<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 April 30, 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 June 11, 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)
April 30, October 31,
1998 1997
--------- ---------
(Amounts in thousands
except per share)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,005 $ 6,568
Short-term investments 8,740 14,288
Accounts receivable, less allowance
for doubtful receivables of $6,326
in 1998 and $5,949 in 1997 46,314 48,048
Inventories 52,351 50,450
Deferred income taxes 8,453 8,227
Prepaid expenses and other assets 2,310 3,414
--------- ---------
Total current assets 120,173 130,995
--------- ---------
Property, Plant and Equipment 74,629 73,412
Less - Accumulated depreciation (27,015) (25,480)
--------- ---------
47,614 47,932
--------- ---------
Goodwill, less accumulated amortization of
$3,640 in 1998 and $3,514 in 1997 2,382 2,508
--------- ---------
Other Assets 9,137 6,592
--------- ---------
$ 179,306 $ 188,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 1,392 $ 2,403
Current portion of long-term debt 3,054 2,854
Accounts payable 23,091 27,626
Accrued expenses 11,512 12,713
Accrued income taxes 432 409
--------- ---------
Total current liabilities 39,481 46,005
--------- ---------
Long-Term Debt 78,852 79,918
--------- ---------
Other Noncurrent Liabilities 6,087 9,010
--------- ---------
Deferred Income Taxes 500 196
--------- ---------
Shareholders' Equity:
Common stock, $.01 par value; shares
authorized - 15,000; issued -
5,568 in 1998 and 1997 56 56
Additional paid-in capital 31,202 31,059
Retained earnings 45,393 44,160
Cumulative translation adjustments 104 184
Deferred cost - Employee Stock Ownership
Plan ("ESOP") (5,460) (5,652)
--------- ---------
71,295 69,807
Less - Common stock in treasury, at
cost - 1,722 shares in 1998 and 1997 (16,909) (16,909)
--------- ---------
54,386 52,898
--------- ---------
$ 179,306 $ 188,027
========= =========
See accompanying notes to financial statements.
2
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(Amounts in thousands,
except per share)
<S> <C> <C> <C> <C>
Net Sales $ 56,821 $ 53,873 $ 110,273 $ 102,053
Cost of Sales 41,301 36,721 79,531 69,816
--------- --------- --------- ---------
Gross profit 15,520 17,152 30,742 32,237
--------- --------- --------- ---------
Operating Expenses:
Selling, general
and administrative 11,417 10,955 22,928 21,474
Research and development 1,613 1,682 3,489 3,192
--------- --------- --------- ---------
13,030 12,637 26,417 24,666
--------- --------- --------- ---------
Operating income 2,490 4,515 4,325 7,571
--------- --------- --------- ---------
Interest Expense (Income):
Interest expense 1,496 1,222 2,965 2,309
Interest (income) (241) (146) (417) (246)
--------- --------- --------- ---------
1,255 1,076 2,548 2,063
--------- --------- --------- ---------
Income before income taxes 1,235 3,439 1,777 5,508
Income Taxes 368 1,281 544 2,051
--------- --------- --------- ---------
Net Income $ 867 $ 2,158 $ 1,233 $ 3,457
========= ========= ========= =========
Net Income Per Common Share:
Basic $ .26 $ .67 $ .38 $ 1.07
========= ========= ========= =========
Diluted $ .26 $ .64 $ .37 $ 1.03
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
April 30,
1998 1997
-------- --------
(Amounts in thousands)
Operating activities:
Net income $ 1,233 $ 3,457
Noncash items included in income:
Depreciation and amortization 4,050 3,138
Deferred income taxes 78 (200)
Deferred costs (4) 362
Decrease (increase) in -
Accounts receivable, net 1,734 (5,310)
Inventories (1,901) (6,099)
Prepaid expenses and other assets 1,104 (15)
Increase (decrease) in -
Accounts payable (4,535) 5,123
Accrued expenses and other noncurrent
liabilities (2,978) (606)
Accrued income taxes 23 (8)
-------- --------
Cash used for operating activities (1,196) (158)
-------- --------
Investing activities:
Acquisition of property, plant and equipment (3,606) (7,718)
Sales of short-term investments 13,048 2,000
Purchases of short-term investments -- (3,608)
Repurchase of subsidiary bond issue (7,500) --
Other long term assets (2,545) 45
-------- --------
Cash used for investing activities (603) (9,281)
-------- --------
Financing activities:
Short-term (repayments) borrowings, net (1,011) 11,110
Repayments of long-term debt (1,673) (1,666)
Proceeds from exercised stock options -- 6
Other - net (80) (103)
-------- --------
Cash (used for) provided by financing activities (2,764) 9,347
-------- --------
Decrease in cash and cash equivalents (4,563) (92)
Cash and cash equivalents at beginning of period 6,568 2,884
-------- --------
Cash and cash equivalents at end of period $ 2,005 $ 2,792
======== ========
See accompanying notes to financial statements.
4
<PAGE>
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Six Months Ended
April 30,
1998 1997
-------- --------
(Amounts in thousands)
Supplemental disclosures of cash flow
information:-
Cash paid (received) during the period for:
Interest expense $ 2,843 $ 1,946
======= =======
Income taxes $ 375 $ 2,259
======= =======
Interest income $ (429) $ (240)
======= =======
Supplemental schedule of non-cash
investing and financing activities:-
Refinancing of short-term borrowings
with long-term debt $ 7,500 $ 6,500
======= =======
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:
April 30, October 31,
1998 1997
------- -------
Raw Materials and Work in Process $16,884 $16,053
Finished Goods 35,467 34,397
------- -------
$52,351 $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 six months of fiscal 1998 and fiscal 1997, 575
and 613 unreleased ESOP shares were excluded from the average number of common
shares outstanding. In the second quarter of fiscal 1998 and fiscal 1997, 570
and 609 unreleased ESOP shares were excluded from the average number of common
shares outstanding. The weighted average common
6
<PAGE>
and common equivalent shares outstanding for purposes of calculating net income
per common share are computed as follows -
Three Six
Months Ended Months Ended
April 30, April 30,
1998 1997 1998 1997
----- ----- ----- -----
Weighted average common shares
outstanding used for basic net
income per common share 3,276 3,237 3,271 3,226
Dilutive effect of common stock
options outstanding 41 113 57 121
----- ----- ----- -----
Weighted average common and
common equivalent shares
outstanding used for diluted net
income per common share 3,317 3,350 3,328 3,347
===== ===== ===== =====
(4) Commitments and Contingent Liabilities:
The Company recorded an unusual fourth quarter fiscal 1997 charge of
$13,200 ($8,976 net of tax) 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. A similar unusual Omega (TM) charge was
recorded in fiscal 1996 of $3,750 ($2,362 net of tax). This amount was based on
estimates of the number of Omega TM sprinklers, the action plan the Company
believed was necessary to remediate these sprinklers and various other
assumptions. In fiscal 1996, the Company began to address 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 has reviewed
each situation with the building owner and has developed 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.
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 three homes, the
7
<PAGE>
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 Company has moved to dismiss
the actions for failure to state a claim.
Since the filing of these class actions, the Company has been named as
a defendant in five additional class actions raising virtually identical
allegations, captioned Rebecca Adams v. Central Sprinkler Co. (filed on February
11, 1998 in the Superior Court of California for the County of San Bernadino),
James T. Perona v. Central Sprinkler Corp. (filed March 13, 1998 in the Superior
Court of California for the County of Los Angeles), South Royal Corp. v. Central
Sprinkler Corp. (filed March 27, 1998 in the United States District Court for
the Southern District of Florida), Roy F. Smith v. Central Sprinkler Corp.
(filed March 20, 1998 in the United States District Court for the Eastern
District of Pennsylvania), and Sangiacomo v. Central Sprinkler Corp. (filed
April 3, 1998 in the United States District Court for the Eastern District of
Pennsylvania).
During the quarter ended April 30, 1998, the Company engaged in
substantial settlement negotiations with plaintiffs' counsel in the first two
class actions in order to attempt to obtain a global resolution of all class
action claims and subsequent to the expiration of the quarter, the Company
entered into an agreement with representatives of the class to settle these
class actions. The settlement agreement must be presented to the court for
preliminary and final approval, and several matters relating to the settlement,
including issues relating to attorneys' fees, must be resolved before the
settlement can be considered final.
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 it's Annual Report on Form 10-K for the fiscal year ended October 31,
1997 and its Quarterly Report on Form 10-Q for the quarter ended January 31,
1998 (collectively, the "Reports"), the Commission has been investigating
problems regarding the Company's Omega TM sprinkler heads. The Company disclosed
in the Reports 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 continues defending
itself against the administrative action. The Company believes its voluntary
remediation program adequately addresses the Commission's concerns, but also has
been involved in settlement negotiations with the Commission staff in an attempt
to secure a global resolution of Omega TM sprinkler issues. 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.
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 second quarter of fiscal 1998 increased 5.5% to
$56,821. Such sales were $2,948 greater than the $53,873 recorded in the second
quarter of fiscal 1997. Net sales for the first six months of fiscal 1998 were
$110,273, 8.1% greater than the sales for the comparable six-month period of
fiscal 1997. The sales increases for both the three-month and six-month periods
of fiscal 1998 are due to continued growth of the overall market for fire
sprinkler products, unit sales increases in many fire sprinkler system products,
and new fire sprinkler and fittings products. The new construction market and
the retrofit of existing buildings drive the worldwide demand for the Company's
fire sprinklers and related products. The Company's continuing programs to
develop and expand production and marketing of products have continued to have a
favorable effect on sales. The Glass Bulb fire sprinkler model continues to lead
the Company's sprinkler sales gains. The Company also experienced sales gains in
CPVC pipe and fittings and grooved fittings. Sales increases were realized in
most U.S. markets. International sales for the six months ended April 30, 1998
increased compared to the same period of the prior year. The Company continues
to experience very competitive conditions worldwide in the sprinkler market
through stiff price competition which has continued to depress sales prices.
Cost of Sales and Gross Profit. Cost of sales, in terms of dollars of expense,
increased 12.5% and 13.9% for the three-month and six-month periods ended April
30, 1998, respectively, over the same periods for fiscal 1997. The increase in
cost of sales is due to increased costs of manufacturing related to the higher
sales volume, increased costs for raw material, labor and overhead, and higher
warranty claims. The Company's cost of sales for the three-month and six-month
periods ended April 30, 1998, respectively, were 72.7% and 72.1% of net sales as
compared to 68.2% and 68.4% of net sales for the comparable prior year periods.
This resulted in a gross margin percentage of 27.3% and 27.9% for the
three-month and six-month periods ended April 30, 1998, respectively, as
compared to 31.8% and 31.6% for the three-month and six months periods ended
April 30, 1997. Lower sales prices were the primary reason for the lower gross
profit margins in both the three- and six-month periods ended April 30, 1998.
The Company has faced very stiff price competition on most of its products in
recent months. The gross profit margin percentage also declined due to a less
favorable sales mix and somewhat higher manufacturing costs. The Company has
initiated programs to increase margins and reduce operating expenses for the
purpose of improving operating results.
9
<PAGE>
Operating Expenses. Operating expenses for the second quarter of fiscal 1998
increased 3.1%, or $393, to $13,030 from the second quarter of fiscal 1997.
Total operating expenses increased 7.1%, or $1,751, to $26,417 for the six
months ended April 30, 1998 compared to $24,666 for the same period for fiscal
1997. Operating expenses were 22.9% and 24.0% of net sales for the three- and
six-month periods ended April 30, 1998 compared to 23.5% and 24.2% for the
comparable periods of the prior year. Selling, general and administrative
expenses increased 4.2% and 6.8% for the three- and six-month periods ended
April 30, 1998 compared to the same periods of the prior year. The increase in
selling, general and administrative expenses was due to higher selling and
distribution expenses driven by the increase in sales volume and higher legal
costs. Legal costs increased above the same periods of the prior year primarily
due to the litigation and governmental investigations into the Company's Omega
(TM) sprinkler products. Research and development expenses decreased 4.1%, or
$69, to $1,613 in the second fiscal quarter of 1998 as compared to the same
period in fiscal 1997. The research and development expenses for the six months
ended April 30, 1998 increased 9.3%, or $297, to $3,489 from the comparable
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, which drove the research and
development expenses higher for the six-months ended April 30, 1998.
Interest Expense (Income). Interest expense of $1,496 and $2,965 was incurred in
the three-month and six-month periods ending April 30, 1998, respectively,
compared to interest expense of $1,222 and $2,309 for the same periods of fiscal
1997. The higher interest expense was due to the increased average level of
debt and higher effective borrowing rate for the three- and six-month periods
ended April 30, 1998 compared to the same periods of the prior year. Short and
long-term debt totaled $83,298 at April 30, 1998. The 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- and six-month periods ended April
30, 1998 was $241 and $417, respectively, compared to $146 and $246 for the same
periods ended April 30, 1997. The higher interest income level was the result of
a higher average investment balance in fiscal 1998.
Income Taxes. The Company's effective income tax rate for the second quarter of
fiscal 1998 was 29.8% compared to 37.2% in the comparable period of 1997. For
the six-month period of fiscal 1998, the effective income tax rate was 30.6%
compared to 37.2% in the comparable period in 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.
10
<PAGE>
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,
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
April 30, 1998 Compared to October 31, 1997
Cash, Cash Equivalents and Short-Term Investments. Cash, cash equivalents and
short-term investments totaled $10,745 as of April 30, 1998 as compared to
$20,856 at October 31, 1997. The decrease was due to fluctuations in operations,
the use of funds in investing and financing activities and the repurchase of
$7,500 tax exempt bonds discussed below.
Inventories. Inventories totaled $52,351 at April 30, 1998 as compared to
$50,450 at October 31, 1997. The $1,901 increase in inventories was comprised of
an increase of $831 in raw materials and work in process and an increase of
$1,070 in finished goods. The increase in inventories was due primarily to
increased material requirements and finished goods to meet anticipated product
demand including new products. In the third fiscal quarter, the Company has
begun an inventory reduction program which includes reducing lead, production,
and distribution times to increase inventory turnover rates and implemented
temporary production cutbacks at certain facilities to reduce excess inventory
in certain product lines.
Property, Plant and Equipment. The Company's property, plant and equipment rose
to $74,629 at April 30, 1998. The capital expenditures for the six months ended
April 30, 1998 totaling $3,606 were 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 $83,298 at April 30, 1998 as
compared to $85,175 at October 31, 1997. The Company made net repayments of debt
during the first six months of fiscal 1998 in accordance with normal debt
repayment schedules. 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 have a 15 year term and are payable in 52 equal quarterly
installments, beginning in the third year. The Company repurchased these $7,500
of tax-exempt bonds. They are classified as an other noncurrent asset as the
Company intends to remarket these bonds in the future.
Liquidity and Capital Resources. The Company's primary sources
of long-term and short-term liquidity are its current financial resources,
projected cash 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 April 30, 1998, in addition to the $10,745 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 $2,300 of available borrowing capacity under its
lines of credit. The Company's Revolver Credit Agreement was recently amended in
order to revise certain covenants. As part of the amendment, the Company agreed
to pay a higher interest rate and provide certain additional collateral in
certain assets of the Company's subsidiaries and certain additional covenants
will be required going forward under the Revolver Credit Agreement.
Cash used for operating activities in the first six months of fiscal 1998 was
$1,196 as a compared to cash used for operating activities of $158 in the same
period of 1997. Net income plus non-cash items generated $5,357 of cash in the
first six months of fiscal 1998 as compared to $6,757 in the first six months of
fiscal 1997. The decrease was due to lower net income partially offset by higher
depreciation expense. Cash used for working capital purposes was $6,553 in the
six months ended April 30, 1998 as compared to $6,915 in the same period of
1997. Increases in sales volume will continue to require the use of operating
cash flow. The Company anticipates a reduction in cash used for working capital
as a result of the start of the inventory reduction program in the third fiscal
quarter of 1998.
Cash used for investing activities was $603 in the six months ended April 30,
1998 as compared to cash used for investing activities of $9,281 in the
comparable 1997 period. Cash was provided by the net sales of investments on the
six months ended April 30, 1998 totaling $13,048 as compared to a net purchase
of $1,608 of additional short-term investments in the comparable prior year
period. Cash was also used to repurchase the $7,500 tax-exempt bond that the
Company intends to remarket. Another primary use of cash was for the acquisition
of property, plant and equipment during these periods. These capital
expenditures were primarily for machinery and equipment to expand the
manufacturing capacity and improve the operations for the Company's various
product lines. The capital expenditures in the first six months of fiscal 1997
were for additional manufacturing machinery and equipment and the construction
of the Company's CPVC plastic pipe and fittings facility.
Cash used for financing activities in the six months ended April 30, 1998 was
$2,764 as compared to cash provided by financing activities of $9,347 in the
comparable prior year period. The primary use of cash in the six months ended
April 30, 1998 was net short-term and long-term debt repayments. The primary
source of cash in the prior year period was additional borrowings of $11,110
under the Company's lines of credit. The borrowings in the prior year fiscal
quarters were needed to finance the increased growth in the
12
<PAGE>
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, 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) 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. A similar unusual Omega (TM) charge was recorded in
fiscal 1996 of $3,750 ($2,362 net of tax). This amount was based on estimates of
the number of Omega TM sprinklers, the action plan the Company believes was
necessary to remediate these sprinklers and various other assumptions. In fiscal
1996, the Company began to address 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 has reviewed each
situation with the building owner and has developed 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.
In August 1997, a lawsuit was filed against the Company in the State of
California regarding the Omega TM sprinkler heads. 7 Although the suit has been
brought by owners of three 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
Company has moved to dismiss the actions for failure to state a claim.
Since the filing of these class actions, the Company has been named as a
defendant in five additional class actions raising virtually identical
allegations, captioned Rebecca Adams v. Central Sprinkler Co. (filed on February
11, 1998 in the Superior Court of California for the County of San Bernadino),
James T. Perona v. Central Sprinkler Corp. (filed March 13, 1998 in the Superior
Court of California for the County of Los Angeles), South Royal Corp. v. Central
Sprinkler Corp. (filed March 27, 1998 in the United States District Court for
the Southern District of Florida), Roy F. Smith v. Central Sprinkler Corp.
(filed March 20, 1998 in the United States District Court for the Eastern
District of Pennsylvania), and Sangiacomo v. Central Sprinkler Corp. (filed
April 3, 1998 in the United States District Court for the Eastern District of
Pennsylvania).
During the quarter ended April 30, 1998, the Company engaged in substantial
settlement negotiations with plaintiffs' counsel in the first two class actions
in order to attempt to obtain a global resolution of all class action claims and
subsequent to the expiration of the quarter, the Company entered into an
agreement with representatives of the class to settle these class actions. The
settlement agreement must be presented to the court for preliminary and final
approval, and several matters relating to the settlement, including issues
relating to attorneys' fees, must be resolved before the settlement can be
considered final.
13
<PAGE>
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
it's Annual Report on Form 10-K for the fiscal year ended October 31, 1997 and
its Quarterly Report on Form 10-Q for the quarter ended January 31, 1998
(collectively, the "Reports"), the Commission has been investigating problems
regarding the Company's Omega TM sprinkler heads. The Company disclosed in the
Reports 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 continues defending itself against
the administrative action. The Company believes its voluntary remediation
program adequately addresses the Commission's concerns, but also has been
involved in settlement negotiations with the Commission staff in an attempt to
secure a global resolution of Omega TM sprinkler issues. 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 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
14
<PAGE>
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 the Company's voluntary remediation program regarding its Omega TM
sprinklers, the growth expected in the construction market, liquidity (including
the expectation that the Company will use less cash in its third quarter for
working capital), information relating to the litigation matters involving the
Company (including the adequacy of the charge recorded to cover lawsuits and
actions relating to the Omega TM sprinkler) and matters relating to Year 2000
issues, as well as information contained elsewhere in this document where
statements are preceded by, following 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 the various documents filed by the
Company with the Securities and Exchange Commission.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 three 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
Company has moved to dismiss the actions for failure to state a claim.
Since the filing of these class actions, the Company has been named as
a defendant in five additional class actions raising virtually identical
allegations, captioned Rebecca Adams v. Central Sprinkler Co. (filed on February
11, 1998 in the Superior Court of California for the County of San Bernadino),
James T. Perona v. Central Sprinkler Corp. (filed March 13, 1998 in the Superior
Court of California for the County of Los Angeles), South Royal Corp. v. Central
Sprinkler Corp. (filed March 27, 1998 in the United States District Court for
the Southern District of Florida), Roy F. Smith v. Central Sprinkler Corp.
(filed March 20, 1998 in the United States District Court for the Eastern
District of Pennsylvania), and Sangiacomo v. Central Sprinkler Corp. (filed
April 3, 1998 in the United States District Court for the Eastern District of
Pennsylvania).
During the quarter ended April 30, 1998, the Company engaged in
substantial settlement negotiations with plaintiffs' counsel in the first two
class actions in order to attempt to obtain a global resolution of all class
action claims and subsequent to the expiration of the quarter, the Company
entered into an agreement with representatives of the class to settle these
class actions. The settlement agreement must be presented to the court for
preliminary and final approval, and several matters relating to the settlement,
including issues relating to attorney's fees, must be resolved before the
settlement can be considered final.
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 it's Annual Report on Form 10-K for the fiscal year ended October 31,
1997 and its Quarterly Report on Form 10-Q for the quarter ended January 31,
1998 (collectively, the "Reports"), the Commission has been investigating
problems regarding the Company's Omega TM sprinkler heads. The Company disclosed
in the Reports 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 continues defending
itself against the administrative action. The Company believes its voluntary
remediation program adequately addresses the Commission's concerns, but also has
been involved in settlement negotiations with the Commission staff in an attempt
to secure a global resolution of Omega TM sprinkler issues. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following document is filed as an Exhibit and attached as follows:
Exhibit 11 -- Computation of Net Income Per Common Share
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
On March 6, 1998, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission in which the Company reported that
the United States Product Safety Commission had filed an administrative
action against the Company. In such Report, the Company also provided
an explanation of its response to the action taken by the United States
Consumer Products Safety Commission.
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
Chief Executive Officer
DATE: June 11, 1998
/s/Albert T. Sabol
-----------------------------
Albert T. Sabol
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
Exhibit 11
CENTRAL SPRINKLER CORPORATION
NET INCOME PER COMMON SHARE
Three Six
Months Ended Months Ended
April 30, April 30,
1998 1997 1998 1997
------- ------- ------- -------
(Amounts in thousands,
except per share)
Net income $ 867 $ 2,158 $ 1,233 $ 3,457
======= ======= ======= =======
Weighted average number of
common shares outstanding 3,846 3,846 3,846 3,839
Adjustment to exclude average
unreleased common shares in ESOP (570) (609) (575) (613)
------- ------- ------- -------
Weighted average common shares
outstanding used for basic
net income per share 3,276 3,237 3,271 3,226
Dilutive effect of common
stock options 41 113 57 121
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding used
for diluted net income per
common share 3,317 3,350 3,328 3,347
======= ======= ======= =======
Net Income per common share:
Basic $ .26 $ .67 $ .38 $ 1.07
======= ======= ======= =======
Diluted $ .26 $ .64 $ .37 $ 1.03
======= ======= ======= =======
18
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000766041
<NAME> CENTRAL SPRINKLER CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1998
<PERIOD-START> FEB-01-1998 NOV-01-1997
<PERIOD-END> APR-30-1998 APR-30-1998
<EXCHANGE-RATE> 1.0000 1.000
<CASH> 2,005 2,005
<SECURITIES> 8,740 8,740
<RECEIVABLES> 52,640 52,640
<ALLOWANCES> 6,326 6,326
<INVENTORY> 52,351 52,351
<CURRENT-ASSETS> 120,173 120,173
<PP&E> 74,629 74,629
<DEPRECIATION> 27,015 27,015
<TOTAL-ASSETS> 179,306 179,306
<CURRENT-LIABILITIES> 39,481 39,481
<BONDS> 78,852 78,852
0 0
0 0
<COMMON> 56 56
<OTHER-SE> 54,330 54,330
<TOTAL-LIABILITY-AND-EQUITY> 179,306 179,306
<SALES> 56,821 110,273
<TOTAL-REVENUES> 56,821 110,273
<CGS> 41,301 79,531
<TOTAL-COSTS> 41,301 79,531
<OTHER-EXPENSES> 13,030 26,417
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,255 2,548
<INCOME-PRETAX> 1,235 1,777
<INCOME-TAX> 368 544
<INCOME-CONTINUING> 867 1,233
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 867 1,233
<EPS-PRIMARY> .26 .38
<EPS-DILUTED> .26 .37
</TABLE>
