scanlon technologies inc anne scanlon founded scanlon technologies inc 1993 company designed

Scanlon Technologies, Inc.*

Anne Scanlon founded Scanlon Technologies, Inc., in 1993. The company designed and manufactured high-tech products that were used in various industries ranging from semiconductor to aviation. Over the years, Scanlon Technologies reported a compound annual growth rate in revenues of over 20% due to high demand for the company’s products and Anne’s superior management skills. By the end of 1996, it was clear that any further growth would have to come from international expansion. However, establishing manufacturing operations and opening up sales and marketing offices abroad required a significant amount of capital. Anne considered investing more of her own money into the business; however, given that she already had most of her wealth tied up in the company, she decided against the idea. Moreover, she believed that the amount of funds Scanlon Technologies needed to raise for expansion was in the tens of millions. In her mind, there was only one clear solution—go public.

In September 1996, Anne hired J.P. Suisse, a top tier investment bank, to take Scanlon Technologies public. On January 1, 1997, the company, which was authorized by the State of Delaware to sell 20 million common stock and 10 million preferred stock, issued one million shares of common stock in an Initial Public Offering (IPO) and began trading on the New York Stock Exchange under the ticker symbol STI. The stock, which had a par value of $1, was sold for $20 per share and climbed to $26 a share by the end of its first trading day.

As expected, the funds raised in the IPO were used to open offices all over the world as well as build a second manufacturing plant in Toronto, Canada. Over the next couple of years, business was good and the company was able to generate enough cash to maintain its level of operations.

In October 1999, Anne learned that Kadehjian Solutions Coporation, a competitor, was considering the option of being acquired. Anne believed that such an acquisition would position Scanlon Technologies as the industry leader. One of Kadehjian’s requirements for such an acquisition was that it be an all-cash transaction. Anne knew that this would require Scanlon Technologies to raise approximately $7 million.

Ann contracted J.P. Suisse to discuss raising these funds through the capital markets. The managing directors at J.P. Suisse recommended that Scanlon Technologies employ a combination of debt and equity securities. Anne agreed and on January 1, 2000, the company issued an additional one hundred thousand shares of its $1 par value common stock at $40 per share. On the same day, the company issued $2 million in bonds at 95.8, due in 5 years with 5% interest payable annually (at year end). The market interest rate at the time was 6% per year. Also on January 1, 2000, Scanlon Technologies issued $1.3 million in zero-coupon (i.e. no interest) convertible bonds, also due in 5 years. Each $1,000 bond converted into 20 shares of its common stock at any time during the five-year period. The convertible bonds were sold for a total of $1,100,000.

*(Copyright © by the President and Fellows of Harvard College. Harvard Business School case 190-017)



On March 2, 2000, Scanlon Technologies acquired Kadehjian Solutions Corporation in an all-cash transaction. Following the acquisition, the company’s revenues increased significantly and the company’s profit margins reached a new high of 30%. In addition to its outstanding income statement performance, the company was generating a significant amount of cash from its operating activities. As a result, On June 30, 2000, Scanlon Technologies’ Board of Directors declared and paid a dividend of $0.10 per share.

On December 31, 2000, the company made the first interest payment on the $2 million in bonds. At that time the effective interest rate had risen to 7% due to market conditions.

In January of 2001, the high-tech industry suddenly entered a slump and the stock of Scanlon Technologies plummeted along with the entire industry. Anne believed that the sell off was overdone and, on February 1, 2001, decided to repurchase 10, 000 shares of common stock for $20 per share.

By June 30, 2001, there were strong indicators that the economic slowdown was coming to an end, as evidenced by the fact that related industries were starting to show signs of recovery. At the time, the Board was in the midst of deciding whether to declare and pay a dividend similarly to the one paid in the previous year. Eventually, after strong arguments by various directors, the Board decided to declare a stock dividend. Thus, on June 30, 2001, Scanlon Technologies’ Board declared and issued a dividend of one new share for every ten existing shares. At the time, the market price of STI stock was trading at $29 per share.

By December 2001, STI stock was back at its all-time high level and management decided to resell the shares it had previously repurchased for the current market price of $50 per share. Moreover, given that Scanlon Technologies had a significant amount of cash on its balance sheet, Anne decided on January 15, 2002, to retire all of its outstanding (non- convertible) debt for a payment of only $1, 865,000.

By September 2002, the stock of Scanlon Technologies reached an all-time high of $68 per share and management was contemplating a 2 for 1 stock split.

Required question

Prepare the accounting journal entries needed to record the actual and contemplated capital financing transactions described above.