<PAGE>
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, 1999 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 22, 1999
- --------------------------------------------------------------------------------
Common Stock, par value $.10 per share 18,151,915
<PAGE>
SCOTT TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .3
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 . . . . . . . . . . . . . . .3
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 . . . . . . . . . . . . . .4
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998 . . . . . . . . . . . . . . . . . . . . .5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 . . . . . . . . . . . . . . .7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . .8
Summary of Significant Accounting Policies . . . . . . . . . . . . . . .8
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Discontinued Operations. . . . . . . . . . . . . . . . . . . . . . . . .9
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Credit Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 14
Extraordinary Item - Early Extinguishment of Debt. . . . . . . . . . . 14
Subsequent Event . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 2. 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
Corporate and Unallocated Costs and Expenses . . . . . . . . . . . . . 18
Financial Position and Liquidity . . . . . . . . . . . . . . . . . . . 18
Factors Affecting the Company's Prospects. . . . . . . . . . . . . . . 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . 22
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 23
ITEM 5. SUBSEQUENT EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCOTT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------------------------
<S> <C> <C>
Net Sales $98,946 $92,178
Cost of Sales 66,087 61,691
---------------------------
Gross Profit on Sales 32,859 30,487
---------------------------
Operating Expenses:
Selling, General and Administrative 12,427 12,216
Research and Development 1,571 1,684
---------------------------
Total Operating Expenses 13,998 13,900
---------------------------
Operating Income 18,861 16,587
---------------------------
Other Expense (Income):
Refinancing Costs 188 390
Interest Expense 4,961 7,301
Interest Income (1,238) (2,350)
Other, Net 879 1,208
---------------------------
Income from Continuing Operations before
Income Tax and Extraordinary Item 14,071 10,038
Income Tax 5,188 4,025
---------------------------
Income from Continuing Operations
before Extraordinary Item 8,883 6,013
Discontinued Operations, net of tax:
Income (Loss) from Operations 1,761 (1,432)
Gain on Disposal 32,625 -
---------------------------
34,386 (1,432)
Income before Extraordinary Item 43,269 4,581
Extraordinary Item - (Loss) on
Extinguishment of Debt, net of tax (156) (1,645)
---------------------------
Net Income $43,113 $2,936
---------------------------
---------------------------
Weighted Average Shares - Basic 18,190 18,507
Weighted Average Shares - Diluted 18,453 18,734
PER SHARE DATA - BASIC EPS:
Income from Continuing Operations $0.49 $0.32
Income (Loss) from Discontinued Operations 1.89 (0.07)
---------------------------
Income Before Extraordinary Item 2.38 0.25
Extraordinary Item (Loss) (0.01) (0.09)
---------------------------
Net Income $2.37 $0.16
---------------------------
---------------------------
PER SHARE DATA - ASSUMING DILUTION:
Income from Continuing Operations $0.48 $0.32
Income (Loss) from Discontinued Operations 1.87 (0.07)
---------------------------
Income Before Extraordinary Item 2.35 0.25
Extraordinary Item (Loss) (0.01) (0.09)
---------------------------
Net Income $2.34 $0.16
---------------------------
---------------------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
SCOTT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---------------------------
<S> <C> <C>
Net Sales $50,193 $45,964
Cost of Sales 33,158 30,380
---------------------------
Gross Profit on Sales 17,035 15,584
---------------------------
Operating Expenses:
Selling, General and Administrative 6,380 6,066
Research and Development 815 793
---------------------------
Total Operating Expenses 7,195 6,859
---------------------------
Operating Income 9,840 8,725
---------------------------
Other Expense (Income):
Refinancing Costs 94 131
Interest Expense 2,433 3,085
Interest Income (639) (909)
Other, Net 407 666
---------------------------
Income from Continuing Operations before
Income Tax and Extraordinary Item 7,545 5,752
Income Tax 2,833 2,313
---------------------------
Income from Continuing Operations
before Extraordinary Item 4,712 3,439
Discontinued Operations, net of tax:
Income from Operations 762 443
Gain on Disposal 16,245 -
---------------------------
17,007 443
Income before Extraordinary Item 21,719 3,882
Extraordinary Item - (Loss) on
Extinguishment of Debt, net of tax (156) (1,565)
---------------------------
Net Income $21,563 $2,317
---------------------------
---------------------------
Weighted Average Shares - Basic 18,198 18,534
Weighted Average Shares - Diluted 18,519 18,792
PER SHARE DATA - BASIC EPS:
Income from Continuing Operations $0.26 $0.19
Income from Discontinued Operations 0.93 0.02
---------------------------
Income Before Extraordinary Item 1.19 0.21
Extraordinary Item (Loss) (0.01) (0.08)
---------------------------
Net Income $1.18 $0.13
---------------------------
---------------------------
PER SHARE DATA - ASSUMING DILUTION:
Income from Continuing Operations $0.25 $0.18
Income from Discontinued Operations 0.92 0.02
---------------------------
Income Before Extraordinary Item 1.17 0.20
Extraordinary Item (Loss) (0.01) (0.08)
---------------------------
Net Income $1.16 $0.12
---------------------------
---------------------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
SCOTT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $100,512 $39,344
Trade Accounts Receivable, less Allowance for
Uncollectible Accounts of $328 in 1999 and
$257 in 1998 21,679 13,978
Inventories 27,217 26,360
Prepaid Expenses 923 939
Recoverable Income Taxes 172 974
Current Deferred Tax Asset 12,000 28,000
Net Assets of Discontinued Operations 1,041 25,039
---------------------------
Total Current Assets 163,544 134,634
---------------------------
PROPERTY, PLANT AND EQUIPMENT
Land and Land Improvements 35,208 37,395
Buildings and Leasehold Improvements 12,996 14,696
Machinery and Equipment 24,127 18,682
---------------------------
72,331 70,773
Accumulated Depreciation (18,314) (17,972)
---------------------------
Net Property, Plant and Equipment 54,017 52,801
---------------------------
OTHER ASSETS
Deferred Divestiture Proceeds and Other, Net 16,293 20,803
Prepaid Pension Costs 15,687 15,687
Intangible Assets 1,823 1,866
Cash Surrender Value of Insurance Policies 5,097 4,838
Prepaid Finance Costs 2,062 1,800
Deferred Tax Asset 18,935 26,936
Other 3,609 3,819
---------------------------
Total Other Assets 63,506 75,749
---------------------------
Total Assets $281,067 $263,184
---------------------------
---------------------------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
SCOTT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $17,508 $15,661
Accrued Insurance Reserves 10,899 10,853
Accrued Compensation 4,142 3,964
Accrued Interest 2,041 2,435
Accrued Liabilities and Expenses 16,699 18,135
Current Portion of Long-Term Debt 6,135 24,481
---------------------------
Total Current Liabilities 57,424 75,529
---------------------------
Long-Term Debt 75,410 75,550
Non-Current Insurance Reserves 21,583 26,172
Other Non-Current Liabilities 29,567 30,667
---------------------------
Total Liabilities 183,984 207,918
---------------------------
STOCKHOLDERS' EQUITY
Series A Junior Participating Preferred Shares,
$1.00 Par Value; Authorized, 500 Shares;
Issued and Outstanding, None - -
Preferred Stock, $1.00 Par Value; Authorized,
3,217 Shares; Issued and Outstanding, None - -
Common Stock, $0.10 Par Value; Authorized,
36,000 Shares; Issued and Outstanding
1999 - 18,968; 1998 - 18,855 1,897 1,886
Capital Surplus 113,495 112,409
Accumulated Deficit (3,462) (46,575)
Accumulated Other Comprehensive (Loss) (3,147) (3,229)
Treasury Stock, Common Shares at Cost
1999 - 816 Shares; 1998 - 685 Shares (11,700) (9,225)
---------------------------
Total Stockholders' Equity 97,083 55,266
---------------------------
Total Liabilities and Stockholders' Equity $281,067 $263,184
---------------------------
---------------------------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
SCOTT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------------------------
<S> <C> <C>
Operating Activities:
Income from Continuing Operations $8,883 $6,013
Income (Loss) from Discontinued Operations 34,386 (1,432)
(Loss) from Extraordinary Item (156) (1,645)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities -
Depreciation and Amortization 2,791 2,650
Other, Net 1,370 902
Changes in Operating Assets and Liabilities
Accounts Receivable (935) 937
Inventories (3,399) (4,188)
Prepaid Items (4) 104
Other Assets 4,199 840
Accounts Payable 1,874 (3,652)
Accrued Liabilities and Expenses 593 (2,252)
Accrued Income Taxes 23,555 5,675
Other Liabilities (5,689) (8,917)
---------------------------
Net Cash Provided (Used) by Operating Activities 67,468 (4,965)
---------------------------
Investing Activities:
Capital Expenditures for Continuing Operations (4,404) (4,224)
Capital Expenditures for Discontinued Operations (1,950) (311)
Proceeds from Sale of Property, Plant and
Equipment 497 2,470
Proceeds from Business Divestitures 20,360 -
Receivable from Snorkel Earn-Out (See Note 4) (1,041) -
---------------------------
Net Cash Provided (Used) by Investing Activities 13,462 (2,065)
---------------------------
Financing Activities:
Principal Payments on Debt (18,486) (58,843)
Proceeds from Issuing Common Stock 1,097 968
Payments to Reacquire Common Stock (2,475) (1)
---------------------------
Net Cash (Used) by Financing Activities (19,864) (57,876)
---------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 61,066 (64,906)
Cash and Cash Equivalents at Beginning of Year 39,446 104,243
---------------------------
Cash and Cash Equivalents at End of Period $100,512 $39,337
---------------------------
---------------------------
</TABLE>
Cash and Cash Equivalents include Cash from Discontinued Operations
See Notes to Consolidated Financial Statements
7
<PAGE>
SCOTT TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(1) 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 1998 Form 10-K.
(2) RECEIVABLES:
Receivables consist of the following components (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
U.S. Government
Billed $1,779 $398
Unbilled - -
---------------------------
1,779 398
Commercial
Billed 20,228 13,837
Allowance for Uncollectible Accounts (328) (257)
---------------------------
$21,679 $13,978
---------------------------
---------------------------
</TABLE>
U.S. Government receivables include amounts derived from contracts on which
the Company performs on a prime contractor or subcontractor basis. Costs
charged by the Company to the U.S. Government in the performance of U.S.
Government contracts are subject to audit.
(3) INVENTORIES:
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
Raw Materials $8,284 $7,323
Work in Process 3,502 3,526
Finished Goods 16,045 15,944
Inventory Reserves (614) (433)
---------------------------
Total Inventories $27,217 $26,360
---------------------------
---------------------------
</TABLE>
8
<PAGE>
(4) DISCONTINUED OPERATIONS:
INTERSTATE ELECTRONICS: On June 30, 1999, the Company completed the
previously announced sale of its Interstate Electronics Corporation ("IEC")
subsidiary to L-3 Communications Corporation for $60 million. The final
purchase price will be subsequently adjusted to reflect changes in IEC's
balance sheet since the beginning of the current fiscal year. As a result of
the sale of IEC, the Company has recorded an after-tax gain on disposal of
discontinued operations of $17.3 million in the second quarter of 1999. The
consolidated statements of income for the six months and three months ended
June 30, 1999 and 1998, and the consolidated balance sheets as of June 30,
1999 and December 31, 1998 reflect IEC as a discontinued operation; however,
in the consolidated statements of cash flows, items relating to discontinued
operations have not been disaggregated as they have in the aforementioned
financial statements. Previously reported 1998 financial information has
been restated to reflect IEC as a discontinued operation and is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
As
Previously
Reported IEC As Restated
----------------------------------------
<S> <C> <C> <C>
Six Months ended June 30, 1998:
Net Sales $129,714 ($37,536) $92,178
----------------------------------------
----------------------------------------
Income from Continuing Operations 4,581 1,432 6,013
(Loss) from Discontinued Operations - (1,432) (1,432)
Extraordinary Item (Loss) (1,645) - (1,645)
----------------------------------------
Net Income $2,936 - $2,936
----------------------------------------
----------------------------------------
<CAPTION>
As
Previously
Reported IEC As Restated
----------------------------------------
Three Months ended June 30, 1998:
Net Sales $64,853 ($18,889) $45,964
----------------------------------------
----------------------------------------
Income from Continuing Operations 3,882 (443) 3,439
Income from Discontinued Operations - 443 443
Extraordinary Item (Loss) (1,565) - (1,565)
----------------------------------------
Net Income $2,317 - $2,317
----------------------------------------
----------------------------------------
</TABLE>
SNORKEL: On November 17, 1997, the Company sold its Snorkel division. The
agreement, as amended, provided for $100 million paid to the Company at
closing plus a contingent additional amount. The contingent amount was 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. In the first quarter of 1999, the Company recognized $26
million of income as a result of the Earn-Out. In the second quarter of
1999, the Company recognized an additional $2 million representing an
adjustment to the sales price. As of June 30, 1999, $27 million related to
the earn-out has been received by the Company. The remaining $1 million is
expected to be received in the third quarter upon completion of a final audit.
9
<PAGE>
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS: For the first half of 1999, gain
on disposal included (1) the second quarter pretax gain from the sale of IEC
of $27.2 million, (2) a second quarter $4.0 pretax charge to adjust the
carrying value of real estate relating to discontinued operations and (3) the
$28.0 million pretax gain from the Snorkel Earn-Out.
PRIOR DIVESTITURES: Beginning in 1994, 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
by the Company to purchasers of the businesses and by purchasers of the
businesses to the Company. 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.
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 due to the Company from future tax benefits under a tax
sharing agreement with an unaffiliated public company, Rawlings Sporting
Goods Company, Inc., the value of former facilities of discontinued business
units, a note receivable from the purchaser of the Taylor Instruments
business, cash held in bank escrow accounts from the sale of the Company's
Hartman Electrical and Safway Steel Products operations, and other items.
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 $12.5 million at June 30, 1999
against these assets, which is presented as a deduction from deferred
divestiture proceeds.
(5) INCOME TAXES:
For the six-month and three-month periods ended June 30, 1999, the following
income tax provisions (benefits) have been provided (in thousands):
<TABLE>
<CAPTION>
Six Months Three Months
June 30, 1999 June 30, 1999
----------------------------
<S> <C> <C>
Continuing Operations $5,188 $2,833
----------------------------
----------------------------
Discontinued Operations $19,161 $8,972
----------------------------
----------------------------
Extraordinary Item ($89) ($89)
----------------------------
----------------------------
</TABLE>
For the period ended June 30, 1999, net federal tax expense amounts, due
primarily to the sale of IEC and the Snorkel Earn-Out, have decreased the
deferred tax asset. The current deferred tax asset as of June 30, 1999
reflects the tax benefits the Company expects to utilize in the succeeding
twelve-month period.
10
<PAGE>
(6) CREDIT FACILITY:
On December 31, 1998, the Company obtained new loan facilities ("Amended
Credit Agreement") through General Electric Capital Corporation ("GECC").
The Amended Credit Agreement includes a 72-month, $75 million revolving line
of credit ("Revolver") and a 69-month, $75 million, delayed draw, term loan
facility ("Term Loan").
Within the Revolver is a $30 million letter of credit sub-facility.
Borrowings under the Revolver are available up to the lesser of: (1) $75
million, less outstanding letters of credit, or (2) four times the Company's
trailing twelve-month EBITDA plus cash and cash equivalents less: (a)
outstanding indebtedness and (b) a 50% letter of credit reserve. At the
Company's option, borrowings under the Revolver bear interest at alternate
base rates based on (1) the higher of (a) U.S. prime rate or (b) the Federal
Funds rate plus 50 basis points, plus a margin ranging from 25 to 150 basis
points ("Index Margin"); or (2) LIBOR plus a margin ranging from 175 to 300
basis points ("LIBOR Margin"). The Index Margin and LIBOR Margin are
adjusted based on the Company's leverage ratio except in the first loan year
during which the Index Margin is fixed at 100 basis points and the LIBOR
Margin is fixed at 250 basis points.
The Term Loan is available to pay the Company's 9.875% Senior Notes due on
October 1, 1999. The Company can draw amounts under the Term Loan from time
to time to pay for the purchase of Senior Notes in the open market.
Borrowings under the Term Loan are subject to the same interest rate
alternatives as the Revolver. The Company is also permitted to arrange for
financial hedges to swap a variable interest rate on the Term Loan for a
fixed interest rate.
The Amended Credit Agreement is secured by a majority of the Company's
non-real estate assets, including certain accounts receivable, inventory,
machinery and equipment, and intangibles. The facility contains various
affirmative and negative covenants, including restrictions on dividends and
financial covenants (maximum leverage ratio, minimum fixed charge coverage
ratio and limitations on capital expenditures).
As of June 30, 1999, $15.8 million of letters of credit were outstanding
under the Revolver ($59.2 million was available), no borrowings were
outstanding under the Revolver or Term Loan and all financial covenants have
been satisfied.
11
<PAGE>
(7) LONG-TERM DEBT:
Total debt consists of the following components (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------------------
<S> <C> <C>
Long-Term Debt:
9.875% Senior Notes $81,050 $97,647
Credit Facility - 1,550
Mortgage Notes 495 834
----------------------------
Total 81,545 100,031
Less - Current Portion (6,135) (24,481)
----------------------------
Long-Term Debt $75,410 $75,550
----------------------------
----------------------------
</TABLE>
The Company intends to extinguish its 9.875% Senior Notes, due October 1,
1999, by using cash and the $75 million Term Loan available under the
Company's Amended Credit Agreement. As a result, $75 million of Senior Notes
have been classified as long-term debt with the balance classified as current
maturities. Interest on the Senior Notes is payable semiannually on April 1
and October 1.
(8) CAPITAL STOCK:
Each share of common stock is entitled to one vote per share. The Company's
Board of Directors authorized the Company to purchase up to 3 million shares
of its common stock. During the second quarter, the Company purchased 131,700
shares at a cost of $2.5 million on the open market. Since 1998, the Company
has purchased a total of 816,300 at a cost of $11.7 million on the open
market. The total cost of purchasing the shares is reflected as treasury
stock on the Company's balance sheet.
Earnings per share ("EPS") for the six-month and three-month periods ended
June 30, 1999 and 1998 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):
<TABLE>
<CAPTION>
For the Six-Month Period Ended Income Shares Per Share
June 30, 1999 Numerator Denominator Amount
------------------------------ ------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to
common stockholders $43,113 18,190 $2.37
Effect of dilutive securities
Stock options 263
Diluted EPS
Income available to
common stockholders $43,113 18,453 $2.34
</TABLE>
Options to purchase shares of common stock which were outstanding as of June
30, 1999 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>
None
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the Three-Month Period Ended Income Shares Per Share
June 30, 1999 Numerator Denominator Amount
------------------------------ ------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to
common stockholders $21,563 18,198 $1.18
Effect of dilutive securities
Stock options 321
Diluted EPS
Income available to
common stockholders $21,563 18,519 $1.16
</TABLE>
Options to purchase shares of common stock which were outstanding as of June
30, 1999 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>
None
</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>
<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>
13
<PAGE>
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>
(9) 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.
(10) EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT:
During the second quarter of 1999 the Company paid $17.1 million to
extinguish $16.6 million of its senior notes due October 1, 1999. The
payment included a $0.2 million premium for the early retirement of the debt
and $0.3 million of accrued interest. Accordingly, in the second quarter of
1999 the Company recorded an extraordinary after-tax loss of $0.2 million on
the premium to extinguish $16.6 million of senior notes.
(11) SUBSEQUENT EVENT:
On July 22, 1999, the Company and Bacharach Holdings, Inc. and Affiliates
("Bacharach") entered into an agreement to form a joint venture, known as
Scott/Bacharach Instruments LLC, for the purpose of designing, developing,
manufacturing, and distributing gas detection products, including continuous
and portable instruments. The Company will contribute cash of approximately
$14 million and certain assets in exchange for a 51% interest in the newly
formed company and Bacharach will contribute certain assets in exchange for a
49% interest in the newly formed company. This transaction is subject to
customary closing conditions and is expected to close by the end of the third
quarter of 1999.
14
<PAGE>
ITEM 2. 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.
1999 1999 1999 1998 1998
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $48,753 $50,193 $98,946 $92,178 $45,964
Cost of Sales 32,929 33,158 66,087 61,691 30,380
-------------------------------------------------
Gross Profit on Sales 15,824 17,035 32,859 30,487 15,584
% of Net Sales 32.5% 33.9% 33.2% 33.1% 33.9%
Operating Expenses:
Selling, General and
Administrative 6,047 6,380 12,427 12,216 6,066
Research & Development 756 815 1,571 1,684 793
-------------------------------------------------
Total Operating Expenses 6,803 7,195 13,998 13,900 6,859
-------------------------------------------------
Operating Income 9,021 9,840 18,861 16,587 8,725
-------------------------------------------------
% of Net Sales 18.5% 19.6% 19.1% 18.0% 19.0%
Other Expense (Income):
Refinancing Costs 94 94 188 390 131
Interest Expense 2,528 2,433 4,961 7,301 3,085
Interest Income (599) (639) (1,238) (2,350) (909)
Other, Net 472 407 879 1,208 666
-------------------------------------------------
Income from Continuing
Operations before Income
Tax and Extraordinary Item 6,526 7,545 14,071 10,038 5,752
Income Tax 2,355 2,833 5,188 4,025 2,313
-------------------------------------------------
Income from Continuing
Operations before
Extraordinary Item 4,171 4,712 8,883 6,013 3,439
Discontinued Operations,
net of tax 17,379 17,007 34,386 (1,432) 443
Extraordinary Item - (Loss)
on Extinguishment of
Debt, net of tax - (156) (156) (1,645) (1,565)
-------------------------------------------------
Net Income $21,550 $21,563 $43,113 $2,936 $2,317
-------------------------------------------------
-------------------------------------------------
</TABLE>
15
<PAGE>
Income from continuing operations in the first six months of 1999 increased
to $8.9 million from $6.0 million in the first six months of 1998. Income
from continuing operations in the second quarter of 1999 increased to $4.7
million from $3.4 million in the second quarter of 1998. For both periods,
the increase was attributable to improved results at Scott Aviation and lower
corporate expenses. Discussion and analysis of both Scott Aviation and
Corporate results are presented below under Segment Information.
Income from discontinued operations for the first six months of 1999 included
income from operations, representing IEC's net operating results, and income
on disposal representing (1) the second quarter pretax gain from the sale of
IEC of $27.2 million, (2) a second quarter $4.0 pretax charge to adjust the
carrying value of real estate related to discontinued operations and (3) the
$28.0 million pretax gain from the Snorkel Earn-out. Discontinued operations
for the first six months and second quarter of 1998 represents IEC's net
operating results.
SEGMENT INFORMATION
The Company is engaged principally, under the name of Scott Aviation, in one
line of business which includes the manufacturing, procurement and sale of
life support respiratory products. The results of operations are as follows:
16
<PAGE>
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 reliable, 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 Air-Pak* (a
self-contained breathing apparatus), air-purifying products, gas detection
instruments, thermal imaging cameras, 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.
1999 1999 1999 1998 1998
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $48,753 $50,193 $98,946 $92,178 $45,964
Cost of Sales 32,929 33,158 66,087 61,691 30,380
-------------------------------------------------
Gross Profit on Sales 15,824 17,035 32,859 30,487 15,584
% of Net Sales 32.5% 33.9% 33.2% 33.1% 33.9%
Operating Expenses:
Selling, General and
Administrative 4,264 4,552 8,816 7,830 3,926
Research & Development 756 815 1,571 1,684 793
-------------------------------------------------
Total Operating Expenses 5,020 5,367 10,387 9,514 4,719
-------------------------------------------------
Operating Income $10,804 $11,668 $22,472 $20,973 $10,865
-------------------------------------------------
% of Net Sales 22.2% 23.2% 22.7% 22.8% 23.6%
</TABLE>
DISCUSSION OF 1999 COMPARED TO 1998:
Net sales for the six months ended June 30, 1999 increased by approximately
7%, compared to net sales for the same period in 1998. The increase was due
to an increase in the amount of shipments of products, principally Air-Paks,
to Health and Safety customers of approximately $9.6 million, or 21%, offset
by a decrease in the amount of shipments of oxygen products to Aviation and
Government customers of approximately $2.9 million, or 6%. Net sales for the
second quarter ended June 30, 1999 increased by approximately 9%, compared to
net sales for the same period in 1998. The increase was due to an increase
in the amount of shipments of products, principally Air-Paks, to Health and
Safety customers of approximately $4.5 million, or 20%, offset by a decrease
in the amount of
- ---------------------
*Registered or common law trademarks and service marks of SCOTT
TECHNOLOGIES, INC. and its subsidiaries.
17
<PAGE>
shipments of oxygen products to Aviation and Government customers of
approximately $0.3 million, or 1%.
Gross profit margin increased slightly for the six months ended June 30, 1999
due primarily to increased sales volume. Gross profit margin remained
constant for the second quarters ended June 30, 1999 and June 30, 1998.
Selling, general and administrative expenses increased slightly as a
percentage of sales for the first six months and second quarter ended June
30, 1999, when compared to the same periods for 1998, while research and
development expenses in 1999 were slightly lower as a percentage of sales.
CORPORATE AND UNALLOCATED COSTS AND EXPENSES
RESULTS OF OPERATIONS SUMMARY
(in thousands)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr.
1999 1999 1999 1998 1998
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling, General and
Administrative $1,783 $1,828 $3,611 $4,386 $2,140
Other Expense (Income):
Refinancing Costs 94 94 188 390 131
Interest Expense 2,528 2,433 4,961 7,301 3,085
Interest Income (599) (639) (1,238) (2,350) (909)
Other, Net 472 407 879 1,208 666
</TABLE>
DISCUSSION OF 1999 COMPARED TO 1998:
Selling, general and administrative expenses decreased $0.8 million for the
first six months of 1999 and $0.3 million for the second quarter of 1999 when
compared with 1998 due primarily to lower payroll and fringes, and
professional fees.
Interest expense decreased for the first six months and second quarter of
1999 as a result of lower outstanding debt.
Interest income decreased for the first six months and second quarter of 1999
due to the reduction in the Company's cash position and lower interest rates.
FINANCIAL POSITION AND LIQUIDITY
The Company's consolidated statements of cash flows contain items relating to
discontinued operations which have not been disaggregated as they have in the
consolidated balance sheet.
At June 30, 1999 cash and cash equivalents totaled $100.5 million, compared
to $39.4 million at December 31, 1998.
Net cash provided by operating activities was $67.5 million reflecting the
net income from continuing operations of $8.9 million and the net income from
discontinued operations of $34.4 million; the change in accrued income taxes
of $23.6 million, which includes the utilization of the deferred tax asset in
connection with the Company's first six months profit; and the net cash
provided by other operating activities of $0.6 million.
18
<PAGE>
Net cash provided by investing activities was $13.5 million reflecting the
net assets of IEC, which were sold on June 30, 1999, offset by capital
expenditures of $6.4 million. Capital expenditures are expected to be
approximately $11 million for all of 1999 and will be funded from internally
generated funds and/or credit facilities.
Net cash used by financing activities was $19.9 million, which included a
$1.6 million repayment of funds previously borrowed under the Company's
revolving line of credit, $16.9 million for principal payments on senior debt
and mortgages, $2.5 million to reacquire common stock, and $1.1 million in
proceeds from the issuance 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 $100.5 million at June 30, 1999, and by the credit facility of which
$59.2 million was available at June 30, 1999. The Company intends to
extinguish its 9.875% senior notes, due October 1, 1999, by using cash and
the $75 million Term Loan available under the Company's Amended Credit
Agreement.
The Company expects to continue to focus on internal growth and market
expansion at Scott Aviation, investigate acquisitions, and consider
alternative strategies that may further enhance stockholder value.
The Company's cash balance at June 30, 1999 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 9.875% Senior Notes and
stock purchases. The Company's Board of Directors has authorized the Company
to purchase up to three million shares of its common stock. In 1998, the
Company purchased 684,600 shares of common stock at market prices. The
Company purchased an additional 131,700 shares of its common stock in the
second quarter of 1999.
FACTORS AFFECTING THE COMPANY'S PROSPECTS
The prospects of the Company may be affected by a number of factors,
including the matters discussed below:
COMPETITION - Scott Aviation's Health and Safety unit manufactures the Scott
Air-Pak, air-purifying products, gas detection instruments, thermal imaging
cameras, 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. Both of
these manufacturing units participate in markets which are technology-based,
industry-regulated, and highly competitive. Failure by Scott Aviation to
develop new products and/or remain competitive with changing industry
conditions could adversely affect market share.
LEVERAGE - Part of the Company's strategy is to grow through acquisitions.
Any such future acquisition could involve the incurrence of significant
additional debt. In addition, the Company's Board of Directors has
authorized the Company to purchase up to three million shares of its common
stock. In 1998, 684,600
19
<PAGE>
shares were purchased. For the first six months of 1999, the Company
purchased an additional 131,700 shares. Future purchases of common stock
could affect 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
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 and other matters. The Company believes that its accruals and
reserves are appropriate and adequate. However, as these contractual matters
are subject to significant uncertainty, no assurances can be given that the
ultimate resolution of these matters will not have a material adverse effect
upon the Company's financial position, operating results or cash flows.
At June 30, 1999, the Company's balance sheet reflected $16.3 million of
deferred divestiture proceeds which is net of a reserve of $12.5 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 from these assets
may differ materially from the amounts recorded.
STRATEGIC PLAN - The Company's strategic plan is to grow through strategic
acquisitions, systematic market expansion and continued growth through new
and "next generation" product development.
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 Amended Credit
Agreement. 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.
20
<PAGE>
Expansion into international markets will depend on numerous factors that 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 strategic acquisitions, alliances or joint ventures, any
integration of the acquired businesses into the Company's 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.
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
research and development investments and such investments do not lead to
commercially successful products, the Company's results of operations could
be adversely affected.
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."
STATE OF READINESS: The Company has completed 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. As part of its Year
2000 Issue assessment, the Company has taken into account whether third
parties with which the Company has material relationships, including the U.S.
Government, are Year 2000 compliant. The Company's formalized plan is
comprised of the following phases: (1) development of an inventory and
ranking of risks; (2) evaluation of compliance, impact of non-compliance, and
development of remediation plans; (3) remediation of material non-compliance
items; (4) testing and validation of remediation efforts; (5) implementation
of upgrades or replacement of non-compliance items; and (6) establishment of
support assistance, as required, during the year 2000. The Company has
completed the first four phases and is currently in the process of
implementing the fifth phase with respect to its internal information and
operating systems. Phase five is expected to be completed for all priority
items by year-end 1999. The Company is still in the process of testing and
validating readiness related to third parties and finalizing contingency
plans.
COSTS: The Company's expenses include both out of pocket and internal costs
incurred in the Year 2000 Issue assessment process. The Company does not
separately track such internal costs which are principally associated with
payroll expenses, but estimates that the Year 2000 compliance costs for the
first half of 1999 were minimal. The Company estimates that the total costs
(including
21
<PAGE>
both operating and capital expenditures) of the Company's formalized plan, as
described above, will be approximately $1.5 million. However, there can be
no assurance that the Company will not incur any unanticipated costs in
completing its Year 2000 Compliance Project.
RISKS: The Company has identified and developed remediation plans for several
significant risks. These risks relate to vendors, suppliers, distributors,
customers, and other third parties, as well as to the Company's own internal
information and operation systems. Any failure by the Company or third
parties to ensure that the applicable computer systems are Year 2000
compliant could have a material adverse effect on the Company's operations,
liquidity and financial position. Any failure of the Company's products to
perform could result in claims against the Company.
CONTINGENCY PLANS: The Company will continue to develop contingency
strategies, as appropriate, as part of its Year 2000 plan. These contingency
strategies may include identifying alternate suppliers, developing procedures
to override internal computer systems, increasing inventory levels, and
reallocating internal resources as necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual stockholders meeting was held on May 26, 1999. Holders on the
record date for the annual meeting represented 18,186,983 shares of common
stock. Each holder of a share of common stock is entitled to one vote per
share on each matter presented at the annual meeting.
ELECTION OF DIRECTORS: The nominees for Director were elected pursuant to the
following vote:
<TABLE>
<CAPTION>
NOMINEE FOR AUTHORITY WITHHELD
- ------------------------------------------------------------------------------
<S> <C> <C>
N. Colin Lind 15,265,534 192,309
Glen W. Lindemann 15,264,344 193,499
</TABLE>
ITEM 5. SUBSEQUENT EVENT
On July 22, 1999, the Company and Bacharach Holdings Inc. and Affiliates
("Bacharach") entered into an agreement to form a joint venture, known as
Scott/Bacharach Instruments LLC, for the purpose of designing, developing,
manufacturing, and distributing gas detection products, including continuous
and portable instruments. The Company will contribute cash of approximately
$14 million and certain assets in exchange for a 51% interest in the newly
formed company and Bacharach will contribute certain assets in exchange for a
49% interest in the newly formed company. This transaction is subject to
customary closing conditions and is expected to close by the end of the third
quarter of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
10.0 Material Contracts
(i) Amendment and Waiver No.4 to the Amended and Restated Credit
Agreement, dated as of July 22, 1999, by and between the Company
and the Lenders Party hereto and General Electric Capital
Corporation, as agent.
27.0 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter
Form 8-K dated June 30, 1999, reporting Item 2 (Acquisition or
Disposition of Assets), the sale of Interstate Electronics
Corporation.
23
<PAGE>
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
Senior Vice President and
Chief Financial Officer
(Duly Authorized and Principal Accounting Officer)
Date: August 10, 1999
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------ ----------------------------------------- --------
<S> <C> <C>
10.0 Material Contracts 26
27.0 Financial Data Schedule 33
</TABLE>
25
<PAGE>
Exhibit 10 (i)
AMENDMENT AND WAIVER NO. 4
AMENDMENT AND WAIVER NO. 4 (this "Amendment"), dated as of July 22,
1999, among Scott Technologies, Inc., a Delaware corporation ("Borrower"),
the Lenders party to the Credit Agreement referred to below ("Lenders") and
General Electric Capital Corporation, a New York corporation, as agent for
said Lenders ("Agent"), to the Credit Agreement referred to below.
W I T N E S S E T H
WHEREAS, Borrower, Agent and Lenders have entered into an Amended
and Restated Credit Agreement, dated as of December 31, 1998 (as heretofore
amended, the "Credit Agreement"; the terms defined in Credit Agreement being
used herein as therein defined, unless otherwise defined herein);
WHEREAS, Borrower proposes entering into that certain Contribution
Agreement, dated as of July 22, 1999, with Bacharach Holdings, Inc.,
Bacharach, Inc., Exidyne Instrumentation Technologies LLC, Paul M. Zito, Paul
M. Zito, Jr. and Elizabeth A. Zito-Cuda (together with all schedules, annexes
and exhibits thereto and related documents referenced therein, the
"Contribution Agreement");
WHEREAS, Borrower has requested that: (a) Agent and Lenders consent
to Borrower entering into the Contribution Agreement and the joint venture
and other transactions contemplated under the Contribution Agreement (the
"Bacharach Joint Venture"); (b) Agent and Lenders waive the provisions of
Sections 1.3, 5.11, 5.12, 6.1, 6.2, 6.5, 6.6, 6.7, 6.8 and 6.14 of the Credit
Agreement that would otherwise prohibit the Bacharach Joint Venture; and (c)
amend certain provisions of the Credit Agreement to facilitate the Bacharach
Joint Venture; and
WHEREAS, Agent and Lenders party hereto are willing to grant such
consent and waivers and amend certain provisions of the Credit Agreement,
subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereby agree as follows:
SECTION 1. CONSENT AND WAIVER. Subject to the satisfaction of
each of the conditions set forth in Section 7 hereof, Agent and each Lender
party hereto hereby (a) consents, pursuant to Section 11.1 of the Credit
Agreement, to the Bacharach Joint Venture; and (b) waives the provisions of
Sections 1.3, 5.11, 5.12, 6.1, 6.2, 6.5, 6.6, 6.7, 6.8 and 6.14 of the Credit
Agreement to the extent, but only to the extent, such provisions would
prohibit the
26
<PAGE>
Bacharach Joint Venture.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement
is hereby amended as follows:
(a) AMENDMENT TO SECTION 6.3 OF CREDIT AGREEMENT. Section 6.3 of
the Credit Agreement is amended by inserting the following sentence at the
end thereof:
"Borrower shall not permit Scott Bacharach, LLC to create, incur, assume
or permit any Indebtedness in excess of $5,000,000 during the term of
this Agreement."
(b) AMENDMENTS TO SECTION 6.4 OF CREDIT AGREEMENT. (i) Section
6.4 of the Credit Agreement is amended by deleting clause (v) of subsection
(a) thereof in its entirety and substituting in lieu thereof the following:
"(v) extend loans to Scott Bacharach, LLC in an aggregate principal
amount not to exceed $5,000,000 during the term of this Agreement and to
other Joint Venture Subsidiaries to the extent permitted by SECTION
6.2(vii);"
(ii) Section 6.4 of the Credit Agreement is further amended by
inserting immediately preceding the phrase "Subsidiaries of Borrower" in
clause (vi) of subsection (a) thereof the phrase "Scott Bacharach, LLC or".
SECTION 3. AMENDMENTS TO ANNEX A TO CREDIT AGREEMENT. Annex A to
the Credit Agreement is hereby amended as follows:
(a) AMENDMENT TO DEFINITION OF "EBITDA". The definition of the
term "EBITDA" is amended by inserting immediately before the period at the
end thereof the following:
"; and PROVIDED, FURTHER, that the calculation of EBITDA shall not in
any event include any Net Income, Interest Expense, tax expense,
amortization expense, depreciation expense, extraordinary gains and
losses and other non-cash expenses in respect of the foregoing to the
extent included in the determination of Net Income of any minority
interest in any Joint Venture Subsidiary"
(b) AMENDMENT TO DEFINITION OF "INTEREST EXPENSE". The definition
of the term "Interest Expense" is amended by deleting the phrase "and its
Subsidiaries" therein and substituting in lieu thereof the phrase ", its
Subsidiaries and its Joint Venture Subsidiaries (if required to be
consolidated with Borrower in accordance with GAAP)".
(c) AMENDMENT TO DEFINITION OF "NET INCOME". The definition of
the term "Net Income" is amended by deleting the phrase "and its
Subsidiaries" therein and substituting in lieu thereof the phrase ", its
Subsidiaries and its Joint Venture Subsidiaries (if required to be
consolidated with Borrower in accordance with GAAP)".
27
<PAGE>
SECTION 4. AMENDMENT TO SCHEDULE 3.9 TO CREDIT AGREEMENT.
Schedule 3.9 to the Credit Agreement is hereby amended by inserting "Scott
Bacharach, LLC" therein as an Unrestricted Subsidiary and a Joint Venture
Subsidiary.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Borrower represents
and warrants to Agent and Lenders as follows:
(a) All of the representations and warranties of Borrower
contained in the Credit Agreement and in the other Loan Documents are true
and correct on the date hereof as though made on such date, except to the
extent that any such representation or warranty expressly relates to an
earlier date, for changes permitted or contemplated by the Credit Agreement
or as otherwise disclosed in writing to Agent and Lenders. No Default or
Event of Default has occurred and is continuing or would result from the
transactions contemplated hereby.
(b) The execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary or proper corporate
action and do not require the consent or approval of any Person which has not
been obtained.
(c) This Amendment has been duly executed and delivered by
Borrower and each of this Amendment and the Credit Agreement as amended
hereby constitutes a legal, valid and binding obligation of Borrower,
enforceable against Borrower in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
SECTION 6. EFFECT ON THE LOAN DOCUMENTS. (a) Upon the
effectiveness of this Amendment, each reference in any Loan Document to "this
Agreement", "hereunder", "herein", or words of like import, and each
reference in any other Loan Document to such Loan Document, shall mean and be
a reference to such Loan Document as amended hereby.
(b) Except as certain provisions are specifically amended or
waived herein, the Credit Agreement shall remain in full force and effect and
is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a modification of
any right, power, or remedy of the Agent or the Lenders under any of the Loan
Documents, nor constitute a modification of any provision of any of the Loan
Documents.
SECTION 7. EFFECTIVENESS. This Amendment shall become effective
as of the date first set forth above, provided that each of the following
conditions has been satisfied on the date hereof, including the delivery to
Agent of each of the documents set forth below in form and substance
satisfactory to Agent:
(a) Counterparts of this Amendment duly executed by Borrower, the
Required Lenders and Agent;
28
<PAGE>
(b) A copy of the fully and duly executed Contribution Agreement;
(c) Pursuant to the definition of "Joint Venture Subsidiary" in
the Credit Agreement, a certificate of a Responsible Officer of Borrower
certifying the designation of the newly formed Subsidiary (after giving
effect to the Bacharach Joint Venture) as a Joint Venture Subsidiary; and
(d) All of the representations and warranties of Borrower
contained in Section 5 hereof shall be true and correct and certified by a
certificate of an officer of Borrower.
SECTION 8. EXPENSES. Borrower agrees to pay on demand all
reasonable out-of-pocket costs and expenses of Agent in connection with the
preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel for
Agent with respect thereto.
SECTION 9. GOVERNING LAW. This Amendment shall be governed by,
construed and enforced in accordance with the laws of the State of New York,
without regard to conflict of laws principles thereof.
SECTION 10. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, which shall, collectively and separately, constitute
one agreement.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed as of the date first above written.
SCOTT TECHNOLOGIES, INC.
By: /s/
-------------------------------------------
Name: Mark A. Kirk
Title: Senior VP & Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and
Lender
By: /s/
-------------------------------------------
Name: Charles D. Chiodo
Title: Duly Authorized Signatory
BANK OF AMERICA, N.A. (formerly NationsBank, N.A.), as
Lender
By: /s/
-------------------------------------------
Name: Lisa S. Donoghue
Title: Managing Director
NBD BANK, as Lender
By: /s/
-------------------------------------------
Name: William J. Maxbauer
Title: First Vice President
30
<PAGE>
ABN AMRO BANK, N.V., as Lender
By: /s/
-------------------------------------------
Name: Christopher S. Helmeci / Patrick M. Pasto
Title: Vice President / Vice President
NATIONAL CITY BANK, as Lender
By: /s/
-------------------------------------------
Name: Matthew P. Tuohey
Title: Vice President
THE HUNTINGTON NATIONAL BANK, as Lender
By: /s/
-------------------------------------------
Name: John R. Macks
Title: Portfolio Manager
PNC BANK, NATIONAL ASSOCIATION, as Lender
By: /s/
-------------------------------------------
Name: Bryon A. Pike
Title: Vice President
31
<PAGE>
AMSOUTH BANK, as Lender
By: /s/
-------------------------------------------
Name: Frank D. Marsicano
Title: Attorney in Fact
THE PROVIDENT BANK, as Lender
By: /s/
-------------------------------------------
Name: Christopher B. Gribble
Title: Vice President
STAR BANK, N.A., as Lender
By: /s/
-------------------------------------------
Name: W. Gregory Schmid
Title: Vice President
32
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 100,512
<SECURITIES> 0
<RECEIVABLES> 22,007
<ALLOWANCES> 328
<INVENTORY> 27,217
<CURRENT-ASSETS> 163,544
<PP&E> 72,331
<DEPRECIATION> 18,314
<TOTAL-ASSETS> 281,067
<CURRENT-LIABILITIES> 57,424
<BONDS> 75,410
0
0
<COMMON> 1,897
<OTHER-SE> 95,186
<TOTAL-LIABILITY-AND-EQUITY> 281,067
<SALES> 98,946
<TOTAL-REVENUES> 98,946
<CGS> 66,087
<TOTAL-COSTS> 80,085
<OTHER-EXPENSES> 1,067
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<INTEREST-EXPENSE> 3,723
<INCOME-PRETAX> 14,071
<INCOME-TAX> 5,188
<INCOME-CONTINUING> 8,883
<DISCONTINUED> 34,386
<EXTRAORDINARY> (156)
<CHANGES> 0
<NET-INCOME> 43,113
<EPS-BASIC> 2.37
<EPS-DILUTED> 2.34
</TABLE>
