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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, 1999
--------------------------
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
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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 15, 1999
----- -----------------------------
Common Stock, $.01 Par Value 3,845,637
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
January 31, October 31,
1999 1998
----------- -----------
(Amounts in thousands,
except per share)
ASSETS
Current Assets:
Cash and cash equivalents $ 12,566 $ 18,801
Accounts receivable, less allowance
for doubtful receivables of $6,775
in 1999 and $6,688 in 1998 40,932 45,315
Inventories 44,481 43,319
Deferred income taxes 10,893 11,117
Prepaid expenses and other assets 4,787 4,968
-------- --------
Total current assets 113,659 123,520
-------- --------
Property, Plant and Equipment 76,387 74,984
Less - Accumulated depreciation (32,040) (29,989)
-------- --------
44,347 44,995
-------- --------
Goodwill, less accumulated amortization of
$3,828 in 1999 and $3,765 in 1998 2,194 2,257
-------- --------
Other Assets 6,006 6,332
-------- --------
$166,206 $177,104
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 600 $ 297
Current portion of long-term debt 4,058 4,064
Accounts payable 19,231 21,353
Accrued expenses 20,732 20,379
-------- --------
Total current liabilities 44,621 46,093
-------- --------
Long-Term Debt 69,410 76,807
-------- --------
Long-Term Omega Liabilities 20,226 23,141
-------- --------
Other Noncurrent Liabilities 264 296
-------- --------
Commitments and Contingent Liabilities (Note 5)
Shareholders' Equity:
Common stock, $.01 par value; shares
authorized - 15,000; issued -
5,568 in 1999 and 1998 56 56
Additional paid-in capital 31,180 31,179
Retained earnings 22,481 21,556
Cumulative translation adjustments 35 145
Deferred cost - Employee Stock Ownership
Plan ("ESOP") (5,158) (5,260)
-------- --------
48,594 47,676
Less - Common stock in treasury, at
cost - 1,722 shares in 1999 and 1998 (16,909) (16,909)
-------- --------
31,685 30,767
-------- --------
$166,206 $177,104
======== ========
See accompanying notes to financial statements.
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CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
January 31,
1999 1998
-------------------
(Amounts in thousands,
except per share)
Net Sales $50,728 $53,452
Cost of Sales 36,672 38,230
------- -------
Gross profit 14,056 15,222
------- -------
Operating Expenses:
Selling, general
and administrative 9,908 11,511
Research and development 1,457 1,876
------- -------
11,365 13,387
------- -------
Operating income 2,691 1,835
------- -------
Interest Expense (Income):
Interest expense 1,501 1,469
Interest income (136) (176)
------- -------
1,365 1,293
------- -------
Income before income taxes 1,326 542
Income Taxes 401 176
------- -------
Net Income $ 925 $ 366
======= =======
Net Income Per Common Share:
Basic $ .28 $ .11
======= =======
Diluted $ .28 $ .11
======= =======
See accompanying notes to financial statements.
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CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
January 31,
1999 1998
-------------------
(Amounts in thousands)
Operating activities:
Net income $ 925 $ 366
Noncash items included in income:
Depreciation and amortization 2,114 1,974
Deferred income taxes 269 39
Deferred costs 95 151
Decrease (increase) in -
Accounts receivable, net 4,383 1,058
Inventories (1,162) (3,559)
Prepaid expenses and other assets 181 218
Increase (decrease) in -
Accounts payable (2,122) (1,274)
Accrued expenses and other
noncurrent liabilities (2,586) (2,066)
------- ------
Cash provided by (used for) operating activities 2,097 (3,093)
------- ------
Investing activities:
Acquisition of property, plant and equipment (1,403) (1,853)
Sales of short-term investments - 3,840
Purchase of short-term investments - (2,794)
Other long-term assets 281 (77)
------- ------
Cash used for investing activities (1,122) (884)
------- ------
Financing activities:
Short-term borrowings, net 303 (551)
Repayments of long-term debt (9,001) (8,639)
Proceeds from long-term debt 1,598 7,500
Other - net (110) (173)
------- ------
Cash used for financing activities (7,210) (1,863)
------- ------
Decrease in cash and cash equivalents (6,235) (5,840)
Cash and cash equivalents at beginning of period 18,801 6,568
------- ------
Cash and cash equivalents at end of period $12,566 $ 728
======= ======
See accompanying notes to financial statements.
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CENTRAL SPRINKLER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Three Months Ended
January 31,
1999 1998
-------------------
(Amounts in thousands)
Supplemental disclosures of cash flow
information:-
Cash paid (received) during the period for:
Interest expense $ 1,426 $1,496
======= =======
Income taxes $ - $ 20
======= =======
Interest income $ (61) $ (239)
======= =======
See accompanying notes to financial statements.
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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 fiscal year ended October 31, 1998. 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,
1999 1998
----------- ----------
Raw Materials and Work in Process $15,361 $15,605
Finished Goods 29,120 27,714
------- -------
$44,481 $43,319
======= =======
(3) Net Income Per Common Share:
----------------------------
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)unless the
inclusion of common stock equivalents would have an antidilutive impact.
Unreleased shares of the Company's stock in the ESOP are excluded from the
average number of common shares
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outstanding when computing basic and diluted net income per share. The net
income and 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,
1999 1998
-------------------
Net income used for basic and
diluted net income per common share $ 925 $ 366
====== ======
Weighted average number of common
shares outstanding 3,846 3,846
Adjustment to exclude average
unreleased common shares in ESOP (540) (580)
------ ------
Weighted average common shares
outstanding used for basic net
income per common share 3,306 3,266
Dilutive effect of common stock
options outstanding 10 73
------ ------
Weighted average common and
common equivalent shares
outstanding used for diluted net
income per common share 3,316 3,339
====== ======
(4) New Accounting Pronouncement:
----------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 established standards for the reporting and display of
comprehensive income in financial statements. Comprehensive income is the change
in net assets during a period from transactions generated from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distribution to owners. The Company
adopted SFAS No. 130 as of November 1, 1998 and a reconciliation of
comprehensive income follows.
Three Months Ended
January 31,
1999 1998
-------------------
Net Income $ 925 $ 366
Cumulative Translation Adjustments (110) (173)
----- -----
Comprehensive Income $ 815 $ 193
===== =====
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(5) Commitments and Contingent Liabilities:
---------------------------------------
The Company has been involved in seven class action lawsuits as well as an
administrative lawsuit filed on March 4, 1998, by the United States Consumer
Product Safety Commission ("Commission") related to the Company's Omega
sprinklers. The Company has reached a settlement of the Omega litigation with
the Commission as well as a definitive settlement agreement with the plaintiffs
in the Hart and Santa Clara class actions. The court granted final approval to
the settlement on February 19, 1999. The agreements with the Commission and
Class Action litigants generally provide for replacement of the Omega sprinkler
heads with free replacement sprinklers and parts, the establishment of a
separate trust account for payments to the owners of Omega sprinklers,
administration of the recall program and a notification program related to the
Omega sprinkler product recall.
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and based on current information, the Company
revised its estimate of the probable future cost of settling these matters and
recorded a $38 million ($26.6 million net of tax) charge in third quarter of
fiscal 1998 to reflect the total estimated additional future cost.
In an effort to recover a portion of the cost of the Omega settlement, the
Company filed suit on August 19, 1998 against twelve product liability insurance
carriers with which the Company had coverage over the last 15 years. No
insurance or third party recoveries have been considered in the Company's
accrual analysis and the amount of such recoveries, if any, is uncertain at this
time.
The Company presently believes that the remaining reserve balance totaling
$32.2 million ($12.0 million of which is included in accrued expenses) as of
January 31, 1999 will be adequate to cover the total estimated future costs of
the Omega sprinkler matters. It is possible that additional litigation may
ensue. In the event additional information becomes available in the future which
may change management's estimates, future additional provisions may be
necessary.
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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 1999 decreased 5.1% to
$50,728. Such sales were $2,724 less than the $53,452 recorded in the first
quarter of fiscal 1998. The new construction market and the retrofit of existing
buildings are the primary drivers in determining the worldwide demand for the
Company's fire sprinklers and related products. The sales decreases in the first
quarter of fiscal 1999 from the comparable period in fiscal 1998 were due, in
part, to the discontinuance of the Omega sprinkler products (2%), stiff market
competition on virtually all product lines and unfavorable publicity surrounding
litigation and governmental investigations into the Company's Omega sprinkler
products. The Company experienced sales increases in CPVC plastic pipe and
fittings and grooved couplings and fittings. Unit sales results of fire
sprinkler heads were mixed with Optima, Attic, ESFR, and K-25/K-17 leading the
increases. Sales increases were realized in most international markets. The
Company continues to experience very competitive conditions worldwide in the
sprinkler market through stiff price competition which has depressed sales
prices and overall sales.
Cost of Sales and Gross Profit. Cost of sales, in terms of dollars of expense,
for the first quarter of fiscal 1999 decreased 4.1% to $36,672. Cost of sales
were $1,558 below the $38,230 in the first quarter of fiscal 1998. The Company's
cost of sales for the first quarter of fiscal 1999 was 72.3% of net sales
compared to 71.5% of net sales for the first quarter of fiscal 1998. This
resulted in a gross margin percentage of 27.7% in the first quarter of fiscal
1999 compared to 28.5% in the first fiscal quarter of 1998. The decrease in cost
of sales, in terms of dollars of expense, is due to lower sales volume. The
fiscal 1999 first quarter gross profit margin percentage did increase to 27.7%,
however, from the fourth quarter of fiscal 1998 amount of 25.0% due to a first
quarter sales price increase and certain production efficiencies.
Operating Expenses. Operating expenses for the first quarter of fiscal 1999
decreased 15.1% from the first quarter of fiscal 1998. Total operating expenses
decreased $2,022 to $11,365 for the first quarter of fiscal 1999 compared to
$13,387 for the same period for fiscal 1998. Operating expenses were 22.4% of
net sales in the first quarter of fiscal 1999. Selling, general and
administrative expenses decreased 13.9%, or $1,603, from the
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first quarter of fiscal 1998. The primary decrease in selling, general and
administrative expenses was in selling and distribution expenses which decreased
$1,559 or 18.0% from the first quarter of fiscal 1998. The lower expenses
primarily are due to the Company's cost reduction programs initiated in fiscal
1998. The Company opened a new distribution center in Kansas City, Missouri late
in the first quarter of fiscal 1999. General and Administrative expenses
increased 4.2% due to higher financial and other fees partially offset by cost
reductions in other expenses. Research and development expenses decreased 22.3%,
or $419, to $1,457 in the first quarter of fiscal 1999 as compared to the same
period in fiscal 1998. Research and development expenses were unusually high in
the first quarter of fiscal 1998 in connection with the development and final
approvals of a new line of fire sprinklers.
Interest Expense (Income). Interest expense of $1,501 was incurred in the first
quarter of fiscal 1999 compared to interest expense of $1,469 in the comparable
quarter of fiscal 1998. The higher interest expense primarily was due to a
higher effective borrowing rate. Total debt was $74,068 at January 31, 1999 as
compared to $83,485 at January 31, 1998. The Company repaid borrowings, net by
$7,100 in the first quarter of fiscal 1999. Interest income for the three months
ended January 31, 1999 and 1998 was $136 and $176, respectively. The lower
interest income level was the result of a lower average investment balance in
fiscal 1999.
Income Taxes. The Company's effective tax rate for the first quarter of fiscal
1999 was 30.2% compared to 32.5% in the comparable period of 1998. The decrease
in the overall effective income tax rate results from the estimated income tax
rate used to record the tax benefit of prior year's unusual charges, a lower
state income tax rate, tax credits and the impact of deductible expenses.
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 and
the 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.
10
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FINANCIAL CONDITION
January 31, 1999 Compared to October 31, 1998
Cash and Cash Equivalents. Cash and cash equivalents were $12,566 as of January
31, 1999 as compared to $18,801 at October 31, 1998. This decrease was primarily
a result of the use of funds in investing and financing activities and normal
fluctuation in operating activities.
Inventories. Inventories were $44,481 at January 31, 1999 as compared to $43,319
at October 31, 1998. The $1,162 increase in inventories was comprised of a
decrease of $244 in raw materials and work in process and an increase of $1,406
in finished goods. The decrease in raw materials and work in process primarily
was due to decreased material requirements. The increase in finished goods was
due to a replenishment of certain fire sprinkler system products in the
Company's distribution centers which had fallen below optimum levels.
Property, Plant and Equipment. The Company's property, plant and equipment rose
by $1,403 to $76,387 at January 31, 1999. The increase is due to continuing
manufacturing automation and expanding certain manufacturing capabilities for
fire sprinklers, as well as associated components and grooved fittings product
lines.
Total Debt. The Company's total debt decreased to $74,068 at January 31, 1999
compared to $81,168 at October 31, 1998. The Company made voluntary net
repayments of long-term debt during the first fiscal quarter of 1999.
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 operations,
growth and expansion, and the Omega settlements. As of January 31, 1999, after
considering cash and cash equivalents and the available borrowing capacity,
based on the borrowing base formulas, including subjective elements, as defined
in the agreements, the Company has approximately $3,300 of availability under
the Revolving Credit Facility and a line of credit. Under the terms of the
Revolving Credit Facility, the Company must maintain minimum balances of net
borrowing availability. Should the net balance of borrowing availability fall
below such level, the bank may require the Company to apply its lockbox receipts
to its loan balances.
Cash provided by operating activities in the first quarter of fiscal 1999 was
$2,097 as compared to cash used for operating activities of $3,093 in the same
period of 1998. Net income plus noncash items generated $3,403 of cash in the
first
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quarter of fiscal 1999 as compared to $2,530 in the first quarter of fiscal
1998. The increase was due to higher net income. Cash used for working capital
purposes decreased to $1,306 in the first quarter of fiscal 1999 from $5,623 in
the same period of fiscal 1998. Net cash used for working capital purposes in
the first quarter of fiscal 1999 was comprised of an increase in inventories, a
decrease in accounts payable and cash used to fund Omega programs. These were
partially offset by a decrease in accounts receivable. Net cash used for working
capital in the first quarter of fiscal 1998 was for increased levels of
inventories and reduced levels of accounts payable and accrued expenses
including the funding of Omega programs.
Cash used in investing activities was $1,122 in the first quarter of fiscal 1999
as compared to $884 in the comparable period of fiscal 1998. The primary use of
cash was for the acquisition of property, plant and equipment during these
periods. The capital expenditures in the first quarters of fiscal 1999 and
fiscal 1998 were primarily for machinery and equipment to increase manufacturing
automation, expand the manufacturing capacity and for the operations of the
Company's various product lines. In the first quarter of fiscal 1998, a net
amount of $1,046 was provided from the net sales of short-term investments.
Cash used for financing activities in the first quarter of fiscal 1999 was
$7,210 as compared to $1,863 in the comparable prior year period. The primary
use of cash in the first quarters of fiscal 1999 and fiscal 1998 was net
repayments of debt of $7,100 and $1,690, respectively.
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. The Company presently 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 and cash equivalents, along with the Company's future
earnings and borrowing capacity are expected to provide adequate liquidity to
meet the Company's obligations, to fund future growth and expansion and fund the
Omega settlements.
The Company has been involved in seven class action lawsuits as well as an
administrative lawsuit filed on March 4, 1998, by the
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United States Consumer Product Safety Commission ("Commission") related to the
Company's Omega sprinklers. The Company has reached a settlement of the
Omega litigation with the Commission as well as a definitive settlement
agreement with the plaintiffs in the Hart and Santa Clara class actions. The
court granted final approval to the settlement on February 19, 1999. The
agreements with the Commission and Class Action litigants generally provide for
replacement of the Omega sprinkler heads with free replacement sprinklers and
parts, the establishment of a separate trust account for payments to the owners
of Omega sprinklers, administration of the recall program and a notification
program related to the Omega sprinkler product recall.
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" and based on current information, the Company
revised its estimate of the probable future cost of settling these matters and
recorded a $38,015 ($26,610 net of tax) charge in third quarter of fiscal 1998
to reflect the total estimated additional future cost.
In an effort to recover a portion of the cost of the Omega settlement, the
Company filed suit on August 19, 1998, against twelve product liability
insurance carriers with which the Company had coverage over the last 15 years.
No insurance or third party recoveries have been considered in the Company's
accrual analysis and the amount of such recoveries, if any, is uncertain at this
time.
The Company presently believes that the remaining balance totaling $32.2 million
($12 million of which is included in accrued expenses) as of January 31, 1999
will be adequate to cover the total estimated future costs of the Omega
sprinkler matters. It is possible that additional litigation may ensue. In the
event additional information becomes available in the future which may change
management's estimates, future additional provisions may be necessary.
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 product recall and litigation regarding its Omega
sprinklers (including the adequacy of charges taken to cover future costs),
general business strategy, the expansion and improvement of operations and
facilities, the growth expected in the construction market, the effects of the
Year 2000 matter on the Company, the effects of new products on the gross profit
margin, liquidity, availability of funds and the effect that certain litigation
could have on the Company as well as information contained elsewhere in this
document where
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statements are preceded by, followed by or include the words "believes",
"expects", "estimates", "anticipates", "intends", 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.
Year 2000
- ---------
At midnight on December 31, 1999, all computer systems that use two digits to
represent the year are at risk of malfunction or failure. Many systems will
continue to run, but may interpret any data in the year '00 to be prior to any
date in the year '99. Businesses and systems that use a four-digit format to
report and process dates later than December 31, 1999 are often denoted as "Year
2000 compliant". While many systems have no date comparison functions and
operate in a date-independent mode, they may have a date function. If full
system operation and correct display of dates subsequent to January 1, 2000 are
possible, these systems may be denoted as "Year 2000 operationally ready". Many
systems and subsystems using two digit dates will operate smoothly until the end
of their technological or economic life without regard to the actual date. These
systems are unaffected by whether it is 2000 or 1900, make no "real-time" date
comparisons and have no date to display features. At the other extreme are
systems that will cease functioning or malfunction when an unacceptable date is
perceived (which in some cases could be during 1999).
The Company is committed to the operation of our business without interruption.
The Company has been and continues to be in the process of evaluating and
modifying both its information technology and non-information technology
infrastructures for Year 2000 compliance. The Company believes its primary
operating systems and software are Year 2000 compliant. In the normal course of
business, the Company has upgraded certain systems and software and these
upgrades are Year 2000 compliant. The Company has also modified certain systems
to be Year 2000 compliant. It is anticipated that the full assessment of all
potential issues will be completed in the third quarter of fiscal 1999 and the
issues tested and resolved, through modification or replacement, by the end of
the fourth quarter of fiscal 1999. The Company does not expect that the cost to
modify or replace infrastructure affected by the Year 2000 issue 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
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of any failure by the Company to be in compliance. The Company is in the
preliminary stages of ascertaining the Year 2000 compliance actions and efforts
by its suppliers and vendors and the potential impact on the Company's
operations should they not achieve Year 2000 compliance. In the event that any
of the Company's significant suppliers or customers do not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected. Throughout the assessment, the Company will be developing
contingency plans.
There can be no assurances that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in technology used in its products or internal systems which
are comprised predominantly of third party software and hardware, or by the
inability of third parties to adequately disclose and correct their Year 2000
issues. While the Company presently believes that the ultimate outcome of its
efforts to be Year 2000 compliant will not have a material effect on the
Company's current financial position, liquidity, or operations, there can be no
assurances that unanticipated increased costs could have a material effect on
its results of operations. Readers should be cautioned that forward-looking
statements contained in the Year 2000 disclosure should be read in conjunction
with the Company's disclosure regarding forward-looking Statements.
Qualitative Disclosure About Market Risk
- ----------------------------------------
Interest Rate Sensitivity
The Company's interest rate exposure relates primarily to its long-term debt
obligations. All debt obligations and the interest rate swap are entered into
for purposes other than trading. A significant portion of the Company's interest
expense is based upon variable interest rates of its banks' prime rate or
Eurodollar rate.
The table below provides annual information about the Company's debt obligations
and interest rate swap agreement. All of the Company's debt obligations have
been classified as variable rate. The table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For the
interest rate swap, the table presents the notional amounts and weighted average
interest rates by contractual maturity date. Notional amounts are used to
calculate the contractual payments to be made under the contract. Dollar amounts
are in thousands.
Expected Variable Rate Average Interest Average
Maturity Long-Term Interest Rate Pay
Date Debt Rate Swap Rate
- -------- ------------- -------- -------- --------
1999 $ 725 6.72% $ 0 1.175%
2000 4,618 6.68% 550 1.175
2001 52,939 6.58% 550 1.175
2002 1,368 6.23% 550 1.175
2003 1,345 6.22% 550 1.175
Thereafter 12,473 6.18% 7,150 1.175
------- ------
Total $73,468 6.60% $9,350 1.175%
======= ======
Fair Value $73,468 $ (535)
------- ------
Exchange Rate Sensitivity
The Company conducts business on a global basis in several major international
currencies. As such, it is exposed to adverse or beneficial movements in foreign
currency exchange rates. Fluctuations in foreign currency exchange rates have
not had, and are not anticipated to have, a material impact on the Company's
current financial condition, liquidity, or operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of the Notes to Consolidated Financial Statements (included herein),
relating to litigation regarding the Company's Omega sprinklers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed as an Exhibit and attached as follows:
10(a) Class Action Order, Final Judgment & Decree; Superior Court of
the State of California, County of Los Angeles dated February 19, 1999.
27 -- Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter.
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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/ E. Talbot Briddell
--------------------------------
E. Talbot Briddell
Chairman and
Chief Executive Officer
DATE: March 15, 1999
- ----- --------------
/s/ Albert T. Sabol
--------------------------------
Albert T. Sabol
Executive Vice President-Finance
(Principal Financial and
Accounting Officer)
16
<PAGE>
Exhibit 10(a)
CLIFFORD H. PEARSON (#108523)
GARY S. SOTER (#67622)
DANIEL L. WARSHAW (185365)
WASSERMAN, COMDEN & CASSELMAN L.L.P.
5567 Reseda Boulevard, Suite 330
Post Office Box 7033
Tarzana, California 91357-7033
818/705-6800 * 213/872-0995
JOSEPH W. COTCHETT (#36324)
BRUCE L. SIMON (#96241)
TIMOTHY J. FOX (#190084)
COTCHETT, PITRE & SIMON
San Francisco Airport Office Center
840 Malcolm Road, Suite 200
Burlingame, CA 94010
650/697-6000
Attorneys for Class Plaintiffs and the Class
J. GORDON COONEY, Jr. (Admitted Pro Haec Vice)
MORGAN, LEWIS & BOCKIUS L.L.P.
1701 Market St.
Philadelphia, PA 19103-6993
215/963-5000
Attorneys for Defendant Central Sprinkler Corp.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
CHARLES HART, ROBIN HART, ) Case No. BC 176727
MAURICIO CACERES, YOLANDA )
CACERES, LESLIE GULP, and the COUNTY ) CLASS ACTION
OF SANTA CLARA, on behalf of themselves)
and all others similarly situated, ) ORDER, FINAL
) JUDGMENT & DECREE
Plaintiffs, )
) DATE: February 19, 1999
v. ) TIME: 10:00 a.m.
) PLACE: Dep't 59
CENTRAL SPRINKLER CORPORATION, )
CENTRAL SPRINKLER COMPANY, and ) Honorable Bruce E. Mitchell
DOES 2 THROUGH 50, INCLUSIVE, )
)
Defendants. )
)
)
)
)
_______________________________________)
* * * *
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
This matter is before the Court on the joint motion of the parties in
the above-captioned action, as well as a related action, County of Santa Clara
v. Central Sprinkler Corp., Santa Clara County Superior Court No. CV 771019, for
final approval of the proposed settlement between Class Plaintiffs CHARLES HART,
ROBIN HART, MAURICIO CACERES, YOLANDA CACERES, LESLIE CULP, and COUNTY OF SANTA
CLARA, individually and on behalf of all others similarly situated (the
"Class"), and defendants CENTRAL SPRINKLER CORPORATION and CENTRAL SPRINKLER
COMPANY (hereinafter, the "Defendants"), as set forth in the Amended Settlement
Agreement between the parties, and as preliminarily approved by this Court in
its order dated October 27, 1998. The hearing on the final approval of the
proposed settlement was held on February 19, 1999, pursuant to this Court's
order granting preliminary approval of the settlement, entered on October 27,
1998 ("the Preliminary Approval Order"), and properly noticed to the Class.
Class Counsel's attorneys' fees and costs are being addressed separately and
will not be paid out of the trust.
The definition of the settlement class preliminarily approved by this
Court is:
All current owners or operators of real property or structures in the
United States (including, but not limited to, residential, public entities,
private entities and commercial owners or operators) in which there are
installed Omega Series Sprinklers manufactured, distributed, and/or sold by
Central, including all such owners or operators or prior owners or
operators who incur or incurred any cost or expenses by reason of the
testing, replacement and/or repair of any portion of said Omega Series
Sprinklers, provided, that the Class shall not include Central, any of its
subsidiaries, affiliates or controlled entities or the officers and
directors of any of them. Excluded from the Class are any person or entity
who properly executes and files a timely request for exclusion from the
Settlement Class, Central, any of Central's subsidiaries, affiliates and
controlled entities, and any such entities' officers and directors.
For purposes of this judgment, and pursuant to the Joint Supplemental
Memorandum filed in support of this Final Approval, to qualify for membership in
the class, the person or entity must either be: (a) the actual owner of the
Omega sprinklers currently installed in the property or structure; or (b) the
actual owner of Omega sprinklers that were formerly installed and were replaced
with non-Omega sprinklers after May 1, 1996, so long as that person or entity
owned the Omega sprinklers at the time they were replaced.
2
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
Notice of the February 19, 1999 fairness hearing was given to the Class
in accordance with the Preliminary Approval Order. The Court is satisfied that,
commencing on November 1, 1999, a broad and extensive notice campaign was
instituted. Extensive print media and trade publications in all areas of the
country ran the Summary Notice. The Summary Notice has also appeared in
newspapers and nationwide publications of general interest. Both long form and
short form notices were distributed through direct mailings on a nationwide
basis to trade organizations, governmental agencies, fire authorities having
jurisdiction ("AHJs"), and other parties of interest, including organizations
likely to include class members. This published notice was provided in
publications with high readership among the Class of building owners and
homeowners. A home page was set up for the settlement on the Internet, and a
toll free number was established as well. The Summary Notice of the class
action, the Proposed Settlement and notice of the fairness hearing were
published in accordance with the Preliminary Approval Order.
The parties appeared by their respective attorneys of record: Bruce L.
Simon of the law offices of Cotchett, Pitre & Simon; Clifford H. Pearson of the
law offices of Wasserman, Comden & Casselman L.L.P.; and Thomas V. Girardi of
the law offices of Girardi & Keese appeared on behalf of plaintiffs and the
Class. J. Gordon Cooney, Jr. and Theodore G. Spanos of the law offices of
Morgan, Lewis & Bockius LLP appeared on behalf of the Defendants. The Court
heard and considered evidence in support of and in opposition to the proposed
settlement. The attorneys for the parties were heard. An opportunity to be heard
was given to all other persons requesting to be heard in accordance with the
Preliminary Approval Order, whether represented by counsel or not.
The entire matter of the proposed settlement having been heard and
considered by the Court, and for all of the reasons stated by the Court in the
proceedings on February 19, 1999,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED THAT:
1. This Court has jurisdiction over the claims of the Class members
asserted in the Actions and over all parties to the Actions, including the
Class.
* * * *
3
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
2. The notice given to the members of the Class fully and accurately
informed them of all material elements of the proposed settlement; was the best
notice practicable under the circumstances; was valid, due and efficient notice
to all Class members; and complied fully with California law, the United States
Constitution, and other applicable law regarding notice to Class members of a
proposed settlement. The best notice practicable under the circumstances has
been provided to ascertainable members of the Class and full opportunity has
been offered to the Class to participate in the fairness hearing. It is hereby
determined that all members of the Class who have not timely elected to be
excluded from the Class (hereinafter "Settlement Class Members") are bound by
this Order, Final judgment, and Decree. As set forth above, Settlement Class
Members means that the class member must either be: (a) the actual owner of the
Omega sprinklers currently installed in the property or structure; or (b) the
actual owner of Omega sprinklers that were formerly installed and were replaced
with non-Omega sprinklers after May 1, 1996, so long as that person or entity
owned the Omega sprinklers at the time they were replaced.
3. Pursuant to Cal. Civ. Proc. Code ss.382, and Cal. Civ. Code ss.1781
to the extent that such section is made applicable to this case by California
decisional authorities, the Court hereby grants final approval of the Amended
Settlement Agreement and the settlement set forth in the Amended Settlement
Agreement, and finds that it was entered into in good faith, and is fair,
reasonable and adequate under the circumstances, and is in the best interests of
the Class. The objections which were filed timely or otherwise have been
considered, and either were addressed or are overruled. Accordingly, the Court
directs that the settlement be consummated in accordance with the terms and
conditions of the Amended Settlement Agreement, as preliminarily approved by
this Court.
4. Class plaintiffs and Settlement Class Members are bound by the terms
of the Amended Settlement Agreement, and are barred from initiating, asserting,
or prosecuting against Central Sprinkler Corporation and Central Sprinkler
Company, as well as any of its predecessors, successors, subsidiaries,
affiliates, and/or any and all of their past, present and future officers,
directors, stockholders, partners, agents, servants, subrogees and assigns and
their respective insurers, any claims that were asserted or could have been
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
4
<PAGE>
asserted in the subject complaints, sounding in tort, breach of warranty, breach
of contract, violation of the Manguson Moss Warranty Act, or any other theory,
and further including but not limited to any and all claims for actual,
incidental, consequential or punitive damages relating to the purchase,
installation, use, inspection and/or replacement of Omega Sprinklers. The claims
that are subject to this Settlement and Judgment do not include claims for
compensatory damages arising from fire damage, property damage, personal injury
or wrongful death associated with the failure or alleged failure of an Omega
Sprinkler to perform as intended, designed or expected in a fire, nor is any
release given by Settlement Class Members for such compensatory damage claims,
nor would any bar exist by entry of a judgment of dismissal herein for such
compensatory damage claims. All claims for multiple or punitive damages in
connection with the claims that were asserted or could have been asserted in the
complaint are released in this Settlement and all are barred by this judgment.
No claim for any punitive damages arising from any failure or alleged failure of
an Omega Sprinkler to perform in any fire occurring prior to Final approval is
barred by this judgment. No release is given by Settlement Class Members, nor
would any bar exist by this judgment of dismissal herein, for any claim arising
from the failure or alleged failure of any Central-designed Replacement
Sprinkler to perform as intended, designed or expected. (Amended Settlement
Agreement paragraph 3.18.) This judgment does not, however, bind persons or
entities who are not either (a) the actual owner of the Omega sprinklers
currently installed in the property or structure; or (b) the actual owner of
Omega sprinklers that were formerly installed and were replaced with non-Omega
sprinklers after May 1, 1996, so long as that person or entity owned the Omega
sprinklers at the time they were replaced.
5. Pursuant to the Amended Settlement Agreement, this judgment includes
all Settlement Class Members on behalf of themselves and any person claiming by
or through their heirs, administrators, devisees, predecessors, successors,
sellers, purchasers, representatives of any kind, shareholders, partners,
members, directors, owners of any kind, affiliates, subrogees, assignees, or
insurers. (Amended Settlement Agreement at paragraph 3.19.)
* * * *
5
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
6. The remediation program as set forth in the Settlement shall
constitute the sole and exclusive remedy for any and all released claims of
Settlement Class Members; no court or arbitrator may award punitive or multiple
damages with respect to any such claim; and no Settlement Class Member may serve
as a representative plaintiff with respect to such a claim or remain in any
action or permit himself to be represented by a third party in any action in
which such a claim in asserted.
7. Pursuant to the Amended Settlement Agreement, each Settlement Class
Member shall take the following steps to bar, discharge, and release any
liability on the part of Central to any other person for contribution and/or
indemnity arising from the claims that are the subject of this Settlement:
Each class member shall reduce any judgment it obtains against any person
by the amount, percentage, or share of such judgment attributable to
Central, so as to bar, discharge and release under applicable law any
claims for contribution and/or indemnity against Central arising from or
related to the claims that are the subject of this Settlement. In the event
that any Settlement Class Member obtains a judgment (including pursuant to
a settlement agreement) against one or more persons and any of those
persons obtains a judgment against Central, in whole or in part, for
contribution or indemnity, then such Settlement Class Member will be
required to reduce or remit any judgment or portion thereof obtained by
those persons by the amount of the judgment against Central.
8. A list of the Settlement Class members who properly and timely
excluded themselves from the Class before the close of the opt-out period has
been filed by Class Counsel.
9. The Actions and all claims and causes of action therein are
dismissed with prejudice, without costs to any party except as provided in the
settlement.
10. Without affecting the finality of this Order, Final Judgment &
Decree, the Court shall retain continuing jurisdiction over this action and the
parties, including all Settlement Class Members, and over all matters pertaining
to the implementation and enforcement of the Settlement. Except as provided to
the contrary herein, any disputes or controversies arising with respect to the
interpretation, enforcement or implementation of the Settlement shall be
presented by motion to the Court for resolution.
* * * *
6
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
11. By September 15, 1999, Central and Class Counsel shall file with
this Court a joint motion to approve a Distribution Plan, or, if an agreement
regarding a Distribution Plan cannot be reached, Central and Class Counsel will
file separate motions. Pursuant to the Amended Settlement Agreement between the
parties, and with the consent of the United States Consumer Product Safety
Commission, the Distribution Plan approved by this Court shall be reviewed
exclusively by, and either approved or modified by, the CPSC, with any further
review of the CPSC's determination to be provided by the Commission. The
Commission's decision regarding a Distribution Plan shall be final and binding,
and cannot be appealed. Within 10 days after the Commission approves a
Distribution Plan, Central shall provide written, mail notice of the
Distribution Plan to those Settlement Class Members who have timely submitted
valid claims for a distribution. Such Settlement Class Members shall have 20
days from the date of the mailing of the Notice in which to file with the Los
Angeles Superior Court any objection to the Distribution Plan. Although the
Court will not modify the Distribution Plan, it may, in its discretion, hear any
objection to the Distribution Plan and communicate any such objections and/or
recommendations to the Commission. The Court's determination concerning whether
to refer an objection and/or recommendation to the Commission shall be final and
not subject to appellate review. Pursuant to the Amended Settlement Agreement
between the parties, Supplemental Distribution Plans shall be subject to the
same requirements and procedures as the Initial Distribution Plan specified
above, except that notice to Settlement Class Members shall not be required.
7
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
Presented jointly by:
GIRARDI & KEESE
WASSERMAN, COMDEN & CASSELMAN
COUNTY OF SANTA CLARA
COTCHETT, PITRE & SIMON
/s/ Bruce L. Simon
- --------------------------------
BRUCE L. SIMON
Class Counsel
Dated:_________________
MORGAN, LEWIS & BOCKIUS L.L.P.
________________________________
J. GORDON COONEY, Jr.
Attorneys for Defendants
Dated:_________________
IT IS SO ORDERED.
DATED:____________________ ___________________________
BRUCE E. MITCHELL
8
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
Presented jointly by:
GIRARDI & KEESE
WASSERMAN, COMDEN & CASSELMAN
COUNTY OF SANTA CLARA
COTCHETT, PITRE & SIMON
________________________________
BRUCE L. SIMON
Class Counsel
Dated:_________________
MORGAN, LEWIS & BOCKIUS L.L.P.
/s/ J. Gordon Cooney, Jr.
_________________________
J. GORDON COONEY, Jr.
Attorneys for Defendants
Dated: 2/18/99
_______
IT IS SO ORDERED.
DATED: 3/04/99 BRUCE E. MITCHELL
_______ ____________________
BRUCE E. MITCHELL
9
________________________________________________________________________________
[PROPOSED] ORDER FINAL JUDGMENT & DECREE
<PAGE>
PROOF OF SERVICE BY FACSIMILE
-----------------------------
I am employed in the County of Los Angeles, State of California. I am
over the age of 18 and not a party to the within action. My business address is
300 South Grand Avenue, Los Angeles, California 90071-3132.
On February 18, 1999, I caused the document(s), described as
"[PROPOSED] ORDER, FINAL JUDGMENT & DECREE" to be served by facsimile machine by
causing said document to be transmitted to:
SEE ATTACHED SERVICE LIST.
---
The number to which said document was transmitted are set forth above,
and I confirmed that the transmissions were received by calling up the machine's
journal and checking that the machines in question connected and that 11 pages
were transmitted.
Executed on February 18, 1999, at Los Angeles, California. I declare
under penalty of perjury under the laws of the United States of America that the
above is true and correct.
Frances Wirt /s/ Frances Wirt
------------------ -----------------
Type or Print Name Signature
<PAGE>
SERVICE LIST
------------
Bruce L. Simon, Esq.
COTCHETT & PITRE
San Francisco Airport Office Center
840 Malcolm Road, Suite 200
Burlingame, California 94010
Telephone: 650-697-6000
Facsimile: 650-697-0577
Thomas V. Girardi, Esq.
GIRARDI & KEESE
1126 Wilshire Boulevard
Los Angeles, California 90017-1904
Telephone: 213-977-0211
Facsimile: 213-481-1554
Clifford H. Pearson, Esq.
WASSERMAN, COMDEN &
CASSELMAN LLP
5567 Reseda Boulevard, Suite 330
Post Office Box 7033
Tarzana, California 91357-7033
Telephone: 818-705-6800
Facsimile: 818-345-0162
Deborah S. Orlove, Esq.
Complaint Counsel
U.S. CONSUMER PRODUCT SAFETY COMMISSION
4430 East West Highway
Bethesda, Maryland 20814
Telephone: 301-504-0626, Ext. 1347
Facsimile: 301-504-0359
Kathleen F. Carpenter, Esq.
MORGAN, MILLER & BLAIR
1676 N. California Blvd., Suite 200
Walnut Creek, California 94596
Telephone: 925-937-3600
Facsimile: 925-943-1106
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