<PAGE> 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
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 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)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
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)
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SCOTT TECHNOLOGIES, INC.
(formerly FIGGIE INTERNATIONAL INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -------
(Unaudited)
<S> <C> <C>
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
========= =======
</TABLE>
5
<PAGE> 6
SCOTT TECHNOLOGIES, INC.
(formerly FIGGIE INTERNATIONAL INC.)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
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
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 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)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE> 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):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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
<PAGE> 9
(4) INVENTORIES:
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
(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
<PAGE> 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):
<TABLE>
<CAPTION>
Six Months Three Months
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Continuing Operations $ 3,067 $ 2,605
======= =======
Extraordinary Item $(1,097) $(1,043)
======= =======
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
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
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED Income Shares Per Share
JUNE 30, 1998 Numerator Denominator Amount
--------- ----------- ------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ---------------
<S> <C> <C> <C>
April 20, 1998 7 $14.75 April 20, 2005
May 20, 1998 4 $14.75 May 20, 2005
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED Income Shares Per Share
JUNE 30, 1998 Numerator Denominator Amount
--------- ----------- ------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ---------------
<S> <C> <C> <C>
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
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED Income Shares Per Share
JUNE 30, 1997 Numerator Denominator Amount
--------- ----------- ---------
<S> <C> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ---------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED Income Shares Per Share
JUNE 30, 1997 Numerator Denominator Amount
--------- ----------- ---------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ---------------
<S> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr.
1998 1998 1998 1997 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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)
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 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
<PAGE> 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)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr.
1998 1998 1998 1997 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 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)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr.
1998 1998 1998 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 19
CORPORATE AND UNALLOCATED COSTS AND EXPENSES
RESULTS OF OPERATIONS SUMMARY
(In thousands)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr.
1998 1998 1998 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,337
<SECURITIES> 0
<RECEIVABLES> 35,414
<ALLOWANCES> 489
<INVENTORY> 34,237
<CURRENT-ASSETS> 119,280
<PP&E> 97,825
<DEPRECIATION> 31,897
<TOTAL-ASSETS> 273,362
<CURRENT-LIABILITIES> 48,699
<BONDS> 102,787
0
0
<COMMON> 1,855
<OTHER-SE> 73,663
<TOTAL-LIABILITY-AND-EQUITY> 273,362
<SALES> 129,714
<TOTAL-REVENUES> 129,714
<CGS> 91,965
<TOTAL-COSTS> 113,232
<OTHER-EXPENSES> 3,714
<LOSS-PROVISION> 96
<INTEREST-EXPENSE> 5,120
<INCOME-PRETAX> 7,648
<INCOME-TAX> 3,067
<INCOME-CONTINUING> 4,581
<DISCONTINUED> 0
<EXTRAORDINARY> (1,645)
<CHANGES> 0
<NET-INCOME> 2,936
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
