% and a paid-in-kind (PIK) component of 3.5% (11.0%)
(collectively the Term Loans) and (ii) a five-year Revolving Credit Facility
maturing December 2006, bearing interest at LIBOR plus 2.5% or the Wells Fargo
Reference Rate plus 0.5% (4.50%), providing the lesser of (a) $30.0 million
less the aggregate outstanding principal amount of the Term A Loan less letter
of credit usage and (b) borrowing base less letter of credit usage. At April 3,
2004, total availability and aggregate borrowings under the Revolving Credit
Facility were $13.7 million and $12.0 million, respectively. On November 18, 2003, the Company amended its Foothill Facility by entering
into the First Amendment and Waiver to Loan and Security Agreement (the First
Amendment) and also amended its Cypress Facility by entering into the Second
Amendment to Loan and Security Agreement (the Second Amendment). The First
Amendment increased the Term B Loan by $15.0 million to $20.3 million and
extended the maturity date of Term B Loan to December 26, 2005. Commitments
under the Revolving Credit Facility and Term A Loan were reduced in the
aggregate from $35.0 million to $30.0 million. The additional funds provided
by the First Amendment will be used for capital investment programs, general
working capital purposes and may also be used to purchase the Companys Senior
Subordinated Notes in an aggregate amount not to exceed $5.0 million. The
First Amendment also revised certain covenants to be more 18




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##### Table of Contents



consistent with the Companys business plans. The amendments did not effect the maturity date
(December 26, 2006) of the Revolving Credit Facility, Term A Loan and the
Cypress Facility. Upon execution of the First Amendment and Second Amendment in 2003, the Company
was required per EITF 96-19, Debtors Accounting for a Modification or Exchange
of Debt Instruments, to record a loss of $0.5 million on extinguishment of debt
for unamortized costs associated with the original Term B Loan and any bank
related fees in relation to the recent Amendments. The Cypress Facility consists of term loans totaling $35.0 million (the Term C
Loan). The Term C Loan, with an outstanding principal amount of $41.3 million as of April 3, 2004, has a maturity
date of December 26, 2006, and bears Pay-In-Kind (PIK) interest fixed at 12%
per annum paid quarterly, which at the lenders option can be paid in common
stock of the Company. In connection with the Cypress Facility, AMTROL
Holdings, Inc issued the lenders under the Cypress Facility 60,000 warrants to
purchase approximately 5.2% of its common stock on a fully diluted basis. The
60,000 warrants, which have an exercise price of $.01 and are exercisable
immediately, were valued at $3.4 million using the Black-Scholes model. This
amount was recorded as a discount to the Term C Loan debt and included as a
component of shareholders equity. The Company expects that the effective
interest rate associated with the Term C Loan will be greater than 12% given
the additional interest expense associated with the warrants. The Foothill Facility and Cypress Facility contain certain affirmative and
negative covenants and restrictions, such as EBITDA and Fixed Charges Ratio on
a North America and Worldwide basis. As of April 3, 2004, the Company was in
compliance with the various covenants of the Cypress Facility and Foothill
Facility. The
Company has $97.8 million of Senior Subordinated Notes due
November 2006 (the
Notes), which are unsecured obligations of the Company and bear interest at a
rate of 10.625% per annum payable semi-annually on June 30 and December 31.
The Notes are redeemable at the option of the Company on or after December 31,
2003, in whole or in part, at par. 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 April 3, 2004, the Company was in
compliance with the various covenants of the Notes. During the quarter ended March 2003, the Company purchased a portion of the
Notes with a face value of $2.6 million. The purchase was financed through the
issuance of additional Term C debt of $1.1 million. The extinguishment
resulted in a gain of $1.5 million that was included in Gain on
extinguishment of debt on the
Companys Statement of Operations. The Company and/or affiliates of the
Company, including entities related to Cypress may continue, from time to time,
to purchase the Notes previously issued by the Company in the open market or by
other means. The Company intends to fund future working capital, capital expenditure and
debt service requirements with its cash position, cash flow from operations and
borrowings under the Revolving Credit Facility. Management believes that cash
generated from these sources will be sufficient to meet the Companys working
capital and capital expenditure needs in the foreseeable future. Finally,
the Company may consider other options to fund future working capital and
capital expenditure needs, including the issuance of additional debt and equity
securities. The Company anticipates being able to refinance its senior secured debt and
senior subordinated notes, which mature in 2006. The Company
currently anticipates refinancing 19




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##### Table of Contents



the senior secured debt with its existing
lenders or other sources and expects to seek additional unsecured debt to cover
the maturing Senior Subordinated Notes. However, there can be no assurances
that the Company will be able to refinance the maturing debt. The Company will continue to selectively pursue strategic acquisitions. The
Company believes that strategic acquisitions, both domestic and international,
provide an effective means of increasing or establishing a market presence in
targeted markets and a means of identifying and introducing new products and
technologies in markets where it already has a strong presence. The Company
also believes that establishing local manufacturing and distribution facilities
in international markets significantly enhances its ability to build strong
customer relationships, understand local product preferences and be price
competitive. Inflation The Company believes that anticipated inflation rates will not have a
materially adverse effect on its results of operations or its financial
condition in 2004. However, there can be no assurance that sharply increasing
raw material or fuel costs will not adversely affect the Companys financial
condition or results of operations. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in information relating to market risk
since the Companys disclosure included in Item 7A of Form 10-K as filed with
the Securities and Exchange Commission on March 29, 2004. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As of April 3, 2004, the Company, under the supervision and with the
participation of its management, including its principal executive officer and
principal financial officer, performed an evaluation of the Companys
disclosure controls and procedures, as required by Securities Exchange Act Rule
13a-15. Based on that evaluation, the Companys principal executive officer
and principal financial officer concluded that such disclosure controls and
procedures are effective to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to them,
particularly during the period for which the periodic reports are being
prepared. Changes in Internal Controls No significant changes were made in the Companys internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation performed pursuant to Securities Exchange Act Rule 13a-15. 20




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##### Table of Contents



AMTROL INC. AND SUBSIDIARIES 
 PART II 
 Item 1. Legal Proceedings No material legal proceedings were terminated or filed against the Company
during the period covered by this report. 
 Item 2. Changes in Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:  31.1
    
    Certification of Chief Executive
Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule 13a-14 (a) under the Securities
Exchange Act of 1934.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: On March 12, 2004, a Form 8-K was filed in connection
with the sale of the Companys German subsidiary. 21




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##### Table of Contents



AMTROL INC. AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements 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. AMTROL INC.Date: May 14, 2004
    By:
    /s/ ALBERT D. INDELICATOAlbert D. IndelicatoPresident, Chairman of the Board,
Chief Executive Officer and
Director Date: May 14, 2004
    By:
    /s/ LARRY T. GUILLEMETTELarry T. Guillemette,Executive Vice President,
Chief Financial Officer and
Treasurer 22