Item 1. Business
During the 1993 fiscal year, there have been no material changes in the manner in which the Registrant conducts its business operations. As used
herein, the "Company" or the "Registrant" means, unless the context otherwise requires, Figgie International Inc., a Delaware corporation, its predecessors and its subsidiaries and divisions.
The Company's operations can be grouped into five segments: (l) consumer products, (2) fire protection, safety, and security products, (3) machinery and allied products, (4) technical products and (5) services. The Company's business is generally managed at the operating division and subsidiary level. Centralized financial and budget controls and certain other staff functions are performed at the corporate offices of the Company. The Company has decided to dispose of various operations. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations."
Fred Perry Sportswear Ltd. licenses Fred Perry* tennis and other products and casual clothing in the United States and throughout the world.
Fred Perry Sportswear (U.K.) Ltd. designs, manufactures, and distributes tennis and other sports apparel and leisurewear products.
Interstate Engineering manufactures Compact* and Tri-Star* vacuum cleaners and non-electrical heat-activated home fire alarms. It also operates an aluminum and zinc die cast facility.
Rawlings Sporting Goods manufactures and/or distributes baseballs,
baseball gloves, baseball equipment, baseball bats, basketballs, footballs, football equipment, sports clothing, athletic uniforms, and other athletic team equipment.
Sherwood-Drolet Corp. Ltd. designs, manufactures and distributes Sher- Wood* and Chimo* hockey sticks, hockey gloves, and protective equipment.
Taylor Environmental Instruments manufactures thermometers, barometers, and hygrometers for home use and temperature and environmental measuring devices for use in food service, HVAC, and industrial applications as well as in scientific laboratories, hospitals, and universities.
* Registered or common law trademarks and service marks of Figgie International Inc. and its subsidiaries. ** Registered trademark licensed to Figgie International Inc. by Combustion Engineering, Inc.
Advance Security provides security personnel, conducts investigations, and acts as a security consultant to businesses, construction sites, hospitals, public buildings, and governmental installations. The assets of this operation were sold on February 25, 1994 to U.S.A. Security Associates, a privately held firm.
American LaFrance manufactures fire trucks and operates a service center that performs major maintenance, repairs, and refurbishment of fire trucks and apparatus.
"Automatic" Sprinkler Corporation of America is one of the nation's largest designers and installers of sophisticated fire protection systems for commercial and industrial use and for special hazard facilities, including power stations, petrochemical plants, and other facilities. The retrofit market has expanded as stricter governmental, fire code, and insurance requirements have resulted in the upgrading of fire protection systems in many existing buildings.
Figgie Fire Protection Systems manufactures regular and special hazard fire systems and devices employing various extinguishing agents under ASCOA*, Chemetron*, Range Guard*, and Safety First* brand names. It also manufactures fire protection sprinkler devices and is one of the nation's largest manufacturers of industrial and consumer fire extinguishers for use in homes, boats, automobiles, and industrial applications as well as stainless steel liquid type extinguishers for industrial and commercial buildings. Its broad line of hand-portable and wheeled extinguishers include carbon dioxide, halon, water, and multi-purpose dry chemical extinguishing agents. Brass products and fittings are produced for use in standpipe and fire sprinkler systems and for fire engines and fire-fighting equipment.
Medcenter Management Services manages the joint replacement departments of hospitals in cooperation with physicians to reduce the cost and improve the care and treatment of implant patients. The manufacture of orthopaedic implant devices (under the name of Figgie Medical Systems) was discontinued in January of 1994.
Safety Supply America is one of the nation's largest distributors of personal and industrial protective and other safety equipment and industrial hygiene equipment, operating nationally through a number of regional offices with branches in most major metropolitan areas. It also manufactures lumbar and other support devices.
Scott Aviation is the nation's largest manufacturer of protective breathing and emergency oxygen equipment for use in commercial and military aircraft. It also manufactures the Scott Air-Pak* for fire-fighting and for personal protection against industrial contaminants. Its air purifying products provide protection against environmental and safety hazards as increasingly required under governmental regulations. Scott Aviation also produces air and oxygen breathing masks, oxygen regulating devices, canister-type gas masks, electronic gas detection instruments, and various light aircraft accessories.
Snorkel-Economy manufactures powered mobile work platforms and scissorlifts for use in construction and maintenance activities. It also makes hydraulically activated aerial platforms and articulating booms that are mounted on fire apparatus to deliver large quantities of water to fires from elevated positions. This equipment is installed on new as well as on existing fire trucks.
* Registered or common law trademarks and service marks of Figgie International Inc. and its subsidiaries.
Alfa Packaging Equipment designs and manufactures automated rotary wet glue, hot melt, and pressure sensitive labeling machinery as well as net-weight fillers for a wide range of applications in the beverage, food, distillery, pharmaceutical, cosmetic, chemical, and other industries.
Astro-Pneumatic GmbH manufactures and markets air cylinders, valves, and pneumatic equipment for use in the chemical, mining, automotive, material handling, food, and beverage industries.
Essick/Mayco Pump manufactures vibrating rollers, concrete and plaster mixers, and concrete and material pumps for the construction industry.
Figgie Material Handling Systems - which trades as Logan Fenamec (U.K.) Limited, and Logan Glidepath, manufactures computer controlled, high- speed sorting mini stacker cranes and package handling equipment for warehouses, airports, post offices, and distribution terminals, as well as
custom-engineered and pre-engineered conveyor systems for factories, warehouses, and terminals. The companies are established leaders worldwide for airport baggage handling, industrial conveying and sortation equipment.
Figgie Packaging Systems produces high-speed uncasing and packing machinery; material handling and packaging systems; automatic screw-type capping, sorting, and sealing machinery; rotary piston fillers; and high speed can closing and inspection machines. It provides processing equipment for customers in the beverage, food, distillery, dairy, pharmaceutical, chemical, cosmetic, and other industries. Its fully integrated and automated high-speed systems include uncasing, cleaning, processing, filling, capping, labeling, palletizing, conveying, inspecting, packing, and systems control machinery. It offers full line turnkey capabilities and produces a wide range of medium and high-speed labeling machinery.
Figgie Power Systems manufactures bladder accumulators, piston accumulators, surge and pulsation control products, and other fluid power products for applications in the industrial fluid power, mobile equipment, petroleum and chemical processing, and water control markets. It also
designs and manufactures aluminum and steel pneumatic and hydraulic linear actuators for automation and industrial applications.
Safway Steel Products manufactures and distributes tubular steel scaffolding for sale or rental to building, industrial maintenance, and demolition contractors; metal and wood bleachers and risers for sale or rental to schools, auditoriums, coliseums, and others; and vertical shoring, special order scaffolding, and certain other metal products.
S-P/Sheffer International designs and manufactures precision workholding products primarily for the machine tool and metalworking industries. Workholding product lines include collets/collet chucks, diaphragm chucks, flexible power chucks and integrated quick change chucking systems. It also manufactures rotary actuating cylinders and dimensional
control tooling systems.
SpaceGuard Products manufactures woven wire partitions for use in securing areas such as tool cribs and stockrooms for industrial use. It also manufactures ornamental iron railings and columns and metal spiral staircases for both residential and commercial applications as well as steel folding gates for commercial use.
CASI-RUSCO manufactures and sells computer-based CARDENTRY* access control equipment and monitoring systems. These products are used for security and parking control, personnel access, time, attendance, and fuel management control at military and government sites, data centers, parking areas, hospitals, universities, airports, and other commercial and industrial locations.
Hartman Electrical designs and manufactures high-reliability electrical components principally for use in commercial and military aircraft, missiles, and space vehicles. These components include contactors, power relays, protection relays, circuit breaker switches, and automatic control panels used to switch electrical power and to protect the electrical systems from power faults.
Interstate Electronics develops and produces sophisticated telemetry, instrumentation, and data recording systems and GPS position measuring systems for the U. S. Navy's Polaris/Poseidon, TRIDENT, and TRIDENT II submarine fleet ballistic missile programs. It also designs and produces precise Global Positioning Systems (GPS) for aircraft and turnkey test ranges, commercial and business aircraft navigation and landing systems. It also designs and produces plasma, liquid crystal, and cathode ray tube display systems for a variety of shipboard and aircraft applications. Additionally it develops sophisticated bandwidth-on-demand satellite communications modems and terminals for both government and commercial applications.
* Registered or common law trademarks and service marks of Figgie International Inc. and its subsidiaries.
Figgie Financial Services is engaged in providing asset-based financing and vehicle management services. It leases automobiles and other equipment to small and mid-sized commercial fleet customers, including the Company's Divisions, and also leases products manufactured by the Company
to others.
Figgie Natural Resources is engaged in the business of acquiring, exploring, and developing oil and gas properties by acquiring producing properties and further exploring and developing them.
Figgie Properties is the real estate development division of Figgie International Inc. and is active in the planning, development, construction, and management of real estate throughout the United States. Its portfolio includes office and industrial parks, recreational facilities, self-serve storage units, retail/commercial centers, and residential communities.
Waite Hill Holdings is a holding subsidiary that owns Cardinal Casualty, Colony Insurance, Hamilton Insurance, Waite Hill Assurance, and Waite Hill Services.
Cardinal Casualty Co. is a property/casualty insurance company that provides insurance to outside clients. It is licensed in the states of Ohio, Florida, Georgia, Indiana, and the District of Columbia. It is approved to do business in five additional states.
Colony Insurance Co. is a property/casualty insurance company that provides insurance to outside clients. It is licensed in Virginia and Washington State and is approved to do business in thirty-three other states.
Hamilton Insurance Co. is a property/casualty insurance company that provides insurance to outside clients. It is licensed in seventeen states and is approved to do business in three additional states.
Waite Hill Assurance is a non-operating insurance company that formerly provided insurance to the Company and outside clients.
Waite Hill Services performs claims investigation and other insurance related services for the Company and outside clients.
Customers
In 1993, no single customer accounted for more than 10% of the net sales of any segment of the Company other than the U. S. Government, which accounted for approximately 60.0% of the net sales of the Company's Technical Products segment and approximately 16.5% of the Company's total net sales. Approximately 60.0% of the Technical Products segment's net sales for the next year 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 division to recover its costs plus a fee. The Company does not at this time anticipate the termination of any of its major government contracts.
Competition
All of the Company's divisions and subsidiaries are engaged in industries characterized by substantial competition in the form of price, service, quality, and design. In many instances they compete with companies whose financial resources are greater and whose market position is stronger than that of the particular division or subsidiary. The Company believes that in the United States it is among the leading manufacturers of automatic sprinkler devices and systems, elevated booms, portable fire extinguishers, scaffolding, protective breathing apparatus, and consumer thermometers.
Patents and Trademarks
The Company owns and is licensed under a number of patents and trademarks that it regards as sufficient for its operations. It believes its business as a whole is not materially dependent upon any one patent,
trademark, or license or technologically related group of patents or licenses.
Backlog of Orders
As of December 31, 1993 and 1992, the Company had a total backlog of orders from continuing operations in the approximate amounts of $229 million and $267 million, respectively. On these dates such backlog was believed to be firm. Of the backlog on December 31, 1993, approximately 85% could reasonably be expected to be filled during the twelve months commencing
January 1, 1994. However, final verification of the Company's backlog estimates depends on, among other things, general economic and business conditions in 1994 that cannot be predicted due to the many uncertainties involved.
Raw Materials
The Company believes that the principal raw materials and purchased component parts for the manufacture of its 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 a material impact on the Company's capital expenditures, earnings, or competitive position.
Employees
As of December 31, 1993, the Company employed for continuing and discontinued operations approximately 12,600 individuals. Approximately
10,700 of these were employed in the United States, of which approximately 6,600 were hourly paid employees and approximately 4,100 were salaried employees. Approximately 1,900 employees are covered by collective bargaining agreements with various unions. The Company has generally enjoyed good relations with the unions representing its employees. Substantially all of the Company's contracts with the several unions representing its employees expire at various dates within the next three years. Two major labor negotiations were completed during 1993. Two other major union contracts are scheduled to expire in 1994.
Research
During the fiscal year ending December 31, 1993, the Company's research activities consisted principally of normal and customary operations of each of its divisions and subsidiaries in the improvement of its
products. In 1993, approximately $26.9 million was spent on research and development versus approximately $8.3 million in 1992.
Distribution
The Company's products and services are marketed through most normal channels of distribution. These vary on a subsidiary and division-by- division basis and include direct sales by company salesmen, sales through independent distributors and dealers, sales through manufacturers' agents, direct sales to government agencies, and the use of licenses and joint ventures.
Executive Officers of the Company
The following are the present executive officers of the Company who serve in the positions indicated:
HARRY E. FIGGIE, JR., Chairman of the Board and Chief Executive Officer of the Company since 1964 and served as President from 1982 to May 1989; age 70.
WALTER M. VANNOY, Vice Chairman of the Company since February 16, 1994, a member of its Board of Directors since 1981, and President of Vannoy Associates, a consulting firm, since December, 1988. Prior to his retirement in 1988, he was Vice Chairman of McDermott International, the corporate parent of Babcock & Wilcox, a diversified energy equipment and
services company; age 66.
VINCENT A. CHIARUCCI, President of the Company since May 1989 and Group Vice President from June 1988 to May 1989. Prior to joining the Company, he worked as a business consultant from 1986 to June 1988; age 64.
MARY C. CLEARY, Vice President-Assistant to the Chairman of the Board since January 1987 and Administrative Assistant to the Chairman of the Board from 1967 to 1978 and from 1984 to 1987; age 67.
LUTHER A. HARTHUN, Senior Vice President-International, General Counsel
and Secretary since April 1981; Vice President-International, General Counsel and Secretary since May 1979; and Vice President, General Counsel and Secretary of the Company since 1970; General Counsel since 1966; age 58.
MARCQ H. KAUFMANN, Corporate Vice President and President of the Company's European Operations since September 1992 and President of the Company's Packaging Systems division since January 4, 1994. Previously served as President of the Company's Geo. J. Meyer Manufacturing division from 1990 to 1992 and Managing Director of the Company's Alfa Costruzioni Packaging Equipment division from 1988 to 1990; age 68.
JERRY L. LEATH, Vice President-Human Resources and Administration since June, 1992. From 1984 to 1992 he was employed by Sabreliner Corporation, where he held the position of Vice President-Administration; age 53.
CHARLES C. RIEGER, JR., Senior Vice President of the Company since
September 1993 and Group Vice President from 1982 to 1993; age 60.
LARRY G. SCHWARTZ, Vice President-Manufacturing since September 1989 and Director of Manufacturing when he joined the Company in December 1988. From 1986 to 1988, he was Vice President and General Manager, New England Operations, with the Robert E. Morris Company; age 45.
ALAN H. BENNETT, Vice President-Sales and Distribution since September 1993 and also President of the Company's Safety Supply America division since May 1989. Previously served as President of Allied Industrial Distributors, which was acquired by the Company on May 19, 1988; age 51.
KEITH V. MABEE, Vice President-Public and Government Affairs since February 1994 and Director-Public and Government Affairs since July 1993. Previously served as Vice President, Communications with Industrial Indemnity, a commercial insurance company, from 1989 to 1993 and prior to 1989 he was Senior Vice President, Corporate Communications with Amfac Inc., a diversified services company; age 46.
C. WILLIAM EVERS, Vice President-Corporate Procurement since February 1994 and Director-Corporate Procurement since July 1992. Previously served as Director of Purchasing with the Company's Badger-Powhatan division from 1977 to 1992; age 54.
GREGORY J. PATTON, Vice President-Operations Development/Compliance since February 1994 and Director of Audit since June 1993. From 1989 to 1993 he was a senior manager in the manufacturing consulting practice of Price Waterhouse and from 1987 to 1989 he served as Director of Manufacturing Systems with Hercules Engines; age 39.
Item 2.
Item 2. Properties
The Company operates numerous plants in various states and foreign countries. The facilities in the United States have approximately 5,910,000 square feet of floor area for manufacturing, warehousing, and associated administrative uses. Approximately 3,200,000 square feet of this area is owned, and the balance is leased. At this time, the Company believes its facilities are suitable for its purposes, having adequate productive capacity for the Company's present and anticipated needs.
The properties owned and leased in the United States are located primarily in New York (940,000 square feet), California (586,000 square feet), Ohio (549,000 square feet), Missouri (521,000 square feet), Virginia (467,000 square feet), South Carolina (280,000 square feet) and Georgia (243,000 square feet).
Item 3.
Item 3. Legal Proceedings
As reported under Item 3 "Legal Proceedings" in the Company's Form 10-K Annual Report for the fiscal year ending December 31, 1992, the Company appealed to the United States Court of Appeals for the Ninth Circuit from a Federal District Court's summary judgement against the Company in a suit brought by the Federal Trade Commission seeking consumer redress in connection with the sale of heat detectors manufactured by the Company's Interstate Engineering division. In a Per Curiam opinion filed on May 7, 1993, the Court of Appeals affirmed in part and vacated in part the judgement of the District Court. The Court of Appeals held that the District Court had committed error in ordering the Company to pay a minimum amount of approximately $7,600,000 but held that the Company could be required to pay refunds to those buyers who, after notification, can make a valid claim for redress. The Company's subsequent petition for a writ of certiorari to the United States Supreme Court was denied and the Company is working with the Federal Trade Commission to implement a redress program.
In two separate suits, three stockholders of the Company filed derivative complaints during 1993 in the Common Pleas Court of Lake County, Ohio seeking recovery on behalf of the Company for alleged self-dealing, waste of corporate assets, financial statement over-statements, gross mismanagement and participation or acquiescence in such practices by Directors of the Company, all of whom were named as defendants. The Court has consolidated the two suits and the defendants have filed motions to dismiss.
The Company is involved in ordinary routine litigation incidental to its business. Management does not believe that the litigation in which the
Company is involved will have a materially adverse effect upon the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None. PART II
Item 5.
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock has been traded since July 19, 1983, on the over-the-counter market and quoted in the National Association of Security Dealers Automated Quotation National Market System (NASDAQ/NMS) under the following symbols: Class A Common Stock "FIGIA" and Class B Common Stock "FIGI". Prior to July 19, 1983, the Company's Common Stock was traded on the New York Stock Exchange.
As of April 8, 1994, there were 6,670 holders of Class A Common Stock and 5,897 holders of Class B Common Stock.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATIONS
Consolidated net sales from continuing operations in 1993 were $768.6 million, which is $23.8 million or 3.0% lower than the net sales from continuing operations of $792.4 million in 1992. Net sales in 1992 were $50.3 million lower than those in 1991. Price increases in 1993 averaged approximately 3%.
The Company has elected to treat as discontinued operations certain of its operating units as part of its current strategy to reorganize the Company and restore profitability by focusing primarily on its core industrial and technical businesses. The units to be discontinued include: Advance Security, Rawlings Sporting Goods, Sherwood-Drolet, Safety Supply America, Cardinal Casualty Co., Colony Insurance Co., Hamilton Insurance Co., Waite Hill Services, American LaFrance, Medical Devices, and Huber/Essick/Mayco Pump. As a group, these discontinued units represented sales volumes of $379 million for 1993, $380 million for 1992, and $401 million for 1991, and are excluded from the reported sales amounts. During the first quarter of 1994, the Company has concluded the sale of Advance Security to a privately held corporation.
The Consumer products segment's net sales dropped $11.4 million or 15.5% in
1993 from net sales of $73.5 million in 1992. Reduced sales from Fred Perry (U.K.) is the primary contributor, partially due to the deepening European recession, particularly in Spain, Germany, and the U.K. as well as reduced selling prices. The 1992 Consumer product net sales were $2.4 million or 3.2% lower than net sales in 1991, again due to reduced sales volume at Fred Perry (U.K.).
Fire protection/safety/security products' 1993 net sales declined $12.2 million or 5.0% versus net sales of $241.6 million in 1992. Recessionary impacts in the construction-related markets, along with decreased industrial employment, have continued to adversely affect this segment. Automatic Sprinkler, Fire Protection, and Scott Aviation (health and safety) have been most affected. Construction-related activity in the Southeast appears to be improving, while the West Coast is still slow, and mixed results are being reported in the Northeast. In 1992, this segment's net sales decreased by $4.8 million or 2.0% versus net sales in 1991.
Machinery and allied products' 1993 net sales declined $2.6 million or 1.0% when compared with net sales of $265.2 million in 1992. Increased volumes of elevating work platforms, despite the effects of the Midwest flood, were more than offset by declines in the sales of scaffolding products and material handling equipment. Sales drops in scaffolding products were caused by the generally sluggish construction industry and to a lesser degree by start-up disruptions associated with the modernization of Safway Steel's production facilities. Sales of material handling equipment have been slowed by the closing of selected operations and the weak European export market. However, the Australian and Asian markets are showing some signs of economic improvement. The 1992 net sales for this segment were $15.1 million or 5.4% less than in 1991, due primarily to the recessionary economy.
The Technical products segment's net sales declined $1.3 million or .7% in 1993 when compared to net sales of $191.0 million in 1992. The reduction
in sales is primarily a result of reduced billings on certain government contracts. The 1992 net sales declined $26.5 million or 12.2% when compared with 1991, also due to reduced billings on government contracts.
The Services segment's 1993 net sales increased $3.7 million or 17.2% when compared to net sales of $21.3 million in 1992. Increased leasing activity at the Financial Services subsidiary is responsible for this change. The 1992 net sales decreased $1.4 million or 6.3% when compared to net sales in 1991. Reduced sales from the Natural Resources division is responsible for this decline.
Other expense for 1993 was $16.3 million versus other income of $12.3 million in 1992 and other income of $.6 million in 1991. The major contributors to the increased costs in 1993 were (1) amortization of goodwill ($2 million), (2) litigation reserves ($13 million), and (3) miscellaneous items for legal/professional costs, bank fees, and exchange losses ($9 million). These items were partially offset by gains on sales of assets, legal settlement recoveries, and royalty income of approximately $8 million. Other income and expense accounts were favorably affected in 1992 by gains on sales of excess properties arising from consolidation projects and realized gains on the sale of marketable securities. Also contributing to these 1992 favorable results were payments received from the
U.S. Government as a result of a favorable decision by the Armed Services Board of Contract Appeals resolving a dispute between the Department of the Army and Scott Aviation concerning the termination of a mask contract. Other income in 1991 was also favorably affected by payments received in connection with the mask contract decision.
Consolidated cost of sales as a percentage of net sales was 87.6%, 74.4%, and 75.8% for 1993, 1992, and 1991, respectively. Higher costs for materials, purchased services, and employee compensation and fringe benefits added approximately 3% to 4% to the cost of goods and services in 1993.
Average increases in these categories were approximately 3% to 4% in 1992 and 1991. Price adjustments generally offset these types of increases.
In 1993, cost of sales was unfavorably impacted by: (1) increased expenditures, principally for new product development at Hartman Electrical, Interstate Electronics, Scott Aviation, and Snorkel of approximately $19 million over 1992; (2) the liquidation of certain equity investments and additional provisions for assets held for sale of $14 million; (3) a $7 million write-down of non-performing loans still subject to future collection efforts or litigation; and (4) increased provisions for warranty costs and inventory reserves of $12 million. Also during 1993 a number of plants were in the transition phase of installing new machinery and computer systems. This resulted in (1) a temporary need to purchase some materials outside that were previously manufactured; (2) the hiring of additional people and related costs associated with the transition; and (3) the temporary maintenance of duplicate production facilities during the transition. These costs were approximately $38 million in 1993 but are expected to drop significantly in 1994.
Consolidated selling and general and administrative expenses are $163.6 million or 13.8% higher than in 1992. Higher expenses in 1993 are attributed to increased sales efforts to penetrate U.S. and foreign markets, increased advertising and market research costs to complement those selling efforts, and increased legal and professional fees. The Company expects legal and professional fees to be a significant expenditure in 1994 as a result of the restructuring of its debt and the defense of two stockholder derivative lawsuits filed in 1993.
Net interest expense for 1993 of $35.0 was relatively unchanged from the
$35.5 million and $36.5 million reported in 1992 and 1991, respectively. Reduced interest rates offset the costs associated with the Company's increased debt level due in part to the factory automation projects.
In 1990, the Company began a modernization program at its major facilities that involved: (1) the replacement of existing manufacturing processes with state-of-the-art machining centers, fabrication equipment, and robotic welding and assembly; (2) the design and development of factory floor computer systems, and complementary support systems and procedures; (3) the re-training of personnel to schedule and run the newly automated shop floor efficiently; and (4) the consolidation of smaller plants and operations into larger, more efficient facilities to take advantage of the synergies of a larger operation. To date, the Company has reduced Company-wide machine tools from over 3,000 to approximately 280 and consolidated manufacturing plants from 83 to 31 currently, while at the same time increasing capacity by nearly 30 percent. This project was originally on a five-year timetable; however, management elected to accelerate its implementation in late 1992. Although efforts expended in 1993 reflect the largest portion of the implementation, some additional costs are expected in 1994, but at a significantly reduced level.
Restructuring costs associated with the Company's modernization program were $51.0 million, $8.8 million, and $5.9 million for 1993, 1992, and 1991, respectively. These charges stem from: (1) various relocation costs of employees and equipment; (2) consolidation-related costs such as provisions for anticipated losses on sales of real estate, consulting fees to assist with the development of strategic business plans, start-up costs in the new locations; and (3) costs incurred in retooling the plants, such as first production run samples and documenting new procedures and production methods. The future benefits expected to be achieved as a result of this modernization program include (1) cost savings associated with reduced levels of personnel, lower operating costs with respect to fewer, more efficient facilities and fewer machine tools, (2) enhanced quality, better delivery times and better customer service, and (3) overall asset management through reduced inventory levels and increased cash generation.
Factory automation costs associated with the Company's modernization program
included machinery and equipment, software, and outside consulting services. These project costs have historically been deferred and amortized over future periods commencing at the time the equipment is placed into service. Due to a number of factors which arose in 1993, including deteriorating operating results, reduced cash flow, and financing difficulties, the Company adopted a change in accounting by expensing all project costs, as incurred, other than those for the purchase of machinery and equipment. As required by generally accepted accounting principles (GAAP), this accounting change, resulting in a charge of $77 million, has been recorded as a change in estimate and reflected in the results of operations for the fourth quarter in 1993.
The Consumer products segment's operating profit margin reflects a loss of $4.5 million for 1993 versus a profit of $7.4 million in 1992. Losses at Fred Perry U.K. are responsible for the decline, primarily due to a significant drop in sales, continued highly competitive market prices, and reduced margins on the sale of seasonal and substandard quality merchandise. In 1991 the operating profit margin was $10.9 million for this segment.
The Fire protection/safety/security segment's operating profit was $5.0 million in 1993, declining from $40.0 million in 1992. The decline in operating profit has been caused by (1) a 5% drop in sales volume; (2) the change in accounting estimate of approximately $10 million; (3) restructuring charges of approximately $8 million; (4) miscellaneous warranty costs, litigation, and legal and professional costs of approximately $5 million; and (5) transition costs of approximately $7 million. The 1991 operating income was $39.2 million for this segment.
The Machinery and allied products segment's operating profit margin reflects a 1993 loss of $107.2 million, versus income of $8.1 million in 1992. The decline in operating profit has been caused by: (1) the change in accounting estimate of approximately $36 million; (2) restructuring charges of approximately $15 million; (3) miscellaneous warranty costs, litigation, and legal and professional costs of approximately $7 million; (4) miscellaneous costs for employee benefits, pension, insurance and inventory of approximately $7 million; and (5) amortization costs of approximately $27 million. Operating results of Packaging Systems were substantially impacted
by the foregoing charges. The 1991 operating income was $5.9 million for this segment.
In July of 1993, Snorkel Economy, which is part of the Machinery and allied products segment, was severely affected by Midwest flooding. Prior to the flood, the elevating platform business was well ahead of 1992 and appeared to be heading for an excellent performance year. The plants were placed back into production; however, momentum was lost. The Company has been reimbursed by the insurance carrier for the majority of the physical damage claim covering the buildings, machinery, fixtures, and inventory. Negotiations on the business interruption coverage have not as yet been fully concluded and the Company has not recognized any income in 1993 pertaining to this coverage. Known operating earnings lost during the first nine months of 1993 due to flooding are a minimum of $7 million and will most likely be significantly higher when finally determined for the full year. Claims may also be filed for 1994.
The Technical products segment's operating profit margin reflects a loss of $27.4 million, versus income of $25.7 in 1992. Declines in operating margins are due to: (1) the change in accounting estimate of approximately $11 million; (2) restructuring costs of approximately $5 million; (3) increased R&D costs for product development of approximately $17 million; and (4) losses at Hartman caused by production problems. The 1991 operating income was $26.9 million for this segment.
The Services segment's 1993 operating income was $2.2 million or $1.0 million less than the prior year. The primary reason for this decline was a $5 million restructuring charge in 1993 relating to the provision for anticipated loss on the sale of surplus properties that are associated with the Company's consolidation and restructuring programs. In 1991 the operating income for this segment was $5.1 million.
Increases in the cost of goods and services and increases in the prices of the Company's goods and services in 1993, 1992, and 1991 have generally been in line with the prevailing rate of inflation. Because the Company has been able to pass on higher costs in the form of higher prices, inflation has had relatively little impact on the Company's operating results.
The loss from continuing operations before provision for taxes on income was $250.5 million, versus income from operations of $25.5 million and $18.4
million in 1992 and 1991 respectively.
The effective income tax rate from continuing operations was a benefit of 28.4% in 1993, versus provisions of 26.0% in 1992 and 18.4% in 1991. The 1993 benefit does not take into consideration various tax planning strategies available to the Company.
The net loss before discontinued operations was $179.3 million, versus net income of $18.9 million in 1992 and $15.0 million in 1991. The net loss from discontinued operations was $6.3 million in 1993, versus net income of $9.4 million and $15.1 million in 1992 and 1991, respectively.
In December 1990, the Financial Accounting Standards Board (FASB) issued Statement No. 106, Accounting for Post Retirement Benefits Other Than Pensions. In accordance with this new statement, the Company has adopted and incorporated this new accounting principle into its 1993 financial statements. Adoption of this statement did not have any effect on the financial statements.
In February 1992, the Financial Accounting Standards Board (FASB) issued Statement No. 109, Accounting for Income Taxes. This statement is intended to supersede Accounting Principles Board Opinion No. 11 as well as FASB Statement No.96. In accordance with this new statement, the Company has adopted and incorporated this new accounting principle into its 1993 financial statements. The Company has not restated prior periods, and the
adoption of this statement has had a $5.8 million favorable effect on net income in 1993.
The net loss for the Company was $179.8 million in 1993, versus net income of $28.3 million and $30.1 million in 1992 and 1991, respectively.
Liquidity and Capital Commitments
As discussed in the Notes to the Consolidated Financial Statements, the Company was not in compliance as of December 31, 1993 with certain financial covenants contained in certain debt agreements; however it has subsequently received temporary waivers with respect to those financial covenants.
The Company is currently negotiating with banks party to its revolving credit facility, other domestic and foreign banks, and other financial institutions in an effort to finalize a satisfactory restructuring of its debt. As part of its restructuring plan, the Company intends to dispose of certain businesses under a divestiture plan designed to provide liquidity to the Company and pay down debt through the use of proceeds upon sale. In the absence of the finalization of a new long-term financing package, the Company is required under generally accepted accounting principles to classify substantially all of its long-term debt as a current liability as of December 31, 1993. This results in negative working capital of $143.4 million.
During the year the Company reduced key working capital (accounts receivable and inventory net of accounts payable) by $28.9 million and sold assets for $74.0 million, which, along with depreciation and amortization of $43.1 million, the write-off of factory automation project costs of $77.3 million and increased debt of $76.8 million, were used for capital expenditures of $109.6 million, dividends of $8.0 million, net repurchase of Company stock for $6.2 million, and fund a net loss of $179.8 million.
The Company's ability to continue to meet its liquidity requirements is dependent upon its ability to successfully complete its restructuring efforts - specifically, finalizing a new long-term financing package and completion of its divestiture program. The Company continues to make progress in building its cash position and in implementing actions aimed at restoring profitability. Negotiations with certain of the Company's lenders continue to take place in an effort to finalize a restructuring of its debt facilities.
Item 8.
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 balance sheets of Figgie International Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ending December 31, 1993. 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 1993 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, and as discussed in Note 2, the Company incurred a significant net loss and decrease in net worth for the year ending December 31, 1993, which resulted in violations of certain covenants of certain of its debt agreements which permit its lenders to accelerate the due date on its debt. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
As explained in Note 1 to the consolidated financial statements, effective January 1, 1993 the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 "Accounting For Income Taxes". In addition, as explained in Note 15 to the consolidated financial
statements, the Company changed its method of accounting for certain costs associated with its factory automation project in the fourth quarter of 1993.
ARTHUR ANDERSEN & CO.
Cleveland, Ohio, April 15, 1994.
FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
(1) Summary of Significant Accounting Policies:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Figgie International Inc. and its majority- owned subsidiaries (collectively the Company). All significant intercompany transactions and accounts have been eliminated in consolidation.
MARKETABLE SECURITIES. At December 31, 1993 and 1992, marketable securities consisted primarily of marketable equity securities and U.S. Treasury Notes and Bonds. The investments are carried at the lower of cost or market value. There was no significant difference between cost and market value at December 31, 1993 and 1992.
ACCOUNTS RECEIVABLE.
INVENTORIES. All inventories are carried at the lower of first-in first- out (FIFO) cost or market value. It is impractical to segregate inventories into major classes due to the nature of the items and the businesses carried on by the Company and its subsidiaries.
CONTRACTS IN PROCESS. Contracts in process are generally accounted for under the percentage-of-completion method, using costs incurred to date
in relation to estimated total costs of the contracts to measure the stage of completion. The cumulative effects of revisions of estimated total contract costs and revenues are recorded in the period in which the facts requiring the revision become known. When a loss is anticipated on a contract, the full amount thereof is provided currently. Claims, including change orders, are recorded at estimated recoverable amounts. The amounts of retainages and amounts representing claims or other similar items subject to uncertainty included in trade accounts receivable were not material. At December 31, 1993 and 1992, approximately $31,878,000 and $27,669,000, respectively, were included in trade accounts receivable but had not been billed due primarily to differences in the billing and production cycles. Other long term contract costs included in trade accounts receivable at December 31, 1992 amounted to $1,419,000. There were no
other long-term contract costs included in trade accounts receivable at December 31, 1993. Included in trade accounts receivable at December 31, 1993 is $4,821,000, which is not expected to be collected within the next year. The amount of contracts in process and progress payments applied against contracts in process included in inventories was $198,094,000 and $195,138,000, respectively, at December 31, 1993, and $226,070,000 and $224,007,000, respectively, at December 31, 1992.
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment values 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%; Rental Equipment, 12-1/2% and 25%; Leasehold Improvements, life of lease. Oil and gas properties are amortized on the unit of production method.
CAPITALIZATION OF INTEREST. The Company capitalizes interest costs during the development period of certain properties. Total interest
capitalized was approximately $608,288 in 1993, $2,577,000 in 1992, and $2,872,000 in 1991.
INVESTMENTS. Investments in unconsolidated minority owned companies are carried on the equity basis, which approximates the Company's equity in their underlying net book value.
INTANGIBLES. Goodwill accounts, which represent costs in excess of net assets of purchased businesses, are generally amortized over a 40-year period. At December 31, 1993 and 1992, accumulated amortization was $19,404,000 and $16,794,000, respectively. Management, which regularly evaluates its accounting for goodwill considering principally historical and projected operating results, believes that the asset is realizable and the amortization period appropriate. Patents are amortized over their statutory or estimated useful lives. As of December 31, 1993 and 1992, accumulated amortization was $5,178,000 and $5,054,000, respectively.
RESTRUCTURING CHARGES. Restructuring charges, included in the accompanying consolidated statements of income, include costs
associated with the relocation and consolidation of various Company facilities and operations, provisions for anticipated losses on sales of real estate, consulting fees to assist with the development of strategic business plans, and costs incurred in retooling its plants.
RESEARCH AND DEVELOPMENT COST. During 1993, 1992, and 1991, approximately $26,897,000, $8,333,000, and $13,916,000, respectively, was included in cost of sales for research and development.
FACTORY AUTOMATION COSTS. The Company has incurred certain costs directly related to its factory automation project encompassing owned and leased machinery, software, and outside consultant fees. The owned machinery component of these project costs is depreciated in accordance with the
useful lives discussed above. All other project costs are expensed as incurred. Prior to December 31, 1993, all other project costs were deferred and amortized over a period not exceeding five years. See Note 15, "Accounting Change".
INCOME TAXES. The provision (benefit) for income taxes is based upon results from continuing operations before the cumulative effect of change in accounting. Results from discontinued operations have been disclosed net of tax.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes", effective January 1, 1993. The cumulative effect of such adoption was to increase earnings by $5,839,000, or $.33 per share, for the year ended December 31, 1993. This accounting standard was adopted prospectively in 1993; all prior periods have not been restated.
The 1993 benefit for federal income taxes includes a charge of $1,992,000 which represents the effect of the U.S. federal income tax rate increase from 34% to 35% on net deferred tax liabilities.
Since it is not practicable to determine the tax effect of accumulated unremitted foreign earnings as of January 1, 1993, the Company has elected to prospectively provide deferred U.S. income taxes on foreign earnings which are taxed at a rate below that of the U.S. statutory rate of 35%. Management believes that any liability related to the
remittance of foreign earnings from continuing operations would not be material to the financial statements.
EARNINGS PER SHARE. Earnings per common share are based upon the weighted average number of shares outstanding during each year (17,774,900 in 1993, 17,539,472 in 1992, and 17,451,099 in 1991). The unallocated
shares of the non-leveraged Employee Stock Ownership Plan are not considered outstanding for earnings per share purposes. For 1993, pursuant to the adoption of Statement of Position 93-6 "Employers' Accounting for Employee Stock Ownership Plans", the unallocated shares of the leveraged Employee Stock Ownership Plan are not considered outstanding for earnings per share purposes. These shares were considered outstanding for 1992 and 1991 earnings per share.
FOREIGN CURRENCY TRANSLATION.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates their fair market value due to the short maturity of those investments. The effect of foreign currency translation on cash held by foreign divisions is not material.
OTHER ASSETS. Included in other assets in the accompanying balance sheet are amounts representing the estimated net realizable value of net assets of the Company's finance subsidiary, which continues to be held for sale, approximating $38,157,000 and $62,192,000 as of December 31, 1993 and 1992, respectively.
SELF-INSURANCE PROGRAMS. The Company is self-insured for certain levels of general liability and workers' compensation coverage. Estimated costs of these self-insurance programs are accrued at present values based on projected settlement dates for known and anticipated claims. Any resulting adjustments to previously recorded reserves are reflected in current operating results.
RECLASSIFICATION OF AMOUNTS. Certain amounts for 1992 and 1991 have been reclassified to reflect comparability with account classifications for 1993.
(2) Liquidity and Restructuring Plans:
As a result of 1993 operating results, the Company was not in compliance as of December 31, 1993 with certain financial covenants contained in certain debt agreements, which permit its lenders to accelerate the due date on its debt; however the Company has subsequently received temporary waivers with respect to those financial covenants. Since permanent waivers or modifications of these covenants
have not been obtained, $271 million of long-term debt has been classified as current.
The Company is currently negotiating with banks party to its revolving credit facility, other domestic and foreign banks, and other financial institutions in an effort to finalize a satisfactory restructuring of its debt. As part of the restructuring plan, the Company intends to dispose of certain businesses under a divestiture program designed to pay down debt through the use of proceeds upon sale. See Note 3, "Discontinued Operations".
The Company's consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is dependent upon its ability to successfully complete its debt restructuring efforts. Until such debt restructuring is completed, there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
(3) Discontinued Operations:
In December of 1993, the Company instituted a divestiture plan as part of its debt restructuring efforts to dispose of certain businesses through unrelated sales transactions. These entities represent separate major lines of business, class of customers, or non-reportable business segments and, accordingly, have been treated as discontinued operations as required by generally accepted accounting principles. As a result of this treatment, the accompanying consolidated financial statements have been reclassified to report separately the net assets and operating results of the following operations: Rawlings Sporting
Goods, Sherwood-Drolet Corp. Ltd., Advance Security, American Lafrance, Safety Supply America, Medical Devices, Huber/Essick/Mayco Pump, Cardinal Casualty Co., Colony Insurance Co., Hamilton Insurance Co., Waite Hill Services.
Net assets of the discontinued operations at December 31, 1993 consisted primarily of accounts receivable, inventory, and machinery and equipment offset by insurance loss reserves related to the insurance companies.
As a group, the discontinued operations represented sales volumes of $379 million, $380 million, and $401 million for 1993, 1992, and 1991, respectively, and are excluded from the reported sales amounts. Net income from discontinued operations includes provisions for federal and state taxes at the statutory rates for the applicable period.
No provision for loss on disposal of discontinued operations has been provided as the Company expects its divestiture plan to result in a net gain. During the first quarter of 1994, the Company sold Advance Security to a privately held corporation. Although the transaction is not closed, the Company is estimating a financial reporting gain of approximately $21 million, subject to any adjustments pursuant to the terms of the agreement.
The Company had available a Revolving Credit Agreement (Agreement) in the
amount of $150,000,000 provided by a group of nine banks, with interest at either the Base Rate, Certificate of Deposit rates, or Eurodollar rates, as defined in the Agreement, at the option of the Company. The Agreement required the Company to pay a facility fee of 1/4 of 1% on the entire commitment and a commitment fee of 1/8 of 1% on the unused portion of the commitment. The outstanding balance in the amount of $150,000,000 was converted to a two-year term loan effective December 31, 1993, requiring quarterly principal payments in equal amounts until December 31, 1995 at the current interest rate of 6.25%. As a result of the current year operating loss, the Company was not in compliance as of December 31, 1993 with certain financial covenants contained in the Agreement and did not make its first quarter scheduled principal payment. The Company subsequently received a temporary waiver with respect to the financial covenants and non-payment. Pending completion of the Company's debt restructuring efforts, the entire balance of the term loan is presented as long-term debt classified as current in the accompanying consolidated balance sheet.
In October 1989, the Company completed the registration and sale of $175,000,000 of 9.875% Senior Notes due October 1, 1999. During 1990, $1,000,000 of the notes were repurchased on the open market. Interest is payable semi-annually on April 1 and October 1, commencing April 1, 1990. The net proceeds of the offering, totaling approximately $173,560,000, were used to reduce variable-rate debt that had been used to finance operations, acquisitions, and repurchases of shares. While the Company is in compliance with the Indenture Agreement, the amount due under the Senior Notes has been classified as a current liability in the accompanying consolidated balance sheet, pending completion of the Company's debt restructuring efforts.
The ESOP Note is payable in equal annual installments through 1996. This note bears interest at 85% of the lender`s base rate. The December 31, 1993 payment of $2,500,000 was waived pending restructuring of the Company's total debt facility. Pending completion of the Company's debt restructuring efforts, the ESOP Note is presented as long-term debt classified as current in the accompanying consolidated balance sheet.
The 10.375% subordinated debentures are redeemable at a premium prior to
1998. The Company is required to make annual payments of $1,500,000 into a sinking fund through 1997, with a $5,000,000 payment in 1998. All required redemptions have been made. While the Company is in compliance as of December 31, 1993 with the subordinated indenture agreement, the amounts due under the subordinated debentures have been presented as long-term debt classified as current in the accompanying consolidated balance sheet pending completion of the Company's debt restructuring efforts.
The Company was not in compliance, as of December 31, 1993, with certain financial covenants contained in its 3.94% Notes; however, it has subsequently received temporary waivers with respect to those financial covenants. Pending completion of the Company's debt restructuring efforts, the notes are presented as long-term debt classified as current in the accompanying consolidated balance sheet.
While the Company was in compliance as of December 31, 1993 with the covenants contained in the 6.75% Note Agreement, the amount due has been presented as long-term debt classified as current in the accompanying balance sheet pending completion of the Company's debt restructuring efforts.
Mortgage notes payable are secured by real property and are non-recourse to the Company. The Company was in compliance at December 31, 1993 with these mortgage notes. These mortgage notes payable are classified as long-term debt in the accompanying consolidated balance sheet.
Excluding the effects of any final negotiations with its lender, the scheduled principal payments on the long-term debt, excluding the obligations under capital leases, are approximately as follows: 1994 - $105.0 million; 1995 - $87.7 million; 1996 - $7.8 million; 1997 - $6.7
million; 1998 - $9.3 million; and $218.8 million thereafter.
Total operating lease expense was approximately $28,292,000 in 1993, $21,666,000 in 1992, and $19,205,000 in 1991.
(8) Contingent Liabilities:
As reported under Item 3 "Legal Proceedings", the Company appealed to the United States Court of Appeals for the Ninth Circuit from a Federal District Court's summary judgement against the Company in a suit brought by the Federal Trade Commission seeking consumer redress in connection with the sale of heat detectors manufactured by the Company's Interstate Engineering division. In a Per Curiam opinion filed on May 7, 1993, the Court of Appeals affirmed in part and vacated in part the judgement of the District Court. The Court of Appeals held that the District Court had committed error in ordering the Company to pay a minimum amount of approximately $7,600,000 but held that the Company could be required to pay refunds to those buyers who, after notification, can make a valid claim for redress. The Company's subsequent petition for a writ of certiorari to the
United States Supreme Court was denied and the Company is working with the Federal Trade Commission to implement a redress program. The Company has provided a reserve for the estimated liability related to this matter.
In two separate suits, three stockholders of the Company filed derivative complaints during 1993 in the Common Pleas Court of Lake
County, Ohio seeking recovery on behalf of the Company for alleged self-dealing, waste of corporate assets, asset overstatements, gross mismanagement and participation or acquiescence in such practices by Directors of the Company, all of whom were named as defendants. The Court has consolidated the two suits and the defendants have filed motions to dismiss.
Additionally, the Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. The Company has provided a reserve for the estimated liability related to known cases. In the opinion of management, any additional liability with respect to these matters will not have a material effect on the Company's financial statements. Costs incurred by the Company in the performance of U.S. Government contracts are subject to audit. In the opinion of management, the final settlement of these costs will not result in significant adjustments to recorded amounts.
(9) Pension and Employee Stock Ownership 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 adopted a nonqualified supplemental retirement plan covering certain officers and senior executives.
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 28,883 and 20,742 shares of the Company's Class A Common Stock and 52,115 and 41,707 shares of the Company's Class B Common Stock as of December 31, 1993 and 1992, respectively.
The Company maintains two employee stock ownership plans: a leveraged plan (the ESOP) and a non-leveraged plan (the New ESOP).
The ESOP holds a $20,000,000 note that is guaranteed by the Company and bears interest at 85% of the lender's base rate. The note is currently
paying interest at a 5.1% rate, which, in management's opinion, fully reflects the current market rate for a similar facility. The remaining balance outstanding of $10,000,000 as of December 31, 1993 consists of $2,500,000 past due, and the remaining $7,500,000 is payable in equal annual installments of $2,500,000 through 1996. The ESOP used the proceeds from the note to purchase 756,195 Class B shares, which are allocated to active participant accounts each December 31 on a ratable basis as the note is repaid. Contributions to fund the interest requirements of the loan are reflected as interest expense in the accompanying consolidated statements of income, approximating $365,000, $290,000, and $756,000 (net of dividends of approximately $328,000 in 1993 and $374,000 in 1992 and 1991), were made by the Company during 1993, 1992, and 1991, respectively. During 1993, the Company elected to prospectively account for the ESOP under the provisions of Statement of Position 93-6, "Employers Accounting for Employee Stock Ownership Plans." This election allows the Company to measure the compensation expense based on the market value of the shares on the date of allocation.
The New ESOP was established in 1989 by the transfer of surplus assets from a terminated benefit plan. The New ESOP used the transferred funds to directly and indirectly purchase 1,124,682 Class A and 440,796 Class B shares. Under the terms of the New ESOP, no less than 12.5% of the total shares are to be annually allocated to active participant accounts based upon a formula utilizing salary and years of service. The amortization to expense of the New ESOP unearned compensation is based on the fair market value of the shares on the date of allocation. Dividends on unallocated shares are charged to expense.
The Company also maintains the Figgie International Inc. Stock Bonus Trust and Plan (the Stock Plan). Under this 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 1993, 1992, or 1991. The Stock Plan held 378,402 and 410,809 shares of the Company's Class B Common Stock as of December 31, 1993 and 1992, respectively.
In addition to providing pension benefits, the Company and its subsidiaries provide certain health care and life insurance benefits for certain retired employees. A small percent of the Company's employees become eligible for these benefits paid by the Company if they reach retirement age while working for the Company. For 1993, 1992, and 1991, those premiums approximated $20,000 annually. Most of the Company's salaried employees are eligible for medical benefits at retirement by paying the full cost of the benefits.
The Company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1993. Adoption of this statement did not have any effect on the financial statements.
(10) Capital Stock:
(11) Restricted Stock Purchase Plan:
Under the 1993 Restricted Stock Purchase Plan for Employees (the "1993 Employees Plan"), up to 800,000 shares each of either Class A or Class B Common Stock were authorized for issuance and executive officers and other key employees were granted the right to purchase Common Stock at prices substantially below market value. The purchase of Class A and Class B Common Stock under this plan entitles the employee to full voting and dividend rights, but the shares cannot be sold, transferred, or pledged, and the certificates representing the shares are retained in the custody of the Company. At the earliest of retirement, death, or total disability of the employee, or termination of the plan, these restrictions on transferring, pledging, or selling the shares expire, and the employee or heirs take unrestricted custody of the stock. In the event the employee leaves the Company prior to any of these occurrences, the Company can repurchase the shares (or, in the case of retirement, a portion of the shares) at the lower of the original purchase price paid by the employee or the then prevailing market price. At December 31, 1993, 402,833 shares of Class A Common Stock and 156,877 shares of Class B Common Stock, respectively, subject to
the above restrictions, were outstanding under the 1993 Employees Plan. At December 22, 1992, 442,978 shares of Class A Common Stock and 92,720 shares of Class B Common Stock, subject to similar restrictions, were outstanding under the predecessor 1988 Restricted Stock Purchase Plan for Employees (the "1988 Employees Plan"). On December 22, 1992, the 1988 Employees Plan was terminated and all restrictions on outstanding shares lapsed.
Under the 1993 Restricted Stock Purchase Plan for Directors (the "1993 Directors Plan"), up to 75,000 shares of Class B Common Stock were
authorized for possible issuance and certain Directors of the Company were granted the right to purchase shares of Class B Common Stock at prices substantially below market value. The 1993 Directors' Plan contains restrictions and other provisions similar to those of the 1993 Employees Plan. At December 31, 1993, 39,000 shares of Class B Common Stock, subject to the above restrictions, were outstanding under the Directors' Plan. At December 31, 1992, 42,000 shares of Class B Common Stock, subject to similar restrictions, were outstanding under the predecessor 1988 Restricted Stock Purchase Plan for Directors (the "1988 Directors Plan"). On July 1, 1993, the 1988 Directors Plan terminated and all restrictions on outstanding shares lapsed.
(12) Land and Land Improvements:
The Company's real estate subsidiary develops land for recreational, residential, and commercial purposes. Such investments in development land were $50,238,000 and $57,433,000 at December 31, 1993 and 1992, respectively. Related mortgage debt was $436,000 at December 31, 1993, and $530,000 at December 31, 1992. Excess of investment over mortgage debt was financed by the Company's Revolving Credit Agreement and borrowings of the subsidiary under its own credit agreements.
(13) Purchase of Businesses:
In 1993 and 1992, the Company purchased businesses for a total cash consideration of $5,892,000 and $2,913,000, respectively. All the acquisitions are included in existing product groups.
All acquisitions were accounted for by the purchase method of accounting, and the difference between the fair value of net assets acquired and the purchase consideration has been allocated to goodwill. The results of operations of these purchased businesses are not material to consolidated totals and have been included in the accompanying consoli- dated statements of income since the dates of acquisition.
Increases of $4,126,000 and $3,100,000 were recorded in goodwill relating to the purchases of businesses in 1993 and 1992, respectively.
Additionally, in 1992 the Company purchased a 20% interest in a medical
products company for $7,432,000.
(14) Business Segment Data:
The Company's operations are conducted through five business segments. These segments and the primary operations of each are described on pages 2 through 9.
Pages 11 through 13 contain a summary of certain financial data for each business segment for 1993, 1992, and 1991. Information concerning the content of this financial data is as follows: Intersegment sales are generally at current market prices. Operating profit is total revenue less operating expenses and does not include general corporate expenses, 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 corporate property.
(15) Accounting Change:
In connection with its factory automation project, the Company has incurred significant costs, including machinery and equipment, software, and outside consulting fees. These project costs have historically been deferred and amortized over future periods commencing at the time the equipment is placed into service. Due to a number of factors which arose in 1993, including deteriorating operating results, cash flow and financing difficulties, the Company adopted a change in accounting by expensing all project costs, other than machinery and equipment, as incurred. As required by generally accepted accounting principles, the accounting change, amounting to an after tax charge approximating $50 million ($77 million pre-tax) or $2.80 per share, has been recorded as a change in estimate and recorded in the results of operations for the fourth quarter of 1993.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None
PART III
Item 10.
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 Registrant" contained in Part I, Item 1 of this report, which information is incorporated herein by reference.
(c) Compliance with Section 16(a)
Information with respect to compliance with Section 16(a) is set forth under the caption "Compliance with Section 16(a) of the Exchange Act" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information required by this Item is set forth under the captions
"Compensation of Directors" and "Executive Compensation" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
Item 12.
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 and Officers" in the Company's definitive proxy statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
Item 13.
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.
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 April 15, 1994. Our report on the financial statements includes an explanatory paragraph with respect to substantial doubt about the Company's ability to continue as a going concern, as discussed in Note 2 to the financial statements and an explanatory paragraph with respect to the Company's adoption of the provisions of SFAS No. 109 "Accounting for Income Taxes" in the first quarter of 1993 (as discussed in Note 1 to the financial statements) and to the change in the method of accounting for certain costs associated with its factory automation project in the fourth quarter of 1993 (as discussed in Note 15 to the financial statements). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state 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 & CO.
Cleveland, Ohio, April 15, 1994.
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.J. BATTAGLIA_________________________________ Date: April 13, 1994S. J. Battaglia
Principal Accounting Officer
By__L.A. HARTHUN__________________________________ Date: April 13, 1994L. A. Harthun, Senior Vice President-International General Counsel and Secretary