<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED 12/31/97 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, MAYFIELD HEIGHTS, OHIO 44124
- ----------------------------------------------- -----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (440) 446-1333
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock, Par Value $.10 Per Share
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
Class B Common Stock, Par Value $.10 Per Share
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT. (THE AGGREGATE MARKET VALUE SHALL BE COMPUTED BY REFERENCE TO
THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED PRICES OF
SUCH STOCK, AS OF A SPECIFIED DATE WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.)
At February 10, 1998 - $209,203,100
- --------------------------------------------------------------------------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
Outstanding as of 2/10/98
Class A Common Stock, Par Value $.10 Per Share 13,760,096
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Class B Common Stock, Par Value $.10 Per Share 4,711,547
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE DOCUMENT
IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS; (2) ANY PROXY OR
INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424 (B) OR
(C) UNDER THE SECURITIES ACT OF 1933. (THE LISTED DOCUMENTS SHOULD BE CLEARLY
DESCRIBED FOR IDENTIFICATION PURPOSES.)
Proxy Statement Re: Annual Stockholders' Meeting to be held in 1998 (See Part
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III) Certain documents incorporated from prior filings (See Part IV)
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C>
PART I.....................................................................................................4
Item 1. BUSINESS...............................................................................4
Customers.........................................................................................5
Competition.......................................................................................5
Patents and Trademarks............................................................................5
Backlog of Orders.................................................................................5
Raw Materials.....................................................................................6
Effect of Environmental Compliance................................................................6
Employees.........................................................................................6
Research and Development..........................................................................6
Distribution......................................................................................6
Financial Information About the Company's Business Segments.......................................7
Executive Officers of the Company.................................................................8
Item 2. PROPERTIES..................................................................................8
Principal Facilities..............................................................................8
Item 3. LEGAL PROCEEDINGS...........................................................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 9
PART II...................................................................................................10
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...................................................................10
Item 6. SUMMARY OF SELECTED FINANCIAL DATA....................................................10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................................12
FORWARD-LOOKING INFORMATION......................................................................12
FINANCIAL SUMMARY................................................................................12
SCOTT AVIATION...................................................................................13
INTERSTATE ELECTRONICS CORPORATION...............................................................15
CORPORATE AND UNALLOCATED COSTS AND EXPENSES.....................................................17
DISCONTINUED OPERATIONS..........................................................................18
EXTRAORDINARY ITEM ..............................................................................19
FINANCIAL POSITION AND LIQUIDITY.................................................................19
FACTORS AFFECTING THE COMPANY'S PROSPECTS........................................................19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.........................................................23
CONSOLIDATED STATEMENTS OF OPERATIONS............................................................24
CONSOLIDATED BALANCE SHEETS......................................................................25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY..................................................27
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................29
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES............................................29
(2) RESTRUCTURING AND REFINANCING COSTS...................................................31
(3) DISCONTINUED OPERATIONS...............................................................32
(4) INCOME TAXES..........................................................................34
(5) INVENTORIES...........................................................................36
(6) RECEIVABLES...........................................................................36
(7) CREDIT FACILITY.......................................................................36
</TABLE>
2
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<TABLE>
<S> <C> <C>
(8) LONG-TERM DEBT........................................................................37
(9) LEASES................................................................................37
(10) CONTINGENT LIABILITIES................................................................38
(11) PENSION AND RETIREMENT BENEFITS PLANS.................................................38
(12) CAPITAL STOCK.........................................................................40
(13) STOCK OPTIONS.........................................................................41
(14) RESTRICTED STOCK PURCHASE PLANS.......................................................42
(15) EMPLOYEE STOCK BONUS PLAN.............................................................43
(16) EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT.....................................43
(17) INDUSTRY SEGMENT DATA.................................................................43
QUARTERLY FINANCIAL DATA (UNAUDITED).............................................................44
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................45
PART III..................................................................................................45
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................45
Item 11. EXECUTIVE COMPENSATION................................................................45
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................45
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................45
PART IV...................................................................................................46
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K...................................................................................46
VALUATION AND QUALIFYING ACCOUNTS................................................................50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.........................................................51
SIGNATURES................................................................................................52
EXHIBIT INDEX.............................................................................................53
SUBSIDIARIES OF THE COMPANY.........................................................................64
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS...........................................................65
</TABLE>
3
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Except as otherwise stated, the information contained in this Annual Report is
as of December 31, 1997.
PART I
------
Item 1. Business
- ------- --------
Figgie International Inc. (referred to, with its subsidiaries and divisions, and
their predecessor entities, unless the context otherwise requires, as the
"Company") is comprised of two reporting segments which operate primarily in
North America. The Company's strategy is to grow through new product
development, acquisitions and international expansion. The Company's segments
are described below:
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.
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").
In the fourth quarter of 1997, in light of limited market success for
Interstate's commercial products and the need for further product
development expenditures, the Company decided to curtail the following
classes of products and recorded a $7.6 million restructuring charge: GPS-
based airport landing systems, manufacture and development of commercial
communication modems, and development of GPS products for the commercial
avionics market. These products contributed less than $1.0 million in sales
in 1997.
*Registered or common law trademarks and service marks of Figgie International
Inc. and its subsidiaries.
4
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The Company's business is managed at the segment level. Financial, legal, real
estate and certain administrative functions are performed at the corporate
offices. The Company's real estate development activities, conducted through its
subsidiary, Figgie Properties, Inc., are reported as a corporate department.
During 1997, the Company concluded the sales of its discontinued businesses. For
further discussion of the Company's divestment of these operations, see "Item 7
- - Management's Discussion and Analysis of Financial Condition and
Results of Operations", included elsewhere herein.
Customers
- ---------
The U.S. Government accounted for 38.0%, 42.0% and 45.9% of the Company's total
net sales and 87.0%, 91.4% and 87.6% of the net sales of Interstate Electronics
for 1997, 1996 and 1995, respectively. No other single customer accounted for
more than 10% of the Company's net sales. Approximately 75% of Interstate's net
sales for 1998 are expected to come from U.S. government contracts. These net
sales are subject to the standard government contract clause that permits the
government to terminate such contracts at its convenience. In the event of such
termination, there are provisions to enable the Company to recover its costs
plus a fee. The Company does not anticipate the termination of any of its major
government contracts.
Competition
- -----------
Scott and Interstate Electronics are engaged in industries characterized by
substantial competition in the form of price, service, quality, and design. The
Company believes that in the United States, Scott is among the leading
manufacturers of protective breathing and emergency oxygen equipment.
Patents and Trademarks
- ----------------------
Scott owns and is licensed under a number of patents and trademarks that are
sufficient for its operations. Its business as a whole is not materially
dependent upon any one patent, trademark or license or technologically-related
group of patents or licenses. As to Interstate Electronics, the U.S. Government
holds most patents on GPS technology.
Backlog of Orders
- -----------------
As of December 31, 1997 and 1996, the Company had a backlog of orders as follows
(in millions):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interstate Electronics:
Under contract $ 10 $ 12
Under contract and funded 54 53
----- -----
64 65
Scott 54 53
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Total $ 118 $ 118
===== =====
</TABLE>
5
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On these dates such backlog amounts were believed to be firm. However,
realization of the backlog amounts depends on, among other things, government
funding and general economic and business conditions in 1998 that cannot be
predicted. Of the backlog, $10.2 million and $5.3 million at December 31, 1997
and 1996, respectively, are not expected to be completed within twelve months.
Raw Materials
- -------------
The Company believes that the principal raw materials and purchased component
parts for the manufacture of both segments' products are available from a number
of suppliers and are generally available in sufficient quantities to meet its
current requirements.
Effect of Environmental Compliance
- ----------------------------------
At the present time, compliance with federal, state, and local provisions with
respect to environmental protection and regulation has not had and is not
expected to have a material impact on the Company's capital expenditures,
earnings, operations, financial position or competitive position.
Employees
- ---------
As of December 31, 1997, the Company's workforce was comprised of 1,700
employees. Approximately 250 employees are covered by a collective bargaining
agreement expiring on November 12, 1999. The Company considers its overall
relations with its workforce to be satisfactory.
Research and Development
- ------------------------
The Company's research and development activities consisted principally of
further development of high-technology, defense-based products for commercial
applications at Interstate Electronics and, to a lesser extent, customary
product development activities at Scott. Research and development expenditures
were $12.7 million, $12.0 million and $11.1 million for 1997, 1996 and 1995,
respectively.
Distribution
- ------------
Scott's products and services are marketed and sold through Company salesmen,
independent distributors and dealers, manufacturers' agents and directly to
government agencies. Interstate Electronics' products and services are marketed
through direct sales, principally to the U.S. Government, and, to a lesser
extent, through independent distributors and representatives.
6
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Financial Information About the Company's Business Segments
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales to Unaffiliated Customers* and by Product Line:
Scott Aviation
Health and Safety Products $ 78,069 $ 70,783 $ 62,058
Aviation and Government Products 80,189 65,901 50,511
--------- --------- ---------
158,258 136,684 112,569
Interstate Electronics
Strategic Weapon Systems $ 43,006 $ 45,494 $ 50,914
Global Positioning Systems 27,873 26,099 28,205
Displays and Communications 19,465 18,944 19,146
--------- --------- ---------
90,344 90,537 98,265
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Total Sales to Unaffiliated Customers $ 248,602 $ 227,221 $ 210,834
========= ========= =========
Major Customer Sales*:
Scott Aviation $ 15,885 $ 12,591 $ 10,648
Interstate Electronics 78,638 82,752 86,121
--------- --------- ---------
Total Sales to U.S. Government $ 94,523 $ 95,343 $ 96,769
========= ========= =========
Export Sales - United States to*:
Canada $ 9,343 $ 8,584 $ 9,503
Asia 5,621 4,258 2,757
Europe 15,221 11,010 13,207
Other 4,323 4,232 4,124
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Total U.S. Export Sales $ 34,508 $ 28,084 $ 29,591
========= ========= =========
Operating Profit (Loss)*:
Scott Aviation $ 32,941 $ 26,914 $ 21,145
Interstate Electronics (1,374) 5,055 5,883
--------- --------- ---------
Total for Segments 31,567 31,969 27,028
Corporate and Unallocated Expenses (9,022) (14,019) (18,436)
--------- --------- ---------
Total Operating Profit $ 22,545 $ 17,950 $ 8,592
========= ========= =========
Identifiable Assets:
Scott Aviation $ 51,067 $ 48,787 $ 37,331
Interstate Electronics 46,822 58,395 52,813
Corporate 216,050 161,132 135,524
Discontinued Operations 29,324 90,738 124,142
--------- --------- ---------
Total Identifiable Assets $ 343,263 $ 359,052 $ 349,810
========= ========= =========
Capital Expenditures:
Scott Aviation $ 3,480 $ 2,202 $ 1,251
Interstate Electronics 973 2,518 1,113
Corporate 2,227 2,183 1,624
Discontinued Operations 1,993 3,376 21,356
--------- --------- ---------
Total Capital Expenditures $ 8,673 $ 10,279 $ 25,344
========= ========= =========
Depreciation and Amortization:
Scott Aviation $ 1,562 $ 1,597 $ 1,179
Interstate Electronics 2,278 1,737 1,616
Corporate 313 441 855
Discontinued Operations 2,716 3,378 2,644
--------- --------- ---------
Total Depreciation and Amortization $ 6,869 $ 7,153 $ 6,294
========= ========= =========
</TABLE>
* Excludes those operating units that are discontinued operations. See
"Item 7-Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
7
<PAGE> 8
Executive Officers of the Company
- ---------------------------------
As of March 10, 1998, the following executive officers of the Company serve in
the positions indicated:
GLEN W. LINDEMANN, President and Chief Executive Officer since September
22, 1997; President, Scott Aviation from June 15, 1989 to September 21,
1997; and a Director of the Company since November, 1996; age 58.
STEVEN L. SIEMBORSKI, Senior Vice President and Chief Financial Officer,
and a Director of the Company since July 1, 1994. Mr. Siemborski was
associated with the firm of Ernst & Young from 1976 to 1994, most
recently as a Partner in Ernst & Young's Special Services Group; age 43.
WILLIAM J. SICKMAN, Vice President - Corporate Relations since February
1, 1997; Director - Human Resources and Administration from September
1994 to January 1997; Manager - Manpower Development from March 1992 to
August 1994; Manager - Employee Relations from August 1988 to February
1992; age 45.
Item 2. Properties
- ------- ----------
The Company's principal manufacturing plants have approximately 637,000 square
feet of floor area for manufacturing, warehousing and administrative uses.
Approximately 624,000 square feet of this area is owned and the balance is
leased. Of the 376,000 square feet located in Anaheim, the Company plans to
market in 1998 for sale or lease one of its buildings containing approximately
130,000 square feet. The Company believes its facilities are suitable for its
purposes, having adequate productive capacity for present and anticipated needs.
Principal Facilities
--------------------
<TABLE>
<CAPTION>
Approx.
Floor Area
Reporting Segment Location (Sq. Feet)
----------------- -------- ----------
<S> <C> <C>
Interstate Electronics Anaheim, CA 376,000
Scott Aviation Monroe, NC 124,000
Lancaster, NY 112,000
South Haven, MI 25,000
</TABLE>
8
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Item 3. Legal Proceedings
- ------- -----------------
The Company executed a Settlement Agreement with plaintiffs in the lawsuit
captioned DENNIS TROY ALDERMAN, ET AL. V. THE GRAHAM COMPANIES, ET AL. filed in
1989 in the 11th Judicial Circuit Court, Dade County, Florida, Case Number
89-37617 CA(30), effective December 31, 1997. The case involved personal
injuries sustained by Mr. Alderman when he fell from a scaffold manufactured by
the Company through a previously discontinued business and became a
quadriplegic. Under the Settlement Agreement the Company paid the plaintiffs
twenty-two million dollars ($22,000,000) for complete resolution of all claims
made against the Company, and received from the plaintiffs a full general
release of all claims including claims for damages, fees and costs against the
Company, a hold harmless agreement as to any and all liens, and a
Confidentiality Agreement. The settlement resulted in a charge of $7.0 million
against the Company's 1997 fourth quarter results of discontinued operations. In
the second quarter of 1997, the Company increased its reserve for this case by
$10.0 million. The Company is in litigation with its insurance carriers who had
denied coverage.
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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The annual stockholders meeting was held on December 10, 1997. Holders on the
record date for the annual meeting of 13,738,930 shares of Class A Common Stock
(1/20th of a vote per share) and 4,712,684 shares of Class B Common Stock (1
vote per share) were entitled to cast 686,946 and 4,712,684 votes, respectively.
ELECTION OF DIRECTORS. The nominees for Director were elected pursuant to the
following vote:
<TABLE>
<CAPTION>
AUTHORITY
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Robert P. Collins 3,748,319 63,099
Steven L. Siemborski 3,750,613 60,804
</TABLE>
9
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PART II
-------
Item 5. Market for the Company's Common Stock and Related Stockholder
- ------- -------------------------------------------------------------
Matters
-------
The Company's Common Stock is traded on the over-the-counter market and quoted
in The Nasdaq National Market under the following symbols: Class A Common Stock
"FIGIA" and Class B Common Stock "FIGI".
The high and low sales prices recorded on The Nasdaq National Market for each
quarterly period during the years 1997 and 1996 are set forth below.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------- -----------------------------------------
Quarter Quarter
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Common:
Low $11.375 $11.625 $13.375 $12.875 $10.00 $13.00 $12.25 $10.00
High $12.75 $14.625 $15.00 $15.25 $13.625 $16.375 $15.75 $13.75
Class B Common:
Low $10.00 $10.50 $12.625 $11.50 $10.00 $12.25 $11.625 $9.125
High $11.875 $13.375 $14.812 $14.75 $12.875 $15.50 $14.625 $12.875
</TABLE>
As of February 10, 1998, there were 5,479 holders of Class A Common Stock and
4,499 holders of Class B Common Stock.
No dividends were paid in 1997 or 1996.
Item 6. Summary of Selected Financial Data
- ------- ----------------------------------
The following tables set forth selected consolidated financial data of the
Company for the five years ended December 31, 1997. This data has been derived
from the Company's audited consolidated financial statements. These tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company included elsewhere herein. The report of Arthur
Andersen LLP, independent auditors, covering the Company's consolidated
financial statements for the years ended December 31, 1997, 1996 and 1995, is
also included elsewhere herein.
Beginning in 1994 and concluding in 1997, the Company sold a number of its
business operations to reduce debt and concentrate on its technology-driven
manufacturing companies.
10
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<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Financial Data (in thousands)
- -----------------------------
Net Sales $ 248,602 $ 227,221 $ 210,834 $ 212,327 $ 213,679
Income (Loss) from
Continuing Operations
before Extraordinary Item
and Change in Accounting
Principle $ (1,382) $ 27,665 $ (24,693) $ (96,449) $ (74,618)
Income (Loss) from
Discontinued Operations (346) (4,365) 8,603 (70,281) (110,996)
Extraordinary Loss (778) - - - -
Cumulative Effect of Change
in Accounting Principle - - - - 5,839
------------ ------------ ------------ ------------ ------------
Net Income(Loss) $ (2,506) $ 23,300 $ (16,090) $ (166,730) $ (179,775)
============ ============ ============ ============ ============
Total Assets $ 343,263 $ 359,052 $ 349,810 $ 623,734 $ 907,048
Total Debt $ 162,034 $ 186,256 $ 214,328 $ 413,311 $ 539,737
Per Share Data - Basic EPS:
- ---------------------------
Income (Loss) from
Continuing Operations
before Extraordinary Item
and Change in Accounting
Principle $ (0.08) $ 1.51 $ (1.37) $ (4.90) $ (4.71)
Income (Loss) from
Discontinued Operations (0.02) (0.24) 0.48 (4.51) (5.73)
Extraordinary Loss (0.04) - - - -
Cumulative Effect of Change
in Accounting Principle - - - - .33
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ (0.14) $ 1.27 $ (0.89) $ (9.41) $ (10.11)
============ ============ ============ ============ ============
Per Share Data - Assuming Dilution:
- -----------------------------------
Income (Loss) from
Continuing Operations
before Extraordinary Item
and Change in Accounting
Principle $ (0.08) $ 1.47 $ (1.37) $ (4.90) $ (4.71)
Income (Loss) from
Discontinued Operations (0.02) (0.23) 0.48 (4.51) (5.73)
Extraordinary Loss (0.04) - - - -
Cumulative Effect of Change
in Accounting Principle - - - - 0.33
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ (0.14) $ 1.24 $ (0.89) $ (9.41) $ (10.11)
============ ============ ============ ============ ============
Cash Dividends Class A Shares - - - - $ 0.435
Class B Shares - - - - $ 0.435
</TABLE>
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<PAGE> 12
Item 7. 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".
FINANCIAL SUMMARY
- -----------------
Discussion of 1997 Compared to 1996
- -----------------------------------
Net sales increased 9.4% in 1997 to $248.6 million from $227.2 million in 1996
due to greater volume at Scott. Gross profit increased 8.4% in 1997 to $73.9
million from $68.2 million in 1996 as a result of higher sales and improved
margins at Scott. The operating profit improved by $4.6 million to $22.5 million
as a result of the improved gross profit. However, a restructuring charge with
respect to Interstate Electronics and higher interest expense, mitigated by the
increase in interest income, contributed to a pretax loss from continuing
operations of $1.4 million compared with a loss of $0.1 million in 1996.
In 1997, the Company also recorded a $0.3 million charge, net of tax, related to
discontinued operations and a $0.8 million charge, net of tax, related to the
early extinguishment of debt. The net loss for 1997 was $2.5 million or $0.14
per share, assuming dilution, compared to the net income of $23.3 million or
$1.24 per share, assuming dilution, in 1996.
Discussion of 1996 Compared to 1995
- -----------------------------------
Net sales increased 7.8% in 1996 to $227.2 million from $210.8 million in 1995.
Greater volume at Scott offset the reduction at Interstate Electronics. Gross
profit improved 8.9% in 1996 to $68.2 million from $62.6 million in 1995 as a
result of higher sales and improved margins. The operating profit improved by
$9.4 million to $17.9 million as a result of the improved gross profit and lower
SG&A expenses. Significant reductions of interest expense and refinancing costs
combined with the increase in operating income contributed to a pretax loss from
continuing operations of $0.1 million compared with the loss of $24.7 million in
1995.
Included in the 1996 results of continuing operations was an income tax benefit
of $27.7 million representing the recognition of tax loss carryforwards. The
Company also recorded a $4.4 million charge, net of related tax benefits of
$14.5 million, related to discontinued operations. The net income for 1996 was
$23.3 million or $1.24 per share, assuming dilution, compared to a loss of $16.1
million or $0.89 per share, assuming dilution, in 1995.
12
<PAGE> 13
Segment Information
- -------------------
The Company is comprised of two segments, Interstate Electronics and Scott
Aviation. The results of operations are most meaningful when analyzed and
discussed in this manner.
SCOTT
- -----
Financial Review
- ----------------
The annual results of operations were as follows:
<TABLE>
<CAPTION>
(in thousands)
97 vs 96 96 vs 95
1997 1996 CHANGE 1995 CHANGE
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $158,258 $136,684 $ 21,574 $112,569 $ 24,115
Cost of Sales 106,234 93,963 12,271 76,979 16,984
-------- -------- -------- -------- --------
Gross Profit on Sales 52,024 42,721 9,303 35,590 7,131
% of Sales 32.9% 31.3% 31.6%
Operating Expenses:
Selling, General and
Administrative 15,745 12,869 2,876 11,855 1,014
Research and Development 3,338 2,938 400 2,590 348
-------- -------- -------- -------- --------
Total Operating Expenses 19,083 15,807 3,276 14,445 1,362
-------- -------- -------- -------- --------
Operating Profit $ 32,941 $ 26,914 $ 6,027 $ 21,145 $ 5,769
% of Sales 20.8% 19.7% 18.8%
</TABLE>
Discussion of 1997 Compared to 1996
- -----------------------------------
Net Sales increased for the year due to increased shipments of oxygen products
to aviation and government customers of approximately 22%, and increased
shipments of Air-Paks to health and safety customers of approximately 13%. In
1997 and 1996, sales of $9.5 million and $10.9 million, respectively, were
represented by a multi-year contract with the U.S. Government for emergency
escape breathing devices; shipments under such contract ended in February 1998.
Gross Profit and Gross Margin increased for the year due to significant
increased sales volume.
Selling, General and Administrative expenses have increased in dollar amounts in
support of increased sales, but as a percentage of Net Sales are only slightly
higher when compared to 1996.
Research and Development expenses in 1997 are higher than in 1996 due to new
product development expenses incurred during the first half of 1997, primarily
for health and safety products.
13
<PAGE> 14
1997 Quarterly Results were as follows:
<TABLE>
<CAPTION>
(in thousands)
First Second Third Fourth Twelve
Quarter Quarter Quarter Quarter Months
1997 1997 1997 1997 1997
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $ 39,958 $ 40,709 $ 38,084 $ 39,507 $158,258
Cost of Sales 27,173 27,231 26,051 25,779* 106,234
-------- -------- -------- -------- --------
Gross Profit on Sales 12,785 13,478 12,033 13,728* 52,024
% of Sales 32.0% 33.1% 31.6% 34.7% 32.9%
Operating Expenses:
Selling, General and
Administrative 3,644 3,886 3,921 4,294 15,745
Research and Development 1,178 810 629 721 3,338
-------- -------- -------- -------- --------
Total Operating Expenses 4,822 4,696 4,550 5,015 19,083
-------- -------- -------- -------- --------
Operating Profit $ 7,963 $ 8,782 $ 7,483 $ 8,713 $ 32,941
% of Sales 19.9% 21.6% 19.6% 22.1% 20.8%
</TABLE>
* Includes $1.1 million of favorable pension, depreciation and warranty
experience adjustments.
Discussion of 1996 Compared to 1995
- -----------------------------------
Net Sales increased by 21% for the year due to the impact of emergency escape
breathing equipment sales to the U.S. Government of $10.9 million in 1996 and
$7.3 million in 1995, increased oxygen product sales to aviation customers and
increased breathing apparatus sales to health and safety customers.
Gross Margin was slightly lower for the year due to a shift in product mix
reflected by increased sales to government and aviation customers, as well as
the shipment of a large, lower margin order to a new customer in the third
quarter of 1996.
Selling, General and Administrative expenses increased for the year in support
of increased sales, but were lower as a percent of Net Sales when compared to
1995.
Research and Development expenses increased slightly for the year due to an
increase in new product development. Research and Development expenses in 1996
as a percentage of Net Sales were consistent with 1995.
14
<PAGE> 15
INTERSTATE ELECTRONICS CORPORATION
- ----------------------------------
Financial Review
- ----------------
The annual results of operations were as follows:
<TABLE>
<CAPTION>
(in thousands)
97 vs 96 96 vs 95
1997 1996 CHANGE 1995 CHANGE
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $ 90,344 $ 90,537 $ (193) $ 98,265 $ (7,728)
Cost of Sales 68,440 65,039 3,401 71,253 (6,214)
-------- -------- -------- -------- --------
Gross Profit on Sales 21,904 25,498 (3,594) 27,012 (1,514)
% of Sales 24.2% 28.2% 27.5%
Operating Expenses:
Selling, General and
Administrative 13,884 11,430 2,454 12,611 (1,181)
Research and Development 9,394 9,013 381 8,518 495
-------- -------- -------- -------- --------
Total Operating Expenses 23,278 20,443 2,835 21,129 (686)
-------- -------- -------- -------- --------
Operating Profit $ (1,374) $ 5,055 $ (6,429) $ 5,883 $ (828)
% of Sales (1.5%) 5.6% 6.0%
</TABLE>
Discussion of 1997 Compared to 1996
- -----------------------------------
Net Sales declined slightly for the year as an expected decrease in strategic
weapons systems of $2.5 million and a decrease in displays of $3.7 million were
offset by increases in military GPS of $1.8 million and satellite communications
systems of $4.2 million. IEC expects 1998 sales of approximately $85 million
reflecting continued decline in strategic weapon systems.
Gross Margin decreased due primarily to lower margins on military GPS contracts
and a $1.0 million write-off in the fourth quarter 1997 of the Company's costs
associated with the Next Generation Target Control System project which the U.S.
Government canceled in January 1998.
Selling, General and Administrative expenses are higher due to marketing,
selling and bidding costs to compete for orders and contracts in the different
product lines.
Research and Development costs are relatively constant from year to year.
See also the discussion on page 17 with respect to a restructuring charge
related to Interstate Electronics.
15
<PAGE> 16
1997 Quarterly Results were as follows:
<TABLE>
<CAPTION>
(in thousands)
First Second Third Fourth Twelve
Quarter Quarter Quarter Quarter Months
1997 1997 1997 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales $ 22,693 $ 22,060 $ 22,070 $ 23,521 $ 90,344
Cost of Sales 16,014 16,052 15,853 20,521* 68,440
-------- -------- -------- -------- --------
Gross Profit on Sales 6,679 6,008 6,217 3,000* 21,904
% of Sales 29.4% 27.2% 28.2% 12.8% 24.2%
Operating Expenses:
Selling, General and
Administrative 3,303 3,735 3,228 3,618 13,884
Research and Development 1,647 1,831 2,901 3,015 9,394
-------- -------- -------- -------- --------
Total Operating Expenses 4,950 5,566 6,129 6,633 23,278
-------- -------- -------- -------- --------
Operating Profit $ 1,729 $ 442 $ 88 $ (3,633) $ (1,374)
% of Sales 7.6% 2.0% 0.4% (15.4%) (1.5%)
</TABLE>
* Includes $1.0 million of unfavorable contract cancellation costs.
Discussion of 1996 Compared to 1995
- -----------------------------------
Net Sales declined for the year due to lower revenue from military GPS of $2.1
million and, as expected, from strategic weapon systems of $5.4 million.
Gross Margin increased for the year due to favorable overhead rates based on
year-to-date spending.
Selling, General and Administrative expenses were lower for the year due to cost
reduction activities but higher as a percentage of Net Sales because of fixed
costs unrelated to sales activities.
Research and Development was higher for the year and as a percentage of Net
Sales due to expenditures associated with the certification process for the
flight management system.
16
<PAGE> 17
CORPORATE AND UNALLOCATED COSTS AND EXPENSES
- --------------------------------------------
Financial Review
- ----------------
Corporate activity and unallocated costs and expenses were as follows:
<TABLE>
<CAPTION>
(in thousands)
97 vs 96 96 vs 95
1997 1996 CHANGE 1995 CHANGE
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Selling, General and
Administrative $ 9,022 $ 14,019 $ (4,997) $ 18,436 $ (4,417)
======= ======== ======== ======== ========
Other Expenses (Income):
Restructuring and
Refinancing Costs 8,147 993 7,154 11,855 (10,862)
Interest Expense 22,168 19,733 2,435 29,234 (9,501)
Interest Income (5,274) (2,096) 3,178 (3,230) (1,134)
Other, Net (1,114) (633) 481 (4,574) (3,941)
</TABLE>
Discussion of 1997 Compared to 1996
- -----------------------------------
Selling, General and Administrative expenses decreased significantly in 1997
compared to 1996 due to the continuing benefit from prior years corporate
cost-cutting initiatives.
The 1997 Restructuring and Refinancing Costs were comprised of: (1) $7.6 million
of restructuring costs; and (2) $0.5 million of amortization of prepaid
financing 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. When wide area or local area
augmentation system standards are promulgated, the Company may reconsider the
market; (2) cease manufacturing and further development of commercial
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 recorded a
restructuring charge of $7.6 million comprised of equipment and work-in-process
inventory write-offs of $7.2 million and the accrual of contractual liabilities
of $0.4 million. Further, the Company expects to incur severance costs in 1998
of approximately $2.5 million which will be charged to 1998 operations.
In 1996, Restructuring and Refinancing Costs represent the amortization of
prepaid financing costs. In 1995, Restructuring and Refinancing Costs consist of
fees to lenders and lessors, principally the 3 1/2% fee related to the August 1,
1994 refinancing of $487 million of debt and leases.
Interest expense increased due to interest on the discounted self-insurance
reserves. Interest income increased due to the improvement in the Company's cash
position, interest from Federal and foreign tax refunds, and interest on net
proceeds from the sale of the Snorkel division.
17
<PAGE> 18
1997 Quarterly Results were as follows:
<TABLE>
<CAPTION>
(in thousands)
First Second Third Fourth Twelve
Quarter Quarter Quarter Quarter Months
1997 1997 1997 1997 1997
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Selling, General and
Administrative $ 2,795 $ 1,599 $ 1,750 $ 2,878 $ 9,022
Other Expenses (Income):
Restructuring and
Refinancing Costs 131 131 131 7,754 8,147
Interest Expense 5,453 5,427 5,514 5,774 22,168
Interest Income (1,115) (977) (1,973) (1,209) (5,274)
Other, Net 724 650 707 (3,195)* (1,114)
</TABLE>
*Includes $3.0 million gain on the sale of the Company's former
headquarters facility.
Discussion of 1996 Compared to 1995
- -----------------------------------
Selling, General and Administrative expenses decreased in 1996 due to the
continuing benefit of the 1995 reduction of corporate staff, a decrease in
travel and other expenses associated with divestitures, numerous other
cost-cutting measures, and a favorable adjustment to pension expense.
Refinancing Costs are down significantly because the 1995 expenses were for
lender fees related to the Override Agreement which was paid-off at the end of
1995.
Interest Expense is down significantly due to significantly lower levels of bank
and mortgage debts outstanding.
DISCONTINUED OPERATIONS
- -----------------------
Income from operations of discontinued operations, net of tax in 1997 and 1996,
represents the operating results of the Company's Taylor Environmental division
from January 1, 1995 through its sale on November 25, 1996, and the operating
results of the Company's Snorkel division from January 1, 1995 through its sale
on November 17, 1997.
Loss on disposal of discontinued operations in 1997 of $7.3 million, net of tax
benefit, represents a $17.0 million provision to increase the Company's
self-insurance accrual to reflect the cost of the December 1997 settlement of a
specific personal injury lawsuit against a previously discontinued business, the
gain from the sale of the Company's Snorkel division of $23.6 million, a $9.2
million addition to the self-insurance accrual for discontinued businesses to
reflect general adverse experience on claims per a December 1997
actuarially-prepared valuation, a $6.5 million allowance against the carrying
value of deferred divestiture proceeds to reflect probable settlements of
ongoing disputes underlying prior divestitures, a $1.5 million loss provision
for litigation arising from a discontinued unit as a result of a December 1997
lawsuit, and $1.6 million of other adjustments.
Loss on disposal in 1996 represents a loss provision of $28.3 million, which is
net of a tax benefit of $15.2 million, recorded by the Company in the fourth
quarter of 1996. The provision reflects valuation adjustments to recorded assets
arising from and accruals for costs and probable losses on obligations related
to previously discontinued businesses. The loss consists of a $20.5 million
addition to the self-insurance accrual as a result of a December 1996
actuarially-prepared valuation of the liabilities to negotiate the sale of a
minority position to a third party; a $14.8 million write-down of carrying
18
<PAGE> 19
value of net assets related to discontinued operations and of deferred proceeds
to reflect fourth quarter negotiated resolutions of disputes and events that
gave rise to greater risk of realization; a $2.6 million reserve for litigation
arising from the businesses of the discontinued units and a $5.6 million accrual
to buy out certain employee benefit legacy obligations.
EXTRAORDINARY ITEM
- ------------------
In the fourth quarter of 1997, the Company prepaid the mortgage on its former
Willoughby, Ohio headquarters facility and purchased in the open market $15.7
million of its 9 7/8% Notes due in 1999. The premiums associated with these
early extinguishments of debt were $1.3 million and are presented, net of a tax
benefit of $0.5 million, as an extraordinary loss.
FINANCIAL POSITION AND LIQUIDITY
- --------------------------------
At December 31, 1997, Cash and Cash Equivalents totaled $104.2 million, an
increase of $59.8 million from December 31, 1996.
Net cash used by Operating Activities was $8.0 million reflecting a net loss of
$2.5 million, depreciation and amortization of $6.9 million and the net change
in other operating activities of $12.4 million.
Net cash provided by Investing Activities was $91.7 million, reflecting proceeds
from the sale of property, plant and equipment, and divested businesses.
Proceeds from business divestitures were primarily from the sale of the
Company's Snorkel division which occurred on November 17, 1997. Capital
Expenditures for Continuing Operations were $6.7 million for machinery,
equipment, tooling and real estate development costs.
Net cash used by Financing Activities was $23.9 million, principally payments on
debt.
Liquidity is provided by the Company's Cash and Cash Equivalents and by the $75
million credit facility of which $58.9 million was available at December 31,
1997 (See also Note 7 "Credit Facility" to the financial statements). On
February 25, 1998, the Company's Board of Directors authorized a stock buy back
program of up to 1,000,000 shares of the Company's Class A and Class B common
stock in the aggregate over the course of the year. In addition, the Company's
Board of Directors authorized management to opportunistically make repurchases
of the Company's 9 7/8% Notes.
The Company expects to continue to focus on internal growth at Scott and
Interstate; investigate acquisitions for Scott; make opportunistic debt and
stock reductions; and consider alternative strategies that may further enhance
stockholder value.
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
19
<PAGE> 20
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 December 31, 1997 the Company had outstanding indebtedness
of $162.0 million, shareholders' equity of $71.6 million, and cash of
$104.2 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 1997 year, the Company had interest expense of
$22.2 million which resulted in an EBITDA to interest expense ratio of
approximately 1.2 times. 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) 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
20
<PAGE> 21
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 December 31, 1997, the Company's balance sheet reflected $29.3
million of deferred divestiture proceeds which amount is net of a reserve
of $28.0 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 a substantial R&D
investment and such R&D investment does 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
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 affect on the Company's financial condition and operating
results.
21
<PAGE> 22
YEAR 2000 ISSUE - The Company has begun to identify and assess 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 devises. 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
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To the Board of Directors
and Stockholders
Figgie International Inc.
We have audited the accompanying consolidated balance sheets of Figgie
International Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Figgie International
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
February 23, 1998
23
<PAGE> 24
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Sales $ 248,602 $ 227,221 $ 210,834
Costs of Sales 174,674 159,002 148,232
--------- --------- ---------
Gross Profit on Sales 73,928 68,219 62,602
--------- --------- ---------
Operating Expenses:
Selling, General and Administrative 38,651 38,318 42,902
Research and Development 12,732 11,951 11,108
--------- --------- ---------
Total Operating Expenses 51,383 50,269 54,010
--------- --------- ---------
Operating Income 22,545 17,950 8,592
--------- --------- ---------
Other Expense (Income):
Restructuring and Refinancing Costs 8,147 993 11,855
Interest Expense 22,168 19,733 29,234
Interest Income (5,274) (2,096) (3,230)
Other, Net (1,114) (633) (4,574)
--------- --------- ---------
(Loss) from Continuing Operations (1,382) (47) (24,693)
before Income Tax Benefit and
Extraordinary Item
Income Tax Benefit - 27,712 -
--------- --------- ---------
Income (Loss) from Continuing Operations before
Extraordinary Item (1,382) 27,665 (24,693)
Discontinued Operations, net of tax:
Income from Operations 6,962 23,917 14,200
(Loss) on Disposal (7,308) (28,282) (5,597)
--------- --------- ---------
(346) (4,365) 8,603
Income (Loss) before Extraordinary Item (1,728) 23,300 (16,090)
Extraordinary Item - (Loss) on Extinguishment
of Debt, net of tax (778) - -
--------- --------- ---------
Net Income (Loss) $ (2,506) $ 23,300 $ (16,090)
========== ========= =========
Weighted Average Shares - Basic 18,411 18,371 17,987
Weighted Average Shares - Diluted 18,650 18,728 18,202
PER SHARE DATA - BASIC EPS:
Income (Loss) from Continuing Operations $ (0.08) $ 1.51 $ (1.37)
Income (Loss) from Discontinued Operations (0.02) (0.24) 0.48
--------- --------- ---------
Income (Loss) before Extraordinary Item (0.10) 1.27 (0.89)
Extraordinary (Loss) (0.04) - -
--------- --------- ---------
Net Income (Loss) $ (0.14) $ 1.27 $ (0.89)
========== ========= =========
PER SHARE DATA - ASSUMING DILUTION:
Income (Loss) from Continuing Operations $ (0.08) $ 1.47 $ (1.37)
Income (Loss) from Discontinued Operations (0.02) (0.23) 0.48
--------- --------- ---------
Income (Loss) before Extraordinary Item (0.10) 1.24 (0.89)
Extraordinary (Loss) (0.04) - -
--------- --------- ---------
Net Income (Loss) $ (0.14) $ 1.24 $ (0.89)
========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE> 25
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 104,243 $ 44,447
Trade Accounts Receivable, less Allowance for
Uncollectible Accounts of $394 in 1997 and
$151 in 1996 35,862 43,480
Inventories 30,049 32,903
Prepaid Expenses 885 826
Recoverable Income Taxes 4,120 7,689
Current Deferred Tax Asset 6,400 12,600
Net Assets Related to Discontinued Operations - 59,901
--------- ---------
Total Current Assets 181,559 201,846
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Land and Land Improvements 43,732 42,845
Buildings and Leasehold Improvements 24,103 28,828
Machinery and Equipment 28,793 40,608
--------- ---------
96,628 112,281
Accumulated Depreciation (29,275) (43,478)
--------- ---------
Net Property, Plant and Equipment 67,353 68,803
--------- ---------
OTHER ASSETS
Deferred Divestiture Proceeds and Other, Net 29,324 30,837
Prepaid Pension Costs 12,723 10,811
Prepaid Rent on Leased Equipment - 2,644
Intangible Assets 1,953 2,039
Cash Surrender Value of Insurance Policies 3,596 6,629
Prepaid Finance Costs 1,106 1,954
Deferred Tax Asset 44,060 30,595
Other 1,589 2,894
--------- ---------
Total Other Assets 94,351 88,403
--------- ---------
Total Assets $ 343,263 $ 359,052
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE> 26
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(in thousands, except par value)
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 19,515 $ 16,735
Accrued Insurance Reserves 12,033 12,174
Accrued Compensation 6,430 7,342
Accrued Interest 3,895 4,395
Accrued Environmental Reserves 3,217 3,348
Accrued Liabilities and Expenses 9,329 8,008
Current Maturities of Long-Term Debt 639 2,100
--------- ---------
Total Current Liabilities 55,058 54,102
Long-Term Debt 161,395 184,156
Non-Current Insurance Reserves 31,410 27,345
Other Non-Current Liabilities 23,804 18,888
--------- ---------
Total Liabilities 271,667 284,491
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 Par Value; Authorized, - -
3,217 Shares; Issued and Outstanding, None
Class A Common Stock, $.10 Par Value; 1,373 1,370
Authorized, 18,000 Shares; Issued and
Outstanding 1997 - 13,729; 1996 - 13,695
Class B Common Stock, $.10 Par Value; 471 471
Authorized, 18,000 Shares; Issued and
Outstanding 1997 - 4,707; 1996 - 4,708
Capital Surplus 109,871 109,538
Retained Deficit (40,018) (37,717)
Unearned Compensation (24) (74)
Cumulative Translation Adjustment (77) 973
--------- ---------
Total Stockholders' Equity 71,596 74,561
--------- ---------
Total Liabilities and Stockholders' Equity $ 343,263 $ 359,052
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 27
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Common Stock Capital Surplus Retained Cumulative
------------------------------------------ Earnings Unearned Translation
Class A Class B Class A Class B (Deficit) Compensation Adjustment Total
------- ------- ------- ------- --------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 1,370 $ 471 $102,342 $ 8,176 $ (43,198) $ (3,829) $ 511 $ 65,843
Net Loss (16,090) (16,090)
Minimum Pension Liability (720) (720)
Restricted Stock Purchase Plan, Net (5) 1 (1,434) (38) 2,489 1,013
Translation Adjustments 171 171
------- ------- -------- ------- --------- -------- ------- --------
BALANCE, DECEMBER 31, 1995 1,365 472 100,908 8,138 (60,008) (1,340) 682 50,217
Net Income 23,300 23,300
Minimum Pension Liability (1,009) (1,009)
Restricted Stock Purchase Plan, Net 5 (1) 607 (115) 1,266 1,762
Translation Adjustments 291 291
------- ------- -------- ------- --------- -------- ------- --------
BALANCE, DECEMBER 31, 1996 1,370 471 101,515 8,023 (37,717) (74) 973 74,561
Net (Loss) (2,506) (2,506)
Minimum Pension Liability 205 205
Restricted Stock Purchase Plan, Net 3 340 (7) 50 386
Translation Adjustments (1,050) (1,050)
------- ------- -------- ------- --------- -------- ------- --------
BALANCE, DECEMBER 31, 1997 $ 1,373 $ 471 $101,855 $ 8,016 $ (40,018) $ (24) $ (77) $ 71,596
======= ======= ======== ======= ========= ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 28
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
Operating Activities:
Income (Loss) from Continuing Operations $ (1,382) $ 27,665 $ (24,693)
Income (Loss) from Discontinued Operations (346) (4,365) 8,603
(Loss) from Extraordinary Item (778) - -
Adjustments to Reconcile Income (Loss) to Net Cash
Used by Operating Activities-
Depreciation and Amortization 6,869 7,153 6,294
Amortization of Unearned Compensation 50 973 952
Gain on the Sale of Snorkel (23,600)
Other, Net (5,320) (692) 1,740
Changes in Operating Assets and Liabilities
Accounts Receivable 3,271 (2,183) (1,802)
Inventories (4,452) (15,736) (15,800)
Prepaid Items (1,742) (1,138) 8,164
Other Assets 3,733 11,549 11,252
Accounts Payable 4,505 (1,799) (27,132)
Accrued Liabilities and Expenses (945) (3,731) 8,952
Accrued Income Taxes 3,724 (35,246) 3,176
Other Liabilities 8,395 12,414 (12,719)
--------- --------- ---------
Net Cash (Used) by Operating Activities (8,018) (5,136) (33,013)
---------- --------- ---------
Investing Activities:
Capital Expenditures for Continuing Operations (6,680) (6,903) (3,988)
Capital Expenditures for Discontinued Operations (1,993) (3,376) (21,356)
Proceeds from Sale of Property, Plant and Equipment 7,739 13,240 11,637
Proceeds from Business Divestitures 92,634 48,049 203,447
--------- --------- ---------
Net Cash Provided by Investing Activities 91,700 51,010 189,740
--------- --------- ---------
Financing Activities:
Proceeds from Debt - 200 3,963
Principal Payments on Debt (24,222) (28,272) (202,946)
Proceeds From Issuing Common Stock 721 839 198
Payments to Reacquire Common Stock (385) (50) (386)
--------- --------- ---------
Net Cash (Used) by Financing Activities (23,886) (27,283) (199,171)
--------- --------- ---------
Net Increase (Decrease)in Cash and Cash Equivalents 59,796 18,591 (42,444)
Cash and Cash Equivalents at Beginning of Year 44,447 25,856 68,300
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 104,243 $ 44,447 $ 25,856
========= ========= =========
Supplemental Disclosures:
Cash Paid (Received) during the Year for -
Net Interest Paid $ 13,705 $ 18,390 $ 32,565
Domestic Federal Income Taxes $ (1,704) $ (3,732) $ (15,671)
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 29
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies:
-------------------------------------------
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Figgie International Inc. (referred to, with all its consolidated
subsidiaries and divisions and their predecessor entities, unless the context
otherwise requires, as the "Company".) All intercompany account transactions
have been eliminated in consolidation.
NATURE OF OPERATIONS. The Company is a United States-based multinational
corporation operating in two segments: (1) life support respiratory products and
(2) sophisticated electronic systems. The largest single customer is the U.S.
Government, accounting for 38.0%, 42.0% and 45.9% of the Company's total net
sales for 1997, 1996 and 1995, respectively. The Company's products are marketed
through most normal channels of business, principally in North America.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from the estimates.
CASH AND CASH EQUIVALENTS. For purposes of the statements of cash flows, the
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents are stated at cost
which approximates their fair market value. The effect of foreign currency
translation on cash held by foreign divisions is immaterial.
LONG-TERM CONTRACTS. Government sales are principally under long-term contracts
and include cost-reimbursement and fixed-price contracts. Sales under
cost-reimbursement contracts are recognized as costs are incurred and include a
proportion of the fees expected to be realized equal to the ratio of costs
incurred to date to total estimated costs. Sales under fixed price contracts are
recognized as the actual cost of work performed relates to the estimate at
completion.
Cost or performance incentives, which are incorporated in certain contracts, are
recognized when realization is assured and amounts can be reasonably estimated.
Estimated amounts for contract changes and claims are included in contract sales
only when realization is probable. Assumptions used for recording sales and
earnings are adjusted in the period of change to reflect revisions in contract
value and estimated costs. In the period in which it is determined that a loss
will be incurred on a contract, the entire amount of the estimated loss is
charged to income.
29
<PAGE> 30
CONCENTRATION OF CREDIT RISK. The Company does not have any concentrations of
credit risk by major customer, geographic region or activity. The Company
generally does not require collateral.
INVENTORIES. Manufacturing inventories are stated at the lower of first-in-
first-out cost or market. Costs accumulated under government contracts are
stated at actual cost.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost
and depreciated over the estimated useful lives of the assets, generally by the
straight-line method. The principal rates of depreciation are: Buildings,
2-1/2%; Machinery and Equipment, 8-1/3%; Leasehold Improvements, life of lease.
LAND AND LAND IMPROVEMENTS. Land and land improvements includes $42.5 million
and $41.2 million at December 31, 1997 and 1996, respectively, of developed and
developable land and improvements. The recorded amounts are net of reserves of $
5.2 million and $ 5.3 million at December 31, 1997 and 1996, respectively. The
recorded amounts include the Company's investment in the Chagrin Highlands
project which amounted to $12.3 million and $11.3 million at December 31, 1997
and 1996, respectively.
INTANGIBLES. Goodwill of $3.5 million at December 31, 1997 and 1996 represents
costs in excess of net assets of purchased businesses, and is generally
amortized over a 40-year period. At December 31, 1997 and 1996, accumulated
goodwill amortization was $1.7 million and $1.6 million, respectively. The
Company has evaluated the realizability of goodwill based upon expectations of
undiscounted cash flows and operating income of the related business unit and
has concluded that no impairment exists.
CAPITALIZATION OF INTEREST. The Company capitalizes interest costs during the
development period of certain properties. Total interest capitalized was $0.5
million in 1997, $0.4 million in 1996 and $0.3 million in 1995.
ENVIRONMENTAL COMPLIANCE. At the present time, compliance with federal, state,
and local provisions with respect to environmental protection and regulation has
not had a material impact on the Company's capital expenditures, earnings, or
competitive position. The Company believes compliance with respect to
environmental matters will not have a material adverse effect on the Company's
financial position, future operations or cash flow.
INCOME TAXES. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled.
SELF-INSURANCE LIABILITIES. The Company is self-insured for certain levels of
general liability (including product liability) and workers' compensation
coverage. The costs and balance sheet accruals for self-insurance programs are
based on actuarial calculations prepared by outside actuaries. Adjustments to
recorded accruals of continuing operations are reflected in current operating
results. Adjustments to recorded accruals of discontinued operations are
reflected in the loss from discontinued operations.
30
<PAGE> 31
EARNINGS PER SHARE. Basic earnings per common share are based upon the weighted
average number of shares outstanding during each year. Diluted earnings per
common share are based upon the basic earnings per share adjusted for any
dilutive effect from the common stock equivalents of stock options.
STOCK OPTIONS. The Company accounts for stock options under APB Opinion No. 25,
under which no compensation cost has been recognized.
(2) Restructuring and Refinancing Costs:
------------------------------------
The 1997 Restructuring and Refinancing Costs were comprised of: (1) $7.6 million
of restructuring costs; and (2) $0.5 million of the amortization of prepaid
financing 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 and lines of business. The Company
concluded that several lines of business 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
lines of business. Specifically, the Company decided to (1) stop the development
and new sales activities of GPS based airport landing systems. When wide area or
local area augmentation system standards are promulgated, the Company may
reconsider the market; (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 recorded a restructuring charge of
$7.6 million comprised of equipment and work-in-process inventory write-offs of
$7.2 million and the accrual of contractual liabilities of $0.4 million.
Further, the Company expects to incur severance costs in 1998 of approximately
$2.5 million which will be charged to 1998 operations.
In 1996, Refinancing Costs represent the amortization of prepaid financing
costs. In 1995, Refinancing Costs consist of fees to lenders and lessors,
principally the 3 1/2% fee related to the August 1, 1994 refinancing of $487
million of debt and leases.
31
<PAGE> 32
(3) 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
sale generated a $23.6 million gain, which was recognized in the Company's
financial statements. The financial statements do not reflect the contingent
additional amount as an asset or as income. Snorkel had revenue of $138.9
million for the period January 1, 1997 to November 17, 1997. Prior year
financial statements have been restated to reflect Snorkel as a discontinued
business and are summarized as follow:
<TABLE>
<CAPTION>
(in thousands)
---------------------------------------------
As Previously
Reported Snorkel As Restated
-------- ------- -----------
<S> <C> <C> <C>
1996:
Net Sales $ 385,717 $(158,496) $ 227,221
========= ========= =========
Income (Loss) from
Continuing Operations 50,302 (22,637) 27,665
Income (Loss) from
Discontinued Operations (27,002) 22,637 (4,365)
--------- --------- ---------
Net Income $ 23,300 $ - $ 23,300
========= ========= =========
1995:
Net Sales $ 340,818 $(129,984) $ 210,834
========= ========= =========
(Loss) from
Continuing Operations (12,364) (12,329) (24,693)
Income (Loss) from
Discontinued Operations (3,726) 12,329 8,603
--------- --------- ---------
Net (Loss) $ (16,090) $ - $ (16,090)
========= ========= =========
</TABLE>
Snorkel and Prior Divestitures:
- -------------------------------
Income from the operation of the discontinued operations, net of tax in 1997 and
1996, represents the operating results of the Company's Taylor Environmental
division from January 1, 1995 through its sale on November 25, 1996, and the
operating results of the Company's Snorkel division from January 1, 1995 through
its sale on November 17, 1997.
Loss on disposal of discontinued operations in 1997 of $7.3 million, net of tax
benefit, represents a $17.0 million provision to increase the Company's
self-insurance accrual to reflect the cost of the December 1997 settlement of a
specific personal injury lawsuit against a previously discontinued business, the
gain from the sale of the Company's Snorkel division of $23.6 million, a $9.2
million addition to the self-insurance accrual for discontinued businesses to
reflect general adverse experience on claims per a December 1997
actuarially-prepared valuation, a $6.5 million allowance against the carrying
32
<PAGE> 33
value of deferred divestiture proceeds to reflect probable settlements of
ongoing disputes underlying prior divestitures, a $1.5 million loss provision
for litigation arising from a discontinued unit as a result of a December 1997
lawsuit, and $1.6 million of other adjustments.
Loss on disposal of discontinued operations in 1996 represents a loss provision
of $28.3 million, which is net of a tax benefit of $15.2 million, recorded by
the Company in the fourth quarter of 1996. The provision reflects valuation
adjustments to recorded assets arising from and accruals for costs and probable
losses on obligations related to previously discontinued businesses. The loss
consists of a $20.5 million addition to the self-insurance accrual as a result
of a December 1996 actuarially-prepared valuation of the liabilities to
negotiate the sale of a minority position to a third party; a $14.8 million
write-down of carrying value of net assets related to discontinued operations
and of deferred proceeds to reflect negotiated resolutions of disputes and
events that gave rise to greater risk of realization; a $2.6 million reserve for
litigation arising from the businesses of the discontinued units and a $5.6
million accrual to buy out certain employee benefit legacy obligations.
The $5.6 million loss on disposal in 1995 consisted of a $21.6 million loss on
the disposal of businesses, $4.0 million loss on operating losses of the
businesses prior to disposal in excess of the 1994 provision, and an income tax
benefit of $20.0 million.
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 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
33
<PAGE> 34
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 and sale of discontinued operations.
The amounts the Company will ultimately realize could differ materially from the
amounts recorded. The Company has established a reserve of $28.0 million at
December 31, 1997 and $21.7 million at December 31, 1996 against these assets,
which is presented as a deduction from deferred divestiture proceeds.
(4) Income Taxes:
-------------
Income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
(in thousands)
Continuing Operations: 1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Currently Payable:
Federal $ (470) $ 25,384 $ -
Effect of Net Operating Loss and
Valuation Allowance 470 (25,384) -
-------- -------- --------
0 0 0
Deferred and other:
Federal (1,408) (17,149) -
Effect of Net Operating Loss and
Valuation Allowance 1,408 (10,563) -
-------- -------- --------
Total from Continuing Operations 0 (27,712) 0
Discontinued Operations:
Operations 4,857 690 -
Disposal (4,873) (15,228) (20,009)
-------- -------- --------
Total from Discontinued Operations (16) (14,538) (20,009)
Extraordinary Item (519) - -
-------- -------- --------
Total Tax(Benefit) $ (535) $(42,250) $(20,009)
======== ======== ========
</TABLE>
A reconciliation of the actual tax provision (benefit) to the U.S. federal
income tax rate effective for each year for continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Statutory Federal Tax Rate (35.0)% 35.0% (35.0)%
International Rate Differential (33.1) - -
Goodwill - 2.5 4.6
Other net 5.6 1.9 2.3
Effect of Net Operating Loss and
Valuation Allowance 62.5 (161.8) 28.1
----- ----- -----
Effective Tax Rate (Benefit) 0% (122.4)% 0%
===== ===== =====
</TABLE>
34
<PAGE> 35
The components of the net deferred tax asset as of December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
(in thousands)
1997 1996
-------- ------
<S> <C> <C>
Deferred Tax Assets:
Deferred Compensation Plans $ 2,441 $ 4,525
Insurance and Other Reserves 15,399 15,780
Contingency Reserves 3,436 2,200
Inventory Reserves 532 596
Operating & Capital Losses and
Tax Credit Carryforwards 66,069 77,800
Discontinued Operations and Other 2,443 2,002
Valuation Allowance (16,029) (13,825)
-------- --------
Total Deferred Tax Assets $ 74,291 $ 89,078
-------- --------
Deferred Tax Liabilities:
Property, Plant and Equipment $(14,871) $(19,156)
Benefit Plans (4,590) (3,104)
Discontinued Operations and Other (4,370) (23,623)
-------- --------
Total Deferred Tax Liabilities $(23,831) $(45,883)
-------- --------
Net Deferred Tax Assets $ 50,460 $ 43,195
======== ========
</TABLE>
As of December 31, 1997, for tax reporting purposes, the Company has tax credit
carryforwards of $21.7 million, and operating loss and charitable contribution
deduction carryforwards of $87.4 million ($30.5 million tax) which will begin to
expire in 2005 through 2008, respectively. The Company recorded these assets in
1996 based on the profitability of the continuing divisions. Management has
determined that income will more likely than not be sufficient to recognize
fully all deferred tax assets.
In addition, the Company has capital loss carryforwards of $39.5 million ($13.8
million tax) which were incurred in 1996. At the present time, the Company has
reserved the future tax benefit of these loss carryforwards until a time when it
believes they can be realized.
Realization of tax carryforwards is dependent on future taxable income and
amounts realized are subject to tax regulations which include limitations by
year and type of tax attribute being carried forward. The Company has similar
carryforward attributes for federal alternative minimum tax purposes and for
state income tax purposes.
Accumulated unremitted foreign earnings are not material and any liability
related to the remittance of foreign earnings would not be material to the
financial statements.
As of December 31, 1997, the Company had recoverable income taxes on the balance
sheet of $4.1 million. Of this amount $2.0 million represents a refund from
Inland Revenue in the United Kingdom, which was received in January 1998, and
$2.1 million represents a refund from an Internal Revenue Service audit for the
Company's 1991-1993 tax years, of which $0.7 million was received in January
1998 and the balance is expected in March 1998.
35
<PAGE> 36
(5) Inventories:
------------
Inventories are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 8,515 $ 7,867
Work in process 8,489 14,336
Finished goods 14,594 11,812
Inventory reserves (1,549) (1,112)
-------- --------
Total Inventories $ 30,049 $ 32,903
======== ========
</TABLE>
(6) Receivables:
------------
Receivables consist of the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- -------
<S> <C> <C>
U.S. Government
Billed $ 13,802 $ 12,687
Unbilled 8,309 14,920
-------- --------
22,111 27,607
Commercial
Billed 14,145 16,024
Allowance for Uncollectible Accounts (394) (151)
-------- --------
$ 35,862 $ 43,480
======== ========
</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. During 1997, the U.S. Government
concluded their audit with respect to 1991 costs. Years 1992 and 1993 are
currently under audit.
(7) Credit Facility:
---------------
As of December 31, 1997, 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 Credit
Agreement was amended effective December 31, 1997, which, among other
provisions, replaced all financial covenants, except limitations on capital
expenditures, by a financial covenant specifying a maximum leverage ratio. The
financial covenant related to limitations on capital expenditures was increased.
The facility expires on January 1, 1999.
36
<PAGE> 37
As of December 31, 1997, $16.1 million of letters of credit were outstanding
under the facility, there were no borrowings outstanding ($58.9 million was
available) and all financial covenants have been satisfied.
(8) Long-Term Debt:
---------------
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
1997 1996
------------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
9.875% Senior Notes $ 158,270 $ 164,600 $ 174,000 $ 180,960
Mortgage Notes 3,580 3,580 11,076 11,076
Obligations under Capital Lease 184 184 1,180 1,180
--------- --------- --------- ---------
Total 162,034 $ 168,364 186,256 $ 193,216
========= =========
Less - Current Maturities (639) (2,100)
--------- ---------
Long-Term Debt $ 161,395 $ 184,156
========== =========
</TABLE>
The 9.875% Senior Notes are due October 1, 1999. Interest is payable
semi-annually on April 1 and October 1. During the fourth quarter of 1997, the
Company purchased in the market $15.7 million of Senior Notes at market prices.
These Senior Notes have been returned to the Indenture Trustee for retirement.
Mortgage notes are secured by real property, are due at various dates through
2009 and bear interest at rates ranging from 7.5% to 10.52%.
The fair value estimates were made as follows: the Senior Notes were based on
the market price at which the debt traded near year-end; and the mortgages were
based on carrying value given their collateralized nature.
The scheduled principal payments for long-term debt are as follows: 1998 - $0.6
million; 1999 - $ 158.5 million; 2000 - $0.3 million; 2001 - $0.3 million; and
2002 and after - $ 2.3 million.
(9) Leases:
-------
The Company leases manufacturing equipment under operating leases. Operating
lease expense for continuing operations was approximately $4.7 million, $3.9
million, and $4.1 million in 1997, 1996, and 1995, respectively. Rental
commitments under non-cancelable operating leases as of December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
(in thousands)
Discontinued Continuing
Operations Operations Total
---------- ---------- -----
<S> <C> <C> <C>
Year Ending December 31,
1998 $ 375 $ 4,957 $ 5,332
1999 133 3,222 3,355
2000 0 1,279 1,279
2001 0 118 118
2002 & Beyond 0 298 298
--------- -------- ---------
Total minimum payments required $ 508 $ 9,874 $ 10,382
========= ======== =========
</TABLE>
37
<PAGE> 38
At the termination of two equipment leases in June 1999, the Company is
effectively required to purchase the equipment for a fixed price of
approximately 35% of the original lease value. As a result of these provisions
and the anticipated need for continued use of the equipment in the Company's
operations, the Company currently expects to purchase this equipment. The
purchase price would be approximately $4.6 million.
Future minimum lease payments under capital leases and their present value as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, (in thousands)
<S> <C>
1998 $ 215
Less amount representing interest (31)
-------
Present value of net minimum lease payments $ 184
=======
</TABLE>
(10) 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 (3) with reference to discontinued businesses.
(11) Pension and Retirement Benefits Plans:
--------------------------------------
The Company has pension plans covering the majority of its employees. The plan
benefits for salaried employees are based on employees' earnings during their
years of participation in the plan. Hourly employees' plan benefits are based on
various dollar units multiplied by the number of years of eligible service as
defined in each plan. The Company's policy has been to fund amounts as necessary
on an actuarial basis to comply with the Employee Retirement Income Security Act
of 1974. In addition, the Company has a nonqualified supplemental retirement
plan covering certain officers and senior executives.
38
<PAGE> 39
The components of net periodic pension expense and the actuarial assumptions
used in accounting for the benefit plans for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,774 $ 2,054 $ 2,558
Interest cost on projected
benefit obligation 5,827 5,385 5,408
Actual (gain) on plan assets (13,173) (8,880) (10,866)
Net amortization and deferral of
actuarial gains 6,444 2,716 5,811
FAS 88 curtailment during the year 127 0 0
------- ------- -------
$ 999 $ 1,275 $ 2,911
======= ======= =======
Assumptions:
Weighted average discount rates 7.50% 7.50% 7.50%
Rate of increase in compensation
levels 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 10.00% 10.00% 10.00%
</TABLE>
The funded status of the Company's domestic and international plans, along with
the reconciliation to amounts reported in the consolidated balance sheets, were
as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
(in thousands) Benefits Assets Benefits Assets
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial Present Value of
Benefit Obligations:
Accumulated
benefit obligations $ 67,273 $ 15,086 $ 58,387 $ 15,109
======== ========= ======== ========
Vested benefit obligations $ 64,542 $ 14,894 $ 56,034 $ 14,809
======== ========= ======== ========
Plan assets at fair value 78,035 0 66,209 0
Projected benefit obligations (69,425) (15,342) (59,686) (15,180)
-------- -------- -------- --------
Assets over (under) projected
benefit obligation 8,610 (15,342) 6,523 (15,180)
Unrecognized net (assets) (3,192) 0 (3,761) 0
Unrecognized net loss 6,632 3,349 7,605 3,479
Unrecognized prior service cost 673 0 444 0
Adjustment required to
recognize minimum liability 0 (3,093) 0 (3,408)
-------- -------- -------- --------
Prepaid pension cost asset
(liability) $ 12,723 $(15,086) $ 10,811 $(15,109)
======== ======== ======== ========
</TABLE>
The plans' assets consist primarily of listed common stocks, corporate and
government bonds, real estate investments, and cash and cash equivalents. The
plans' assets included 27,621 shares of the Company's Class B Common Stock as of
December 31, 1997 and 1996, respectively.
39
<PAGE> 40
(12) Capital Stock:
-------------
Each share of Class A Common Stock is entitled to one-twentieth of one vote per
share, while each share of the 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") were calculated using the following share data.
Reconciliation of the numerators and denominators of the basic and diluted EPS
calculations:
For the Year Ended December 31, 1997
- ------------------------------------
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
(Loss) available to common
stockholders $ (2,506) 18,411 $(0.14)
Effect of Dilutive Securities
Stock Options 239
Diluted EPS
(Loss) available to common
stockholders and assumed
conversions $ (2,506) 18,650 $(0.14)
</TABLE>
Options to purchase shares of common stock which were outstanding as of
December 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
August 27, 1996 9,000 $13.50 August 27, 2003
September 22, 1997 200,000 $13.75 September 22, 2004
</TABLE>
For the Year Ended December 31, 1996
- ------------------------------------
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders $23,300 18,371 $1.27
Effect of Dilutive Securities
Stock Options 357
Diluted EPS
Income available to common
stockholders and assumed
conversions $23,300 18,728 $1.24
</TABLE>
40
<PAGE> 41
Options to purchase shares of common stock which were outstanding as of
December 31, 1996, 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>
August 27, 1996 9,000 $13.50 August 27, 2003
</TABLE>
For the Year Ended December 31, 1995
- ------------------------------------
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
(Loss) available to common
stockholders $(16,090) 17,987 $(0.89)
Effect of Dilutive Securities
Stock Options 215
Diluted EPS
(Loss) available to common
stockholders and assumed
conversions $(16,090) 18,202 $(0.89)
</TABLE>
Options to purchase shares of common stock which were outstanding as of
December 31, 1995, 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>
July 18, 1995 72,000 $10.00 July 18, 2002
</TABLE>
(13) Stock Options:
--------------
The Figgie International Inc. Key Employees' Stock Option Plan ("The Stock
Option Plan") was approved by stockholders on October 19, 1994. The Company
accounts for this plan under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for stock options been
determined consistent with FASB Statement No. 123, the Company's operating
results would have been calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- -------
<S> <C> <C> <C>
Net Income (Loss):
As Reported $(2,506) $ 23,300 $(16,090)
Pro Forma $(3,322) $ 22,600 $(16,486)
Primary EPS:
As Reported $(0.14) $1.27 $(0.89)
Pro Forma $(0.18) $1.23 $(0.92)
Fully Diluted EPS:
As Reported $(0.14) $1.24 $(0.89)
Pro Forma $(0.18) $1.21 $(0.92)
</TABLE>
The Company may grant options for up to 1,500,000 shares. The stock option plan
allows for grants below the stock's market price, however, option exercise
prices typically equal the stock's market price on the date of grant. Options
generally vest after three years and expire after seven years.
41
<PAGE> 42
A summary of the status of the Stock Option Plan at December 31, 1997 and 1996
and changes during the years then ended is presented in the table and narrative
below:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------- ---------
Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, Beg of year 889.4 $ 7.92 769.5 $ 7.12
Granted 523.0 12.07 237.5 11.26
Exercised (81.2) 5.45 (23.8) 7.63
Forfeited (237.4) 8.86 (93.8) 9.86
Canceled (92.5) 7.38 (0.0) 0.00
----- -----
Outstanding, End of year 1,001.3 $ 10.12 889.4 $ 7.92
Exercisable at end of year 482.6 $ 7.65 292.6 $ 7.06
Weighted average fair value
of options granted $ 7.19 $ 5.77
</TABLE>
Of the 1,001,267 options outstanding at December 31, 1997, 569,100 have exercise
prices between $6.50 and $11.63, with a weighted average exercise price of $7.90
and a weighted average remaining contractual life of 4.3 years. 462,611 of these
options are exercisable. The remaining 432,167 options have exercise prices
between $11.88 and $13.75, with a weighted average price of $13.04 and a
weighted average remaining contractual life of 6.7 years. 20,001 of these
options are exercisable.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the five option grants in 1997: risk-free interest rates of
6.23 percent, no expected dividend yield, expected life of 7.0 years, expected
volatility of 39.90 percent.
(14) Restricted Stock Purchase Plans:
--------------------------------
Under the 1993 Restricted Stock Purchase Plan for Employees ("Employee Plan"),
up to 800,000 shares of Common Stock were authorized for issuance. On December
4, 1996, the Board decided to terminate the Employee Plan, effective January 2,
1997, and all restrictions on outstanding shares lapsed. Accordingly, the
Company wrote-off in 1996 all unearned compensation with respect to this plan.
Under the 1993 Restricted Stock Purchase Plan for Directors ("Director Plan"),
up to 75,000 shares of Class B Common Stock are authorized for possible issuance
and certain directors of the Company have been granted the right to purchase
shares of Class B Common Stock at prices substantially below market value. In
general, restrictions under the Director Plan lapse on July 1, 1998. At December
31, 1997, 15,000 shares of Class B Common Stock, were outstanding under the
Director Plan.
The original excess of market price over purchase price at date of grant for the
Director Plan, $0.6 million, was deferred as Unearned Compensation and is being
amortized as compensation expense over the restricted period.
42
<PAGE> 43
Unamortized amounts (unearned compensation) are shown as a reduction of
stockholders' equity. The following amounts were amortized to expense:
<TABLE>
<CAPTION>
(in thousands)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Employee Plan $ - $ 904 $ 862
Director Plan 50 69 90
------ ------ ------
Total $ 50 $ 973 $ 952
====== ====== ======
</TABLE>
In 1996, the Company loaned to an executive officer and director, $430,000 with
interest at the applicable federal rate in lieu of the officer and director
selling stock and using the proceeds to repay a loan he incurred in order to pay
federal income taxes resulting from his purchase of 75,000 shares of Common
Stock pursuant to his employment contract issued through the Employee Plan. In
1997, the Company paid the executive a bonus in an amount equal to the accrued
interest, grossed-up for applicable taxes, and the executive officer and
director repaid the principal in full with interest.
(15) Employee Stock Bonus Plan:
--------------------------
Under the Stock Bonus Trust and Plan, shares of the Company's Class B Common
Stock are allocated to eligible employee accounts each December 31 based on
salary. The Company did not make contributions to this plan in 1997, 1996, or
1995. The Stock Plan held 631,577 and 269,074 shares of the Company's Class B
Common Stock as of December 31, 1997 and 1996, respectively.
(16) Extraordinary Item - Early Extinguishment of Debt:
--------------------------------------------------
On October 9, 1997, the Company prepaid the mortgage on its Willoughby, Ohio
headquarters. The cash payment of $7.2 million included a $0.6 million yield
maintenance premium to retire the debt before its maturity date of February 1,
2005. Also, in December 1997, the Company paid $16.4 million to extinguish $15.7
million of its Senior Notes due October 1, 1999. The payment included a $0.7
million premium for the early retirement of the debt. Accordingly, the Company
recorded an extraordinary after tax loss of $0.8 million on the premiums to
pay-off the headquarter mortgage and the extinguishment of $15.7 million of
senior notes.
(17) Industry Segment Data:
----------------------
The Company's operations are conducted through two business segments. These
segments are described in Part I, Item 1 on page 4 of this Form 10-K.
Page 7 contains a summary of certain financial data for each business segment
for 1997, 1996 and 1995. Information concerning the content of this financial
data is as follows: Intersegment and foreign sales are immaterial. Operating
profit is total revenue less operating expenses (cost of sales, SG&A expense and
R&D expense). Operating profit does not include restructuring and refinancing
costs, interest expense, interest income, or federal and state income taxes.
Identifiable assets are those assets used in the Company's operation for each
segment. Corporate assets are principally cash and cash equivalents, property
and other assets.
43
<PAGE> 44
QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
This information is required by the Securities and Exchange Commission and is
unaudited.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands except for per share data)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
- -----
Net sales $ 62,651 $ 62,769 $ 60,154 $ 63,028
Gross profit 19,464 19,486 18,250 16,728
Net income (loss):
Continuing operations 1,117 1,587 972 (5,058)
Discontinued operations 3,400 (2,992) 1,252 (2,006)
Extraordinary Loss - - - (778)
-------- -------- -------- --------
Net income (loss) $ 4,517 $ (1,405) $ 2,224 $ (7,842)
======== ======== ======== ========
Per Share Data - Basic EPS:
Continuing operations $ 0.06 $ 0.09 $ 0.05 $(0.27)
Discontinued operations 0.19 (0.16) 0.07 (0.11)
Extraordinary Loss - - - (0.04)
-------- -------- -------- --------
Net income (loss) $ 0.25 $ (0.07) $ 0.12 $ (0.42)
======== ======== ======== =======
Per Share Data - Assuming Dilution:
Continuing operations $ 0.06 $ 0.09 $ 0.05 $(0.27)
Discontinued operations 0.18 (0.16) 0.07 (0.11)
Extraordinary Loss - - - (0.04)
-------- -------- -------- --------
Net income (loss) $ 0.24 $ (0.07) $ 0.12 $ (0.42)
======== ======== ======== =======
- -------------------------------------------------------------------------------------------------------------------
1996:
- -----
Net sales $ 55,388 $ 56,429 $ 57,611 $ 57,793
Gross profit 16,787 16,955 17,396 17,081
Net income (loss):
Continuing operations (1,491) (1,147) 90 30,213
Discontinued operations 5,697 7,566 6,538 (24,166)
-------- -------- -------- --------
Net income $ 4,206 $ 6,419 $ 6,628 $ 6,047
======== ======== ======== ========
Per Share Data - Basic EPS:
Continuing operations $ (0.08) $ (0.06) $ 0.00 $ 1.64
Discontinued operations 0.31 0.41 0.36 (1.31)
-------- -------- -------- --------
Net income (loss) $ 0.23 $ 0.35 $ 0.36 $ 0.33
======== ======== ======== ========
Per Share Data - Assuming Dilution:
Continuing operations $ (0.08) $ (0.06) $ 0.00 $ 1.62
Discontinued operations 0.31 0.41 0.35 (1.30)
-------- -------- -------- --------
Net income (loss) $ 0.23 $ 0.35 $ 0.35 $ 0.32
======== ======== ======== ========
<FN>
1996 fourth quarter adjustments consist of:
1.) $1,000,000 unfavorable, reserve for possible disallowed costs
2.) $2,804,000 favorable, inventory results and warranty experience
3.) $ 710,000 favorable, actuarial pension and self-insurance
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 45
Item 9. Disagreements on Accounting and Financial Disclosure
- ------- ----------------------------------------------------
None
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
(a) Identification of Directors
---------------------------
Information with respect to the members of the Board of Directors of the
Company is set forth under the captions "Nominees for Election as Directors to
be Elected for a Term of Three Years" and "Directors Continuing in Office" in
the Company's definitive proxy statement to be filed pursuant to Regulation
14A, which information is incorporated herein by reference.
(b) Identification of Executive Officers
------------------------------------
Information with respect to the executive officers of the Company is set forth
under the caption "Executive Officers of the Company" contained in Part I, Item
1 of this report, which information is incorporated herein by reference.
Item 11. Executive Compensation
----------------------
Information required by this Item is set forth under the captions "Executive
Compensation", "Compensation of Directors", "Retirement Plans", "Pension Plan
Table" and "Employment and Severance Agreements" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information required by this Item is set forth under the captions "Principal
Stockholders" and "Stock Ownership of Directors, Nominees for Directors and
Executive Officers" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information required by this Item is set forth under the caption "Certain
Transactions" in the Company's definitive proxy statement to be filed pursuant
to Regulation 14A, which information is incorporated herein by reference.
45
<PAGE> 46
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Page
No.
---
(a) Financial Statements, Schedules and Exhibits:
---------------------------------------------
<S> <C>
1. Financial Statements
--------------------
Included in Part II of this report:
Report of Independent Public Accountants 23
Consolidated Statements of Operations for the
Years Ended December 31, 1997, 1996, and 1995 24
Consolidated Balance Sheets at December 31, 1997 and 1996 25-26
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995 27
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996, and 1995 28
Notes to Consolidated Financial Statements 29-43
Quarterly Financial Data (Unaudited) 44
2. Schedules
---------
Included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts for
the Years Ended December 31, 1997, 1996 and 1995 50
Report of Independent Public Accountants 51
</TABLE>
3. Exhibits:
---------
(3) Articles of incorporation and by-laws:
(i) The Restated Certificate of Incorporation of the Company, as
amended, included as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, File
No. 1-8591, is hereby incorporated herein by reference.
(ii) The Bylaws of the Company, as amended and restated
effective November 26, 1996, included as Exhibit
3(ii) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, File No
1-8591, is hereby incorporated by reference.
46
<PAGE> 47
(4) Instruments defining rights of security holders, including
indentures, for the following classes of securities:
(i) Class A Common Stock, par value $.10 per share, are
contained in the Restated Certificate of
Incorporation, as amended, incorporated by reference
in Exhibit (3)(i) above and are incorporated herein
by reference.
(ii) Class B Common Stock, par value $.10 per share, are
contained in the Restated Certificate of
Incorporation, as amended, and incorporated by
reference in Exhibit (3)(i) above and are
incorporated herein by reference.
(iii) Indenture, dated as of October 1, 1989, between
Figgie International Inc. and Continental Bank,
National Association, as Trustee, with respect to
the 9.875% Senior Notes due October 1, 1999,
included as Exhibit (4) (c) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1989, is hereby incorporated herein by reference.
State Street Trust succeeded Continental Bank as
Trustee pursuant to an agreement dated as of
February 7, 1994, which was included as Exhibit
(4)(c) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and is hereby
incorporated herein by reference.
(10) Material contracts:
(i)* The Company's Compensation Plan for Executives,
included as Exhibit (3)(10)(b) to the Company's Form
8-B filed October 19, 1983 with the Commission, is
hereby incorporated herein by reference.
(ii)* The Company's Senior Executive Benefits Program, as
amended, included as Exhibit (19) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, is hereby incorporated herein by
reference.
(iii)* The Company's 1983 Deferred Compensation Agreement,
included as Exhibit (3)(10)(f) to the Company's Form
8-B filed on October 19, 1983 with the Commission,
is hereby incorporated herein by reference.
(iv)* The Company's 1982 Deferred Compensation Agreement,
included as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1984, File No. 1-8591, is hereby incorporated herein
by reference.
(v)* The Company's Split Dollar Life Insurance Plan,
included as Exhibit 10(h) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1985, File No. 1-8591, is hereby incorporated herein
by reference.
47
<PAGE> 48
(vi)* The Company's 1993 Restricted Stock Purchase Plan
for Employees, included as Exhibit A to the
Company's definitive Proxy Statement dated May 25,
1993, is hereby incorporated herein by reference.
(vii)* The Company's 1993 Restricted Stock Purchase Plan
for Directors, included as Exhibit B to the
Company's definitive Proxy Statement dated May 25,
1993, is hereby incorporated herein by reference.
(viii)* The Company's Key Employees' Stock Option Plan,
included as Exhibit A to the Company's definitive
Proxy Statement dated September 22, 1994, is hereby
incorporated herein by reference.
(ix)* Employment agreement dated July 1, 1994, by and
between the Company and Steven L. Siemborski,
included as Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1994, is hereby incorporated herein by
reference.
(x)* Employment Agreement, dated as of January 1, 1995,
by and between John P. Reilly and the Company,
included as Exhibit 10(p) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994, is hereby incorporated herein by reference.
(xi) Credit Agreement between the Company and General
Electric Capital Corporation, dated as of December
19, 1995; Waiver and Amendment No. 1 dated as of
January 30, 1996; Amendment No. 2 dated as of
February 19, 1996, included as Exhibit 10(xiv) on
Form 10-K for the year ended December 31, 1995, is
hereby incorporated herein by reference.
(xii)* Management Agreement, dated February 1, 1996, by and
between Robert D. Vilsack and the Company, included
as Exhibit 10(xii) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, is
hereby incorporated by reference.
(xiii)* Retention Agreement, dated March 20, 1996, by and
between Robert D. Vilsack and the Company, included
as Exhibit 10 (xiii) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996,
is hereby incorporated by reference.
(xiv)* Management Agreement, dated December 9, 1994, by and
between Glen W. Lindemann and the Company, included
as Exhibit 10 (xv) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, is
hereby incorporated by reference.
(xv)* Retention Agreement, dated July 17, 1996, by and
between Glen W. Lindemann and the Company, included
as Exhibit 10 (xvi) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996,
is hereby incorporated by reference.
48
<PAGE> 49
(xvi) Amendment No. 3, dated June 6, 1996, to the Credit
Agreement between the Company and General Electric
Capital Corporation, included as Exhibit 10 (xvii)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, is hereby incorporated
by reference.
(xvii)* Executive Arrangement, approved by the Management
Development, Compensation and Nominating Committee
of the Board of Directors on February 18, 1997,
included as Exhibit 10 (a) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, is hereby incorporated by
reference.
(xviii)* Amended and Restated Management Agreement, dated
June 9, 1997, by and between Glen W. Lindemann and
the Company, included as Exhibit 10 (b) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is hereby
incorporated by reference.
(xix)* Amended and Restated Management Agreement, Dated
June 11, 1997, by and between William J. Sickman and
the Company, included as Exhibit 10 (c) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is hereby
incorporated by reference.
(xx)* Amended and Restated Management Agreement, dated
June 11, 1997, by and between Robert D. Vilsack and
the Company, included as Exhibit 10 (d) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is hereby
incorporated by reference.
(xxi)* Letter Agreement, dated October 15, 1997, by and
between Glen W. Lindemann and the Company, included
as Exhibit 10 (e) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1997, is hereby incorporated by reference.
(xxii) Amendment No. 4, dated February 9, 1998 and
effective December 31, 1997, to the Credit Agreement
between the Company and General Electric Capital
Corporation.
* Management contracts or compensatory plans filed pursuant to
Item 14(c) of the Form 10-K.
(21) Subsidiaries of the Company
(23) Consents of Independent Public Accountants
(27) Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
Form 8-K dated November 17, 1997, filed November 26, 1997.
Form 8-K dated December 31, 1997, filed January 6, 1998.
(c) See Exhibits to this report.
49
<PAGE> 50
(d) SCHEDULE II
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance, Charged Amounts Balance,
Beginning to Costs Charged End of
Description of Year & Expenses Off Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE
TRADE ACCOUNTS RECEIVABLES
Year ended December 31, 1997 $ 151 $ 260 $ (17) $ 394
======= ======= ======= =======
Year ended December 31, 1996 $ 174 $ 74 $ (97) $ 151
======= ======= ======= =======
Year ended December 31, 1995 $ 24 $ 256 $ (106) $ 174
======= ======= ======= =======
ALLOWANCE FOR PROPERTIES
HELD FOR SALE
Land and Land Improvements $ 5,344 $ - $ (167) $ 5,177
Building and Leasehold Improvements - - - -
------- ------- ------- -------
Year ended December 31, 1997 $ 5,344 $ 0 $ (167) $ 5,177
======= ======= ======= =======
Land and Land Improvements $ 7,694 - $(2,350) $ 5,344
Building and Leasehold Improvements 3,490 - (3,490) -
------- ------- ------- -------
Year ended December 31, 1996 $11,184 $ 0 $(5,840) $ 5,344
======= ======= ======= =======
Land and Land Improvements $12,772 - $(5,078) $ 7,694
Building and Leasehold Improvements 4,083 - (593) 3,490
------- ------- ------- -------
Year ended December 31, 1995 $16,855 $ 0 $(5,671) $11,184
======= ======= ======= =======
ALLOWANCE FOR DEFERRED
DIVESTITURE PROCEEDS
Year ended December 31, 1997 $21,743 $ 6,479 $ (260) $27,962
======= ======= ======= =======
Year ended December 31, 1996 $20,825 $ 8,519 $(7,601) $21,743
======= ======= ======= =======
Year ended December 31, 1995 $ 0 $20,825 $ 0 $20,825
======= ======= ======= =======
</TABLE>
50
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors
and Stockholders,
Figgie International Inc.
We have audited in accordance with generally accepted auditing standards, the
financial statements of Figgie International Inc. and Subsidiaries included in
this Form 10K, and have issued our report thereon dated February 23, 1998. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The financial statement schedule is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
/s/
Cleveland, Ohio,
February 23, 1998
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIGGIE INTERNATIONAL INC.
(Company)
By /s/
-------------------------------
Date: March 10, 1998 S. L. Siemborski
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed as of March 10, 1998 by the following persons on behalf
of the Company and in the capacities indicated.
By /s/ By /s/
--------------------------------------- ------------------------------
G. W. Lindemann, Principal H. Nesbit, II, Director
Executive Officer & Director
By /s/ By /s/
--------------------------------------- ------------------------------
F. J. Brinkman, Director R.P. Collins, Director
By /s/ By /s/
--------------------------------------- ------------------------------
J.P. Reilly, Director S. L. Siemborski, Director
(Principal financial and
accounting officer)
By /s/
---------------------------------------
F. R. McKnight, Director
52
<PAGE> 53
EXHIBIT INDEX
-------------
(3) Articles of incorporation and by-laws:
(i) The Restated Certificate of Incorporation of the Company, as
amended, included as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997, File
No. 1- 8591, is hereby incorporated herein by reference.
(ii) The Bylaws of the Company, as amended and restated effective
November 26, 1996, included as Exhibit 3(ii) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996, File No 1-8591, is hereby incorporated by reference.
(4) Instruments defining rights of security holders, including indentures,
for the following classes of securities:
(i) Class A Common Stock, par value $.10 per share, are contained
in the Restated Certificate of Incorporation, as amended,
incorporated by reference in Exhibit (3)(i) above and are
incorporated herein by reference.
(ii) Class B Common Stock, par value $.10 per share, are contained
in the Restated Certificate of Incorporation, as amended, and
incorporated by reference in Exhibit (3)(i) above and are
incorporated herein by reference.
(iii) Indenture, dated as of October 1, 1989, between Figgie
International Inc. and Continental Bank, National
Association, as Trustee, with respect to the 9.875% Senior
Notes due October 1, 1999, included as Exhibit (4)(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, is hereby incorporated herein by
reference. State Street Trust succeeded Continental Bank as
Trustee pursuant to an agreement dated as of February 7,
1994, which was included as Exhibit (4)(c) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993, and is hereby incorporated herein by reference.
(10) Material contracts:
(i) The Company's Compensation Plan for Executives, included as
Exhibit (3)(10)(b) to the Company's Form 8-B filed October
19, 1983 with the Commission, is hereby incorporated herein
by reference.
(ii) The Company's Senior Executive Benefits Program, as amended,
included as Exhibit (19) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1988, is hereby
incorporated herein by reference.
(iii) The Company's 1983 Deferred Compensation Agreement, included
as Exhibit (3)(10)(f) to the Company's Form 8-B filed on
October 19, 1983 with the Commission, is hereby incorporated
herein by reference.
(iv) The Company's 1982 Deferred Compensation Agreement, included
as Exhibit 10(g) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1984, File No. 1-8591, is
hereby incorporated herein by reference.
53
<PAGE> 54
(v) The Company's Split Dollar Life Insurance Plan, included as
Exhibit 10(h) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1985, File No. 1-8591, is hereby
incorporated herein by reference.
(vi) The Company's 1993 Restricted Stock Purchase Plan for
Employees, included as Exhibit A to the Company's definitive
Proxy Statement dated May 25, 1993, is hereby incorporated
herein by reference.
(vii) The Company's 1993 Restricted Stock Purchase Plan for
Directors, included as Exhibit B to the Company's definitive
Proxy Statement dated May 25, 1993, is hereby incorporated
herein by reference.
(viii) The Company's Key Employees' Stock Option Plan, included as
Exhibit A to the Company's definitive Proxy Statement dated
September 22, 1994, is hereby incorporated herein by
reference.
(ix) Employment agreement dated July 1, 1994, by and between the
Company and Steven L. Siemborski, included as Exhibit 10(b)
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, is hereby incorporated
herein by reference.
(x) Employment Agreement, dated as of January 1, 1995, by and
between John P. Reilly and the Company, included as Exhibit
10(p) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, is hereby incorporated herein
by reference.
(xi) Credit Agreement between the Company and General Electric
Capital Corporation, dated as of December 19, 1995; Waiver
and Amendment No. 1 dated as of January 30, 1996; Amendment
No. 2 dated as of February 19, 1996, included as Exhibit
10(xiv) on Form 10-K for the year ended December 31, 1995, is
hereby incorporated herein by reference.
(xii) Management Agreement, dated February 1, 1996, by and between
Robert D. Vilsack and the Company, included as Exhibit
10(xii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, is hereby incorporated by
reference.
(xiii) Retention Agreement, dated March 20, 1996, by and between
Robert D. Vilsack and the Company, included as Exhibit 10
(xiii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, is hereby incorporated by
reference.
(xiv) Management Agreement, dated December 9, 1994, by and between
Glen W. Lindemann and the Company, included as Exhibit 10
(xv) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, is hereby incorporated by reference.
(xv) Retention Agreement, dated July 17, 1996, by and between Glen
W. Lindemann and the Company, included as Exhibit 10 (xvi) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is hereby incorporated by reference.
(xvi) Amendment No. 3, dated June 6, 1996, to the Credit Agreement
between the Company and General Electric Capital Corporation,
included as Exhibit 10 (xvii) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, is hereby
incorporated by reference.
(xvii) Executive Arrangement, approved by the Management
Development, Compensation and Nominating Committee of the
Board of Directors on February 18, 1997, included as Exhibit
10 (a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is hereby incorporated by
reference.
54
<PAGE> 55
(xviii) Amended and Restated Management Agreement, dated June 9,
1997, by and between Glen W. Lindemann and the Company,
included as Exhibit 10 (b) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is
hereby incorporated by reference.
(xix) Amended and Restated Management Agreement, Dated June 11,
1997, by and between William J. Sickman and the Company,
included as Exhibit 10 (c) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is
hereby incorporated by reference.
(xx) Amended and Restated Management Agreement, dated June 11,
1997, by and between Robert D. Vilsack and the Company,
included as Exhibit 10 (d) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is
hereby incorporated by reference.
(xxi) Letter Agreement, dated October 15, 1997, by and between Glen
W. Lindemann and the Company, included as Exhibit 10 (e) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, is hereby incorporated by
reference.
(xxii) Amendment No. 4, dated February 9, 1998 and effective
December 31, 1997, to the Credit Agreement between the
Company and General Electric Capital Corporation.
(21) Subsidiaries of the Company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
55
<PAGE> 1
EXHIBIT 10(xxii)
AMENDMENT NO. 4
AMENDMENT NO. 4 (this "Amendment"), dated as of
February 9, 1998, and effective as of December 31, 1997
pursuant to Section 6 hereof, between General Electric
Capital Corporation ("GE Capital"), as lender ("Lender") and
agent ("Agent") under the Credit Agreement referred to below
and Figgie International Inc. ("Borrower").
W I T N E S S E T H
-------------------
WHEREAS, Borrower and GE Capital, as Lender and as Agent, have
entered into a Credit Agreement, dated as of December 19, 1995 (as heretofore
amended, the "Credit Agreement"; the terms defined in Credit Agreement being
used herein as therein defined, unless otherwise defined herein); and
WHEREAS, Borrower wishes to amend, INTER ALIA, the Applicable
Margin, the Borrowing Base requirement and the financial covenants contained in
the Credit Agreement and certain definitions contained in Annex A to the Credit
Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties hereby agree as follows:
SECTION 1. Amendments to Credit Agreement.
-------------------------------
a. AMENDMENT TO SECTION 1.1(a). Section 1.1(a) is hereby amended to
delete the proviso in the first sentence therein.
b. AMENDMENT TO SECTION 1.1(e). Section 1.1(e) is hereby amended to
delete it in its entirety and to substitute in lieu thereof the
phrase "[Section 1.1(e) intentionally omitted.]".
c. AMENDMENT TO SECTION 1.4(a). Section 1.4(a) is hereby amended: (i)
to delete the proviso in the first paragraph therein; and (ii) to
delete the second paragraph therein in its entirety.
d. AMENDMENT TO SECTION 1.5. Section 1.5 is hereby amended to delete it
in its entirety and to substitute in lieu thereof "[Section 1.5
intentionally omitted.]".
e. AMENDMENTS TO SECTION 1.6(c). (i) Section 1.6(c) is hereby amended
to delete the reference to "one and one-half percent (1.5%)" therein
and to substitute in
56
<PAGE> 2
lieu thereof the reference to "one percent (1.0%)"; (ii) to delete
the proviso in the first paragraph therein; and (iii) to delete the
second paragraph therein in its entirety.
f. AMENDMENTS TO SECTION 2.2(c). Section 2.2(c) is hereby
amended: (i) to delete from the first paragraph therein clause (i)
in its entirety and to substitute in lieu thereof the phrase "(i)
the aggregate principal amount of the Revolving Credit Loan shall
not exceed the Maximum Revolving Credit Commitment less the
outstanding Letter of Credit Obligations" and (ii) to delete the
proviso at the end thereof.
g. Amendments to Section 3.4.
--------------------------
(i) Section 3.4(b) is hereby amended: (x) to delete the two
references to "September 30, 1995" therein and to substitute in lieu
thereof, in each case, the reference to "September 30, 1997"; and
(y) to insert the phrase "or in writing to Agent and Lenders"
immediately after the term "Agreement" in the last line therein.
(ii) Section 3.4(d) is hereby amended: (x) to delete the reference
to "December 31, 1994" therein and to substitute in lieu thereof the
reference to "December 31, 1996"; and (y) to delete the reference to
"1995" therein and to substitute in lieu thereof the reference to
"1997".
h. AMENDMENT TO SECTION 6.3. Section 6.3 is hereby amended to
delete from clause (viii) therein the phrase "or Agent in the case
of any such renewal, extension, refinancing or refunding of
Indebtedness secured by the CAFIG Mortgage".
i. Amendments to Section 6.10.
---------------------------
(i) Section 6.10 is hereby amended to delete subsections (a), (b),
(c), (d) and (e) and to substitute in lieu thereof the following:
"(a) LEVERAGE RATIO. Borrower shall maintain for each four
Fiscal Quarter period, commencing with the four Fiscal
Quarter period ending on December 31, 1997, a Leverage
Ratio for such period of not greater than 5 : 1."
(ii) Section 6.10(f) is hereby amended: (w) to delete the phrase
"(f)" therein and to substitute in lieu thereof the phrase "(b)";
(x) to delete from the sixth line therein the reference to
"$8,000,000" and to substitute in lieu thereof the phrase
"$8,500,000
57
<PAGE> 3
(or as such amount may be increased in any Fiscal Year thereafter
with the written approval of Agent and Lenders)"; (y) to delete from
the penultimate line therein the reference to "$5,000,000" and to
substitute in lieu thereof the reference to "$10,000,000"; and (z)
to insert at the end thereof the following sentence: "Such
$10,000,000 of Capital Expenditures for purposes of the Chagrin
Highland development may be made directly by Borrower or indirectly
by a Subsidiary of Borrower or a Joint Venture Subsidiary, and shall
be in addition to the Investments permitted by Section 6.2(vii)
hereof".
j. AMENDMENT TO SECTION 9.10(a). Section 9.10(a) is hereby
amended to delete beginning from the sixth line therein the phrase
", or that any particular items of Collateral meet eligibility
criteria applicable in respect of the Borrowing Base".
k. AMENDMENTS TO SECTION 10.2(b). Section 10.2(b) is hereby
amended to delete the two references to "$7,500,000" therein and to
substitute in lieu thereof, in each case, the reference to
"$10,000,000".
l. AMENDMENT TO SECTION 11.1. Section 11.1 is hereby amended
to delete from clause (i) therein the phrase ", or increase the
advance rate percentages contained in the term "Borrowing Base"
therein.
m. AMENDMENT TO SECTION 11.2(d). Section 11.2(d) is hereby
amended to delete from clause (ii) therein the phrase "prior to the
inclusion of such Equipment or machinery as Eligible Equipment"
therein.
n. AMENDMENTS TO SECTION 11.10(c). Section 11.10(c) is hereby
amended to delete it in its entirety and to substitute in lieu
thereof the following:
"(c) If to Borrower, at:
Figgie International Inc.
5875 Landerbrook Drive
Suite 250
Mayfield Heights, Ohio 44124
Attention: Chief Financial Officer
Telecopy No.: (440) 442-1519
58
<PAGE> 4
With copies to:
Figgie International Inc.
5875 Landerbrook Drive
Suite 250
Mayfield Heights, Ohio 44124
Attention: General Counsel
Telecopy No.: (440) 442-1519
and
Calfee, Halter & Griswold
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114-2688
Attention: Lawrence N. Schultz, Esq.
Telecopy No.: (216) 241-0816"
SECTION 2. Amendments to Annex A to the Credit
----------------------------------
Agreement.
----------
a. DEFINITION OF "APPLICABLE MARGIN". The definition of the
term "Applicable Margin" is hereby amended to read as follows:
"APPLICABLE MARGIN" shall mean (i) with respect to Index Rate
Advances, 0% per annum and (ii) with respect to LIBOR Rate Advances,
2.0% per annum.
b. DEFINITION OF "BORROWING AVAILABILITY". The definition of
the term "Borrowing Availability" is hereby amended to delete
subsection (a) thereof and to substitute the following in lieu
thereof: "(a) with respect to the Revolving Credit Loan, the Maximum
Revolving Credit Commitment less (i) the outstanding Letter of
Credit Obligations and (ii) the outstanding amount of the Revolving
Credit Loan, and".
c. DEFINITION OF "CAPITAL LEASE". The definition of the term
"Capital Lease" is hereby amended to insert the phrase "or any
Subsidiary thereof" immediately after the word "Borrower" in the
last two lines of such definition.
d. DEFINITION OF "CHANGE OF CONTROL". The definition of the
term "Change of Control" is hereby amended to delete the references
in clause (ii) therein to "Harold Figgie" and to substitute in lieu
thereof the reference to "Harry Figgie, Jr.".
e. DEFINITION OF "SENIOR OFFICER". The definition of the term
"Senior Officer" is hereby amended to delete the word "or"
immediately after the term "Controller" therein, to substitute in
lieu thereof a
59
<PAGE> 5
comma and to insert the phrase "or Assistant Treasurer" immediately
after the term "Treasurer".
f. DELETED DEFINITIONS. Annex A to the Credit Agreement is
hereby amended to delete the definitions of the following terms
therein in their entirety: "Borrowing Base", "Borrowing Base
Certificate", "CAFIG Mortgage", "Current Assets", "Current
Liabilities", "Eligible Accounts", "Eligible Equipment" and
"Eligible Inventory".
g. ADDITIONAL DEFINITIONS. Annex A to the Credit Agreement is
hereby amended to add the following new definitions in the proper
alphabetical order:
"LEVERAGE RATIO" shall mean, with respect to any date of
determination, the ratio of (a) the sum of Indebtedness for borrowed
money and Letter of Credit Obligations, less cash and Cash
Equivalents to (b) EBITDA of Borrower for the twelve month period
ended as of such date of determination.
SECTION 3. AMENDMENT TO ANNEX D TO THE CREDIT AGREEMENT. Annex D to
the Credit Agreement is hereby amended by deleting Paragraph (a)
therein in its entirety and to substitute in lieu thereof the phrase
"[Paragraph (a) intentionally omitted.]".
SECTION 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Agent and Lenders as follows:
a. All of the representations and warranties of Borrower
contained in the Credit Agreement and in the other Loan
Documents are true and correct on the date hereof as though
made on such date, except to the extent that any such
representation or warranty expressly relates to an earlier
date for changes permitted or contemplated by the Credit
Agreement or as otherwise disclosed in writing to Agent and
Lenders. No Default or Event of Default has occurred and is
continuing or would result from the transactions contemplated
hereby.
b. The execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary or proper
corporate action and do not require the consent or approval of
any Person which has not been obtained.
c. This Amendment has been duly executed and delivered by
Borrower and each of this Amendment
60
<PAGE> 6
and the Credit Agreement as amended hereby constitutes a
legal, valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
SECTION 5. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS.
a. Upon the effectiveness of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein", or words of like import, and each
reference in other Loan Documents to the Credit Agreement,
shall mean and be a reference to the Credit Agreement as
modified hereby.
b. Except as specifically amended herein, the Credit Agreement
shall remain in full force and effect and is hereby ratified
and confirmed.
c. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a
modification of any right, power, or remedy of the Agent or
the Lenders under any of the Loan Documents, nor constitute a
modification of any provision of any of the Loan Documents.
SECTION 6. EFFECTIVENESS. This Amendment shall become effective as
of December 31, 1997, provided that each of the following conditions
has been satisfied on the date hereof, including the delivery to
Agent of each of the documents set forth below in form and substance
satisfactory to Agent:
a. Counterparts of this Amendment duly executed by Borrower,
each Lender and Agent.
b. All of the representations and warranties of Borrower
contained in Section 4 hereof shall be true and correct and
certified by a certificate of an officer of Borrower.
SECTION 7. EXPENSES. Borrower agrees to pay on demand all reasonable
out-of-pocket costs and expenses of Agent in connection with the
preparation, execution and delivery of this Amendment, including,
61
<PAGE> 7
without limitation, the reasonable fees and out-of-pocket expenses
of counsel for Agent with respect thereto.
SECTION 8. GOVERNING LAW. This Amendment shall be governed by,
construed and enforced in accordance with the laws of the State of
New York, without regard to conflict of laws principles thereof.
SECTION 9. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, which shall, collectively and separately,
constitute one agreement.
62
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
FIGGIE INTERNATIONAL INC.
By: /s/
Name: Steven L. Siemborski
Title: Senior Vice President and
Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent and Lender
By: /s/
Name: Rick Luck
Title: Senior Vice President,
GE Capital Commercial
Finance, Inc., Being duly
authorized
63
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY (AS OF MARCH 10, 1998)
<TABLE>
<CAPTION>
Percentage of
Jurisdiction of Securities Owned
Name Incorporation By the Company
---- ------------- --------------
<S> <C> <C>
Allied Industrial Distributors California 100%
Figgie Acceptance Corporation Delaware 100%
Figgie Asia Pte. Ltd. Singapore 100%
Figgie Canadian Holdings Ltd. Canada-Federal 100%
Figgie Canada Inc. Canada-Federal 100%
Figgie Communications Inc. Ohio 100%
Figgie do Brasil Industria e
Commercio Ltda. (IN LIQ.) Brazil 100%
Figgie Foreign Sales Corporation Virgin Islands 100%
Figgie (G.B.) Limited United Kingdom 100%
Figgie (U.K.) Limited United Kingdom 100%
Figgie Sportswear (U.K.) Limited United Kingdom 100%
Wimbledon Shirt Company Limited United Kingdom 100%
Figgie International (H.K.) Ltd. Hong Kong 100%
Figgie International Real Estate Inc. Delaware 100%
Cafig Inc. Delaware 100%
Figgie Investment Trustee Limited United Kingdom 50%
Figgie Leasing Corporation Delaware 100%
Figgie Licensing Corporation Delaware 100%
Figgie Packaging Systems Pty. Ltd. Australia 100%
Figgie Pension Trustee Limited United Kingdom 50%
Figgie Properties Inc. Delaware 100%
Chagrin Highlands, Ltd. LLC United States 50%
Chagrin Highlands Inc. Ohio 100%
Cudahy Self Storage, Inc. Wisconsin 100%
Figgie Risk Management Company Florida 85%
Virginia Center Inc. Virginia 100%
Figgie Sportswear Limited United Kingdom 100%
FP Sportswear B.V. Netherlands 100%
Figgie Transportteknik Sweden AB (in liq.) Sweden 100%
Interstate Electronics Corporation California 100%
Mojonnier de Mexico S de RL de CV (IN LIQ) Mexico 49%
Mojonnier do Brasil Industria e Commercio
de Equipamentos Ltda. (IN LIQ) Brazil 100%
Shanghai Eagle Safety Equipment Ltd. China 51%
Willoughby Holdings Inc. Delaware 100%
Willoughby Assurance Ltd. Bermuda 100%
Willoughby Services, Inc. Delaware 100%
</TABLE>
64
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements File No. 33-56705, File No. 33-33177, File No. 333-
12183 and File No. 333-38175.
/s/
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 10, 1998
65
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 104,243
<SECURITIES> 0
<RECEIVABLES> 36,256
<ALLOWANCES> 394
<INVENTORY> 30,049
<CURRENT-ASSETS> 181,559
<PP&E> 96,628
<DEPRECIATION> 29,275
<TOTAL-ASSETS> 343,263
<CURRENT-LIABILITIES> 55,058
<BONDS> 161,395
0
0
<COMMON> 1,844
<OTHER-SE> 69,752
<TOTAL-LIABILITY-AND-EQUITY> 343,263
<SALES> 248,602
<TOTAL-REVENUES> 248,602
<CGS> 174,674
<TOTAL-COSTS> 226,057
<OTHER-EXPENSES> 7,033
<LOSS-PROVISION> 61
<INTEREST-EXPENSE> 16,894
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