<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- -----------------------
Commission file number 0-13940
---------------
CENTRAL SPRINKLER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2328106
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
451 North Cannon Avenue, Lansdale, PA 19446
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 362-0700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 13, 1998
------- -----------------------------
Common Stock, $.01 Par Value 3,845,637
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
January 31, October 31,
1998 1997
------------ -----------
(Amounts in thousands,
except per share)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 728 $ 6,568
Short-term investments 13,242 14,288
Accounts receivable, less allowance
for doubtful receivables of $6,145
in 1998 and $5,949 in 1997 46,990 48,048
Inventories 54,009 50,450
Deferred income taxes 8,108 8,227
Prepaid expenses and other assets 3,196 3,414
--------- ---------
Total current assets 126,273 130,995
--------- ---------
Property, Plant and Equipment 75,265 73,412
Less - Accumulated depreciation (27,391) (25,480)
--------- ---------
47,874 47,932
--------- ---------
Goodwill, less accumulated amortization of
$3,577 in 1998 and $3,514 in 1997 2,445 2,508
--------- ---------
Other Assets 6,669 6,592
--------- ---------
$ 183,261 $ 188,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,852 $ 2,403
Current portion of long-term debt 2,850 2,854
Accounts payable 26,352 27,626
Accrued expenses 11,401 12,713
Accrued income taxes 428 409
--------- ---------
Total current liabilities 42,883 46,005
--------- ---------
Long-Term Debt 78,783 79,918
--------- ---------
Other Noncurrent Liabilities 8,207 9,010
--------- ---------
Deferred Income Taxes 116 196
--------- ---------
Commitments and Contingent Liabilities (Note 4)
Shareholders' Equity:
Common stock, $.01 par value; shares
authorized - 15,000; issued -
5,568 in 1998 and 1997 56 56
Additional paid-in capital 31,145 31,059
Retained earnings 44,526 44,160
Cumulative translation adjustments 11 184
Deferred cost - Employee Stock Ownership
Plan ("ESOP") (5,557) (5,652)
--------- ---------
70,181 69,807
Less - Common stock in treasury, at
cost - 1,722 shares in 1998 and 1997 (16,909) (16,909)
--------- ---------
53,272 52,898
--------- ---------
$ 183,261 $ 188,027
========= =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
January 31,
1998 1997
----------------------------
(Amounts in thousands,
except per share)
Net Sales $ 53,452 $ 48,180
Cost of Sales 38,230 33,095
-------- --------
Gross profit 15,222 15,085
-------- --------
Operating Expenses:
Selling, general
and administrative 11,511 10,519
Research and development 1,876 1,510
-------- --------
13,387 12,029
Operating income 1,835 3,056
-------- --------
Interest Expense (Income):
Interest expense 1,469 1,111
Interest income (176) (124)
-------- --------
1,293 987
-------- --------
Income before income taxes 542 2,069
Income Taxes 176 770
-------- --------
Net Income $ 366 $ 1,299
======== ========
Net Income Per Common Share:
Basic $ .11 $ .40
======== ========
Diluted $ .11 $ .39
======== ========
See accompanying notes to financial statements
3
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January, 31,
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Operating activities:
Net income $ 366 $ 1,299
Noncash items included in income:
Depreciation and amortization 1,974 1,508
Deferred income taxes 39 (182)
Deferred costs 151 172
Decrease (increase) in -
Accounts receivable, net 1,058 775
Inventories (3,559) (4,171)
Prepaid expenses and other assets 218 24
Increase (decrease) in -
Accounts payable (1,274) (296)
Accrued expenses and other
noncurrent liabilities (2,085) (1,544)
Accrued income taxes 19 671
------- -------
Cash used for operating activities (3,093) (1,744)
------- -------
Investing activities:
Acquisition of property, plant and equipment (1,853) (3,379)
Sales of short-term investments 3,840 1,800
Purchase of short-term investments (2,794) (2,701)
Other long-term assets (77) (16)
------- -------
Cash used for investing activities (884) (4,296)
------- -------
Financing activities:
Short-term borrowings, net (551) 5,159
Repayments of long-term debt (8,639) (1,095)
Proceeds from long-term debt 7,500 --
Proceeds from exercised stock options -- 6
Other - net (173) 8
------- -------
Cash (used for) provided by financing activities (1,863) 4,078
------- -------
Decrease in cash and cash equivalents (5,840) (1,962)
Cash and cash equivalents at beginning of period 6,568 2,884
------- -------
Cash and cash equivalents at end of period $ 728 $ 922
======= =======
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three Months Ended
January, 31,
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Supplemental disclosures of cash flow
information:-
Cash paid (received) during the period for:
Interest expense $1,496 $ 864
====== ======
Income taxes $ 20 $ 281
====== ======
Interest income $ (239) $ (125)
====== ======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share)
(1) Basis of Presentation:
The condensed financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These statements include all adjustments that, in the
opinion of management, are necessary to provide a fair statement of the results
for the periods covered. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's Form 10-K for the year ended October 31, 1997. The results of
operations for the interim periods presented are not necessarily indicative of
the results for the full year.
(2) Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist of the following:
January 31, October 31,
1998 1997
----------- -----------
Raw Materials and Work in Process $18,436 $16,053
Finished Goods 35,573 34,397
----------- -----------
$54,009 $50,450
=========== ===========
(3) Net Income Per Common Share:
In the first quarter of fiscal 1998, the Company adopted SFAS No. 128
"Earnings Per Share". In accordance with SFAS No. 128, the Company's prior year
reported net income per share amounts were restated to comply with SFAS No. 128.
Basic net income per common share is computed using the weighted
average number of shares of common stock outstanding. Diluted net income per
common share is computed using the weighted average number of shares of common
stock and common stock equivalents outstanding (dilutive stock options).
Unreleased shares of the Company's stock in the ESOP are excluded from the
average number of common shares outstanding when computing basic and diluted net
income per share. In the first quarter of fiscal 1998 and fiscal 1997, 580 and
618 unreleased ESOP shares were excluded from the average number of common
shares outstanding.
6
<PAGE>
The weighted average common and common equivalent shares outstanding
for purposes of calculating net income per common share are computed
as follows:
Three Months Ended
January 31,
1998 1997
---- ----
Weighted average common shares
outstanding used for basic net
income per common share 3,266 3,216
Dilutive effect of common stock
options outstanding 73 128
----- -----
Weighted average common and
common equivalent shares
outstanding used for diluted net
income per common share 3,339 3,344
===== =====
(4) Commitments and Contingent Liabilities:
The Company recorded an unusual fourth quarter fiscal 1997 charge of
$13,200 ($8,976 net of tax) which the Company believes was adequate to cover the
estimated future costs associated with the expansion of a voluntary program over
the next several years which was initiated by the Company to encourage the
testing and possible replacement of certain Omega TM fire sprinklers. This
amount was based on estimates of the number of Omega TM sprinklers, the action
plan necessary to remediate these sprinklers and various other assumptions. In
fiscal 1996, the Company became aware of potential problems in certain steel
pipe systems utilizing Omega TM sprinklers. In order to assess the extent of the
problems, the Company in 1996 strongly recommended that a sampling of Omega TM
sprinklers from each such installed system be returned to the Company for
testing. Based on the results of the tests, the Company reviews each situation
with the building owner and develops an appropriate action plan, if needed. The
Company did not install such sprinklers and installation of the sprinklers is
the responsibility of the building owner. However, the Company's primary concern
is to offer the finest possible fire protection to building owners and to
maintain customer goodwill. The Company continues to be an active participant
with building owners in testing sprinklers and remediating the problem. The
Company provides kits to test installed sprinklers and continues to monitor the
results of the tests and costs incurred.
7
<PAGE>
In August 1997, a lawsuit was filed against the Company in the State of
California regarding the Omega TM sprinkler heads. Although the suit has been
brought by owners of two homes, the plaintiffs seek to represent a class of
building owners who have Omega TM sprinkler heads installed in their buildings.
The lawsuit concerns the activation pressures of certain Omega TM sprinkler
heads. In December 1997, a similar lawsuit was filed in California on behalf of
the County of Santa Clara, seeking to represent a class of public entities and
commercial building owners who have installed Omega TM sprinkler heads. The two
cases should receive substantially similar treatment from the courts, and may be
formally coordinated by the courts. The courts have not determined whether they
will permit the actions to go forward as class actions and the complaints do not
specify a dollar amount the plaintiffs are seeking. There can be no assurance
that the ultimate outcome of such actions will be resolved favorably to the
Company or that such litigation, or any additional litigation, will not have an
adverse effect on the Company's liquidity, financial condition or results of
operations.
Several governmental authorities, including the United States Consumer
Product Safety Commission (the "Commission"), are investigating problems
regarding the Company's Omega TM sprinkler heads. As previously disclosed by the
Company in its Annual Report on Form 10-K for the fiscal year ended October 31,
1997 (the "Form 10-K"), the Commission has been investigating problems regarding
the Company's Omega(TM) sprinkler heads. The Company disclosed in the Form 10-K
that the staff of the Commission had advised the Company that the staff would be
recommending to the Commission that it take an administrative action against the
Company. On March 4, 1998, the Commission filed an administrative complaint
against the Company and one of its subsidiaries. A report on Form 8-K was filed
by the Company with the Securities and Exchange Commission on March 6, 1998
providing certain information relating to the administrative action that was
commenced by the Commission against the Company and the Company's press release
dated March 4, 1998 which includes the Company's response to the administrative
action. The complaint seeks a nationwide recall by the Company of Omega(TM) fire
sprinkler heads. The Company will be defending itself against the administrative
action. The Company believes its voluntary remediation program adequately
addresses the Commission's concerns. Depending on the ultimate resolution of
this matter or matters raised by other regulatory authorities, the Company may
be required to take remedial action that would have an adverse effect on the
Company's liquidity, financial condition or results of operations.
The charge recorded in the fourth quarter of fiscal 1997 is believed
to be adequate to cover the estimated costs of resolving the Omega(TM) lawsuits,
the Commission and other investigations and the voluntary Omega(TM) remediation
program based on information available at this time. In the event additional
information becomes available in the future which changes management's
estimates, additional provisions may be necessary.
8
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Amounts in thousands, except per share)
RESULTS OF OPERATIONS
Net Sales. Net sales for the first quarter of fiscal 1998 increased 10.9% to
$53,452. Such sales were $5,272 greater than the $48,180 recorded in the first
quarter of fiscal 1997. The new construction market and the retrofit of existing
buildings drive the worldwide demand for the Company's fire sprinklers and
related products. The growth in sales in the first fiscal quarter of 1998 from
the comparable period in 1997 is due to a continued strong market share held by
the Company for fire sprinkler products, new fire sprinkler and fittings
products and unit sales increases in several fire sprinkler system products. The
Company's continuing programs to develop and expand production and marketing of
products have had a favorable effect in increasing sales. The glass bulb fire
sprinkler models continue to lead the Company's sprinkler sales gains. The
Company also experienced strong sales gains in CPVC pipe and fittings and
grooved fittings. Sales increases were realized throughout the U.S. and
international markets. Sales increases in international markets, however, are
significantly below expectations. The Company has experienced an increase in the
competitive conditions in the sprinkler market through stiff price competition
which has depressed sales prices.
Cost of Sales and Gross Profit. Cost of sales, in terms of dollars of expense,
for the first quarter of fiscal 1998 increased 15.5% to $38,230. Cost of sales
were $5,135 greater than the $33,095 in the same fiscal 1997 quarter. The
Company's cost of sales for the first quarter of fiscal 1998 was 71.5% of net
sales compared to 68.7% of net sales for the first quarter of fiscal 1997. This
resulted in a gross margin percentage of 28.5% in the first quarter of fiscal
1998 compared to 31.3% in the first fiscal quarter of 1997. The increase in cost
of sales is due to several factors. The net increase in cost of sales is due
primarily to increased costs of manufacturing related to higher sales volume and
increased costs for raw material, labor and overhead costs for most products.
The Company also incurred higher product warranty claims and incurred startup
costs associated with moving the manufacturing process for some valve products
to a different facility. The fiscal 1998 first quarter gross margin percentage
was also negatively impacted by lower sales prices due to increased price
competition.
9
<PAGE>
Operating Expenses. Operating expenses for the first quarter of fiscal 1998
increased 11.3% from the first quarter of fiscal 1997. Total operating expenses
increased $1,358 to $13,387 for the first quarter of fiscal 1998 compared to
$12,029 for the same period for fiscal 1997. Operating expenses were 25.0% of
net sales in the first fiscal quarters of 1998 and 1997. Selling, general and
administrative expenses increased 9.4%, or $992, from the first fiscal quarter
of 1997. The primary increase in selling, general and administrative expenses
was selling and distribution expenses which increased 11.9%, or $916, from the
first quarter of fiscal 1997. The higher expenses are due to the increase in
sales volume and the expansion of distribution operations with expanded product
lines. Additionally, legal costs increased $217 in the first fiscal quarter of
1998 from the comparable period in 1997 in connection with litigation and
governmental investigations into the Company's Omega TM sprinkler products.
Research and development expenses increased 24.2%, or $366, to $1,876 in the
first fiscal quarter of 1998 as compared to the same period in fiscal 1997.
Research and development expenses rose sharply in the first fiscal quarter of
1998 in connection with the development and final approvals of a new line of
ESFR fire sprinklers. The Company is taking steps to improve the overall gross
profit margin for the purpose of improving operating results.
Interest Expense (Income). Interest expense of $1,469 was incurred in the first
fiscal quarter of 1998 compared to interest expense of $1,111 in the comparable
quarter of fiscal 1997. The higher interest expense was due to the overall
increase in debt and a higher effective borrowing rate. Total debt was $83,485
at January 31, 1998 as compared to $66,978 at January 31, 1997. The additional
debt was required to finance the increased growth in the Company's business,
principally in manufacturing capital expenditures and increased accounts
receivable and inventories. Interest income for the three months ended January
31, 1998 and 1997 was $176 and $124, respectively. The higher interest income
level was the result of a higher average investment balance in fiscal 1998.
Income Taxes. The Company's effective tax rate for the first quarter of fiscal
1998 was 32.5% compared to 37.2% in the comparable period of 1997. The decrease
in the overall effective income tax rate results from lower effective state
income tax rates and an increase in anticipated federal income tax credits.
Seasonal Aspects of Business. The Company's sales are affected by seasonal
factors and the weather as well as the level of new construction activity,
remodeling and retrofitting of older properties in the industrial, commercial,
10
<PAGE>
residential and institutional real estate markets. The Company's sales tend to
increase the most when there is a high level of new construction activity in all
such real estate markets. In addition, as a result of relatively higher levels
of new construction during the warmer spring and summer months, the demand for
sprinkler system components tends to be greater during the summer and fall than
during other seasons.
FINANCIAL CONDITION
January 31, 1998 Compared to October 31, 1997
Cash, Cash Equivalents and Short-Term Investments. Cash, cash equivalents and
short-term investments were $13,970 as of January 31, 1998 as compared to
$20,856 at October 31, 1997. This decrease was primarily a result of normal
fluctuation in operating activities and the use of funds in investing and
financing activities.
Inventories. Inventories were $54,009 at January 31, 1998 as compared to $50,450
at October 31, 1997. The $3,559 increase in inventories was comprised of an
increase of $2,383 in raw materials and work in process and an increase of
$1,176 in finished goods. The increase in raw materials and work in process was
primarily due to increased material requirements to meet the increased product
demand including the necessary raw materials to bring new products into
production. The increase in finished goods was also due to an anticipation of a
continued strong demand for fire sprinkler system products. In particular, the
Company continues to produce and stock new lines of grooved fittings products.
Property, Plant and Equipment. The Company's property, plant and equipment rose
by $1,853 to $75,265 at January 31, 1998. The increase is due to expanding
certain manufacturing capabilities for fire sprinklers, associated components
and grooved fittings product lines.
Total Debt. The Company's total debt decreased to $83,485 at January 31, 1998
compared to $85,175 at October 31, 1997. The Company made net repayments of
short-term and long-term debt during the first fiscal quarter of 1998. In
December 1997, a term loan was refinanced through the issuance of First Mortgage
Industrial Development Revenue Bonds Series 1997, principal amount $7,500 issued
by the Industrial Development Board of the City of Huntsville, Alabama
11
<PAGE>
("IDB's"). The IDB's are secured by substantially all of the assets of the CPVC
plastic pipe and fittings subsidiary and $5,000 of pledged investments which are
classified as long-term assets. The IDB's have a 15 year term and are payable in
52 equal quarterly installments, beginning in the third year, and bear interest
at a variable rate which was 5.43% at the end of the quarter.
Liquidity and Capital Resources. The Company's primary sources of long-term and
short-term liquidity are its current financial resources, projected cash flow
from operations and its borrowing capacity. The Company believes that these
sources are sufficient to fund the programs necessary for future growth and
expansion. At January 31, 1998, in addition to the $13,970 of cash, cash
equivalents and short-term investments, the Company has approximately $5,000 of
available borrowing capacity under its long-term Revolver Credit Agreement and
approximately $2,400 of available borrowing capacity under its lines of credit.
Cash used for operating activities in the first quarter of fiscal 1998 was
$3,093 as compared to $1,744 in the same period of 1997. Net income plus
non-cash items generated $2,530 of cash in the first fiscal quarter of 1998 as
compared to $2,797 in the first fiscal quarter of 1997. The decrease was due to
lower net income partially offset by higher depreciation expense. Cash used for
working capital purposes increased to $5,623 in the first fiscal quarter of 1998
from $4,541 in the same period of 1997. In the first fiscal quarter of 1998 and
1997, cash was used primarily for increased levels of inventories and reduced
levels of accounts payable and accrued expenses. Increases in sales volume are
expected to continue to require the use of operating cash flow to support
increased levels of working capital.
Cash used in investing activities was $884 in the first fiscal quarter of 1998
as compared to $4,296 in the comparable 1997 period. The primary use of cash was
for the acquisition of property, plant and equipment during these periods. The
capital expenditures in the first fiscal quarter of 1998 were primarily for
machinery and equipment to expand the manufacturing capacity and for the
operations of the Company's various product lines. The capital expenditures in
the first fiscal quarter of 1997 were for additional manufacturing machinery and
equipment and the ongoing construction of the Company's CPVC plastic pipe and
fittings facility. In the first fiscal quarter of 1998, a net amount of $1,046
was provided from the net sales of short-term investments compared to a net
purchase of short-term investments of $901 in the first fiscal quarter of 1997.
12
<PAGE>
Cash used for financing activities in the first fiscal quarter of 1998 was
$1,863 as compared to cash provided by financing activities of $4,078 in the
comparable prior year period. The primary use of cash in the first fiscal
quarter of 1998 was net repayments of debt of $1,690. In the first fiscal
quarter of 1997, net borrowings increased by $4,064 as a result of the Company's
use of short-term borrowings to finance the increased growth in the Company's
business, including capital expenditures and working capital.
The Company purchases property, plant and equipment from time to time as
required to maintain and expand its offices, manufacturing and research
facilities and distribution centers. The Company has expanded and improved its
operations over the years with such purchases and the Company intends to
continue this policy in the future. The Company has commitments in the ordinary
course of business for such expansions of facilities and equipment and for
research and other contracts.
The Company's cash, cash equivalents and short-term investments, along with the
Company's borrowing capacity, are expected to provide adequate liquidity to meet
the Company's obligations and to fund programs necessary for future growth and
expansion.
The Company recorded an unusual fourth quarter fiscal 1997 charge of $13,200
($8,976 net of tax) which the Company believes was adequate to cover the
estimated future costs associated with the expansion of a voluntary program over
the next several years which was initiated by the Company to encourage the
testing and possible replacement of certain Omega TM fire sprinklers. This
amount was based on estimates of the number of Omega TM sprinklers, the action
plan necessary to remediate these sprinklers and various other assumptions. In
fiscal 1996, the Company became aware of potential problems in certain steel
pipe systems utilizing Omega TM sprinklers. In order to assess the extent of the
problems, the Company in 1996 strongly recommended that a sampling of Omega TM
sprinklers from each such installed system be returned to the Company for
testing. Based on the results of the tests, the Company reviews each situation
with the building owner and develops an appropriate action plan, if needed. The
Company did not install such sprinklers and installation of the sprinklers is
the responsibility of the building owner. However, the Company's primary concern
is to offer the finest possible fire protection to building owners and to
maintain customer goodwill. The Company continues to be an active participant
with building owners in testing sprinklers and remediating the problem. The
Company provides kits to test installed sprinklers and continues to monitor the
results of the tests and costs incurred.
13
<PAGE>
In August 1997, a lawsuit was filed against the Company in the State of
California regarding the Omega TM sprinkler heads. Although the suit has been
brought by owners of two homes, the plaintiffs seek to represent a class of
building owners who have Omega TM sprinkler heads installed in their buildings.
The lawsuit concerns the activation pressures of certain Omega TM sprinkler
heads. In December 1997, a similar lawsuit was filed in California on behalf of
the County of Santa Clara, seeking to represent a class of public entities and
commercial building owners who have installed Omega TM sprinkler heads. The two
cases should receive substantially similar treatment from the courts, and may be
formally coordinated by the courts. The courts have not determined whether they
will permit the actions to go forward as class actions and the complaints do not
specify a dollar amount the plaintiffs are seeking. There can be no assurance
that the ultimate outcome of such actions will be resolved favorably to the
Company or that such litigation, or any additional litigation, will not have an
adverse effect on the Company's liquidity, financial condition or results of
operations.
Several governmental authorities, including the United States Consumer Product
Safety Commission (the "Commission"), are investigating problems regarding the
Company's Omega TM sprinkler heads. As previously disclosed by the Company in
its Annual Report on Form 10-K for the fiscal year ended October 31, 1997 (the
"Form 10-K"), the Commission has been investigating problems regarding the
Company's Omega TM sprinkler heads. The Company disclosed in the Form 10-K that
the staff of the Commission had advised the Company that the staff would be
recommending to the Commission that it take an administrative action against the
Company. On March 4, 1998, the Commission filed an administrative complaint
against the Company and one of its subsidiaries. A report on Form 8-K was filed
by the Company with the Securities and Exchange Commission on March 6, 1998
providing certain information relating to the administrative action that was
commenced by the Commission against the Company and the Company's press release
dated March 4, 1998 which includes the Company's response to the administrative
action. The complaint seeks a nationwide recall by the Company of Omega TM fire
sprinkler heads. The Company will be defending itself against the administrative
action. The Company believes its voluntary remediation program adequately
addresses the Commission's concerns. Depending on the ultimate resolution of
this matter or matters raised by other regulatory authorities, the Company may
be required to take remedial action that would have an adverse effect on the
Company's liquidity, financial condition or results of operations.
The charge recorded in the fourth quarter of fiscal 1997 is believed to be
adequate to cover the estimated costs of resolving the Omega TM lawsuits, the
Commission and other investigations and the voluntary Omega TM remediation
program based on information available at this time. In the event additional
information becomes available in the future which changes management's
estimates, additional provisions may be necessary.
14
<PAGE>
The Company has been and continues to be in the process of evaluating its
information technology infrastructure for the Year 2000 compliance. The Company
has modified certain systems to be Year 2000 compliant. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company does not currently have information concerning Year 2000 compliance
status of its suppliers and customers. In the event that any of the Company's
significant suppliers or customers does not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected.
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to adequacy of charges taken to cover future costs, the sufficiency of
the Company's voluntary remediation program to meet the Commission's concerns,
the expansion and improvement of operations, the effects of the year 2000 matter
on the Company, the effects of new products on the gross profit margin,
liquidity, and the effect that certain litigation could have on the Company as
well as information contained elsewhere in this document where statements are
preceded by, followed by or include the words "believes," "expects,"
"estimates," "anticipates" or similar expressions. For such statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed elsewhere in this document.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following data summarizes the Annual Meeting highlights:
(a) The Annual Meeting of Shareholders of the Company was held at the
Company's offices in Lansdale, Pennsylvania on March 9, 1998.
Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended.
(b) At the Annual Meeting, shareholders re-elected the board of
directors to one-year terms and until their successors are elected
and qualified.
15
<PAGE>
(c) The shareholders ratified the appointment of Arthur Andersen LLP as
independent auditors for the Company for fiscal year ending October
31, 1998.
Number of Votes
For Against Abstain
--------- ------- -------
3,199,454 5,472 5,144
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed as an Exhibit and attached as follows:
11 -- Computation of Earnings Per Common Share
27 -- Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company with the Securities and
Exchange Commission on March 6, 1998, in which the Company reported
certain information relating to an administrative action that was
commenced by the U.S. Consumer Product Safety Commission against the
Company on March 4, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTRAL SPRINKLER CORPORATION
-----------------------------
(Registrant)
/s/ George G. Meyer
-----------------------------
George G. Meyer
President and
Chief Executive Officer
DATE: March 13, 1998
----------------
/s/ Albert T. Sabol
-----------------------------
Albert T. Sabol
Executive Vice President-Finance
(Principal Financial and
Accounting Officer)
17
<PAGE>
Exhibit 11
CENTRAL SPRINKLER CORPORATION
EARNINGS PER COMMON SHARE
Three Months Ended
January 31,
1998 1997
---- ----
(Amounts in thousands,
except per share)
Net income $ 366 $ 1,299
======= =======
Weighted average number of
common shares outstanding 3,846 3,834
Adjustment to exclude average
unreleased common shares in ESOP (580) (618)
------- -------
Weighted average common shares
outstanding used for basic
net income per common share 3,266 3,216
Dilutive effect of common
stock options 73 128
------- -------
Weighted average common and common
equivalent shares outstanding used for
diluted net income per common share 3,339 3,344
======= =======
Net income per common share:
Basic $ .11 $ .40
======= =======
Diluted $ .11 $ .39
======= =======
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