<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the quarter ended March 31, 1998 Commission file number 1-8591
-------------- ------
FIGGIE INTERNATIONAL INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1297376
- ------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5875 Landerbrook Drive, Suite 250
Mayfield Heights, Ohio 44124
- ------------------------------------ ---------------------------
(Address of principal executive offices) (Zip Code)
(440) 446-1333
------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding as of April 15, 1998
- ------------------------------------------------------------------------------
Class A Common Stock, par value $.10 per share 13,804,030
Class B Common Stock, par value $.10 per share 4,711,847
<PAGE> 2
FIGGIE INTERNATIONAL INC.
-------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION .......................................................................3
<S> <C>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 ................................................3
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997 ..............................................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 ................................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................................................7
Summary of Significant Accounting Policies ....................................................7
Receivables ...................................................................................7
Inventories ...................................................................................8
Discontinued Operations .......................................................................8
Income Taxes .................................................................................10
Credit Facility ..............................................................................10
Long-Term Debt ...............................................................................11
Capital Stock ................................................................................11
Contingent Liabilities .......................................................................12
Restructuring and Refinancing Costs ..........................................................13
Extraordinary Item - Early Extinguishment of Debt ............................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ....................................................14
Forward-Looking Information ..................................................................14
Results of Operations Summary ................................................................14
Scott Aviation ...............................................................................16
Interstate Electronics Corporation ...........................................................17
Corporate and Unallocated Costs and Expenses .................................................18
Financial Position and Liquidity .............................................................18
Factors Affecting the Company's Prospectus ...................................................20
PART II. OTHER INFORMATION .........................................................................23
LEGAL PROCEEDINGS ............................................................................23
EXHIBITS AND REPORTS ON FORM 8-K .............................................................23
SIGNATURES ..........................................................................................24
EXHIBIT INDEX .......................................................................................25
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
FIGGIE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1998
-------------- ---------------
Net Sales
<S> <C> <C>
Cost of Sales $ 64,861 $ 62,651
Gross Profit on Sales 46,711 43,187
------------- -------------
18,150 19,464
------------- -------------
Operating Expenses:
Selling, General & Administrative 9,125 9,742
Research & Development 1,986 2,825
------------- -------------
Total Operating Expenses 11,111 12,567
------------- -------------
Operating Income 7,039 6,897
------------- -------------
Other Expense (Income):
Restructuring and Refinancing Costs 2,491 131
Interest Expense 4,297 5,453
Interest Income (1,441) (1,115)
Other, Net 531 724
------------- -------------
Income from Continuing Operations before
Income Tax and Extraordinary Item 1,161 1,704
Income Tax 462 587
------------- -------------
Income from Continuing Operations
before Extraordinary Item 699 1,117
Discontinued Operations, net of tax:
Income from Operations - 3,400
(Loss) on Disposal - -
------------- -------------
- 3,400
Income before Extraordinary Item 699 4,517
Extraordinary Item - (Loss) on
Extinguishment of Debt, net of tax (80) -
------------- -------------
Net Income $ 619 $ 4,517
============= =============
Weighted Average Shares - Basic 18,479 18,385
Weighted Average Shares - Diluted 18,699 18,594
Per Share Data - Basic EPS:
- ---------------------------
Income from Continuing Operations $ 0.04 $ 0.06
Income from Discontinued Operations - 0.18
------------- -------------
Income Before Extraordinary Item 0.04 0.24
Extraordinary (Loss) (0.01) -
------------- -------------
Net Income $ 0.03 $ 0.24
============= =============
Per Share Data - Assuming Dilution:
- -----------------------------------
Income from Continuing Operations $ 0.04 $ 0.06
Income from Discontinued Operations - 0.18
------------- -------------
Income Before Extraordinary Item 0.04 0.24
Extraordinary (Loss) (0.01) -
------------- -------------
Net Income $ 0.03 $ 0.24
============= =============
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE> 4
FIGGIE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 104,259 $ 104,243
Trade Accounts Receivable, less Allowance for
Uncollectible Accounts of $474 in 1998
and $394 in 1997 41,958 35,862
Inventories 31,331 30,049
Prepaid Expenses 1,375 885
Recoverable Income Taxes - 4,120
Current Deferred Tax Asset 8,200 6,400
------------ ----------
Total Current Assets 187,123 181,559
------------ ----------
PROPERTY, PLANT AND EQUIPMENT
Land and Land Improvements 42,760 43,732
Buildings and Leasehold Improvements 24,574 24,103
Machinery and Equipment 28,870 28,793
------------ ----------
96,204 96,628
Accumulated Depreciation (30,581) (29,275)
------------ ----------
Net Property, Plant and Equipment 65,623 67,353
------------ ----------
OTHER ASSETS
Deferred Divestiture Proceeds and Other, Net 28,616 29,324
Prepaid Pension Costs 12,723 12,723
Intangible Assets 1,931 1,953
Cash Surrender Value of Insurance Policies 3,526 3,596
Prepaid Finance Costs 930 1,106
Deferred Tax Asset 41,889 44,060
Other 1,818 1,589
------------ ----------
Total Other Assets 91,433 94,351
------------ ----------
Total Assets $ 344,179 $ 343,263
============ ==========
</TABLE>
4
<PAGE> 5
FIGGIE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(Unaudited)
LIABILITIES
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 18,676 $ 19,515
Accrued Insurance Reserves 13,197 12,033
Accrued Compensation 6,476 6,430
Accrued Interest 7,840 3,895
Accrued Environmental Reserve 2,991 3,217
Accrued Liabilities and Expenses 9,938 9,329
Current Portion of Long-Term Debt 45,512 639
----------- ----------
Total Current Liabilities 104,630 55,058
----------- ----------
Long-Term Debt 113,292 161,395
Non-Current Insurance Reserves 29,773 31,410
Other Non-Current Liabilities 23,782 23,804
----------- ----------
Total Liabilities 271,477 271,667
----------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 Par Value; Authorized, - -
3,217 Shares; Issued and Outstanding, None
Class A Common Stock, $0.10 Par Value;
Authorized, 18,000 Shares; Issued and
Outstanding 1998 - 13,779; 1997 - 13,729 1,378 1,373
Class B Common Stock, $0.10 Par Value;
Authorized, 18,000 Shares; Issued and
Outstanding 1998 - 4,706; 1997 - 4,707 470 471
Capital Surplus 110,349 109,871
Accumulated Deficit (39,399) (40,018)
Unearned Compensation (14) (24)
Cumulative Translation (82) (77)
----------- ----------
Total Stockholders' Equity 72,702 71,596
----------- ----------
Total Liabilities and Stockholders' Equity $ 344,179 $ 343,263
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
FIGGIE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------- ------------
Operating Activities:
<S> <C> <C>
Income from Continuing Operations $ 619 $ 1,117
Income from Discontinued Operations - 3,400
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities-
Depreciation and Amortization 1,319 1,978
Amortization of Unearned Compensation 11 12
Other, Net 801 20
Changes in Operating Assets and Liabilities
Accounts Receivable (6,096) (5,686)
Inventories (1,282) (116)
Prepaid Items (490) (1,073)
Other Assets 725 3,687
Accounts Payable (839) (1,392)
Accrued Liabilities and Expenses 5,536 1,160
Accrued Income Taxes 4,486 2,322
Other Liabilities (1,652) (1)
------------ -----------
Net Cash Provided by Operating Activities 3,138 5,428
------------ -----------
Investing Activities:
Capital Expenditures for Continuing Operations (2,592) (1,307)
Capital Expenditures for Discontinued Operations - (676)
Proceeds from Sale of Property, Plant and Equipment 2,219 82
Proceeds from Business Divestitures - (2,699)
------------ -----------
Net Cash (Used) by Investing Activities (373) (4,600)
------------ -----------
Financing Activities:
Principal Payments on Debt (3,230) (322)
Proceeds from Issuing Common Stock 482 37
Payments to Reacquire Common Stock (1) (385)
------------ -----------
Net Cash (Used) by Financing Activities (2,749) (670)
------------ -----------
Net Increase in Cash and Cash Equivalents 16 158
Cash and Cash Equivalents at Beginning of Year 104,243 44,447
------------ -----------
Cash and Cash Equivalents at End of Period $ 104,259 $ 44,605
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial information included herein has been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
and properly reflects all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to present a fair statement
of the financial results of operations for the periods covered by this report.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
(1) Summary of Significant Accounting Policies:
-------------------------------------------
The financial statements have been prepared in accordance with the accounting
policies described in Note 1 of the Notes to Consolidated Financial Statements
appearing in Figgie International Inc.'s 1997 Form 10-K.
(2) Receivables:
-----------
Receivables consist of the following components (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
U.S. Government
Billed $ 14,373 $ 13,802
Unbilled 7,697 8,309
---------- ----------
22,070 22,111
Commercial
Billed 20,362 14,145
Allowance for Uncollectible Accounts (474) (394)
---------- ----------
$ 41,958 $ 35,862
========== ==========
</TABLE>
U.S. Government receivables include amounts derived from contracts on which the
Company performs on a prime contractor or subcontractor basis. Unbilled
receivables represent the difference between revenue recognized on a percentage
of completion basis for financial accounting and reporting purposes and amounts
permitted to be billed to customers under contract terms. These amounts will be
billed in subsequent periods based on provisions of the agreements.
Costs charged by the Company to the U.S. Government in the performance of U.S.
Government contracts are subject to audit. Years 1992 and 1993 are currently
under audit.
7
<PAGE> 8
(3) Inventories:
-----------
Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Raw Materials $ 6,299 $ 8,515
Work In Process 12,641 8,489
Finished Goods 14,354 14,594
Inventory Reserves (1,963) (1,549)
----------- ------------
Total Inventories $ 31,331 $ 30,049
=========== ============
</TABLE>
(4) Discontinued Operations:
-----------------------
SALE OF SNORKEL: On November 17, 1997, the Company sold its Snorkel aerial work
platform division. The agreement, as amended, provides for $100 million paid to
the Company at closing plus a contingent additional amount. The contingent
amount will be the amount of sales of the Snorkel business for the twelve-month
period commencing on April 1, 1998 and ending on March 31, 1999 (the "Earn-Out
Period") in excess of $140 million, such additional payment not to exceed $20
million, plus 70% of the amount of sales of the Snorkel business during the
Earn-Out Period in excess of $160 million, such additional amount not to exceed
$30 million. The agreement further provides for the assumption by the purchaser
of certain liabilities and operating lease commitments of the Snorkel business.
The financial statements do not reflect the contingent additional amount as an
asset or as income. Prior year's financial statements have been restated to
reflect Snorkel as a discontinued business and are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
------------------------------------
As
Previously As
Reported Snorkel Restated
-------- ------- --------
Three Months Ended March 31, 1997:
<S> <C> <C> <C>
Net Sales $ 107,665 $ (45,014) $ 62,651
========= ========= ========
Income from Continuing Operations $ 4,517 $ (3,400) $ 1,117
Income from Discontinued Operations - 3,400 3,400
--------- --------- --------
Net Income $ 4,517 $ - $ 4,517
========= ========= ========
</TABLE>
Prior Divestitures:
- -------------------
Prior to the sale of Snorkel, the Company divested a number of its businesses.
The contract terms under which businesses were divested include representations
and warranties, covenants and indemnification provisions made (a) by the Company
to purchasers of the businesses and (b) by purchasers of businesses to the
Company. Each transaction has contract terms specific to that transaction. The
extent of representations and warranties made ranged from those qualified by
time, knowledge, and dollar materiality to those representations and
8
<PAGE> 9
warranties which are unqualified. Covenants require the Company to act, or
prevent the Company from acting, in a variety of ways, such as not competing
with the purchasers of a business. Covenants also require the purchasers to act,
or prevent them from acting, in a variety of ways. The duration of covenants
ranges from those effective for a specified period of time to those which are
indefinite.
Remedies available for breaches of representations and warranties and covenants
range from monetary relief in specific amounts for specific breaches or
violations to unlimited amounts.
Under the contracts, the Company has generally retained liability for events
that occurred prior to sale. The Company believes that it has established
appropriate accruals for losses that may arise, such as workers' compensation,
product liability, general liability, environmental risks and federal and state
tax matters.
The Company has indemnified purchasers and has received indemnifications from
purchasers for a variety of items. In some transactions, a portion of the
purchase price was held back or escrowed at banks to support indemnification
provisions. Such amounts are reflected as the assets of the Company within
deferred divestiture proceeds.
Proceeds and other consideration from divestitures which will be paid to the
Company upon fulfillment of contractual provisions, the passage of time, or the
occurrence of future events have been recorded as non-current assets. Deferred
divestiture proceeds consist of cash held in bank escrow accounts from the sale
of the Company's Hartman Electrical, Waite Hill Insurance and Safway Steel
Products operations, cash held back by purchasers from the sale of the Company's
Waite Hill Insurance and Figgie Financial Services operations, receivables
expected from Safway Steel Products arising from final calculations of the
purchase price, a note receivable from the purchaser of the Taylor Instruments
business, a partnership interest in the entity that acquired Interstate
Engineering (a vacuum cleaner manufacturer), cash due to the Company from future
tax benefits under a tax sharing agreement with an unaffiliated public company,
Rawlings Sporting Goods, Inc., the net assets of Willoughby Assurance, Ltd., a
dormant reinsurance subsidiary of the Company, installation contracts in process
of completion from the "Automatic" Sprinkler business, former facilities of
discontinued business units and other items. Deferred divestiture proceeds do
not include any contingent additional amount associated with the Snorkel sale.
Deferred divestiture proceeds include management's best estimates of the amounts
expected to be realized on the collection of deferred proceeds and sale of
residual assets related to discontinued operations. The amounts the Company will
ultimately realize could differ materially from the amounts recorded. The
Company has a reserve of $27.7 million at March 31, 1998 against these assets,
which is presented as a deduction from deferred divestiture proceeds.
9
<PAGE> 10
(5) Income Taxes:
------------
For the three-month periods ended March 31, 1998 and 1997, the following income
tax provisions (benefits) have been provided (in thousands):
<TABLE>
<CAPTION>
Three Months Three Months
March 31, 1998 March 31, 1997
-------------- ---------------
<S> <C> <C>
Continuing Operations $ 462 $ 587
============ ============
Discontinued Operations:
Operations - 2,216
Disposal - -
------------ ------------
$ - $ 2,216
============ ============
Extraordinary Item $ (54) $ -
============ ============
</TABLE>
Net Federal Tax provision amounts have reduced the deferred tax asset.
Recoverable Income Taxes represent refunds claimed from prior taxes paid. The
current deferred tax asset as of March 31, 1998 reflects the tax benefits the
Company expects to utilize in the succeeding twelve-month period in respect of
operating results.
(6) Credit Facility:
----------------
As of March 31, 1998, the Company has a $75 million revolving credit loan and
letter of credit facility ("Credit Agreement"). Within the Credit Agreement, the
Company can issue up to $60 million in letters of credit. Borrowings are
available up to $75 million less outstanding letters of credit. At the Company's
option, borrowings bear interest at alternate rates based on (1) the highest of
the U.S. prime rate, the 90 day commercial paper rate, or the Federal Funds rate
plus 50 basis points or (2) LIBOR plus 200 basis points. The facility is secured
by certain accounts receivable, inventory, machinery and equipment and
intangibles. The facility contains various affirmative and negative covenants,
including restrictions on dividends and certain financial covenants. The
facility expires on January 1, 1999.
As of March 31, 1998, $16.7 million of letters of credit were outstanding under
the facility, there were no borrowings outstanding ($58.3 million was available)
and all financial covenants have been satisfied.
10
<PAGE> 11
(7) Long-Term Debt:
--------------
Total debt consists of the following components (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ---------------
Long-Term Debt:
<S> <C> <C>
9.875% Senior Notes due October 1, 1999 $ 155,195 $ 158,270
Mortgage Notes 3,547 3,580
Obligations under Capital Lease 62 184
------------ ------------
Total 158,804 162,034
Less - Current Portion (45,512) (639)
------------ ------------
Long Term Debt $ 113,292 $ 161,395
============ ============
</TABLE>
The 9.875% Senior Notes are due October 1, 1999. Interest is payable
semi-annually on April 1 and October 1. During the first quarter of 1998, the
Company purchased in the market $3.1 million of Senior Notes at market prices.
In April, the Company repurchased an additional $45 million of its 9.875% Senior
Notes at market prices. As a result, the April repurchases have been classified
as current liabilities on the March 31, 1998 balance sheet. These Senior Notes
will be returned to the Indenture Trustee for retirement.
(8) Capital Stock:
-------------
Each share of Class A Common Stock is entitled to one-twentieth of one vote per
share, while each share of Class B Common Stock is entitled to one vote per
share, except, in each case, with respect to shares beneficially owned by
certain persons coming within the definition of a Substantial Stockholder (as
defined in the Company's Restated Certificate of Incorporation, as amended), in
which case the voting rights of such stock are governed by the appropriate
provisions of the Company's Restated Certificate of Incorporation.
Earnings per share ("EPS") for the three month periods ended March 31, 1998 and
1997 were calculated using the following share data. Reconciliation of the
numerators and denominators of the basic and diluted EPS calculation are as
follows:
<TABLE>
<CAPTION>
(In thousands)
Income Shares Per Share
For the Three Month Period Ended Numerator Denominator Amount
- -------------------------------- -------- ----------- ------
March 31, 1998
--------------
<S> <C> <C> <C>
Basic EPS
Income available to
common stockholders $ 619 18,479 $ 0.03
Effect of dilutive securities
Stock Options 220
Diluted EPS
Income available to common
stockholders $ 619 18,699 $ 0.03
</TABLE>
11
<PAGE> 12
Options to purchase shares of common stock which were outstanding as of March
31, 1998 but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares are as follows:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ---------------
<S> <C> <C> <C>
April 16, 1996 1,000 $13.1875 April 16, 2003
August 27, 1996 9,000 $13.50 August 27, 2003
September 22, 1997 200,000 $13.75 September 22, 2004
March 9, 1998 88,500 $13.125 March 9, 2005
<CAPTION>
For the Three Month Period Ended (In thousands)
- -------------------------------- Income Shares
March 31, 1997 Numerator Denominator Per Share Amount
- -------------- --------- ----------- ----------------
<S> <C> <C> <C>
Basic EPS
Income available to $ 4,517 18,385 $ 0.24
common stockholders
Effect of dilutive securities 209
Stock Options
Diluted EPS
Income available to $ 4,517 18,594 $ 0.24
common stockholders
</TABLE>
Options to purchase shares of common stock which were outstanding as of
March 31, 1997 but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares are as follows:
<TABLE>
<CAPTION>
Grant Date #of Shares Option Price Expiration Date
- ---------- ---------- ------------ ----------------
<S> <C> <C> <C>
April 16, 1996 1,000 $13.1875 April 16, 2003
April 30, 1996 5,000 $13.00 April 30, 2003
August 27, 1996 9,000 $13.50 August 27, 2003
February 4, 1997 273,500 $12.375 February 4, 2004
</TABLE>
(9) Contingent Liabilities :
----------------------
The Company and its subsidiaries are defendants in various lawsuits arising in
the ordinary course of business. In the opinion of management, any liability
with respect to these matters will not have a material adverse effect on the
Company's financial condition, cash flow or results of operations.
The Company has been cooperating with the U.S. Government in a criminal
investigation involving possible improprieties at an Army facility where a
division of the Company was a supplier. The Company has furnished documents and
other requested information and denies any wrongdoing. This investigation is
ongoing and could result in sanctions by the Government which could affect the
Company's ability to obtain future Government contracts.
See, also Note (4) with reference to discontinued businesses.
12
<PAGE> 13
(10) Restructuring and Refinancing Costs:
------------------------------------
In the fourth quarter of 1997, in light of limited market success for Interstate
Electronics' commercial products and the need for further product development
expenditures, the Company undertook a number of steps to evaluate Interstate
Electronics' products. The Company concluded that several classes of products
did not have a competitive market position or required additional product
development costs that could not be economically justified. As a result, the
Company decided to curtail certain classes of products. Specifically, the
Company decided to (1) stop the development and new sales activities of
GPS-based airport landing systems with the intent to reconsider the market at
the time that wide area or local area augmentation system standards are
promulgated; (2) cease manufacturing and further development of communication
modems and focus its communication business on providing service to Eastern
European military applications; (3) cease further Company-funded development of
a GPS avionic product for a specific commercial customer; and (4) limit
marketing efforts for the certified 9002 flight management system to military
customers.
As a result of these decisions, the Company incurred the expected 1998 first
quarter restructuring charge, representing primarily severance costs at
Interstate Electronics, of approximately $2.3 million. Further, the Company
expects to incur additional severance costs in the second quarter of 1998 of
approximately $0.3 million which will be charged to second quarter results.
(11) Extraordinary Item - Early Extinguishment of Debt:
--------------------------------------------------
In March 1998 the Company paid $3.3 million to extinguish $3.1 million of its
Senior Notes due October 1, 1999. The payment included $0.1 million premium for
the early retirement of the debt and $0.1 million of accrued interest.
Accordingly, the Company recorded an extraordinary after tax loss of $0.1
million on the premiums to extinguish $3.1 million of Senior Notes.
In April 1998, the Company repurchased an additional $45 million of it 9.875%
Senior Notes at a premium. The premium, along with premiums related to any
future second quarter debt repurchases, will be recorded as an extraordinary
loss in the Company's second quarter results.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION: Information contained in this Report includes
forward-looking statements, which can be identified by the use of
forward-looking terminology such as "believes," "may," "will," "expects,"
"intends," "plans," "anticipates," "estimates" or "continues" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy. The Company undertakes no obligation to revise these
forward-looking statements to reflect any future events or circumstances. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences are discussed under
the caption "Factors Affecting the Company's Prospects."
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS SUMMARY
- -----------------------------
(in thousands) First Qtr. First Qtr.
1998 1997 `98 vs `97
-------- -------- ----------
<S> <C> <C> <C>
Net Sales $ 64,861 $ 62,651 $ 2,210
Cost of Sales 46,711 43,187 3,524
-------- -------- --------
Gross Profit on Sales 18,150 19,464 (1,314)
% of Net Sales 28.0% 31.1%
Operating Expenses:
Selling, General and
Administrative 9,125 9,742 (617)
Research & Development 1,986 2,825 (839)
-------- -------- --------
Total Operating Expenses 11,111 12,567 (1,456)
-------- -------- --------
Operating Income 7,039 6,897 142
-------- -------- --------
% of Net Sales 10.9% 11.0%
Other Expense (Income):
Restructuring and
Refinancing Costs 2,491 131 2,360
Interest Expense 4,297 5,453 (1,156)
Interest Income (1,441) (1,115) (326)
Other, Net 531 724 (193)
-------- -------- --------
Income from Continuing
Operations before Income Tax
and Extraordinary Item 1,161 1,704 (543)
Income Tax 462 587 (125)
-------- -------- --------
Income from Continuing
Operations before
Extraordinary Item 699 1,117 (418)
Discontinued Operations, net
of tax -- 3,400 (3,400)
Extraordinary Item - (Loss)
on Extinguishment of Debt,
net of tax (80) -- (80)
-------- -------- --------
Net Income $ 619 $ 4,517 $ (3,898)
======== ======== ========
</TABLE>
14
<PAGE> 15
For the first three months of 1998, Net Sales increased $2.2 million, or 3.5%,
to $64.9 million from Net Sales of $62.7 million for the same period in 1997.
Net Sales increased at Scott by $6.2 million, and decreased at Interstate
Electronics by $4.0 million.
Gross Profit for the first quarter was lower by $1.3 million to $18.2 million
and represented 28.0% of Net Sales as compared to 31.1% in 1997.
Selling, General and Administrative expenses for the first quarter improved as a
percentage of Net Sales to 14.1% in 1998, compared to 15.5% in 1997. Lower
corporate expenses were responsible for the majority of the improvement.
Research and Development costs for the first quarter, as a percentage of Net
Sales, were 3.1% in 1998, compared to 4.5% in 1997. Lower first quarter 1998
Research and Development expenses at Interstate Electronics, reflecting fewer
classes of products as a result of the restructuring, were primarily responsible
for the decrease.
Operating Income for the first quarter amounted to $7.0 million in 1998, as
compared to Operating Income of $6.9 million in 1997.
Income taxes for continuing operations for the first quarters of 1998 and 1997
were $0.5 million and $0.6 million respectively. In 1997, Discontinued
Operations, net of tax, consists of the operating results of the Snorkel
division which was sold on November 17, 1997.
Income from Continuing Operations in the first quarter of 1998 decreased
compared to the corresponding period of 1997. The decrease was due principally
to the $2.3 million restructuring charge, which represented primarily severance
costs at IEC, partially offset by lower interest expense.
SEGMENT INFORMATION
The Company has operations in two reporting segments, Scott Aviation and
Interstate Electronics Corporation. The results of operations are most
meaningful when analyzed and discussed in this manner.
15
<PAGE> 16
SCOTT AVIATION
("Scott") is a leading manufacturer of life support respiratory products. Scott
consists of two principal business units: Health and Safety; and Aviation and
Government. The two units have benefited from several similarities. Scott has
used its broad experience and expertise in high pressure gas regulation and
distribution developed from the two product lines to provide end-users with
products that are light weight, compact in size and user friendly. Each unit has
also benefited from the common use of manufacturing cell and team technology. In
addition, Scott's uniform quality assurance program has allowed the units to
work jointly to comply with the rigorous quality requirements of the government,
regulatory agencies and customers.
Scott's Health and Safety unit manufactures the Scott Air-Pak* (a self-contained
breathing apparatus), air-purifying products, gas detection instruments and
other life support products for firefighting and personal protection against
environmental and safety hazards.
Scott's Aviation and Government unit manufactures protective breathing
equipment, pilot and crew oxygen masks, and emergency oxygen for passengers and
crew members on commercial, government and private aircraft and ships.
The results of operations for Scott were as follows:
<TABLE>
<CAPTION>
First Qtr. First Qtr.
RESULTS OF OPERATIONS SUMMARY 1998 1997 `98 vs `97
- ----------------------------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Net Sales $ 46,214 $ 39,958 $ 6,256
Cost of Sales 31,311 27,173 4,138
---------- ---------- ----------
Gross Profit on Sales 14,903 12,785 2,118
% of Net Sales 32.2% 32.0%
Operating Expenses:
Selling, General & Administration 3,904 3,644 260
Research & Development 891 1,178 (287)
---------- ---------- ----------
Total Operating Expenses 4,795 4,822 (27)
---------- ---------- ----------
Operating Income $ 10,108 $ 7,963 $ 2,145
---------- ---------- ----------
% of Net Sales 21.9% 19.9%
</TABLE>
Discussion of 1998 Compared to 1997:
- ------------------------------------
Net Sales for the first quarter of 1998 increased approximately 16% compared to
Net Sales for the first quarter 1997 due to increased shipments of oxygen
products to aviation/government customers of approximately $3.7 million, or 18%,
and increased shipments of products, principally Air-Paks, to health and safety
customers of approximately $2.6 million, or 13%. Sales to the U.S. Government
under a contract that was completed in February 1998 were approximately $3.1
million and $2.5 million for the first quarter of 1998 and 1997 respectively.
Gross Margin increased for the three months due to significant increased sales
volume in the major product lines.
Selling, General and Administrative expenses have increased in dollar amounts
due to significantly increased sales but are down as a percentage of Net Sales
when compared to the same period for 1997. Research and Development expenses in
1998 are slightly lower for the first quarter.
*Registered or common law trademarks and service marks of Figgie International
Inc. and its subsidiaries.
16
<PAGE> 17
INTERSTATE ELECTRONICS CORPORATION
("Interstate Electronics" or "IEC") provides a variety of high-technology
equipment. Since its founding in 1956, IEC has provided sophisticated test
instrumentation equipment to the U.S. Navy for use in the Polaris, Poseidon, and
Trident submarine missile programs ("Strategic Weapon Systems"). For these
programs and many others, both domestic and foreign, IEC provides telemetry,
data recording, and position measuring systems. IEC pioneered the use of the
Global Positioning System ("GPS") for tracking the Trident missile during test
firings. Currently, GPS systems are also being used in many other military
programs to provide highly accurate positioning and navigation information. IEC
also designs and manufactures a line of ruggedized flat-panel and CRT display
systems ("Displays"), and operates satellite-based communication systems for
military applications ("Communications").
As discussed on page 13, Note 10, the Company decided to curtail several classes
of products as part of a restructuring of IEC.
The results of operations for Interstate Electronics were as follows:
<TABLE>
<CAPTION>
First Qtr. First Qtr.
RESULTS OF OPERATIONS SUMMARY 1998 1997 `98 vs `97
- ----------------------------- --------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Net Sales $ 18,647 $ 22,693 $ (4,046)
Cost of Sales 15,400 16,014 (614)
--------- ---------- ---------
Gross Profit on Sales 3,247 6,679 (3,432)
% of Net Sales 17.4% 29.4%
Operating Expenses:
Selling, General & Administration 2,975 3,303 (328)
Research & Development 1,095 1,647 (552)
--------- ---------- ---------
Total Operating Expenses 4,070 4,950 (880)
--------- ---------- ----------
Operating Income $ (823) $ 1,729 $ (2,552)
-------- ---------- ---------
% of Net Sales (4.4%) 7.6%
</TABLE>
Discussion of 1998 Compared to 1997:
- ------------------------------------
Net Sales for the first quarter of 1998 declined approximately 18% compared to
Net Sales for the first quarter of 1997 due to decreases in: Strategic Weapons
Systems of approximately $0.5 million, or 5%; Displays of approximately $1.1
million, or 45%; GPS of approximately $1.4 million, or 22%; and Communications
of approximately $1.0 million, or 34%. IEC expects 1998 full-year sales of
approximately $83 million.
Gross Margin decreased for the first quarter due to reduced sales volume and
lower margin contracts which IEC is in the process of completing.
Selling, General and Administrative expenses are lower for the first quarter due
to reduced sales and higher costs incurred in 1997 to compete for orders and
contracts in the different product lines.
Research and Development costs are lower for the first quarter of 1998 due to
curtailed classes of products associated with the restructuring of IEC.
17
<PAGE> 18
CORPORATE AND UNALLOCATED COSTS AND EXPENSES
Corporate and unallocated costs and expenses were as follows:
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS SUMMARY
- ----------------------------- First Qtr. First Qtr.
(in thousands) 1998 1997 `98 vs `97
--------- --------- ----------
<S> <C> <C> <C>
Selling, General and Administrative $ 2,246 $ 2,795 $ (549)
Other Expenses:
Restructuring and Refinancing Costs 2,491 131 2,360
Interest Expense 4,297 5,453 (1,156)
Interest Income (1,441) (1,115) (326)
Other, Net 531 724 (193)
</TABLE>
Discussion of 1998 Compared to 1997:
- ------------------------------------
Selling, General and Administrative expenses decreased due to the continuing
benefit from prior years corporate cost savings initiatives.
Restructuring and refinancing costs, primarily for severance, of $2.3 million
were recorded in the first quarter of 1998 as part of the restructuring of IEC.
The Company expects to incur additional restructuring costs of approximately
$0.3 million in the second quarter of 1998.
Interest expense decreased for the first quarter of 1998 due to lower
outstanding debt and reduced interest expense on the discounted present value of
insurance reserves.
Interest income increased for the first quarter of 1998 due primarily to the
improvement in the Company's cash position.
FINANCIAL POSITION AND LIQUIDITY
At March 31, 1998 Cash and Cash Equivalents totaled $104.3 million, compared to
$104.2 million at December 31, 1997.
Net Cash provided by Operating Activities was $3.1 million reflecting net income
of $0.6 million, depreciation and amortization of $1.3 million and the net
change in other operating activities of $1.2 million.
Net Cash used by Investing Activities was $0.4 million, reflecting capital
expenditures and proceeds from the sale of real estate. Capital Expenditures for
Continuing Operations were $2.6 million in the first quarter of 1998 for
machinery, equipment, tooling and real estate development costs and are expected
to be approximately $7 million for all of 1998. Proceeds from the sale of real
estate during the first quarter 1998 were $2.2 million. Capital Expenditures
will be funded from internally generated funds and leases.
Net Cash used by Financing Activities was $2.7 million, which included $3.2
million for debt payments and $0.5 million in proceeds from the issuing of
common stock.
18
<PAGE> 19
Liquidity is provided by the Company's Cash and Cash Equivalents, which totaled
$104.3 million at March 31, 1998, and by the credit facility of which $58.3
million was available at March 31, 1998. In April 1998, the Company used cash to
reduce its debt by repurchasing $45 million of its 9.875% Senior Notes. The
repurchasing of the Senior Notes will result in lower interest expense, and to a
lesser extent, lower interest income in subsequent periods.
The Company expects to continue to focus on internal growth at its two segments;
investigate acquisitions for Scott; and consider alternative strategies that may
further enhance stockholder value.
The Company's cash balance at March 31, 1998 is available for general corporate
purposes. Those purposes include investment in the current operations of the
Company, payment of liabilities associated with previously divested businesses,
use as all or a portion of the purchase price of possible acquisitions,
additional repurchases of its 9.875% Senior Notes and opportunistic stock
repurchases.
19
<PAGE> 20
FACTORS AFFECTING THE COMPANY'S PROSPECTS
The prospects of the Company may be affected by a number of factors, including
the matters discussed below:
DEPENDENCE ON GOVERNMENT CONTRACTS - Sales to the U.S. Government
represented approximately 40% of the Company's total net sales in each of
the last three years; these sales represented approximately 90% and 10% of
Interstate's and Scott's sales, respectively. The Company expects to
continue to derive the majority of IEC's revenues, and a portion of Scott's
revenues, from Government contracts. Consequently, fluctuations in military
spending by the U.S. Government could adversely affect the Company's
revenues and profitability. In addition, since these contracts are the
result of competitive bidding processes, there can be no assurance that the
Company will be awarded future contracts, or that once awarded, the
Government will not terminate such contracts at its convenience. The
Company's results of operations would be adversely affected should the U.S.
Government not represent a substantial portion of its business. Finally,
the Company has been cooperating with the U.S. Government in a criminal
investigation involving possible improprieties at an Army facility where a
division of the Company was a supplier. The Company has furnished documents
and other requested information and denies any wrongdoing. The
investigation could result in sanctions by the Government which could
affect the Company's ability to obtain future Government contracts.
COMPETITION - The GPS and Displays markets are highly competitive, subject
to rapid change and significantly affected by new product introductions.
Competition may intensify, particularly as companies well established in
the defense industry increase their focus on GPS. Certain of these
companies have significantly greater financial, technical and marketing
resources. In addition, the development and commercialization of new types
of displays or position measuring systems could reduce the demand for the
Company's products. These competitive factors could adversely affect the
Company's financial condition, cash flow, results of operations or expected
benefits from its restructuring initiatives.
LEVERAGE - At March 31, 1998 the Company had outstanding indebtedness of
$158.8 million, shareholders' equity of $72.7 million, and cash of $104.3
million. The high level of cash represents the portion of the Snorkel sale
proceeds that have not yet been utilized for acquisitions or debt
reduction. For the first quarter of 1998, the Company had interest expense
of $4.3 million which resulted in an EBITDA to interest expense ratio of
approximately 1.5 times, compared to approximately 1.2 times for the 1997
year. In February 1998, the Company's Board authorized management to
opportunistically make repurchases of its 9 7/8% Notes and of up to one
million shares of stock in the open market from time to time. Debt
repurchases will decrease the amount of leverage and improve the EBITDA to
interest expense ratio. However, there can be no assurances the Company's
purchases of Notes will significantly reduce the amount of debt that the
Company will have to otherwise refinance on October 1, 1999. Stock
repurchases would increase the amount of leverage and worsen the interest
coverage ratio. The degree to which the Company is leveraged could: (i)
20
<PAGE> 21
impair the Company's ability to obtain future financing for acquisitions, a
refinancing, or other purposes; (ii) make it more vulnerable than some of
its competitors in a prolonged economic downturn; and (iii) restrict its
ability to exploit new business opportunities and limit its flexibility to
respond to changing business conditions.
DISCONTINUED OPERATIONS - Since January 1, 1994, the Company has sold
numerous businesses. The contract terms included representations,
warranties, and indemnification provisions made by the Company. Remedies
available for breaches of representations and warranties range from
monetary relief in specific amounts for specific breaches to unlimited
amounts.
The Company has generally retained liability for the conduct of the sold
businesses prior to the date of sale. As a result, the Company is subject
to various known and contingent liabilities, including indemnification
obligations, with respect to its discontinued operations. The Company has
established accruals and reserves for losses that may arise out of workers'
compensation, product liability and general liability claims, environmental
risks, tax matters and other matters. The Company believes that its
accruals and reserves are appropriate and adequate. However, as these
contractual matters may be subject to significant uncertainty and as
litigation is inherently unpredictable, no assurances can be given that
resolution will not have a material adverse effect upon the Company's
financial position, operating results or cash flows or require additional
reserves.
Further, at March 31, 1998, the Company's balance sheet reflected $28.6
million of deferred divestiture proceeds which is net of a reserve of $27.7
million. Deferred divestiture proceeds include management's best estimates
of the amounts expected to be realized after the resolution of the
underlying matters. The amounts the Company will ultimately realize could
differ materially from the amounts recorded.
STRATEGIC PLAN - The Company's strategic plan contemplates continued
development and marketing of new products, international expansion, and
future acquisitions.
The Company expects to continue to make investments in new product
development. There can be no assurance that the Company will be able to
develop and introduce, in a timely manner, new products or enhancements to
its existing products which satisfy customer needs or achieve market
acceptance. To the extent that the Company makes substantial marketing and
R&D investments and such investments do not lead to commercially successful
products, the Company's results of operations could be adversely affected.
Expansion into international markets will depend on numerous factors which
are beyond the Company's control, including its ability to develop or
acquire additional manufacturing and distribution capabilities outside the
United States. In addition, international expansion may increase the
Company's exposure to certain risks inherent in doing business outside the
United States, such as currency exchange rate fluctuations, compliance with
foreign codes and standards and political risks. If the Company
21
<PAGE> 22
pursues this strategy through acquisitions, strategic alliances or joint
ventures, any integration of the acquired businesses into the Company's
business would entail expense and management attention. If the Company
pursues this strategy through the establishment of new operations, it will
be subject to the difficulties inherent in starting a new business in
foreign jurisdictions. There can be no assurance that the business and
competitive environment in international markets will be as favorable to
the Company as is the U.S. market currently.
Part of the Company's strategy is to grow through acquisitions. There can
be no assurance, however, that the Company will identify attractive
acquisitions, that such acquisitions will be consummated, or that, if
consummated, any anticipated benefits will be realized from such
acquisitions. In addition, the availability of additional acquisition
financing cannot be assured and, depending on the terms of such additional
acquisitions, could be restricted by the terms of the Credit Facility.
Moreover, the process of integrating acquired operations into the Company's
existing operations may result in unforeseen operating difficulties and may
require significant financial resources that would otherwise be available
for the ongoing development or expansion of the Company's existing
operations. Future acquisitions by the Company would likely result in
amortization expense of goodwill which could have a material adverse effect
on the Company's financial condition and operating results.
YEAR 2000 ISSUE - The Company is in the process of identifying and
assessing whether its manufacturing equipment, business systems and
products could be affected by the Year 2000 Issue. The Year 2000 Issue
refers to a number of date-related problems that may affect software
applications, including codes imbedded in chips and other hardware devices.
These problems include software programs that identify a year by two digits
and not four so that a date using "00" would be recognized as the year
"1900" rather than the year "2000."
The Company plans to complete the assessment of the impact of the Year
2000, formalize its plan to resolve the issues and begin to implement the
plan by December 1998. At this time, the Company cannot assess the extent
to which it will be dependent upon third parties to identify or address
such issues and does not have an estimate of the cost of compliance. Any
failure by the Company to ensure that its computer systems are Year 2000
compliant could have a material adverse effect on the Company's operations.
Any failure of the Company's products to perform could result in claims
against the Company.
22
<PAGE> 23
PART II. OTHER INFORMATION
(1) Legal Proceedings
-----------------
The Company has been cooperating with the U.S. Government in a criminal
investigation involving possible improprieties at an Army facility where a
division of the Company was a supplier. The Company has furnished documents and
other requested information and denies any wrongdoing. This investigation is
ongoing and could result in sanctions by the Government which could affect the
Company's ability to obtain future Government contracts.
The Company is also involved in ordinary litigation incidental to its business.
Management does not believe that such litigation will have a material adverse
effect upon the Company.
(2) Exhibits and Reports on Form 8-K
--------------------------------
(a) List of Exhibits
10.0 Material Contracts
27.0 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter
Form 8-K dated December 31, 1997, filed January 6, 1998.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Figgie International Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIGGIE INTERNATIONAL INC.
By: /s/ William M. Goellner
------------------------------
William M. Goellner
(Duly Authorized and
Principal Accounting Officer)
Date: May 11, 1998
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Exhibits Page No.
- ------ ----------------------- --------
<S> <C> <C>
10.0 Material Contracts
(a) Arrangement dated March 31, 1998, by and between
Steven L. Siemborski and the Company. 26
27.0 Financial Data Schedule 27
</TABLE>
25
<PAGE> 26
MATERIAL CONTRACTS
Exhibit 10.0(a)
EXECUTIVE ARRANGEMENT
On March 31, 1998, the Stock Option Committee of the Board of Directors
approved an arrangement to implement the following changes with respect to the
stock options of Steven L. Siemborski (former Senior Vice President and Chief
Financial Officer), in exchange for Mr. Siemborski's agreement to assist the
Company in transition matters through March 31, 1999:
1. The 16,666 unvested options granted on February 4, 1997 at an option price
of $12.375 per share became fully vested.
2. The 23,000 unvested options granted March 9, 1998 at an option price of
$13.125 per share became fully vested.
3. The period of excercisability of the 25,000 1997 options and 23,000 1998
options is through March 31, 1999.
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 104,259
<SECURITIES> 0
<RECEIVABLES> 42,432
<ALLOWANCES> 474
<INVENTORY> 31,331
<CURRENT-ASSETS> 187,123
<PP&E> 96,204
<DEPRECIATION> 30,581
<TOTAL-ASSETS> 344,179
<CURRENT-LIABILITIES> 104,630
<BONDS> 113,292
0
0
<COMMON> 1,848
<OTHER-SE> 70,854
<TOTAL-LIABILITY-AND-EQUITY> 344,179
<SALES> 64,861
<TOTAL-REVENUES> 64,861
<CGS> 46,711
<TOTAL-COSTS> 57,822
<OTHER-EXPENSES> 3,022
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 2,856
<INCOME-PRETAX> 1,161
<INCOME-TAX> 462
<INCOME-CONTINUING> 699
<DISCONTINUED> 0
<EXTRAORDINARY> (80)
<CHANGES> 0
<NET-INCOME> 619
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
