1 FILE NO. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 WATER PIK TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 25-1843384 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 660 NEWPORT CENTER DRIVE, SUITE 470 NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-3700 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED --------------------------------------- ------------------------------ COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (TITLE OF CLASS) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 WATER PIK TECHNOLOGIES, INC. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT ---- ------------ --------------------------------- 1 Business........................................... "Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business" 2 Financial Information.............................. "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Our Historical Selected Financial Data," "Our Unaudited Pro Forma Consolidated Financial Information," and "Index to Our Financial Statements" 3 Properties......................................... "Our Business" 4 Security Ownership of Certain Beneficial Owners and Management......................................... "Security Ownership" 5 Directors and Officers............................. "Management" and "Liability and Indemnification of Our Officers and Directors" 6 Executive Compensation............................. "Management" 7 Certain Relationships and Related Transactions..... "Arrangements with ATI Relating to the Spin-Off" 8 Legal Proceedings.................................. "Our Business" 9 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters...... Not Applicable 10 Recent Sales of Unregistered Securities............ Not Applicable 11 Description of Registrant's Securities to be Registered......................................... "Description of Our Capital Stock" 12 Indemnification of Officers and Directors.......... "Liability and Indemnification of Our Officers and Directors" 13 Financial Statements and Supplementary Data........ "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Our Historical Selected Financial Data," "Our Unaudited Pro Forma Consolidated Financial Information," and "Index to Our Financial Statements" 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ Not Applicable 15 Financial Statements and Exhibits.................. "Index to Our Financial Statements" and 3 [ALLEGHENY TELEDYNE INCORPORATED LOGO] , 1999 To Our Stockholders: These are exciting times at your company. In January we announced our plans to effect a major transformation of Allegheny Teledyne that included the spin-offs of two of our business segments into independent, publicly-traded companies. This transformation is now being implemented. The businesses formerly comprising our Consumer segment will be a separate company known as Water Pik Technologies, Inc. The businesses formerly comprising our Aerospace and Electronics segment will now be a separate company known as Teledyne Technologies Incorporated. The common stock of these companies will be traded on the New York Stock Exchange under the symbols "PIK" and "TDY," respectively. Concurrently with the spin-offs, we will change our name to "Allegheny Technologies Incorporated." We also intend to effect a one-for-two reverse split of our common stock. The spin-offs will allow Allegheny Technologies to focus exclusively on its strategic growth objectives as one of the largest and most diversified specialty metals companies in the world. ATI's strong base of companies provides an excellent foundation for enhanced operating synergies and for adding strategically complementary acquisitions. At the same time, the spin-offs provide each new company with a sharper focus, more efficient access to the capital markets, and substantial growth opportunities in its respective areas of expertise. By creating these new companies, we believe that we will unlock greater value for their respective businesses and enhance their ability to thrive in today's competitive marketplace. Both of the spin-offs, which will be tax-free to U.S. stockholders and which do not require any action on your part, will be completed on , 1999. For every 20 shares of ATI common stock that you own as of the close of business on that date, you will receive one share of Water Pik Technologies common stock. For every seven shares of ATI common stock that you own as of the close of business on , 1999, you will receive one share of Teledyne Technologies common stock. The enclosed Information Statement contains information about the spin-off of Water Pik Technologies and about Water Pik Technologies' business, management and financial performance. Information about the Teledyne Technologies spin-off is being provided to you in a separate document. We encourage you to read all of these materials carefully. Very truly yours, Richard P. Simmons Chairman 4 [WATER PIK TECHNOLOGIES, INC. LOGO] , 1999 To Our Future Stockholders: Welcome to Water Pik Technologies, Inc. On , 1999 you will become a stockholder of our company. We hope that you share our enthusiasm about our new company and its future. Water Pik Technologies is a leader in the design, manufacturing and marketing of a broad range of well recognized personal health care products and pool and water-heating products. We believe that our Water Pik(R), Laars(R) and Jandy(R) products have strong brand name recognition and a reputation for quality and innovation among consumers. For over 35 years, we have manufactured personal health care products, such as The Original Shower Massage(R) product line, that are sold primarily under our Water Pik(R) brand name. Our swimming pool and spa heaters, controls, valves and accessories, many of which we have manufactured for over 40 years, are sold primarily under our Laars(R) and Jandy(R) brand names. Our residential and commercial water-heating systems, which we have manufactured for over 50 years, are sold primarily under our Laars(R) brand name. Our vision is to create a growth oriented consumer products company which capitalizes on our well recognized brand names and develops innovative products that provide outstanding value to our customers. I am excited to be working with a management team that will provide high caliber, experienced leadership and that is committed to achieving our business strategy. Please read the enclosed material for more information about our company. We look forward to your support and are pleased to have you share in this exciting opportunity. Very truly yours, Michael P. Hoopis President and Chief Executive Officer 5 PRELIMINARY INFORMATION STATEMENT DATED SEPTEMBER 13, 1999 -- FOR INFORMATION ONLY INFORMATION STATEMENT ------------------------- ALLEGHENY TELEDYNE INCORPORATED'S SPIN-OFF OF WATER PIK TECHNOLOGIES, INC. ------------------------- We are furnishing you with this Information Statement in connection with the spin-off by Allegheny Teledyne Incorporated ("ATI") of all of the outstanding common stock of Water Pik Technologies, Inc. to stockholders of ATI. We own and operate the businesses formerly comprising the Consumer segment of ATI. ATI will accomplish the spin-off by distributing all issued and outstanding shares of our common stock to holders of record of ATI common stock. ATI will distribute one share of our common stock for every 20 ATI shares held as of the close of business on , 1999. The actual number of our shares to be distributed will depend on the number of ATI shares outstanding on that date. Concurrently with the spin-off, ATI will change its name to "Allegheny Technologies Incorporated." OWNING SHARES OF OUR COMMON STOCK WILL ENTAIL RISKS. PLEASE READ "RISK FACTORS" BEGINNING ON PAGE 15. NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE SPIN-OFF. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE NOT REQUESTED TO SEND US A PROXY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. The date of this Information Statement is , 1999. 6 [PHOTOGRAPHS OF WATER PIK TECHNOLOGIES PRODUCTS] 7 TABLE OF CONTENTS PAGE ---- Summary..................................................... 5 Risk Factors................................................ 15 Cautionary Statement as to Forward-Looking Statements....... 21 The Spin-Off................................................ 22 Reasons for the Spin-Off.................................. 22 Manner of Effecting the Spin-Off.......................... 23 Results of the Spin-Off................................... 23 Certain Federal Income Tax Consequences of the Spin-Off... 24 Listing and Trading of Our Common Stock................... 26 Our Historical Selected Financial Data...................... 28 Our Unaudited Pro Forma Consolidated Financial Information............................................... 29 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 34 Our Business................................................ 44 Overview.................................................. 44 Industry Overview......................................... 44 Competitive Strengths..................................... 45 Our Business Strategy..................................... 46 Our Products.............................................. 48 Sales, Marketing and Distribution......................... 52 Competition............................................... 53 Research and Development.................................. 53 Manufacturing and Facilities.............................. 54 Patents and Trademarks.................................... 55 Seasonality............................................... 55 Legal Proceedings......................................... 55 Employees................................................. 55 Arrangements with ATI Relating to the Spin-Off.............. 56 Separation and Distribution Agreement..................... 56 Employee Benefits Agreement............................... 57 Tax Sharing and Indemnification Agreement................. 58 Interim Services Agreement................................ 59 Management.................................................. 60 Directors................................................. 60 Committees of Our Board of Directors...................... 61 Compensation of Our Directors............................. 63 3 8 PAGE ---- Executive Officers and Senior Management.................. 64 Historical Compensation of Executive Officers............. 65 Employment Agreements..................................... 66 Benefit Plans Following the Spin-Off...................... 67 Security Ownership.......................................... 70 Description of Our Capital Stock............................ 71 Common Stock.............................................. 71 Preferred Stock........................................... 72 Rights Plan............................................... 72 Certain Provisions of Our Governing Documents............. 74 Anti-takeover Legislation................................. 77 Transfer Agent and Registrar.............................. 77 Liability and Indemnification of Our Officers and Directors................................................. 78 Elimination of Liability.................................. 78 Indemnification of Officers and Directors................. 78 Available Information....................................... 78 4 9 SUMMARY This summary highlights selected information from this Information Statement, but does not contain all the details concerning the spin-off, including information that may be important to you. To better understand us and the spin-off, you should carefully review this entire document. References to "we," "us," "our", "Water Pik Technologies" or "the Company" mean Water Pik Technologies, Inc. and our subsidiaries and divisions. References to "ATI" mean Allegheny Teledyne Incorporated and its subsidiaries and divisions. WHO WE ARE Water Pik Technologies is a leader in the design, manufacturing and marketing of a broad range of well recognized personal health care products and pool and water-heating products, which include the following: PERSONAL HEALTH CARE PRODUCTS - Water Pik(R) shower heads, including The Original Shower Massage(R) shower head and innovations such as The Flexible Shower Massage(TM) and the Misting Massage(TM) shower heads - Water Pik(R) oral health products such as the Water Pik(R) Oral Irrigator, Water Pik(R) Dental Systems and the SenSonic(R) Plaque Removal Instrument and a broad range of professional dental products - Water Pik(R) water filtration products such as our Water Pik(R) and Instapure(R) filtration systems POOL AND WATER-HEATING PRODUCTS - Laars(R) swimming pool and spa heaters, such as the Laars(R) LX - Jandy(R) pool and spa digital controls - Jandy(R) RayVac automatic pool cleaners - Jandy(R) pool and spa plumbing products, such as valves, actuators, pumps and filters - Jandy(R) water features such as the Sheer Descent(R) Waterfall and the Jandy(R) Fountain - Jandy(R) Sheer Radiance(TM)fiber optic lighting for underwater perimeter and landscaping uses - Water Pik(TM) and Jandy(TM) pool and spa accessories, including cleaning and maintenance supplies, white goods, ladders, solar reels, floating lounges, pool toys and games - Laars(R) residential and commercial water-heating systems, such as the Laars(R) Endurance(TM) modulating boiler and the Mighty Max(R) series of commercial boilers and water heaters 5 10 We believe our Water Pik(R), Laars(R) and Jandy(R) products have strong brand name recognition and a reputation for quality and innovation among consumers. Through our extensive distribution network, our products are distributed through more than 45,000 retail and wholesale outlets in North America. Fiscal year sales in 1998 were $235.8 million and sales for the first six months of 1999 were $118.5 million. OUR COMPETITIVE STRENGTHS AND BUSINESS STRATEGY Our vision is to create a growth oriented consumer products company which capitalizes on our well recognized brand names and develops innovative products that provide outstanding value to our customers. COMPETITIVE STRENGTHS We believe we are a strong competitor for the following reasons: - Strong Brand Names - Reputation for Innovative Products - Extensive Distribution Network - Proven Manufacturing Capabilities - Experienced Management Team OUR BUSINESS STRATEGY To achieve our vision, we intend to pursue the following strategies: - Accelerate Introduction of Innovative New Products - Broaden Product Offerings - Leverage Our Strong Brand Name Recognition - Capitalize Upon Our Existing Distribution Channels - Utilize Our Manufacturing Capabilities to Become a Lower Cost Producer - Expand Our International Presence - Leverage Our Customer Services Capabilities - Pursue Selected Acquisitions and Strategic Alliances QUESTIONS AND ANSWERS ABOUT US AND THE SPIN-OFF Why are we being spun-off by ATI? - After a strategic review completed in 1998, ATI concluded that its Consumer segment, which will comprise our Company, would be able to grow faster and more effectively as a separate, independent public company. As a separate company, we will be better able to focus on our own strategic priorities and to have more effi- 6 11 cient access to the capital markets than we could as part of ATI. We believe that the spin-off will enable our business to expand and grow more quickly and efficiently in the following ways: - Our business has different fundamentals, growth characteristics and strategic priorities than the specialty metals businesses currently conducted by ATI. The separation of our business from those of ATI will enable us to focus on our own strategic priorities, which should increase our ability to capitalize on growth opportunities for our business and enhance our ability to respond more quickly to changes in the markets that we serve. - The spin-off will enable us to have direct access to the capital markets. We intend to raise our own equity capital that we will use to expand our business by further developing high quality, lower cost manufacturing capabilities; pursuing product line extensions for existing categories; expanding into new channels of distribution with existing products; developing a self-sustaining product development process; and seeking complementary acquisitions and alliances to enhance our market presence. - The spin-off will enable us to recruit, retain and motivate key employees by providing them with stock-based compensation incentives directly tied to the success of our separated business. What will I receive in the spin-off? - ATI will distribute one share of our common stock for every 20 shares of ATI stock you owned as of , 1999. For example, if you own 100 shares of ATI common stock, you will receive five shares of our common stock. You will continue to own your ATI common stock. ATI intends to effect a one-for-two reverse split of its common stock immediately after the spin-off. What do I have to do to participate in the spin-off? - Nothing. No stockholder vote is required for the spin-off. How will ATI distribute Water Pik Technologies common stock to me? - If you own ATI common stock on the record date, the distribution agent will automatically 7 12 credit your shares of our common stock to a book-entry account established to hold your Water Pik Technologies common stock on , 1999 and will mail you a statement of your Water Pik Technologies common stock ownership. Following the spin-off you may retain your shares of Water Pik Technologies common stock in your book-entry account, sell them, transfer them to a brokerage or other account, or request a physical certificate for whole shares. You will not receive new ATI stock certificates. What is the record date? - The record date is , 1999. What if I hold my shares of ATI stock through my stockbroker, bank or other nominee? - If you hold your shares of ATI stock through your stockbroker, bank or other nominee, you are probably not a stockholder of record and your receipt of Water Pik Technologies common stock depends on your arrangements with the nominee that holds your shares of ATI stock for you. We anticipate that stockbrokers, banks and other nominees generally will credit their customers' accounts with Water Pik Technologies common stock on or about , 1999, but you should check with your stockbroker, bank or other nominee. Following the spin-off you may instruct your stockbroker, bank or other nominee to transfer your shares of Water Pik Technologies common stock into your own name to be held in book-entry form through the direct registration system operated by the distribution agent. How will you treat fractional shares? - If you are otherwise entitled to receive a fractional share of Water Pik Technologies common stock you will receive cash instead of the fractional share. Fractional shares will be aggregated and sold by the distribution agent, which will distribute to you your portion of the cash proceeds promptly after the spin-off. No interest will be paid on any cash distributed instead of fractional shares. What is Water Pik Technologies' dividend policy? - We currently anticipate that no cash dividends will be paid on Water Pik Technologies common stock in order to conserve cash for use in our business, including possible future acquisitions. Our board of directors will periodically re-evaluate this dividend policy taking into account our operating results, capital needs and other factors. 8 13 How does Water Pik Technologies common stock differ from ATI common stock? - Water Pik Technologies common stock and ATI common stock will be different securities and will not trade or be valued alike. Water Pik Technologies and ATI will be separate companies, with different management, fundamentals, growth characteristics and strategic priorities. However, as with ATI common stock, Water Pik Technologies common stock will have the following characteristics: - be fully paid and nonassessable; - have one vote per share, with no right to cumulate votes; - carry no preemptive rights; and - be accompanied by Preferred Share Purchase Rights. How will Water Pik Technologies common stock trade? - We have applied to list Water Pik Technologies common stock on the New York Stock Exchange under the symbol "PIK" and expect that regular trading will begin on , 1999. A temporary form of interim trading called "when-issued trading" may occur for our common stock on or before , 1999 and continue through , 1999. If when-issued trading occurs, the listing for Water Pik Technologies common stock will be accompanied by the "wi" letters on the New York Stock Exchange. If when-issued trading develops, you will be able to buy Water Pik Technologies common stock in advance of the , 1999 spin-off and you may sell Water Pik Technologies common stock in advance of such date on a when-issued basis. How will ATI common stock trade? - ATI stock will continue to trade "regular way." Is the spin-off taxable for United States federal income tax purposes? - No. ATI has received a tax ruling from the Internal Revenue Service (or IRS) stating that the spin-off will be tax-free to ATI and to ATI's stockholders. The continuing validity of the IRS tax ruling is subject to various factual representations and assumptions, including the completion of a public offering of our common stock within approximately one year of the spin-off. See "Risk Factors" and "The Spin-Off -- Certain Federal Income Tax Consequences of the Spin-Off." 9 14 Will we be related to ATI in any way after the spin-off? - ATI will not own any of our common stock after the spin-off. - Until the third annual meeting of our stockholders held after the spin-off, at least a majority of the members of our board of directors will also be members of the board of directors of ATI. See "Management." - We will enter into the following agreements with ATI prior to the spin-off: - A Separation and Distribution Agreement, which provides for the various corporate transactions required to separate our business from other businesses of ATI and governs various relationships and circumstances that may arise between us after the spin-off; - An Employee Benefits Agreement, which contains various agreements between ATI and us concerning employees, pension and employee benefit plans and other compensation arrangements for current and former employees of our business; - A Tax Sharing and Indemnification Agreement allocating certain federal, state, local and foreign tax responsibilities and liabilities between ATI and us; and - An Interim Services Agreement under which ATI will provide various services to us for limited periods of time following the spin-off. See "Arrangements with ATI Relating to the Spin-Off." Are there any risks entailed in owning our stock? - Yes. Stockholders should consider carefully the matters discussed in the section of this Information Statement called "Risk Factors." How can I obtain information about the separate spin-off of ATI's Aerospace and Electronics segment? - The decision to spin-off Teledyne Technologies Incorporated, the company that owns and operates the businesses formerly comprising ATI's Aerospace and Electronics segment, was the result of the strategic process that led to the decision to spin-off Water Pik Technologies. You will be provided with a separate Information Statement describing the spin-off of Teledyne Technologies Incorporated. 10 15 WHAT WE HAVE ALREADY DONE IN PREPARATION FOR THE SPIN-OFF Board Appointments - As of the date of the spin-off, the board of directors will consist of at least four members, including Michael P. Hoopis, who is our President and Chief Executive Officer, and Robert P. Bozzone, W. Craig McClelland and William G. Ouchi, who are directors of ATI. Until the third annual meeting of our stockholders held after the spin-off, at least a majority of our directors will also be members of the board of directors of ATI. See "Management." Senior Management Appointments - Michael P. Hoopis is our President and Chief Executive Officer. He has been the President and Chief Executive Officer of ATI's Consumer segment since October 1998. Mr. Hoopis has over 25 years experience in the manufacturing, distribution and marketing of a wide variety of consumer products. Robert A. Shortt will be our Executive Vice President -- Sales, Marketing and Business Development, Victor C. Streufert will be our Vice President -- Finance and Chief Financial Officer, Richard P. Bisson will be our Vice President -- Operations, and Robert J. Rasp will continue as President of Laars. These executives collectively have a broad range of experience in marketing and merchandising, financial management and acquisitions, and multi-national production and distribution. New Credit Facility - Prior to the spin-off, ATI will establish a five-year, $60 million secured term loan and revolving credit facility. Prior to the spin-off, ATI will use $40 million of borrowings under this credit facility to repay certain of its debt obligations. In connection with the spin-off, we will assume the repayment obligations for $40 million under this credit facility. Following the spin-off, we will have up to $20 million of borrowing availability remaining under the credit facility, subject to the terms of the facility. 11 16 WHO CAN HELP ANSWER YOUR QUESTIONS Stockholders of ATI with questions relating to the spin-off should contact: Richard J. Harshman Vice President, Investor Relations and Corporate Communications Allegheny Teledyne Incorporated 1000 Six PPG Place Pittsburgh, Pennsylvania 15222-5479 412-394-2861 The distribution agent for our common stock in the spin-off and the transfer agent and registrar for our common stock after the spin-off is: ChaseMellon Shareholders Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, New Jersey 07660 1-XXX-XXX-XXXX 12 17 OUR HISTORICAL SELECTED FINANCIAL DATA The following table summarizes certain selected combined financial data for Water Pik Technologies. The income statement data for each of the three years ended December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 set forth below are derived from audited combined financial statements of Water Pik Technologies. The income statement data for the six months ended June 30, 1999 and 1998 and the years ended December 31, 1995 and 1994 and the balance sheet data at June 30, 1999 and 1998 and December 31, 1996, 1995 and 1994 set forth below are derived from unaudited combined financial statements of Water Pik Technologies. The historical selected combined financial data are not necessarily indicative of the results of operations or financial position that would have occurred if Water Pik Technologies had been a separate, independent public company during the periods presented, nor are they indicative of our future performance. Such historical data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and the related notes included in this Information Statement. Per share data has not been presented because Water Pik Technologies was not a publicly held company during the periods presented. SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Sales.................... $118,462 $105,477 $235,788 $241,167 $215,675 $205,794 $194,213 Net income............... $ 4,136 $ 3,381 $ 11,495 $ 17,552 $ 7,353 $ 5,231 $ 6,556 Working capital.......... $ 26,812 $ 36,771 $ 35,778 $ 39,057 $ 41,914 $ 42,870 $ 40,314 Total assets............. $116,198 $109,276 $127,794 $119,974 $118,375 $ 97,348 $ 91,966 13 18 PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA The pro forma selected financial data set forth below are derived from the unaudited pro forma consolidated financial information included in this Information Statement. The pro forma data do not represent what our financial condition or results of operations would have been had we operated as a separate, independent public company, nor does it give effect to any events other than those discussed in the related notes. The pro forma data also does not project Water Pik Technologies' financial position or results of operations as of any future date or for any future period. The capital structure that existed when our business operated as a part of ATI is not relevant because it does not reflect the expected future capital structure of Water Pik Technologies as a separate, independent public company. Accordingly, per share data for earnings has not been presented except for pro forma earnings per share for the six months ended June 30, 1999 and the year ended December 31, 1998. The basic weighted average shares outstanding were calculated by applying the distribution ratio (one share of Water Pik Technologies common stock for every 20 shares of ATI common stock) to ATI's basic weighted average shares outstanding during each period. SIX MONTHS ENDED YEAR ENDED JUNE 30, 1999 DECEMBER 31, 1998 ----------------- ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Sales....................................... $118,462 $235,788 Net income.................................. $ 3,176 $ 9,575 Basic earnings per share.................... $ 0.33 $ 0.97 Weighted average shares outstanding -- basic...................... 9,666 9,838 Diluted earnings per share.................. $ 0.33 $ 0.97 Weighted average shares outstanding -- diluted.................... 9,667 9,838 Working capital............................. $ 26,812 Total assets................................ $119,345 Long-term debt.............................. $ 40,000 14 19 RISK FACTORS You should carefully consider all the information we have included in this Information Statement. In particular, you should carefully consider the risk factors described below. In addition, please read "Cautionary Statement as to Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," where we describe additional uncertainties associated with our business and certain forward-looking statements included in this Information Statement. WE MAY BE UNABLE TO SUCCESSFULLY ENHANCE OUR EXISTING PRODUCTS AND DEVELOP AND MARKET ENHANCED OR NEW PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER. Our growth and future success will depend upon our ability to enhance our existing products and to develop and market enhanced or new products in a timely and cost effective manner. We may not be successful in developing or marketing enhanced or new products, and our products may not be accepted by the market. The resulting level of sales of any of our enhanced or new products may not justify the costs associated with their development and marketing. WE MAY NOT HAVE SUFFICIENT CAPITAL RESOURCES TO FUND PLANNED PRODUCT LINE EXTENSIONS, NEW PRODUCT DEVELOPMENT, CAPITAL EXPENDITURES AND POSSIBLE ACQUISITIONS. We cannot satisfy all of our planned product line extensions, new product development plans, capital expenditure programs and possible acquisitions without additional capital. We believe that our working capital and general financing requirements for our existing business can be satisfied from the anticipated cash flow from operations and available borrowings under the credit facility. We plan to raise additional capital through a public offering of our common stock. In addition, we are required to complete a public offering of our common stock in order for the representations underlying the IRS tax ruling to remain valid. Our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including investor perceptions of us, our business and the industries in which we operate, and general economic and market conditions. We may be unable to successfully raise needed capital and the amount of net proceeds that will be available to us may not be sufficient to meet our needs. Failure to successfully raise needed capital on a timely basis or to obtain any needed additional financing could have a material adverse effect on our business, results of operations and financial condition. THE FAILURE OF OUR GROWTH STRATEGY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. As part of our growth strategy, we plan to: - develop high quality, lower cost manufacturing capabilities; - pursue product line extensions for existing categories; - expand into new channels of distribution with existing products; - develop a self-sustaining product development process; and - seek complementary acquisitions and alliances to enhance our market presence. 15 20 We cannot assure you that our strategic objectives will be realized or, if realized, will result in increased revenue, profitability or market presence. Executing our strategy may also place a strain on our production, information systems and other resources. To manage growth effectively, we must maintain a high level of manufacturing quality and efficiency, continue to enhance our operational, financial and management systems, including our database management, inventory control and distribution systems, and expand, train and manage our employee base. We cannot assure you that we will be able to effectively manage our expansion in any one or more of these areas, and any failure to do so could have a material adverse effect on our business, results of operations and financial condition. INCREASING COMPETITION COULD REDUCE THE DEMAND FOR OUR PRODUCTS. The markets in which we operate are highly competitive. We compete with domestic and international companies. Among our most significant competitors are larger companies, such as The Gillette Company, which manufactures Braun(R) products; The Clorox Company, which manufactures Brita(R) products; Procter & Gamble Co., after its pending acquisition of the manufacturer of PUR(R) products; Essef Corporation, which includes PacFab, Inc.East; and United Dominion Industries, Ltd., whose subsidiary Weil-McLain manufactures boiler products. These companies have greater financial and technical resources than we do and may be willing to commit significant resources to protect their own market shares or to capture market share from us. As a result, we may need to incur greater costs than previously incurred for trade and consumer promotions and advertising to preserve or improve market share and to introduce and establish new products and line extensions. At the same time, we may need to undertake additional production related cost-cutting measures to enable us to respond to competitors' price reductions and marketing efforts without reducing our margins. We cannot assure you that we will be able to make such additional expenditures or implement such cost-cutting measures or that, if made or implemented, they will be effective. IF WE FAIL TO UNDERTAKE A PUBLIC OFFERING OF OUR COMMON STOCK WITHIN ONE YEAR FOLLOWING THE SPIN-OFF, WE WILL BE IN BREACH OF OUR AGREEMENTS WITH ATI. ATI has received a tax ruling from the IRS stating that the spin-off will be tax-free to ATI and to ATI's stockholders. One of the assumptions underlying the tax ruling is that we will undertake a public offering of our common stock within one year following the spin-off and use the anticipated gross proceeds of approximately $50 million (less associated costs) for further development of high quality, lower cost manufacturing capabilities, for product line extensions, to expand channels of distribution, to develop a self-sustaining product development process, and for acquisitions andor joint ventures. Pursuant to the Separation and Distribution Agreement and the Tax Sharing and Indemnification Agreement, we have also agreed with ATI to undertake such a public offering. Our failure to do so would be a breach of those agreements and subject us to substantial liabilities. WE ARE DEPENDENT ON CERTAIN KEY CUSTOMERS AND THE GENERAL RETAIL ENVIRONMENT. Our top ten customers accounted for 33% of our net sales in 1998. South Central Pool and Wal-Mart Stores Inc. were our largest customers, accounting for 9.1% and 7.4%, respectively, of our net sales in 1998. 16 21 We face pricing pressures from our trade customers. Because of the highly competitive retail environment, retailers have increasingly sought to reduce inventory levels and obtain pricing concessions from vendors. From time to time, we may need to reduce the prices for some of our products to respond to competitive and consumer pressures. We are also subject to the risk that high-volume customers could seek alternative pricing concessions or better trade terms. The loss of, or a substantial decrease in the volume of purchases by, South Central Pool or Wal-Mart Stores Inc. or any of our other top customers could have a material adverse effect on our business, results of operations and financial condition. Our performance also is dependent upon the general health of the retail environment. Changes in that environment and the financial difficulties of retailers could have a material adverse effect on our business, results of operations and financial condition. ACQUISITIONS INVOLVE INHERENT RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION. Our growth strategy includes possible acquisitions. Acquisitions involve various inherent risks, such as: - our ability to assess accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; - the potential loss of key personnel of an acquired business; - our ability to integrate acquired businesses and to achieve identified financial and operating synergies anticipated to result from an acquisition; and - unanticipated changes in business and economic conditions affecting an acquired business. We recently completed the acquisition of substantially all the assets of Les Agences Claude Marchand Inc., doing business in Canada as Olympic Pool Accessories, a manufacturer and distributor of pool accessories located in Montreal, Quebec. We may be unable to successfully complete the integration of Olympic Pool Accessories into our operations. OUR BUSINESS IS HIGHLY SEASONAL WHICH MAY ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION. Our business is highly seasonal, with operating results varying from quarter to quarter. Both our personal health care products and our water-heating products have historically experienced higher sales in the third and fourth quarters of each year due to the holiday season and cooler weather. Our swimming pool and spa equipment products have historically experienced higher sales in the second and fourth quarters of each year as consumers purchase such products in anticipation of and during the warmer spring and summer months. HAVING NO OPERATING HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT TO PREDICT OUR PROFITABILITY AS A STAND-ALONE COMPANY. We do not have an operating history as an independent company. Our business has historically relied on ATI for various financial, managerial and administrative services and has been able to benefit from the earnings, financial resources, assets and cash flows of 17 22 ATI's other businesses. After the spin-off, ATI will only be obligated to provide us with the assistance and services set forth in the Interim Services Agreement. See "Arrangements with ATI Relating to the Spin-Off." Following the spin-off, we will incur costs and expenses associated with the management of a public company that we expect will be greater than the amounts reflected in our historical financial statements. We will also incur interest expense and be subject to the other requirements associated with our credit facility. While we have been profitable as part of ATI, we cannot assure you that, as a stand-alone company, our future profits will be comparable to historical operating results before the spin-off. We also will need to dedicate significant managerial and other resources at the corporate level to establish the infrastructure and systems necessary for us to operate as an independent public company. While we believe that we have sufficient management resources, we cannot assure you that this will be the case or that we will successfully implement our operating and growth initiatives. Failure to implement these initiatives successfully could have a material adverse effect on our business, results of operations and financial condition. WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INTERNATIONAL SALES. During 1998, international sales accounted for approximately 16% of our total sales, of which approximately 7% were sales made in Canada. We anticipate that future international sales will increase and account for a more significant percentage of our sales. Risks associated with such increased international sales include: - political and economic instability; - export controls; - changes in legal and regulatory requirements; - U.S. and foreign government policy changes affecting the markets for our products; - changes in tax laws and tariffs; - the impact of the transition to a common European currency; - convertibility and transferability of international currencies; and - exchange rate fluctuations (which may affect sales to international customers and the value of and profits earned on international sales when converted into dollars). Any of these factors could have a material adverse effect on our business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR INABILITY TO RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE SUCCESS. Our future success depends to a significant extent upon the continued service of our executive officers, many of whom recently joined us, and other key management and technical personnel, and on our ability to continue to attract, retain and motivate qualified personnel. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, results of operations and financial condition. In particular, the loss of the services 18 23 of Michael P. Hoopis, our President and Chief Executive Officer, could materially and adversely affect us. PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. As a manufacturer and distributor of consumer products, our results of operation are susceptible to adverse publicity regarding the quality or safety of our products. In particular, product liability claims challenging the safety of our products may result in a decline in sales for a particular product, which could adversely affect our results of operations. This could be true even if the claims themselves are ultimately settled for immaterial amounts. We cannot assure you that this type of adverse publicity will not occur or that product liability claims will not be made in the future. In addition, we are subject to the Consumer Products Safety Act which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission could require us to repurchase or recall one or more of our products. Laws regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. If the Consumer Products Safety Commission would require us to recall or repurchase our products, or if we would institute a voluntary recall of our products, the repurchase or recall could be costly to us financially and could damage our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we might have large quantities of finished products that could not be sold. This could have a material adverse effect on our business, results of operations and financial condition. FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD REDUCE OUR COMPETITIVENESS. Our intellectual property rights are important to our business. We rely primarily upon a combination of trademark, copyright, know-how, trade secrets, proprietary information, patent and contractual restrictions to protect our intellectual property rights. We believe that such measures afford only limited protection and, accordingly, we cannot assure you that the steps taken by us to protect these intellectual property rights will be adequate to prevent misappropriation of our technology or the independent development of similar technology by others. The costs associated with protecting our intellectual property rights, including litigation costs, may be material. We also cannot be sure that we will be able to successfully assert our intellectual property rights or that these rights will not be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products are sold do not protect our intellectual property rights to the same extent as the laws of the United States. A failure by us or our inability to protect our intellectual property rights, and a successful intellectual property challenge or infringement proceeding against us, could make us less competitive and have a material adverse effect on our business, operating results and financial condition. 19 24 SINCE THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK IT IS IMPOSSIBLE TO PREDICT THE PRICES AT WHICH OUR COMMON STOCK WILL TRADE IN THE OPEN MARKET. There has been no prior trading market for our common stock, and we cannot predict the prices at which trading in our common stock will occur after the spin-off. The trading prices for our common stock could fluctuate significantly. SUBSTANTIAL SALES OF OUR COMMON STOCK FOLLOWING THE SPIN-OFF OR THE PROSPECT OF THE REQUIRED PUBLIC OFFERING COULD CAUSE A DECREASE IN THE MARKET PRICE OF OUR COMMON STOCK. Substantially all of the shares of our common stock distributed in the spin-off will be eligible for immediate resale in the public market. In transactions similar to the spin-off, it is not unusual for a significant redistribution of shares to occur during the first few weeks or even months following completion of the transaction because of the differing objectives and strategies of investors, including mutual funds, who acquire shares of common stock in the transaction. In addition, the prospect of our being required to undertake a public offering of our common stock within one year following the spin-off may adversely affect the market price of our common stock. We are not able to predict what the market price for our common stock will be following the spin-off. Sales of substantial amounts of our common stock in the public market during this period, the perception that any redistribution has not been completed, or the prospect of our having to undertake a public offering of our common stock following the spin-off, could materially adversely affect the market price of our common stock. FAILURE OF REPRESENTATIONS AND ASSUMPTIONS UNDERLYING THE IRS TAX RULING COULD CAUSE THE SPIN-OFF NOT TO BE TAX-FREE TO ATI OR TO ATI'S STOCKHOLDERS AND MAY REQUIRE US TO INDEMNIFY ATI. While the tax ruling relating to the qualification of the spin-off as a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), generally is binding on the IRS, the continuing validity of the tax ruling is subject to certain factual representations and assumptions, including the assumption that we will complete a required public offering of our common stock within one year following the spin-off, and use the anticipated gross proceeds of approximately $50 million (less associated costs) to further develop high quality, lower cost manufacturing capabilities, extend our existing product lines, expand our channels of distribution, develop a self-sustaining product development process, and for acquisitions andor joint ventures. ATI and Water Pik Technologies are not aware of any facts or circumstances that would cause such representations and assumptions to become untrue. If the spin-off were not to qualify as a tax-free distribution within the meaning of Section 355 of the Code, ATI would recognize taxable gain equal to the amount by which the fair market value of the Water Pik Technologies common stock distributed to ATI's stockholders exceeded ATI's tax basis in our common stock. In addition, the distribution of our common stock to each ATI stockholder would generally be treated as taxable in an amount equal to the fair market value of the Water Pik Technologies common stock they receive. If the spin-off qualified as a distribution under Section 355 of the Code but was disqualified as tax-free to ATI because of certain post-spin-off circumstances (such as an 20 25 acquisition of Water Pik Technologies), ATI would recognize taxable gain as described above, but the distribution of our common stock in the spin-off would generally be tax-free to each ATI stockholder. The Tax Sharing and Indemnification Agreement also provides that we will be responsible for any taxes imposed on and other amounts paid by ATI, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of Section 355 of the Code if the failure or disqualification is caused by certain post-spin-off actions by or with respect to us (including our subsidiaries) or our stockholders. For example, the acquisition of Water Pik Technologies by a third party during the two-year period following the spin-off could cause such a failure or disqualification. If any of the taxes or other amounts described above were to become payable by us, the payment could have a material adverse effect on our business, results of operations, financial position, and cash flow and could exceed our net worth by a substantial amount. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." PROVISIONS OF OUR GOVERNING DOCUMENTS, APPLICABLE LAW AND THE TAX SHARING AND INDEMNIFICATION AGREEMENT COULD HAVE THE EFFECT OF DELAYING OR PREVENTING OUR CHANGE IN CONTROL, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK. Our Certificate of Incorporation, Bylaws and Rights Agreement, and the General Corporation Law of the State of Delaware contain several provisions that could make the acquisition of control of Water Pik Technologies more difficult if our board of directors has not approved the transaction. See "Description of Our Capital Stock -- Rights Plan," "-- Certain Provisions of Our Governing Documents," and "-- Anti-takeover Legislation." Certain tax aspects of the spin-off could also discourage an acquisition of control of Water Pik Technologies for some period of time. For example, the acquisition of Water Pik Technologies by a third party during the two-year period following the spin-off could result in the spin-off not qualifying as a tax-free distribution within the meaning of Section 355 of the Code and trigger indemnification obligations of Water Pik Technologies under the Tax Sharing and Indemnification Agreement. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." CAUTIONARY STATEMENT AS TO FORWARD-LOOKING STATEMENTS We caution you that this document contains disclosures that are forward-looking statements. All statements regarding ATI's or Water Pik Technologies' expected future financial condition, results of operations, cash flows, dividends, financing plans, business strategy, budgets, projected costs or cost savings, capital expenditures, competitive positions, growth opportunities for existing products or products under development, benefits from new technology, plans and objectives of management for future operations and markets for stock are forward-looking statements. In addition, forward-looking statements include statements in which we use words such as "expect," "believe," "anticipate," "intend," or similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure you that such expectations will prove to have been correct, and actual results may differ materially from those reflected in the forward-looking statements. 21 26 Factors that could cause our actual results to differ from the expectations reflected in the forward-looking statements in this document include those set forth in "Risk Factors." Neither Water Pik Technologies nor ATI has any intention of or obligation to update forward-looking statements, even if new information, future events or other circumstances make them incorrect or misleading. THE SPIN-OFF REASONS FOR THE SPIN-OFF After a strategic review completed in 1998, ATI concluded that its Consumer segment, which will comprise our Company, would be able to grow faster and more effectively as a separate, independent public company. As a separate company, we will be better able to focus exclusively on our own strategic priorities and have more efficient access to the capital markets than we could as part of ATI. This Information Statement relates only to distribution of the common stock of Water Pik Technologies, whose business is that formerly comprising ATI's Consumer segment. A separate Information Statement will be provided to you regarding the spin-off of Teledyne Technologies Incorporated, the company that owns and operates the businesses formerly comprising ATI's Aerospace and Electronics segment. We believe that the spin-off will enable our business to expand and grow more quickly and efficiently in the following ways: - Our business has different fundamentals, growth characteristics and strategic priorities than the specialty metals businesses currently conducted by ATI. The separation of our business from those of ATI will allow us to focus on our own strategic priorities, which should increase our ability to capitalize on growth opportunities for our business and enhance our ability to respond more quickly to changes in the markets that we serve. - The spin-off will enable us to have direct access to the capital markets to finance the expansion of our business and support our future growth. More specifically, we intend to raise our own equity capital to: - further develop high quality, lower cost manufacturing capabilities; - pursue product line extensions for existing categories; - expand into new channels of distribution with existing products; - develop a self-sustaining product development process; and - seek acquisitions andor joint ventures, and acquire product lines andor businesses that complement our existing business to attain critical mass. - The spin-off will enable us to recruit, retain and motivate key employees by providing them with stock-based compensation incentives directly tied to the success of our business. 22 27 MANNER OF EFFECTING THE SPIN-OFF ATI will effect the spin-off by distributing all issued and outstanding shares of our common stock to holders of record of ATI common stock as of the close of business on , 1999. The spin-off will be made on the basis of one share of our common stock for every 20 shares of ATI common stock held. Since we will use a direct registration system to implement the spin-off, the distribution agent will credit the shares of Water Pik Technologies common stock distributed on the date of the spin-off to book-entry accounts established for each ATI stockholder and will mail an account statement to each stockholder stating the number of whole shares of Water Pik Technologies common stock received by such stockholder in the spin-off. Following the spin-off, stockholders may request that their shares be transferred to a brokerage or other account or that physical stock certificates be issued for their shares of Water Pik Technologies common stock. If a stockholder is otherwise entitled to receive a fractional share of Water Pik Technologies common stock, that stockholder will instead receive cash. The distribution agent will, promptly after the date of the spin-off, aggregate all fractional share interests in Water Pik Technologies common stock with those of other similarly situated stockholders and sell such fractional share interests in Water Pik Technologies common stock at then-prevailing prices. The distribution agent will distribute the cash proceeds to stockholders entitled to such proceeds pro rata based upon their fractional interests in Water Pik Technologies common stock. No interest will be paid on any cash distributed instead of fractional shares. No owner of ATI common stock will be required to pay any cash or other consideration for shares of Water Pik Technologies common stock received in the spin-off or to surrender or exchange any shares of ATI common stock to receive shares of Water Pik Technologies common stock. The actual total number of shares of Water Pik Technologies common stock to be distributed will depend on the number of shares of ATI common stock outstanding on , 1999. Participants in the ATI Investor Services Program will be credited with the number of shares (including fractional shares) of Water Pik Technologies common stock distributed in the spin-off in respect of the ATI common stock held in their accounts. NO CONSIDERATION WILL BE PAID BY STOCKHOLDERS OF ATI FOR THE SHARES OF OUR COMMON STOCK TO BE RECEIVED BY THEM IN THE SPIN-OFF, AND ATI STOCKHOLDERS WILL NOT BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF ATI COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE OUR COMMON STOCK. RESULTS OF THE SPIN-OFF After the spin-off, we will be an independent, separate public company. Our management, fundamentals, growth characteristics and strategic priorities will be different from those of ATI. Concurrently with the spin-off, ATI will change its name to "Allegheny Technologies Incorporated." The number and identity of our stockholders immediately after the spin-off will be the same as the number and identity of ATI's stockholders at the close of business on 23 28 , 1999. Immediately after the spin-off, we expect to have approximately holders of record of our common stock and approximately shares of our common stock outstanding, based on the number of record stockholders and issued and outstanding shares of ATI common stock as of the close of business on , 1999, and on the distribution ratio of one share of our common stock for every 20 shares of ATI common stock owned by ATI stockholders at that time. As with ATI common stock, the shares of Water Pik Technologies common stock will: - be fully paid and nonassessable; - have one vote per share, with no right to cumulate votes; - carry no preemptive rights; and - be accompanied by Preferred Share Purchase Rights. Water Pik Technologies common stock and ATI common stock, however, will be different securities and will not trade or be valued alike. See "Description of Our Capital Stock." We have applied to have our common stock approved for listing on the New York Stock Exchange under the trading symbol "PIK." The spin-off will not, in and of itself, affect the number of outstanding shares of ATI common stock or the rights associated with these shares. ATI intends to effect a one-for-two reverse split of its common stock immediately following the spin-off. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF The following is a summary of the material United States federal income tax consequences of the spin-off. It is not intended to address the tax consequences applicable to every stockholder. In particular, this summary does not cover state, local, or international income and other tax consequences. Accordingly, stockholders are strongly encouraged to consult their individual tax advisors for information on the tax consequences applicable to their individual situations. ATI has received a tax ruling from the IRS that states that the spin-off will qualify as a tax-free distribution under Section 355 of the Code. In accordance with this tax ruling: - No gain or loss will be recognized by ATI upon the distribution of Water Pik Technologies common stock to ATI's stockholders. - No gain or loss will be recognized by ATI's stockholders as a result of your receipt of our common stock in the spin-off except to the extent that you receive cash instead of a fractional share. - If you receive cash instead of a fractional share of our common stock in the spin-off, you will be treated as having received the fractional share in the spin-off and then having sold the fractional share. Accordingly, you will recognize gain or loss equal to the difference between the cash you receive and the amount of tax basis allocable (as described below) to the fractional share. The gain or loss will be capital gain or loss if you would have held the fractional share as a capital asset. 24 29 - Your tax basis in your ATI common stock will be apportioned among the ATI common stock, the common stock of Water Pik Technologies and the common stock of Teledyne Technologies you receive in the spin-offs on the basis of the relative fair market values of the shares at the time of the spin-offs. Promptly following the spin-off, ATI will send a letter to the holders of ATI common stock who receive our common stock in the spin-off that will explain the allocation of tax basis among ATI common stock, the Water Pik Technologies common stock and the Teledyne Technologies common stock you receive in the spin-offs. - The holding period of Water Pik Technologies common stock that you receive in the spin-off will be the same as the holding period of ATI common stock with respect to which you received our common stock so long as you hold the ATI common stock as a capital asset on the date of the spin-off. The tax ruling relating to the qualification of the spin-off as a tax-free distribution within the meaning of Section 355 of the Code generally is binding on the IRS. However, the continuing validity of the tax ruling is subject to certain factual representations and assumptions, including completion of the required public offering of our common stock within one year of the spin-off, and the use of the anticipated gross proceeds of approximately $50 million (less associated costs) to further develop high quality, lower cost manufacturing capabilities, extend our existing product lines, expand our channels of distribution, develop a self-sustaining development process, and for acquisitions andor joint ventures. If the spin-off were not to qualify as a tax-free distribution within the meaning of Section 355 of the Code, ATI would recognize taxable gain equal to the amount by which the fair market value of our common stock distributed to ATI's stockholders exceeds ATI's tax basis in the our common stock. In addition, each ATI stockholder who receives our common stock in the spin-off would generally be treated as having received a taxable distribution in an amount equal to the fair market value of our common stock. If the spin-off qualified under Section 355 of the Code but was disqualified as tax-free to ATI because of certain post-spin-off circumstances, ATI would recognize taxable gain as described above but the spin-off would generally be tax-free to each ATI stockholder as described in the preceding paragraph. See "Risk Factors." THE FOREGOING SUMMARIZES THE MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF UNDER CURRENT LAW AND IS INTENDED FOR GENERAL INFORMATION ONLY. YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE SPIN-OFF TO YOU, INCLUDING THE APPLICATION OF STATE, LOCAL AND INTERNATIONAL TAX LAWS, AND AS TO POSSIBLE CHANGES IN TAX LAW THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. The Tax Sharing and Indemnification Agreement provides that we are not to take any action inconsistent with, or fail to take any action required by, the request for the tax ruling or the tax ruling unless ATI has given its prior written consent or, in certain circumstances, a supplemental ruling that permits such action is obtained. The Tax Sharing and Indemnification Agreement also provides that we will be responsible for any taxes imposed on, or other amounts paid by, ATI, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of Section 355 of the Code if the failure or disqualification is attributable to certain post-spin-off actions or failures to act by or with respect to us (including our subsidiaries) or our stockholders, such as the acquisition of Water Pik Technologies by a third party at a time and in a manner that would cause such a failure or 25 30 disqualification. See "Arrangements with ATI Relating to the Spin-Off -- Tax Sharing and Indemnification Agreement." LISTING AND TRADING OF OUR COMMON STOCK Currently, there is no public market for our common stock. We have applied to have our common stock approved for listing on the New York Stock Exchange under the trading symbol "PIK." We expect that a when-issued trading market for our common stock will develop on or before the close of business on , 1999. We expect that the New York Stock Exchange will determine that ATI common stock traded on or after , 1999, the second trading day prior to the record date for the spin-off, will be traded "regular way" (with due bills attached). As a result, after that trading day, ATI common stock will have due bills attached entitling the buyer to receive and requiring the seller to deliver the shares of Water Pik Technologies common stock to be distributed in the spin-off as well as the underlying shares of ATI common stock. Beginning on the first New York Stock Exchange trading day after the date of the spin-off, we expect that trading of ATI common stock "regular way" (with due bills attached) will no longer be permitted and ATI common stock will trade "regular way" only, entitling the buyer to receive only ATI common stock. Until our common stock is fully distributed and an orderly market develops, the prices at which trading in our common stock occurs may fluctuate significantly and may be lower or higher than the price that would be expected for a fully-distributed issue. The prices at which our common stock will trade following the spin-off will be determined by the marketplace and may be influenced by many factors, including: - the depth and liquidity of the market for our common stock; - investor perceptions of us, our business and the markets in which we operate; - our dividend policy; - our financial results; and - general economic and market conditions. Substantially all of the shares of our common stock that are distributed in the spin-off will be eligible for immediate resale. In transactions similar to the spin-off, it is not unusual for a significant redistribution of shares to occur during the first few weeks or even months following completion of the transaction because of the differing objectives and strategies of investors who acquire shares of our common stock in the transaction. We are not able to predict whether substantial amounts of our common stock will be sold in the open market following the spin-off or what effect these sales may have on prices at which our common stock may trade. Sales of substantial amounts of our common stock in the public market during this period, or the perception that any redistribution has not been completed, or the prospect of our having to undertake a public offering of our common 26 31 stock following the spin-off could materially adversely affect the market price of our common stock. Generally, the shares of our common stock that are distributed in the spin-off will be freely transferable, except for securities received by persons deemed to be our "affiliates" under the Securities Act of 1933, as amended ("Securities Act"). Persons who may be deemed to be our affiliates after the spin-off generally include individuals or entities that control, are controlled by, or are in common control with, us, including our directors. Persons who are our affiliates will be permitted to sell shares of our common stock they receive in the spin-off only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as in accordance with the requirements of Rule 144 under the Securities Act. 27 32 OUR HISTORICAL SELECTED FINANCIAL DATA The following table summarizes certain selected combined financial data for Water Pik Technologies. The income statement data for each of the three years ended December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 set forth below are derived from audited combined financial statements of Water Pik Technologies. The income statement data for the six months ended June 30, 1999 and 1998 and the years ended December 31, 1995 and 1994 and the balance sheet data at June 30, 1999 and 1998 and December 31, 1996, 1995 and 1994 set forth below are derived from unaudited combined financial statements of Water Pik Technologies. The historical selected combined financial data are not necessarily indicative of the results of operations or financial position that would have occurred if Water Pik Technologies had been a separate, independent public company during the periods presented, nor are they indicative of our future performance. Such historical data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and the related notes included in this Information Statement. Per share data has not been presented because Water Pik Technologies was not a publicly held company during the periods presented. SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Sales.................... $118,462 $105,477 $235,788 $241,167 $215,675 $205,794 $194,213 Net income............... $ 4,136 $ 3,381 $ 11,495 $ 17,552 $ 7,353 $ 5,231 $ 6,556 Working capital.......... $ 26,812 $ 36,771 $ 35,778 $ 39,057 $ 41,914 $ 42,870 $ 40,314 Total assets............. $116,198 $109,276 $127,794 $119,974 $118,375 $ 97,348 $ 91,966 28 33 OUR UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma consolidated income statements for the six months ended June 30, 1999 and for the year ended December 31, 1998 and the unaudited pro forma consolidated balance sheet at June 30, 1999 present the combined results of operations and financial position of Water Pik Technologies assuming that the transactions contemplated by the spin-off had been completed as of the beginning of 1998 with respect to the pro forma consolidated income statements for the six months ended June 30, 1999 and for the year ended December 31, 1998 and as of June 30, 1999 with respect to the pro forma consolidated balance sheet. In the opinion of management, they include all material adjustments necessary to reflect, on a pro forma basis, the impact of transactions contemplated by the spin-off on the historical financial information of Water Pik Technologies. The adjustments are described in the notes to the pro forma consolidated financial information and are set forth in the "Pro Forma Adjustments" column. The unaudited pro forma consolidated financial information of Water Pik Technologies should be read in conjunction with the historical financial statements of Water Pik Technologies and the related notes. The pro forma financial information has been presented for informational purposes only and does not reflect the results of operations or financial position of Water Pik Technologies that would have occurred had Water Pik Technologies operated as a separate, independent public company for the periods presented. Actual results might have differed from pro forma results if Water Pik Technologies had operated independently. The pro forma financial information should not be relied upon as being indicative of results Water Pik Technologies would have had or of future results after the spin-off. 29 34 WATER PIK TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1999 HISTORICAL PRO FORMA WATER PIK PRO FORMA WATER PIK TECHNOLOGIES, INC. ADJUSTMENTS TECHNOLOGIES, INC. ------------------ ----------- ------------------ (IN THOUSANDS) ASSETS Cash...................................... $ -- $ -- $ -- Accounts receivable....................... 38,212 -- 38,212 Inventories............................... 19,878 -- 19,878 Deferred income taxes..................... 5,154 -- 5,154 Prepaid expenses and other current assets.................................. 1,041 -- 1,041 -------- -------- -------- TOTAL CURRENT ASSETS................. 64,285 -- 64,285 Property, plant and equipment............. 31,502 -- 31,502 Cost in excess of net assets acquired..... 18,441 -- 18,441 Deferred income taxes..................... -- 3,147 3,147 Other assets.............................. 1,970 -- 1,970 -------- -------- -------- TOTAL ASSETS......................... $116,198 $ 3,147 $119,345 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable.......................... $ 17,999 $ -- $ 17,999 Accrued liabilities....................... 19,474 -- 19,474 -------- -------- -------- TOTAL CURRENT LIABILITIES............ 37,473 -- 37,473 Long-term debt............................ -- 40,000 40,000 Deferred income taxes..................... 1,152 (1,152) -- Other long-term liabilities............... -- 10,902 10,902 -------- -------- -------- TOTAL LIABILITIES.................... 38,625 49,750 88,375 -------- -------- -------- Stockholders' Equity: Preferred stock, par value $0.01: authorized -- 5,000,000 shares; issued and outstanding -- none....... -- -- -- Common stock, par value $0.01: authorized -- 50,000,000 shares; issued and outstanding -- 9,535,304 shares............................... -- 95 95 Additional paid-in capital.............. -- 31,124 31,124 Net advances (to) from Allegheny Teledyne............................. 77,822 (77,822) -- Foreign currency translation losses..... (249) -- (249) -------- -------- -------- TOTAL STOCKHOLDERS' EQUITY........... 77,573 (46,603) 30,970 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $116,198 $ 3,147 $119,345 See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 30 35 WATER PIK TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 HISTORICAL PRO FORMA WATER PIK PRO FORMA WATER PIK TECHNOLOGIES, INC. ADJUSTMENTS TECHNOLOGIES, INC. ------------------ ----------- ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SALES............................ $118,462 $ -- $118,462 Costs and expenses: Cost of sales.................. 72,773 -- 72,773 Selling expenses............... 23,441 -- 23,441 General and administrative expenses.................... 15,474 -- 15,474 Interest expense............... -- 1,600 1,600 -------- ------- -------- 111,688 1,600 113,288 -------- ------- -------- Earnings before other income..... 6,774 (1,600) 5,174 Other income..................... 119 -- 119 -------- ------- -------- INCOME BEFORE INCOME TAXES....... 6,893 (1,600) 5,293 Provision for income taxes....... 2,757 (640) 2,117 -------- ------- -------- NET INCOME....................... $ 4,136 $ (960) $ 3,176 ======== ======= ======== BASIC NET INCOME PER COMMON SHARE.......................... $ 0.33 ======== DILUTED NET INCOME PER COMMON SHARE.......................... $ 0.33 See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 31 36 WATER PIK TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 HISTORICAL PRO FORMA WATER PIK PRO FORMA WATER PIK TECHNOLOGIES, INC. ADJUSTMENTS TECHNOLOGIES, INC. ------------------ ----------- ------------------ (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SALES............................ $235,788 $ -- $235,788 Costs and expenses: Cost of sales.................. 139,544 -- 139,544 Selling expenses............... 49,830 -- 49,830 General and administrative expenses.................... 27,382 -- 27,382 Interest expense............... -- 3,200 3,200 -------- ------- -------- 216,756 3,200 219,956 -------- ------- -------- Earnings before other income..... 19,032 (3,200) 15,832 Other income..................... 126 -- 126 -------- ------- -------- INCOME BEFORE INCOME TAXES....... 19,158 (3,200) 15,958 Provision for income taxes....... 7,663 (1,280) 6,383 -------- ------- -------- NET INCOME....................... $ 11,495 $(1,920) $ 9,575 ======== ======= ======== BASIC NET INCOME PER COMMON SHARE.......................... $ 0.97 ======== DILUTED NET INCOME PER COMMON SHARE.......................... $ 0.97 See accompanying Notes to Unaudited Pro Forma Consolidated Financial Information. 32 37 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION NOTE 1. The historical financial statements of Water Pik Technologies reflect periods during which Water Pik Technologies did not operate as a separate, independent public company. Certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore, the historical financial statements do not necessarily reflect the results of operations or financial position that would have occurred had Water Pik Technologies been a separate, independent public company during the periods presented, nor are they indicative of future performance. NOTE 2. The pro forma unaudited consolidated balance sheet was prepared assuming the distribution occurred on June 30, 1999 and includes "Pro Forma Adjustments" for transactions which occurred subsequent to June 30, 1999 as follows: (a) To record debt of $40,000,000 to be assumed by Water Pik Technologies at the date of the spin-off. (b) To record the transfer of insurance and product liability reserves of $10,902,000 and related deferred taxes of $4,299,000. (c) To record the planned liquidation of the remaining investment by ATI and the issuance of 9,535,304 shares of Water Pik Technologies common stock. NOTE 3. Pro forma net income was adjusted to include interest expense on ATI debt that we will assume in connection with the spin-off in the amount of $1,600,000 before tax, or $960,000 after tax, for the six months ended June 30, 1999 and $3,200,000 before tax, or $1,920,000 after tax, for the year ended December 31, 1998. Interest expense was calculated assuming the $40,000,000 of assumed debt had been outstanding for the entire period with an average interest rate of 8.0%. NOTE 4. The average number of shares of Water Pik Technologies common stock used in the computation of basic net income per share was 9,666,250 and 9,837,534 for the six months ended June 30, 1999 and the year ended December 31, 1998, respectively, based on a distribution ratio of one share of Water Pik Technologies common stock for every 20 shares of ATI common stock. The average number of shares of Water Pik Technologies common stock used in the computation of diluted net income per share was 9,667,448 and 9,838,465 for the six months ended June 30, 1999 and the year ended December 31, 1998, respectively. A distribution ratio of one share of Water Pik Technologies common stock for every 20 shares of ATI common stock was used to adjust the stock options. The actual stock option adjustment will be based upon the relation of the market price of ATI common stock prior to the spin-off to the market price of Water Pik Technologies common stock after the spin-off and therefore cannot be determined at the present time. 33 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon and should be read in conjunction with the audited combined financial statements, including the related notes, included in this Information Statement. Some of the statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. Actual results could differ materially from the expectations reflected in these forward-looking statements as a result of various factors, some of which are described below. OVERVIEW OF BUSINESS Water Pik Technologies is a leader in the design, manufacturing and marketing of a broad range of well recognized personal health care products and pool and water-heating products. The Company operates in two business segments: Personal Health Care Products and Pool and Water-Heating Products. The Company's products include: shower heads; oral health products; water filtration products; pool and spa heaters, controls, valves and water features; and residential and commercial water-heating systems. Total sales of our two segments for the six months ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996 are summarized below: SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, SEGMENT 1999 1998 1997 1996 ---------------------- --------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS) Personal health care products....... $ 55,849 47.1% $125,763 53.3% $141,792 58.8% $141,133 65.4% Pool and water-heating products............ 62,613 52.9% 110,025 46.7% 99,375 41.2% 74,542 34.6% Total sales:.......... $118,462 100% $235,788 100% $241,167 100% $215,675 100% The financial information in these financial statements is not necessarily indicative of results of operations, financial condition and cash flows that would have occurred if Water Pik Technologies had been a separate, independent public company during the periods presented nor is it indicative of our future results. On an historical basis, the capital for our business was provided by ATI's net investment in our business. In addition, no debt was allocated to us. Accordingly, our historical financial statements reflect no interest income or interest expense. Prior to the spin-off, ATI will establish a five-year $60,000,000 secured term loan and revolving credit facility, and $40,000,000 of borrowings under the facility will be used by ATI prior to the spin-off to repay certain of ATI's debt obligations. In connection with the spin-off, we will assume this term loan and credit facility, including the repayment obligations for ATI's $40,000,000 of borrowings. Following the spin-off, we will have up to $20,000,000 of borrowing availability remaining under the credit facility, subject to the terms of the facility. The historical combined financial statements included herein do not reflect any changes that may occur in the capitalization or results of operations of Water Pik Technologies as a result of, or after, the spin-off. 34 39 RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 COMBINED RESULTS OF OPERATIONS SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 % CHANGE 1998 (DOLLARS IN THOUSANDS) -------------- -------- -------------- (UNAUDITED) Sales................................. $118,462 12% $105,477 Operating profit...................... $ 6,774 22% $ 5,564 Operating profit as a percentage of sales............................... 5.7% 5.3% International sales as a percentage of Our total sales for the six months ended June 30, 1999 were 12% greater than for the six months ended June 30, 1998 due to increases in pool and water-heating products sales. Gross profit as a percentage of sales decreased from 40.3% for the six months ended June 30, 1998 to 38.6% for the same period in 1999. Variable contribution margin by product line remained consistent from period to period; however a less profitable product mix accounted for most of the decrease in the total gross profit percentage. Tooling amortization associated with higher levels of new product development also impacted gross profit. Operating profit increased 22% in the first six months of 1999 as compared to the same period in the prior year mainly due to increases in sales for pool systems and water-heating products. Operating profit in 1999 was negatively impacted by unusual expenses of $930,000 associated with bad debts of several major retail customers, in addition to $1,164,000 of expenses related to plant rationalization costs and non-recurring spin-off related costs. Sales and operating profit for the Company's two segments are presented separately below and in Note 3 of the Notes to the Interim Combined Financial Statements. PERSONAL HEALTH CARE PRODUCTS SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 % CHANGE 1998 (DOLLARS IN THOUSANDS) -------------- -------- -------------- (UNAUDITED) Sales................................... $55,849 1% $55,147 Operating profit........................ $ 330 (68)% $ 1,018 Operating profit as a percentage of sales................................. 0.6% 1.8% International sales as a percentage of Sales of our personal health care products were 1% greater for the six months ended June 30, 1999 than for the six months ended June 30, 1998 due to increased sales of The Flexible Shower Massage(]). Sales of other products were negatively impacted by inventory reduction efforts by a major retailer and pricing pressures. 35 40 Operating profit decreased $688,000 in the first six months of 1999 when compared to the same period in the prior year. Operating profit was impacted by higher tooling amortization associated with increased new product development efforts. Advertising for the six months ended June 30, 1999 decreased from the comparable period in 1998 when substantial new product introductory costs were incurred. Operating profit in 1999 was impacted by unusual expenses of $930,000 associated with bad debts of several major retail customers, in addition to $775,000 of expenses related to the closure of a manufacturing facility and for spin-off related expenses. These unusual expenses were offset by lower selling and marketing expenses of $1,490,000 compared to the same period in the prior year. Selling and marketing expenses for the six months ended June 30, 1999 declined compared to the same period in the prior year due to a reorganization and streamlining of operations during this period. POOL AND WATER-HEATING PRODUCTS SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1999 % CHANGE 1998 (DOLLARS IN THOUSANDS) -------------- -------- -------------- (UNAUDITED) Sales................................... $62,613 24% $50,330 Operating profit........................ $ 6,444 42% $ 4,546 Operating profit as a percentage of sales................................. 10.3% 9.0% International sales as a percentage of Sales of our pool and water-heating products increased 24% in the six months ended June 30, 1999 as compared to the same period in 1998. Pool products sales increased 20% due to strong pool equipment and heater sales. Water-heating products sales increased 38% due mainly to the acquisition of Trianco Heatmaker, Inc. ("Trianco") in August 1998. Sales of water-heating products, excluding Trianco products, increased 7% due to strong sales of our commercial water-heating products. Operating profit increased 42% in the 1999 six months as compared to the same period in 1998. The increase in our operating profit was primarily due to increased sales volume. 36 41 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 COMBINED RESULTS OF OPERATIONS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 % CHANGE 1997 % CHANGE 1996 (DOLLARS IN THOUSANDS) ------------ -------- ------------ -------- ------------ Sales................ $235,788 (2)% $241,167 12% $215,675 Operating profit..... $ 19,032 (33)% $ 28,384 131% $ 12,310 Operating profit as a percentage of sales.............. 8.1% 11.8% 5.7% International sales as a percentage of 1998 COMPARED TO 1997 Our total sales decreased by 2% in 1998 compared to 1997. Sales of personal health care products decreased due to a decline in international sales as a result of weak economic conditions in Canada, Brazil and Russia. In 1997, sales of personal health care products were higher due to the initial retail stocking of newly introduced products. Sales declines in 1998 were partially offset by sales increases for water-heating products resulting from the acquisition of Trianco in August 1998 and the growth in existing pool products lines. Gross profit as a percentage of sales decreased from 42.4% in 1997 to 40.8% in 1998. This decrease is due to a less profitable product mix. In addition, cost of sales were reduced in 1997 as a result of a one-time benefit from the discontinued production of the consumer formulated product line. Operating profit in 1998 declined to $19,032,000, or 8.1% of sales, due to the decrease in sales and change in product mix, costs associated with launching new personal health care products and expenses associated with settling a legal matter. 1997 COMPARED TO 1996 Our total sales increased by 12% in 1997 compared to 1996. The increase in 1997 sales was primarily due to successful product introductions of a new shower massage and pool heater, the inclusion of a full year of sales from Jandy Industries, Inc. ("Jandy"), a pool products manufacturer acquired in May 1996, and improved sales of water-heating products. The increase in 1997 sales was partially offset by the lower sales related to discontinuing certain water filtration products. Gross profit as a percentage of sales increased from 37.8% in 1996 to 42.4% in 1997. The increase in gross profit was primarily due to higher sales volume and a more profitable product mix. A significant factor affecting the improved product mix was the elimination of our low margin consumer formulations business. A one-time adjustment to cost of sales as a result of the discontinued production of the consumer formulated product line in 1997 also contributed to gross profit improvement. 37 42 Operating profit in 1997 increased to $28,384,000 or 11.8% of sales, as a result of the increase in overall sales and higher gross margins resulting from operating efficiencies and cost savings. Operating profit for 1996 was adversely effected by charges of approximately $5,000,000 associated with the settlement of a patent infringement claim and the costs incurred to exit the consumer formulations business. Sales and operating profit for the Company's two segments are presented separately below and in Note 9 of the Notes to the Combined Financial Statements. PERSONAL HEALTH CARE PRODUCTS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 % CHANGE 1997 % CHANGE 1996 (DOLLARS IN THOUSANDS) ------------ -------- ------------ -------- ------------ Sales.................. $125,763 (11)% $141,792 --% $141,133 Operating profit....... $ 9,426 (52)% $ 19,552 103% $ 9,646 Operating profit as a percentage of sales................ 7.5% 13.8% 6.8% International sales as a percentage of 1998 COMPARED TO 1997 Sales of our personal heath care products decreased by 11% in 1998 compared to 1997. Sales decreased due to a decline in international sales as result of weak economic conditions in Canada, Brazil and Russia and two discontinued product lines. In 1997, sales were higher due to the initial retail stocking of newly introduced products. Operating profit decreased by 52% due to the lower sales volume and additional advertising expenses associated with the launch of new products. In 1997, cost of sales was favorably impacted by discontinued production of certain products. 1997 COMPARED TO 1996 Sales of personal health care products were consistent from 1996 to 1997. Increased sales of new shower head models in 1997 were offset by the lower sales of discontinued water filtration and consumer formulated products. Operating profit increased by 103% in 1997 compared to 1996 due to the change in product mix, discontinuing low margin consumer formulated products, and a one-time favorable adjustment to cost of sales associated with discontinuing certain products. In addition, the operating profit for 1996 included a $5,000,000 expense associated with settling a legal matter and the cost of exiting the consumer formulated product line. 38 43 POOL AND WATER-HEATING PRODUCTS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 % CHANGE 1997 % CHANGE 1996 (DOLLARS IN THOUSANDS) ------------ -------- ------------ -------- ------------ Sales.................. $110,025 11% $99,375 33% $74,542 Operating profit....... 9,606 9% 8,832 232% 2,664 Operating profit as a percentage of sales................ 8.7% 8.9% 3.6% International sales as a percentage of 1998 COMPARED TO 1997 Sales of pool and water-heating products increased 11% or $10,650,000 in 1998 compared to 1997. The acquisition of Trianco in August 1998 accounted for $5,368,000 of the increase in sales. Sales increased in all pool and water-heating product categories. Operating profit for 1998 increased 9% or $774,000 compared to 1997. This increase is primarily due to the increased sales volume for pool products and the acquisition of Trianco, which was partially offset by a $1,007,000 non-recurring expense associated with settling a legal matter. 1997 COMPARED TO 1996 Sales of pool and water-heating products increased 33% or $24,833,000 in 1997 compared to 1996. Sales of pool products increased by $21,952,000. This was mainly due to the inclusion of a full year of sales from Jandy, acquired in May 1996, which accounted for $12,300,000 of the increase. Sales of water-heating products increased by 12% or $2,881,000, due to increased sales of commercial water-heating products. Operating profit increased 232% or $6,168,000 in 1997 compared to 1996. Increased sales volume accounted primarily for the increase in operating profit. In addition, improvements related to discontinuing low margin water treatment pool products contributed to the increase in operating profit. FINANCIAL CONDITION AND LIQUIDITY Our principal capital requirements are to fund working capital needs and capital expenditures and to meet required debt payments. We anticipate that our operating cash flow, together with available borrowings under our credit facility described below, will be sufficient to meet our working capital requirements, capital expenditure requirements and interest service requirements on our debt obligations. In the six months ended June 30, 1999, cash generated from operations of $17,033,000 was used to make $1,669,000 in capital expenditures and to advance $15,438,000 to ATI. In 1998, cash generated from operations of $22,325,000 was used to purchase Trianco for $10,647,000, and make $8,650,000 in capital expenditures and to advance $3,223,000 to ATI. 39 44 Our working capital decreased to $26,812,000 at June 30, 1999 from $35,778,000 at December 31, 1998. Our current ratio decreased to 1.7 at June 30, 1999 from 1.9 at December 31, 1998. The decrease in our working capital was primarily due to lower accounts receivable balances at June 30, 1999. Our accounts receivable balances are generally higher at year-end due to the seasonality of our business and the extension of deferred payment terms to pool product customers consistent with industry practices. Our working capital decreased to $35,778,000 at December 31, 1998 from $39,057,000 at the end of 1997. The current ratio decreased to 1.9 in 1998 from 2.0 in 1997. The decrease in working capital was primarily due to lower accounts receivable and inventory balances at December 31, 1998, even after taking into account the working capital acquired in our purchase of Trianco. On a historical basis, most of our capital was provided by ATI's net investment in our business, for which no interest was charged. We were not allocated any amount of ATI's debt on a historical basis. Prior to the spin-off, ATI will establish a five-year $60,000,000 secured term loan and revolving credit facility, and $40,000,000 of borrowings under the facility will be used by ATI to repay certain of ATI's debt obligations. We will assume this term loan and credit facility, including the repayment obligations for ATI's $40,000,000 of borrowings, in connection with the spin-off. Following the spin-off, we will have up to $20,000,000 of borrowing availability remaining under the credit facility, subject to the terms of the facility. In order to expand our business and implement our strategic objectives, we will aggressively develop high quality, lower cost manufacturing capabilities; pursue product line extensions for existing categories; expand into new channels of distribution with existing products; develop a self-sustaining product development process; and seek acquisitions and alliances to more quickly attain the critical mass required to successfully compete in all of our chosen product categories. In August 1999, we acquired substantially all of the assets of Les Agences Claude Marchand, Inc. ("Olympic"), a pool accessories manufacturer and distributor, doing business in Canada as Olympic Pool Accessories, for $2,500,000 in cash and a $6,687,000 promissory note. Olympic is located in Montreal, Quebec, and produces a full line of pool accessories ranging from cleaning and maintenance supplies to white goods, ladders, solar reels, floating lounges, pool toys and games. Olympic distributes its products in Canada, Europe and the United States. We expect to distribute these pool accessories in the U.S. and Europe under our Water Pik(]) and Jandy(]) brand names. This acquisition will be accounted for as a purchase transaction. Total capital expenditures for 1999, excluding the purchase of Olympic, are expected to approximate $10,000,000, of which $1,669,000 has been spent through June 30, 1999. We currently anticipate that no cash dividends will be paid on Water Pik Technologies common stock in order to conserve cash for use in our business, including possible future acquisitions. In addition, we expect that our credit facility will restrict the payment of dividends. Our board of directors will periodically re-evaluate this dividend policy taking into account operating results, capital needs and other factors. In connection with the spin-off, ATI received a tax ruling from the IRS stating that the spin-off would be tax-free to ATI and to ATI's stockholders. The continuing validity of the Internal Revenue Service tax ruling is subject to certain factual representations and assumptions, including our completion of a required public offering of our common stock 40 45 within one year following the spin-off and use of the anticipated gross proceeds of approximately $50,000,000 (less associated costs) for further development of high quality, lower cost manufacturing capabilities, for product line extensions, to expand channels of distribution, to develop a