-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PpPmOKJFJ2B1JRFDtiV4xkPQfCT1Cn5BCOeFovBa20qVSfOCyyk4H9daV4/dK4AZ gbO6mkq19gpg6WTfv9ce0Q== 0000950152-98-006795.txt : 19980817 0000950152-98-006795.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950152-98-006795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTT TECHNOLOGIES INC CENTRAL INDEX KEY: 0000720032 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 521297376 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12558 FILM NUMBER: 98688534 BUSINESS ADDRESS: STREET 1: 5875 LANDERBROOK DR STREET 2: STE 250 CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 BUSINESS PHONE: 4404461333 MAIL ADDRESS: STREET 1: 5875 LANDERBROOK DR STREET 2: STE 250 CITY: MAYFIELD HEIGHTS STATE: OH ZIP: 44124 FORMER COMPANY: FORMER CONFORMED NAME: FIGGIE INTERNATIONAL INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIGGIE INTERNATIONAL HOLDINGS INC DATE OF NAME CHANGE: 19870112 10-Q 1 SCOTT TECHNOLOGIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 1-8591 ---------------- ------ SCOTT TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1297376 - --------------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5875 Landerbrook Drive, Suite 250 Mayfield Heights, Ohio 44124 - ---------------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) (440) 446-1333 ------------------------------- (Registrant's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. CLASS OUTSTANDING AS OF JULY 27, 1998 - -------------------------------------------------------------------------------- Class A Common Stock, par value $.10 per share 13,843,865 Class B Common Stock, par value $.10 per share 4,711,547 2 SCOTT TECHNOLOGIES, INC. ------------------------ (formerly FIGGIE INTERNATIONAL INC.) TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION............................................3 CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997........................3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997......................4 CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997....................................5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997........................7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................8 Name Change........................................................8 Summary of Significant Accounting Policies.........................8 Receivables........................................................8 Inventories........................................................9 Discontinued Operations............................................9 Income Taxes......................................................10 Credit Facility...................................................11 Long-Term Debt....................................................11 Capital Stock.....................................................11 Contingent Liabilities............................................13 Restructuring and Refinancing Costs...............................14 Extraordinary Item - Early Extinguishment of Debt.................14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................15 Forward-Looking Information.......................................15 Results of Operations Summary.....................................15 Scott Aviation....................................................17 Interstate Electronics Corporation................................18 Corporate and Unallocated Costs and Expenses......................19 Financial Position and Liquidity..................................19 Factors Affecting the Company's Prospects.........................21 PART II. OTHER INFORMATION..............................................24 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............24 EXHIBITS AND REPORTS ON FORM 8-K..................................24 SIGNATURES...............................................................25 EXHIBIT INDEX............................................................26 3 PART I. FINANCIAL INFORMATION SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands, except per share data) (Unaudited)
June 30, June 30, 1998 1997 --------- --------- Net Sales $ 129,714 $ 125,420 Cost of Sales 91,965 86,470 --------- --------- Gross Profit on Sales 37,749 38,950 --------- --------- Operating Expenses: Selling, General and Administrative 17,324 18,962 Research and Development 3,943 5,466 --------- --------- Total Operating Expenses 21,267 24,428 --------- --------- Operating Income 16,482 14,522 --------- --------- Other Expense (Income): Restructuring and Refinancing Costs 2,622 262 Interest Expense 7,470 10,880 Interest Income (2,350) (2,092) Other, Net 1,092 1,374 --------- --------- Income from Continuing Operations before Income Tax and Extraordinary Item 7,648 4,098 Income Tax 3,067 1,394 --------- --------- Income from Continuing Operations before Extraordinary Item 4,581 2,704 Discontinued Operations, Net of Tax: Income from Operations - 6,408 (Loss) on Disposal - (6,000) --------- --------- - 408 Income before Extraordinary Item 4,581 3,112 Extraordinary Item - (Loss) on Extinguishment of Debt, Net of Tax (1,645) - --------- --------- Net Income $ 2,936 $ 3,112 ========= ========= Weighted Average Shares - Basic 18,507 18,388 Weighted Average Shares - Diluted 18,734 18,597 Per Share Data - Basic EPS: - --------------------------- Income from Continuing Operations $ 0.25 $ 0.15 Income from Discontinued Operations - 0.02 --------- --------- Income Before Extraordinary Item 0.25 0.17 Extraordinary (Loss) (0.09) - --------- --------- Net Income $ 0.16 $ 0.17 ========= ========= Per Share Data - Assuming Dilution: - ----------------------------------- Income from Continuing Operations $ 0.25 $ 0.15 Income from Discontinued Operations - 0.02 --------- --------- Income Before Extraordinary Item 0.25 0.17 Extraordinary (Loss) (0.09) - --------- --------- Net Income $ 0.16 $ 0.17 ========= =========
See Notes to Consolidated Financial Statements. 3 4 SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands, except per share data) (Unaudited)
June 30, June 30, 1998 1997 -------- -------- Net Sales $ 64,853 $ 62,769 Cost of Sales 45,254 43,283 -------- -------- Gross Profit on Sales 19,599 19,486 -------- -------- Operating Expenses: Selling, General and Administrative 8,199 9,220 Research and Development 1,957 2,641 -------- -------- Total Operating Expenses 10,156 11,861 -------- -------- Operating Income 9,443 7,625 -------- -------- Other Expense (Income): Restructuring and Refinancing Costs 131 131 Interest Expense 3,173 5,427 Interest Income (909) (977) Other, Net 561 650 -------- -------- Income from Continuing Operations before Income Tax and Extraordinary Item 6,487 2,394 Income Tax 2,605 807 -------- -------- Income from Continuing Operations before Extraordinary Item 3,882 1,587 Discontinued Operations, Net of Tax: Income from Operations - 3,008 (Loss) on Disposal - (6,000) -------- -------- - (2,992) Income (Loss) before Extraordinary Item 3,882 (1,405) Extraordinary Item - (Loss) on Extinguishment of Debt, Net of Tax (1,565) - -------- -------- Net Income (Loss) $ 2,317 $ (1,405) ======== ======== Weighted Average Shares - Basic 18,534 18,391 Weighted Average Shares - Diluted 18,792 18,609 Per Share Data - Basic EPS: - --------------------------- Income from Continuing Operations $ 0.21 $ 0.09 (Loss) from Discontinued Operations - (0.16) -------- -------- Income (Loss) Before Extraordinary Item 0.21 (0.07) Extraordinary (Loss) (0.08) - -------- -------- Net Income (Loss) $ 0.13 $ (0.07) ======== ======== Per Share Data - Assuming Dilution: - ----------------------------------- Income from Continuing Operations $ 0.20 $ 0.09 (Loss) from Discontinued Operations - (0.16) -------- -------- Income (Loss) Before Extraordinary Item 0.20 (0.07) Extraordinary (Loss) (0.08) - -------- -------- Net Income (Loss) $ 0.12 $ (0.07) ======== ========
See Notes to Consolidated Financial Statements. 4 5 SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 (In thousands)
June 30, December 31, 1998 1997 --------- ------- (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 39,337 $ 104,243 Trade Accounts Receivable, less Allowance for Uncollectible Accounts of $489 in 1998 and $394 in 1997 34,925 35,862 Inventories 34,237 30,049 Prepaid Expenses 781 885 Recoverable Income Taxes - 4,120 Current Deferred Tax Asset 10,000 6,400 --------- ------- Total Current Assets 119,280 181,559 --------- ------- PROPERTY, PLANT AND EQUIPMENT Land and Land Improvements 43,696 43,732 Buildings and Leasehold Improvements 24,350 24,103 Machinery and Equipment 29,779 28,793 --------- ------- 97,825 96,628 Accumulated Depreciation (31,897) (29,275) --------- ------- Net Property, Plant and Equipment 65,928 67,353 --------- ------- OTHER ASSETS Deferred Divestiture Proceeds and Other, Net 28,073 29,324 Prepaid Pension Costs 12,723 12,723 Intangible Assets 1,910 1,953 Cash Surrender Value of Insurance Policies 3,543 3,596 Prepaid Finance Costs 723 1,106 Deferred Tax Asset 38,746 44,060 Other 2,436 1,589 --------- ------- Total Other Assets 88,154 94,351 --------- ------- Total Assets $ 273,362 $ 343,263 ========= =======
5 6 SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND DECEMBER 31, 1997 (In thousands)
June 30, December 31, 1998 1997 --------- --------- (Unaudited) LIABILITIES CURRENT LIABILITIES Accounts Payable $ 15,863 $ 19,515 Accrued Insurance Reserves 12,952 12,033 Accrued Compensation 7,194 6,430 Accrued Interest 2,557 3,895 Accrued Environmental Reserve 2,863 3,217 Accrued Liabilities and Expenses 6,866 9,329 Current Portion of Long-Term Debt 404 639 --------- --------- Total Current Liabilities 48,699 55,058 --------- --------- Long-Term Debt 102,787 161,395 Non-Current Insurance Reserves 23,501 31,410 Other Non-Current Liabilities 22,857 23,804 --------- --------- Total Liabilities 197,844 271,667 --------- --------- STOCKHOLDERS' EQUITY Preferred Stock, $1.00 Par Value; Authorized, 3,217 Shares; Issued and Outstanding, None - - Class A Common Stock, $0.10 Par Value; Authorized, 18,000 Shares; Issued and Outstanding 1998 - 13,834; 1997 - 13,729 1,384 1,373 Class B Common Stock, $0.10 Par Value; Authorized, 18,000 Shares; Issued and Outstanding 1998 - 4,706; 1997 - 4,707 471 471 Capital Surplus 110,827 109,871 Accumulated Deficit (37,082) (40,018) Other Equity (82) (101) --------- --------- Total Stockholders' Equity 75,518 71,596 --------- --------- Total Liabilities and Stockholders' Equity $ 273,362 $ 343,263 ========= =========
See Notes to Consolidated Financial Statements. 6 7 SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (In thousands) (Unaudited)
June 30, June 30, 1998 1997 --------- --------- Operating Activities: Income from Continuing Operations $ 2,936 $ 2,704 Income from Discontinued Operations - 408 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities- Depreciation and Amortization 2,650 4,163 Other, Net 902 (1,387) Changes in Operating Assets and Liabilities Accounts Receivable 937 (388) Inventories (4,188) (6,095) Prepaid Items 104 (2,802) Other Assets 840 5,914 Accounts Payable (3,652) 1,104 Accrued Liabilities and Expenses (2,252) 8,088 Accrued Income Taxes 5,675 177 Other Liabilities (8,917) (4,729) --------- --------- Net Cash (Used) Provided by Operating Activities (4,965) 7,157 --------- --------- Investing Activities: Capital Expenditures for Continuing Operations (4,535) (2,666) Capital Expenditures for Discontinued Operations - (992) Proceeds from Sale of Property, Plant and Equipment 2,470 76 Proceeds from Business Divestitures - 767 --------- --------- Net Cash (Used) by Investing Activities (2,065) (2,815) --------- --------- Financing Activities: Principal Payments on Debt (58,843) (972) Proceeds from Issuing Common Stock 968 157 Payments to Reacquire Common Stock (1) (385) --------- --------- Net Cash (Used) by Financing Activities (57,876) (1,200) --------- --------- Net (Decrease) Increase in Cash and Cash Equivalents (64,906) 3,142 Cash and Cash Equivalents at Beginning of Year 104,243 44,447 --------- --------- Cash and Cash Equivalents at End of Period $ 39,337 $ 47,589 ========= =========
See Notes to Consolidated Financial Statements. 7 8 SCOTT TECHNOLOGIES, INC. AND SUBSIDIARIES (formerly FIGGIE INTERNATIONAL INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The financial information included herein has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and properly reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of the financial results of operations for the periods covered by this report. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the entire year. (1) NAME CHANGE: Effective May 22, 1998, the Company changed its name from Figgie International Inc. to Scott Technologies, Inc. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements have been prepared in accordance with the accounting policies described in Note 1 of the Notes to Consolidated Financial Statements appearing in SCOTT TECHNOLOGIES, INC.'s (formerly FIGGIE INTERNATIONAL INC.) 1997 Form 10-K. (3) RECEIVABLES: Receivables consist of the following components (in thousands):
June 30, December 31, 1998 1997 ---------- ---------- U.S. Government Billed $ 8,269 $ 13,802 Unbilled 7,968 8,309 ---------- ---------- 16,237 22,111 Commercial Billed 19,177 14,145 Allowance for Uncollectible Accounts (489) (394) ---------- ---------- $ 34,925 $ 35,862 ========== ==========
U.S. Government receivables include amounts derived from contracts on which the Company performs on a prime contractor or subcontractor basis. Unbilled receivables represent the difference between revenue recognized on a percentage of completion basis for financial accounting and reporting purposes and amounts permitted to be billed to customers under contract terms. These amounts will be billed in subsequent periods based on provisions of the agreements. Costs charged by the Company to the U.S. Government in the performance of U.S. Government contracts are subject to audit. Years 1992, 1993 and 1994 are currently under audit. 8 9 (4) INVENTORIES: Inventories consist of the following components (in thousands):
June 30, December 31, 1998 1997 -------- -------- Raw Materials $ 7,260 $ 8,515 Work In Process 13,974 8,489 Finished Goods 14,697 14,594 Inventory Reserves (1,694) (1,549) -------- -------- Total Inventories $ 34,237 $ 30,049 ======== ========
(5) DISCONTINUED OPERATIONS: SALE OF SNORKEL: On November 17, 1997, the Company sold its Snorkel aerial work platform division. The agreement, as amended, provided for $100 million paid to the Company at closing plus a contingent additional amount. The contingent amount will be the amount of sales of the Snorkel business for the twelve-month period commencing on April 1, 1998 and ending on March 31, 1999 (the "Earn-Out Period") in excess of $140 million, such additional payment not to exceed $20 million, plus 70% of the amount of sales of the Snorkel business during the Earn-Out Period in excess of $160 million, such additional amount not to exceed $30 million. The agreement further provides for the assumption by the purchaser of certain liabilities and operating lease commitments of the Snorkel business. The financial statements do not reflect the contingent additional amount as an asset or as income. PRIOR DIVESTITURES: Prior to the sale of Snorkel, the Company divested a number of its businesses. The contract terms under which businesses were divested include representations and warranties, covenants and indemnification provisions made (a) by the Company to purchasers of the businesses and (b) by purchasers of the businesses to the Company. Each transaction has contract terms specific to that transaction. The extent of representations and warranties made ranged from those qualified by time, knowledge, and dollar materiality to those representations and warranties which are unqualified. Covenants require the Company to act, or prevent the Company from acting, in a variety of ways, such as not competing with the purchasers of a business. Covenants also require the purchasers to act, or prevent them from acting, in a variety of ways. The duration of covenants ranges from those effective for a specified period of time to those which are indefinite. Remedies available for breaches of representations and warranties and covenants range from monetary relief in specific amounts for specific breaches or violations to unlimited amounts. Under the contracts, the Company has generally retained liability for events that occurred prior to sale. The Company believes that it has established appropriate accruals for losses that may arise, such as workers' compensation, product liability, general liability, environmental risks and federal and state tax matters. 9 10 The Company has indemnified purchasers and has received indemnifications from purchasers for a variety of items. In some transactions, a portion of the purchase price was held back or escrowed at banks to support indemnification provisions. Such amounts are reflected as the assets of the Company within deferred divestiture proceeds. Proceeds and other consideration from divestitures which will be paid to the Company upon fulfillment of contractual provisions, the passage of time, or the occurrence of future events have been recorded as deferred divestiture proceeds classified as non-current assets. Deferred divestiture proceeds consist of cash held in bank escrow accounts from the sale of the Company's Hartman Electrical, Waite Hill Insurance and Safway Steel Products operations, cash held back by purchasers from the sale of the Company's Waite Hill Insurance and Figgie Financial Services operations, receivables expected from Safway Steel Products arising from final calculations of the purchase price, a note receivable from the purchaser of the Taylor Instruments business, a partnership interest in the entity that acquired Interstate Engineering (a vacuum cleaner manufacturer), cash due to the Company from future tax benefits under a tax sharing agreement with an unaffiliated public company, Rawlings Sporting Goods Company, Inc., the net assets of Willoughby Assurance, Ltd., a dormant reinsurance subsidiary of the Company, installation contracts in process of completion from the "Automatic" Sprinkler business, former facilities of discontinued business units and other items. Deferred divestiture proceeds do not include any contingent additional amount associated with the Snorkel sale. Deferred divestiture proceeds include management's best estimates of the amounts expected to be realized on the collection of deferred proceeds and sale of residual assets related to discontinued operations. The amounts the Company will ultimately realize could differ materially from the amounts recorded. The Company has a reserve of $28.0 million at June 30, 1998 against these assets, which is presented as a deduction from deferred divestiture proceeds. (6) INCOME TAXES: For the six-month and three-month periods ended June 30, 1998, the following income tax provisions (benefits) have been provided (in thousands):
Six Months Three Months June 30, 1998 June 30, 1998 ------------- ------------- Continuing Operations $ 3,067 $ 2,605 ======= ======= Extraordinary Item $(1,097) $(1,043) ======= =======
Net Federal Tax provision amounts have reduced the deferred tax asset. The current deferred tax asset as of June 30, 1998 reflects the tax benefits the Company expects to utilize in the succeeding twelve-month period in respect of operating results. 10 11 (7) CREDIT FACILITY: As of June 30, 1998, the Company has a $75 million revolving credit loan and letter of credit facility ("Credit Agreement"). Within the Credit Agreement, the Company can issue up to $60 million in letters of credit. Borrowings are available up to $75 million less outstanding letters of credit. At the Company's option, borrowings bear interest at alternate rates based on (1) the highest of the U.S. prime rate, the 90 day commercial paper rate, or the Federal Funds rate plus 50 basis points or (2) LIBOR plus 200 basis points. The facility is secured by certain accounts receivable, inventory, machinery and equipment and intangibles. The facility contains various affirmative and negative covenants, including restrictions on dividends and certain financial covenants. The facility expires on January 1, 1999. As of June 30, 1998, $16.3 million of letters of credit were outstanding under the facility, there were no borrowings outstanding ($58.7 million was available) and all financial covenants were satisfied. (8) LONG-TERM DEBT: Total debt consists of the following components (in thousands):
June 30, December 31, 1998 1997 --------- --------- Long-Term Debt: 9 7/8% Senior Notes due October 1, 1999 $ 99,672 $ 158,270 Mortgage Notes 3,519 3,580 Obligations under Capital Lease - 184 --------- --------- Total 103,191 162,034 Less - Current Portion (404) (639) --------- --------- Long Term Debt $ 102,787 $ 161,395 ========= =========
The 9 7/8% Senior Notes are due October 1, 1999. Interest is payable semi-annually on April 1 and October 1. During the second quarter of 1998, the Company purchased in the market $55.5 million of Senior Notes at market prices. These Senior Notes will be returned to the Indenture Trustee for retirement. (9) CAPITAL STOCK: Each share of Class A Common Stock is entitled to one-twentieth of one vote per share, while each share of Class B Common Stock is entitled to one vote per share, except, in each case, with respect to shares beneficially owned by certain persons coming within the definition of a Substantial Stockholder (as defined in the Company's Restated Certificate of Incorporation, as amended), in which case the voting rights of such stock are governed by the appropriate provisions of the Company's Restated Certificate of Incorporation. Earnings per share ("EPS") for the three and six month periods ended June 30, 1998 and 1997 were calculated using the following share data. Reconciliation of the numerators and denominators of the basic and diluted EPS calculation are as follows (in thousands, except per share data): 11 12
FOR THE THREE MONTH PERIOD ENDED Income Shares Per Share JUNE 30, 1998 Numerator Denominator Amount --------- ----------- ------ Basic EPS Income available to common stockholders $2,317 18,534 $ 0.13 Effect of dilutive securities Stock Options 258 Diluted EPS Income available to common stockholders $2,317 18,792 $ 0.12
Options to purchase shares of common stock which were outstanding as of June 30, 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date #of Shares Option Price Expiration Date - ---------- ---------- ------------ --------------- April 20, 1998 7 $14.75 April 20, 2005 May 20, 1998 4 $14.75 May 20, 2005
FOR THE SIX MONTH PERIOD ENDED Income Shares Per Share JUNE 30, 1998 Numerator Denominator Amount --------- ----------- ------ Basic EPS Income available to common stockholders $2,936 18,507 $ 0.16 Effect of dilutive securities Stock Options 227 Diluted EPS Income available to common stockholders $2,936 18,734 $ 0.16
Options to purchase shares of common stock which were outstanding as of June 30, 1998 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date #of Shares Option Price Expiration Date - ---------- ---------- ------------ --------------- September 22, 1997 200 $13.75 September 22,2004 April 20, 1998 7 $14.75 April 20, 2005 May 20, 1998 4 $14.75 May 20, 2005
12 13
FOR THE THREE MONTH PERIOD ENDED Income Shares Per Share JUNE 30, 1997 Numerator Denominator Amount --------- ----------- --------- Basic EPS Income available to common stockholders $(1,405) 18,391 $ (0.07) Effect of dilutive securities Stock Options 218 Diluted EPS Income available to common stockholders $(1,405) 18,609 $ (0.07)
Options to purchase shares of common stock which were outstanding as of June 30, 1997 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date #of Shares Option Price Expiration Date - ---------- ---------- ------------ --------------- April 16, 1996 1 $13.1875 April 16, 2003 April 30, 1996 5 $13.00 April 30, 2003 August 27, 1996 9 $13.50 August 27, 2003
FOR THE SIX MONTH PERIOD ENDED Income Shares Per Share JUNE 30, 1997 Numerator Denominator Amount --------- ----------- --------- Basic EPS Income available to common stockholders $3,112 18,388 $ 0.17 Effect of dilutive securities Stock Options 209 Diluted EPS Income available to common stockholders $3,112 18,597 $ 0.17
Options to purchase shares of common stock which were outstanding as of June 30, 1997 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares are as follows:
Grant Date #of Shares Option Price Expiration Date - ---------- ---------- ------------ --------------- April 16, 1996 1 $13.1875 April 16, 2003 April 30, 1996 5 $13.00 April 30, 2003 August 27, 1996 9 $13.50 August 27, 2003 February 4, 1997 274 $12.375 February 4, 2004
(10) CONTINGENT LIABILITIES: The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. In the opinion of management, any liability with respect to these matters will not have a material adverse effect on the Company's financial condition, cash flow or results of operations. 13 14 The Company has been cooperating with the U.S. Government in a criminal investigation involving possible improprieties at an Army facility where a division of the Company was a supplier. The Company has furnished documents and other requested information and denies any wrongdoing. This investigation is ongoing and could result in sanctions by the Government which could affect the Company's ability to obtain future Government contracts. (11) RESTRUCTURING AND REFINANCING COSTS: In the fourth quarter of 1997, in light of limited market success for Interstate Electronics' commercial products and the need for further product development expenditures, the Company undertook a number of steps to evaluate Interstate Electronics' products. The Company concluded that several classes of products did not have a competitive market position or required additional product development costs that could not be economically justified. As a result, the Company decided to curtail certain classes of products. Specifically, the Company decided to (1) stop the development and new sales activities of GPS-based airport landing systems with the intent to reconsider the market at the time that wide area or local area augmentation system standards are promulgated; (2) cease manufacturing and further development of communication modems and focus its communication business on providing service to Eastern European military applications; (3) cease further Company-funded development of a GPS avionic product for a specific commercial customer; and (4) limit marketing efforts for the certified 9002 flight management system to military customers. As a result of these decisions, the Company incurred the expected 1998 first quarter restructuring charge, representing primarily severance costs at Interstate Electronics, of approximately $2.3 million. Further, the Company expects to incur additional severance costs in the second half of 1998 which will be charged to operating results at that time. (12) EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT: In the second quarter of 1998, the Company paid $58.5 million to extinguish $55.5 million of its 9 7/8% Senior Notes due October 1, 1999. The payments included a $2.5 million premium for the early retirement of the debt and $0.5 million of accrued interest. Accordingly, the Company recorded a second quarter extraordinary after tax loss of $1.6 million on the premiums to extinguish $55.5 million of Senior Notes. For the six month period ended June 30, 1998, the Company paid $61.8 million to extinguish $58.6 million of its 9 7/8% Senior Notes due October 1, 1999. The payments included a $2.6 million premium for the early retirement of the debt and $0.6 million of accrued interest. For the six month period, the Company recorded an extraordinary after tax loss of $1.6 million on the premiums to extinguish $58.6 million of Senior Notes. 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING INFORMATION: Information contained in this Report includes forward-looking statements, which can be identified by the use of forward- looking terminology such as "believes," "may," "will," "expects," "intends," "plans," "anticipates," "estimates" or "continues" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. The Company undertakes no obligation to revise these forward- looking statements to reflect any future events or circumstances. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward- looking statements. Factors that could cause or contribute to such differences are discussed under the caption "Factors Affecting the Company's Prospects." RESULTS OF OPERATIONS SUMMARY (In thousands)
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. 1998 1998 1998 1997 1997 --------- --------- --------- --------- --------- Net Sales $ 64,861 $ 64,853 $ 129,714 125,420 $ 62,769 Cost of Sales 46,711 45,254 91,965 86,470 43,283 --------- --------- --------- --------- --------- Gross Profit on Sales 18,150 19,599 37,749 38,950 19,486 % of Net Sales 28.0% 30.2% 29.1% 31.1% 31.0% Operating Expenses: Selling, General and Administrative 9,125 8,199 17,324 18,962 9,220 Research & Development 1,986 1,957 3,943 5,466 2,641 --------- --------- --------- --------- --------- Total Operating Expenses 11,111 10,156 21,267 24,428 11,861 --------- --------- --------- --------- --------- Operating Income 7,039 9,443 16,482 14,522 7,625 --------- --------- --------- --------- --------- % of Net Sales 10.9% 14.6% 12.7% 11.6% 12.1% Other Expense (Income): Restructuring and Refinancing Costs 2,491 131 2,622 262 131 Interest Expense 4,297 3,173 7,470 10,880 5,427 Interest Income (1,441) (909) (2,350) (2,092) (977) Other, Net 531 561 1,092 1,374 650 --------- --------- --------- --------- --------- Income from Continuing Operations before Income Tax and Extraordinary Item 1,161 6,487 7,648 4,098 2,394 Income Tax 462 2,605 3,067 1,394 807 --------- --------- --------- --------- --------- Income from Continuing Operations before Extraordinary Item 699 3,882 4,581 2,704 1,587 Discontinued Operations, Net of Tax - - - 408 (2,992) Extraordinary Item - (Loss) on Extinguishment of Debt, Net of Tax (80) (1,565) (1,645) - - --------- --------- --------- --------- --------- Net Income (Loss) $ 619 $ 2,317 $ 2,936 $ 3,112 $ (1,405) ========= ========= ========= ========= =========
15 16 For the first six months of 1998, Net Sales increased $4.3 million, or 3.4%, to $129.7 million from Net Sales of $125.4 million for the same period in 1997. For the second quarter of 1998 Net Sales increased by $2.1 million, or 3.3%, to $64.9 million from $62.8 million in the second quarter of 1997. For both periods, Net Sales increased at Scott Aviation and decreased at Interstate Electronics. Gross Profit for the six months ended June 30, 1998 decreased by $1.2 million to $37.7 million and represented 29.1% of Net Sales as compared to 31.1% in 1997. Gross profit for the second quarter of 1998 increased by $0.1 million to $19.6 million and represented 30.2% of Net Sales as compared to 31.0% in 1997. Selling, General and Administrative expenses for the six months improved as a percentage of Net Sales to 13.4% in 1998, compared to 15.1% in 1997. For the second quarter, Selling, General and Administrative expenses improved as a percentage of Net Sales to 12.6% in 1998, compared to 14.7% in 1997. For both periods in 1998, lower expenses as a percentage of sales at both Interstate Electronics and Scott Aviation were responsible for the majority of the improvement. Research and Development costs for the six months ended June 30, 1998, as a percentage of Net Sales, were 3.0% in 1998, compared to 4.4% in 1997. Lower six month 1998 Research and Development expenses at Interstate Electronics, reflecting fewer classes of products as a result of the restructuring, were primarily responsible for the decrease. Scott Aviation's Research and Development expenses have also decreased as a percentage of sales for the first six months of 1998 when compared to the same period last year. Operating Income for the six months amounted to $16.5 million in 1998, as compared to Operating Income of $14.5 million in 1997. Operating income for the second quarter of 1998 was $9.4 million compared to $7.6 million in the second quarter of 1997. Income taxes for continuing operations for the six months of 1998 and 1997 were $3.1 million and $1.4 million respectively. In 1997, Discontinued Operations, net of tax, consists of the operating results of the Snorkel division which was sold on November 17, 1997. Income from Continuing Operations in the six months of 1998 increased to $4.6 million compared to $2.7 million in the corresponding period of 1997. Income from continuing operations for the second quarter of 1998 increased to $3.9 million compared to $1.6 million in the second quarter of 1997. The increase was attributed primarily to improved results at Scott Aviation and lower corporate interest expense. This improvement was offset partially by the $2.3 million restructuring charge, which represented primarily severance costs at Interstate Electronics Corporation. SEGMENT INFORMATION The Company has operations in two reporting segments, Scott Aviation and Interstate Electronics Corporation. The results of operations are most meaningful when analyzed and discussed by reporting segment. 16 17 SCOTT AVIATION Scott Aviation is a leading manufacturer of life support respiratory products and consists of two principal business units: Health and Safety; and Aviation and Government. The two units have benefited from several similarities. Scott Aviation has used its broad experience and expertise in high pressure gas regulation and distribution developed from the two product lines to provide end-users with products that are light weight, compact in size and user friendly. Each unit has also benefited from the common use of manufacturing cell and team technology. In addition, Scott Aviation's uniform quality assurance program has allowed the units to work jointly to comply with the rigorous quality requirements of the government, regulatory agencies and customers. Scott Aviation's Health and Safety unit manufactures the Scott Aviation Air- Pak* (a self-contained breathing apparatus), air-purifying products, gas detection instruments and other life support products for firefighting and personal protection against environmental and safety hazards. Scott Aviation's Aviation and Government unit manufactures protective breathing equipment, pilot and crew oxygen masks, and emergency oxygen for passengers and crew members on commercial, government and private aircraft and ships. RESULTS OF OPERATIONS SUMMARY (In thousands)
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. 1998 1998 1998 1997 1997 ------- ------- ------- ------- ------- Net Sales $46,214 $45,964 $92,178 $80,667 $40,709 Cost of Sales 31,311 30,380 61,691 54,404 27,231 ------- ------- ------- ------- ------- Gross Profit on Sales 14,903 15,584 30,487 26,263 13,478 % of Net Sales 32.2% 33.9% 33.1% 32.6% 33.1% Operating Expenses: Selling, General and Administrative 3,904 3,926 7,830 7,530 3,886 Research & Development 891 793 1,684 1,988 810 ------- ------- ------- ------- ------- Total Operating Expenses 4,795 4,719 9,514 9,518 4,696 ------- ------- ------- ------- ------- Operating Income $10,108 $10,865 $20,973 $16,745 $ 8,782 ------- ------- ------- ------- ------- % of Net Sales 21.9% 23.6% 22.8% 20.8% 21.6%
DISCUSSION OF 1998 COMPARED TO 1997: Net Sales for the six months and second quarter of 1998 increased approximately 14% and 13% respectively, compared to Net Sales for the same periods in 1997. The increase for the six months ended June 30, 1998 was due to an increase in the amount of shipments of oxygen products to aviation/government customers of approximately $6.4 million, or 16%, and an increase in the amount of shipments of products, principally Air-Paks, to health and safety customers of approximately $5.1 million, or 13%. The increase for the second quarter of 1998 was due to an increase in the amount of shipments of oxygen products to aviation/government customers of approximately $2.7 million, or 13%, and an increase in the amount of shipments of products, principally Air-Paks, to health and safety customers of approximately $2.5 million, or 13%. Gross Margin increased for the six months and second quarter due to significant increased sales volume in the major product lines. Selling, General and Administrative expenses increased slightly in dollar amounts during the six months and second quarter ended June 30, 1998 due to significantly increased sales but are down as a percentage of Net Sales when compared to the same periods for 1997. Research and Development expenses in 1998 were lower for the six months and second quarter when compared to the same periods last year. *Registered or common law trademarks and service marks of SCOTT TECHNOLOGIES, INC. (formerly FIGGIE INTERNATIONAL INC.) and its subsidiaries. 17 18 INTERSTATE ELECTRONICS CORPORATION ("Interstate Electronics" or "IEC") provides a variety of high-technology equipment. Since its founding in 1956, IEC has provided sophisticated test instrumentation equipment to the U.S. Navy for use in the Polaris, Poseidon, and Trident submarine missile programs ("Strategic Weapon Systems"). For these programs and many others, both domestic and foreign, IEC provides telemetry, data recording, and position measuring systems. IEC pioneered the use of the Global Positioning System ("GPS") for tracking the Trident missile during test firings. Currently, GPS systems are also being used in many other military programs to provide highly accurate positioning and navigation information. IEC also designs and manufactures a line of ruggedized flat-panel and CRT display systems ("Displays"), and operates satellite-based communication systems for military applications ("Communications"). As discussed on page 14, Note 11, in the fourth quarter of 1997 the Company decided to curtail several classes of products as part of a restructuring of IEC. RESULTS OF OPERATIONS SUMMARY (In thousands)
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. 1998 1998 1998 1997 1997 -------- -------- -------- -------- -------- Net Sales $ 18,647 $ 18,889 $ 37,536 $ 44,753 $ 22,060 Cost of Sales 15,400 14,874 30,274 32,066 16,052 -------- -------- -------- -------- -------- Gross Profit on Sales 3,247 4,015 7,262 12,687 6,008 % of Net Sales 17.4% 21.3% 19.3% 28.3% 27.2% Operating Expenses: Selling, General and Administrative 2,975 2,133 5,108 7,038 3,735 Research & Development 1,095 1,164 2,259 3,478 1,831 -------- -------- -------- -------- -------- Total Operating Expenses 4,070 3,297 7,367 10,516 5,566 -------- -------- -------- -------- -------- Operating Income (Loss) $ (823) $ 718 $ (105) $ 2,171 $ 442 -------- -------- -------- -------- -------- % of Net Sales (4.4%) 3.8% (0.3%) 4.9% 2.0%
DISCUSSION OF 1998 COMPARED TO 1997: Net Sales for the six months ended June 30, 1998 declined by approximately 16% compared to Net Sales for the same period of 1997 due to decreases in sales of: Strategic Weapons Systems of approximately $1.4 million, or 6%; Displays of approximately $2.1 million, or 44%; GPS of approximately $2.1 million, or 16%; and Communications of approximately $1.6 million, or 30%. Net Sales for the second quarter ended June 30, 1998 declined by approximately 14% compared to Net Sales for the same period of 1997 due to decreases in: Strategic Weapons Systems of approximately $0.9 million, or 8%; Displays of approximately $1.0 million, or 43%; GPS of approximately $0.6 million, or 10%; and Communications of approximately $0.7 million, or 25%. IEC expects 1998 full-year sales to be in the $80 million range. Gross Margin decreased for the six months and second quarter due to reduced sales volume and lower margin contracts which IEC is in the process of completing. Selling, General and Administrative expenses are lower in dollar amounts and as a percentage of Net Sales for the six months and second quarter of 1998 due to reduced sales, higher costs incurred in 1997 to compete for orders and contracts in the different product lines, and lower costs as a result of the restructuring effort. Research and Development costs are lower for the six months and second quarter of 1998 due to curtailed development of classes of products associated with the restructuring of IEC. 18 19 CORPORATE AND UNALLOCATED COSTS AND EXPENSES RESULTS OF OPERATIONS SUMMARY (In thousands)
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. 1998 1998 1998 1997 1997 -------- -------- -------- -------- -------- Selling, General and Administrative $ 2,246 $ 2,140 $ 4,386 $ 4,394 $ 1,599 Other Expenses: Restructuring and Refinancing Costs 2,491 131 2,622 262 131 Interest Expense 4,297 3,173 7,470 10,880 5,427 Interest Income (1,441) (909) (2,350) (2,092) (977) Other, Net 531 561 1,092 1,374 650
DISCUSSION OF 1998 COMPARED TO 1997: Selling, General and Administrative expenses have remained constant for the first six months of 1998 compared with last year. For the second quarter of 1998, Selling, General and Administrative expenses increased by approximately 34% when compared to the second quarter of 1997 due to a pension credit recorded in the second quarter of 1997. Restructuring and Refinancing Costs increased for the first six months of 1998 compared to 1997 due to the $2.3 million restructuring charge taken in the first quarter of 1998. For the second quarter of 1998, Restructuring and Refinancing Costs were consistent with the second quarter of 1997. Interest Expense decreased for the six months and second quarter of 1998 due to lower outstanding debt and reduced interest expense on the discounted present value of insurance reserves. Interest Income increased for the six months of 1998 due primarily to the improvement in the Company's cash position. Interest Income for the second quarter of 1998 is comparable to Interest Income in the second quarter of 1997 as the Company used $58.5 million to extinguish $55.5 million of its 9 7/8% Senior Notes. FINANCIAL POSITION AND LIQUIDITY At June 30, 1998 Cash and Cash Equivalents totaled $39.3 million, compared to $104.2 million at December 31, 1997. Net Cash used by Operating Activities was $5.0 million reflecting net income of $2.9 million, depreciation and amortization of $2.7 million and the net usage in other operating activities of $10.6 million, principally for insurance liability payments. Net Cash used by Investing Activities was $2.1 million, reflecting capital expenditures and proceeds from the sale of real estate. Capital Expenditures for Continuing Operations were $4.5 million in the first six months of 1998 for machinery, equipment, tooling and real estate development costs and are expected to be approximately $9 million for all of 1998. Proceeds from the sale of real estate were $2.5 million. Capital Expenditures will be funded from internally generated funds and leases. 19 20 Net Cash used by Financing Activities was $57.8 million, which included $58.8 million for principal payments on debt and $1.0 million in proceeds from the issuing of common stock in connection with the Company's stock option plan. Liquidity is provided by the Company's Cash and Cash Equivalents, which totaled $39.3 million at June 30, 1998, and by the credit facility of which $58.7 million was available at June 30, 1998. In the first six months of 1998, the Company used cash to reduce its debt by repurchasing $58.6 million of its 9 7/8% Senior Notes. The repurchasing of the Senior Notes will result in lower interest expense, and to a lesser extent, lower interest income in subsequent periods. The Company expects to continue to focus on internal growth at its two segments; investigate acquisitions for Scott Aviation; and consider alternative strategies that may further enhance stockholder value. The Company's cash balance at June 30, 1998 is available for general corporate purposes. Those purposes may include investment in the current operations of the Company, payment of liabilities associated with previously divested businesses, use as all or a portion of the purchase price of possible acquisitions, additional repurchases of its 9 7/8% Senior Notes and stock repurchases. 20 21 FACTORS AFFECTING THE COMPANY'S PROSPECTS The prospects of the Company may be affected by a number of factors, including the matters discussed below: DEPENDENCE ON GOVERNMENT CONTRACTS - Sales to the U.S. Government represented approximately 40% of the Company's total net sales in each of the last three years; these sales represented approximately 90% and 10% of IEC's and Scott Aviation's sales, respectively. The Company expects to continue to derive the majority of IEC's revenues, and a portion of Scott Aviation's revenues, from Government contracts. Consequently, fluctuations in military spending by the U.S. Government could adversely affect the Company's revenues and profitability. In addition, since these contracts are the result of competitive bidding processes, there can be no assurance that the Company will be awarded future contracts, or that once awarded, the Government will not terminate such contracts at its convenience. The Company's results of operations would be adversely affected should the U.S. Government not represent a substantial portion of its business. Finally, the Company has been cooperating with the U.S. Government in a criminal investigation involving possible improprieties at an Army facility where a division of the Company was a supplier. The Company has furnished documents and other requested information and denies any wrongdoing. The investigation could result in sanctions by the Government which could affect the Company's ability to obtain future Government contracts. COMPETITION - The GPS and Displays markets are highly competitive, subject to rapid change and significantly affected by new product introductions. Competition may intensify, particularly as companies well established in the defense industry increase their focus on GPS. Certain of these companies have significantly greater financial, technical and marketing resources. In addition, the development and commercialization of new types of displays or position measuring systems could reduce the demand for the Company's products. These competitive factors could adversely affect the Company's financial condition, cash flow, results of operations or expected benefits from its restructuring initiatives. LEVERAGE - At June 30, 1998 the Company had outstanding indebtedness of $103.2 million, stockholders' equity of $75.5 million, and cash of $39.3 million. For the six months and second quarter of 1998, the Company had interest expense of $7.5 million and $3.2 million which resulted in an EBITDA (Earnings Before Interest Expense, Taxes, Depreciation and Amortization) to interest expense ratio of approximately 2.0 times and 2.6 times, respectively, compared to approximately 1.2 times for the 1997 year. In February 1998, the Company's Board authorized management to opportunistically make repurchases of its 9 7/8% Notes and of up to one million shares of stock in the open market. Debt repurchases will decrease the amount of leverage and improve the EBITDA to interest expense ratio. Stock repurchases would worsen the interest coverage ratio. As part of the Company's strategy is to grow through acquisitions, any such future acquisition could involve incurring significant additional leverage. The degree to which the Company is leveraged could: (i) impair the Company's ability to obtain future financing for acquisitions, a refinancing, or other purposes; (ii) make it more vulnerable than some of 21 22 its competitors in a prolonged economic downturn; and (iii) restrict its ability to exploit new business opportunities and limit its flexibility to respond to changing business conditions. DISCONTINUED OPERATIONS - Since January 1, 1994, the Company has sold numerous businesses. The contract terms included representations, warranties, and indemnification provisions made by the Company. Remedies available for breaches of representations and warranties range from monetary relief in specific amounts for specific breaches to unlimited amounts. The Company has generally retained liability for the conduct of the sold businesses prior to the date of sale. As a result, the Company is subject to various known and contingent liabilities, including indemnification obligations, with respect to its discontinued operations. The Company has established accruals and reserves for losses that may arise out of workers' compensation, product liability and general liability claims, environmental risks, tax matters and other matters. The Company believes that its accruals and reserves are appropriate and adequate. However, as these contractual matters may be subject to significant uncertainty and as litigation is inherently unpredictable, no assurances can be given that resolution will not have a material adverse effect upon the Company's financial position, operating results or cash flows or require additional reserves. Further, at June 30, 1998, the Company's balance sheet reflected $28.1 million of deferred divestiture proceeds which is net of a reserve of $28.0 million. Deferred divestiture proceeds include management's best estimates of the amounts expected to be realized after the resolution of the underlying matters. The amounts the Company will ultimately realize could differ materially from the amounts recorded. STRATEGIC PLAN - The Company's strategic plan contemplates continued development and marketing of new products, international expansion, and future acquisitions. The Company expects to continue to make investments in new product development. There can be no assurance that the Company will be able to develop and introduce, in a timely manner, new products or enhancements to its existing products which satisfy customer needs or achieve market acceptance. To the extent that the Company makes substantial marketing and R&D investments and such investments do not lead to commercially successful products, the Company's results of operations could be adversely affected. Expansion into international markets will depend on numerous factors which are beyond the Company's control, including its ability to develop or acquire additional manufacturing and distribution capabilities outside the United States. In addition, international expansion may increase the Company's exposure to certain risks inherent in doing business outside the United States, such as currency exchange rate fluctuations, compliance with foreign codes and standards and political risks. If the Company pursues this strategy through acquisitions, strategic alliances or joint ventures, any integration of the acquired businesses into the Company's 22 23 business would entail expense and management attention. If the Company pursues this strategy through the establishment of new operations, it will be subject to the difficulties inherent in starting a new business in foreign jurisdictions. There can be no assurance that the business and competitive environment in international markets will be as favorable to the Company as is the U.S. market currently. Part of the Company's strategy is to grow through acquisitions. There can be no assurance, however, that the Company will identify attractive acquisitions, that such acquisitions will be consummated, or that, if consummated, any anticipated benefits will be realized from such acquisitions. In addition, the availability of additional acquisition financing cannot be assured and, depending on the terms of such additional acquisitions, could be restricted by the terms of the Credit Facility. Moreover, the process of integrating acquired operations into the Company's existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of the Company's existing operations. Future acquisitions by the Company would likely result in amortization expense of goodwill which could have a material adverse effect on the Company's financial condition and operating results. YEAR 2000 ISSUE - The Year 2000 Issue refers to a number of date-related problems that may affect software applications, including codes imbedded in chips and other hardware devices. These problems include software programs that identify a year by its last two digits so that a year identified as "00" would be recognized as the year "1900" rather than the year "2000." The Company is in the process of identifying and assessing the extent to which its manufacturing equipment, business systems and products could be affected by the Year 2000 Issue. The Company expects to complete its assessment of the impact of the Year 2000, formalize its plan to resolve any noncompliance issues, and begin to implement such a plan by December 1998. As part of its Year 2000 Issue assessment, the Company is taking into account whether third parties with which the Company has material relationships, including the U.S. Government, are Year 2000 compliant. In addition, the Company will develop contigency strategies, as appropriate, as part of its Year 2000 plan. At this time, the Company cannot assess the extent to which it will be dependent upon third parties to identify or address such issues and does not have an estimate of the cost of compliance. Any failure by the Company to ensure that its computer systems are Year 2000 compliant could have a material adverse effect on the Company's operations. Any failure of the Company's products to perform could result in claims against the Company. 23 24 PART II. OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual stockholders meeting was held on May 20, 1998. Holders on the record date for the annual meeting of 13,786,030 shares of Class A Common Stock (1/20th of a vote per share) and 4,711,847 shares of Class B Common Stock (1 vote per share) were entitled to cast 689,302 and 4,711,847 votes, respectively. ELECTION OF DIRECTORS. The nominees for Director were elected pursuant to the following vote: AUTHORITY NOMINEE FOR WITHHELD ------- --- -------- F. Rush McKnight 3,301,252 42,923 John P. Reilly 3,299,843 44,332 Frank N. Linsalata 3,300,820 43,355 APPROVAL OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE CORPORATION TO SCOTT TECHNOLOGIES, INC. The amendment was approved pursuant to the following vote: FOR AGAINST ABSTAIN --- ------- ------- 3,281,735 42,103 20,337 APPROVAL OF DIRECTORS' STOCK OPTION PLAN. The Directors' Stock Option Plan was approved pursuant to the following vote: FOR AGAINST ABSTAIN --- ------- ------- 2,652,793 664,919 26,463 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits 10.0 Material Contracts (a) The Company's Directors' Stock Option Plan, included as Exhibit B to the Company's definitive Proxy Statement dated April 17, 1998, is hereby incorporated herein by reference. 27.0 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter Form 8-K dated May 22, 1998 and filed on May 29, 1998, reporting Item 5 (Other Events), the filing of a Certificate of Amendment to the Restated Certificate of Incorporation. 24 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SCOTT TECHNOLOGIES, INC. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTT TECHNOLOGIES, INC. By: /S/ Mark A. Kirk --------------------------------- Mark A. Kirk Senior Vice President and Chief Financial Officer (Duly Authorized and Principal Accounting Officer) Date: August 12, 1998 25 26 EXHIBIT INDEX NUMBER DESCRIPTION OF EXHIBITS 10.0 Material Contracts (a) The Company's Directors' Stock Option Plan, included as Exhibit B to the Company's definitive Proxy Statement dated April 17, 1998, is hereby incorporated herein by reference. 27.0 Financial Data Schedule 26 EX-27 2 EXHIBIT 27
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 39,337 0 35,414 489 34,237 119,280 97,825 31,897 273,362 48,699 102,787 0 0 1,855 73,663 273,362 129,714 129,714 91,965 113,232 3,714 96 5,120 7,648 3,067 4,581 0 (1,645) 0 2,936 0.16 0.16
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