0000720032-95-000004.txt : 19950809 0000720032-95-000004.hdr.sgml : 19950809 ACCESSION NUMBER: 0000720032-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIGGIE INTERNATIONAL INC /DE/ CENTRAL INDEX KEY: 0000720032 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 521297376 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08591 FILM NUMBER: 95559560 BUSINESS ADDRESS: STREET 1: 4420 SHERWIN RD CITY: WILLOUGHBY STATE: OH ZIP: 44094 BUSINESS PHONE: 2169532700 MAIL ADDRESS: STREET 1: 4420 SHERWIN RD CITY: WILLOUGHBY STATE: OH ZIP: 44094 FORMER COMPANY: FORMER CONFORMED NAME: FIGGIE INTERNATIONAL HOLDINGS INC DATE OF NAME CHANGE: 19870112 10-Q 1 FORM 10-Q SECOND QTR 1995 SECURITIES AND EXCHANGE COMMISSION Washington D.C. FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarter ended June 30, 1995 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.) 4420 Sherwin Road Willoughby, Ohio 44094 (Address of principal executive offices) (Zip Code) (216) 953-2700 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding as of July 10, 1995 Class A Common Stock, par value $.10 per share 13,667,064 Class B Common Stock, par value $.10 per share 4,726,669 18,393,733 2 FIGGIE INTERNATIONAL INC. INDEX Page No. PART I. FINANCIAL INFORMATION Consolidated Statements of Income for the Six Months Ended June 30, 1995 and 1994 3 Consolidated Statements of Income for the Three Months Ended June 30, 1995 and 1994 4 Consolidated Balance Sheets at June 30, 1995 and December 31, 1994; and Pro Forma Consolidated Balance Sheet at June 30, 1995 5-6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1994 7 Notes to Consolidated Financial Statements 8-14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 PART II. OTHER INFORMATION 22 3 FIGGIE INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, (in thousands, except per share data) (Unaudited) 1995 1994 CONTINUING OPERATIONS: Net Sales $173,956 $153,141 Cost of Sales 129,760 117,545 Gross Profit on Sales 44,196 35,596 Operating Expenses: Selling, General and Administrative 26,321 35,897 Research and Development 6,507 11,411 Total Operating Expenses 32,828 47,308 Operating Income (Loss) 11,368 (11,712) Other Expense (Income): Refinancing Costs 10,050 7,948 Interest Expense 16,629 21,070 Interest Income (1,425) (1,534) Other, Net (18) (58) Loss before Income Tax Benefit (13,868) (39,138) Income Tax Benefit - 12,817 Loss from Continuing Operations (13,868) (26,321) Loss from Discontinued Operations, net of tax - (11,887) Net Loss $(13,868) $(38,208) Weighted Average Shares 18,106 17,811 Per Share Data Loss from Continuing Operations $ (.77) $ (1.47) Loss from Discontinued Operations - (.67) Net Loss $ (.77) $ (2.14) See Notes to Consolidated Financial Statements. 4 FIGGIE INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, (in thousands, except per share data) (Unaudited) 1995 1994 CONTINUING OPERATIONS: Net Sales $ 88,690 $ 80,030 Cost of Sales 66,747 61,159 Gross Profit on Sales 21,943 18,871 Operating Expenses: Selling, General and Administrative 12,491 15,431 Research and Development 2,997 8,574 Total Operating Expenses 15,488 24,005 Operating Income (Loss) 6,455 (5,134) Other Expense (Income): Refinancing Costs 5,528 4,517 Interest Expense 7,555 10,300 Interest Income (581) (950) Other, Net (217) 233 Loss before Income Tax Benefit (5,830) (19,234) Income Tax Benefit - 6,183 Loss from Continuing Operations (5,830) (13,051) Loss from Discontinued Operations, net of tax - (4,820) Net Loss $ (5,830) $(17,871) Weighted Average Shares 18,117 17,766 Per Share Data Loss from Continuing Operations $ (.32) $ (.73) Loss from Discontinued Operations - (.27) Net Loss $ (.32) $ (1.00) See Notes to Consolidated Financial Statements. 5 FIGGIE INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1995 AND DECEMBER 31, 1994 (in thousands) Pro Forma June 30, June 30, Dec. 31, 1995 1995 1994 (Unaudited)(Unaudited) Note 2 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 9,615 $ 50,615 $ 28,611 Restricted Cash 16,599 23,599 18,716 Trade Accounts Receivable, less Allowance for Uncollectible Accounts of $376 in 1995 and $259 in 1994 44,450 44,450 44,994 Inventories 43,236 43,236 38,845 Prepaid Expenses 3,912 3,912 3,225 Recoverable Income Taxes - - 8,108 Net Assets Related to Discontinued Operations 203,625 116,625 298,411 Total Current Assets 321,437 282,437 440,910 PROPERTY, PLANT AND EQUIPMENT Land and Land Improvements 24,874 24,874 29,699 Buildings and Leasehold Improvements 44,046 44,046 46,024 Machinery and Equipment 67,042 67,042 70,587 135,962 135,962 146,310 Accumulated Depreciation (44,023) (44,023) (42,385) 91,939 91,939 103,925 Property under Capital Leases, less Accumulated Depreciation of $4,313 in 1995 and $4,709 in 1994 1,914 1,914 2,158 Net Property, Plant and Equipment 93,853 93,853 106,083 OTHER ASSETS Deferred Divestiture Proceeds 25,256 32,256 19,190 Prepaid Pension Costs 10,571 10,571 9,964 Prepaid Rent on Leased Equipment 17,075 17,075 17,075 Intangible Assets 19,845 19,845 20,244 Cash Surrender Value of Insurance Policies 11,108 11,108 10,576 Non-current Receivables 5,700 5,700 5,920 Prepaid Finance Costs 4,017 4,017 8,291 Other 8,508 8,508 6,211 Total Other Assets 102,080 109,080 97,471 Total Assets $ 517,370 $ 485,370 $ 644,464 6 FIGGIE INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1995 AND DECEMBER 31, 1994 (in thousands, except par value) Pro Forma June 30, June 30, Dec. 31, 1995 1995 1994 (Unaudited)(Unaudited) Note 2 LIABILITIES CURRENT LIABILITIES Debt Due Within One Year $ 81,780 $ 49,780 $ 171,641 Accounts Payable 55,798 55,798 55,398 Accrued Insurance Reserves 15,007 15,007 16,889 Accrued Liabilities and Expenses 55,070 55,070 64,706 Current Maturities of Long-term Debt 5,931 5,931 7,179 Total Current Liabilities 213,586 181,586 315,813 Long-term Debt 226,147 226,147 234,491 Other Non-current Liabilities 25,738 25,738 28,938 Total Liabilities 465,471 433,471 579,242 STOCKHOLDERS' EQUITY Preferred Stock, $1.00 Par Value; Authorized, 3,217 Shares; Issued and Outstanding, None - - - Class A Common Stock, $.10 Par Value; 1,361 1,361 1,370 Authorized, 18,000 Shares; Issued and Outstanding 1995 - 13,610; 1994 - 13,695 Class B Common Stock, $.10 Par Value; 473 473 471 Authorized, 18,000 Shares; Issued and Outstanding 1995 - 4,726; 1994 - 4,715 Capital Surplus 108,854 108,854 110,518 Accumulated Deficit (57,066) (57,066) (43,198) Unearned Compensation (1,916) (1,916) (3,829) Cumulative Translation Adjustment 193 193 (110) Total Stockholders' Equity 51,899 51,899 65,222 Total Liabilities and Stockholders' Equity $ 517,370 $ 485,370 $ 644,464 See Notes to Consolidated Financial Statements. 7 FIGGIE INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 (in thousands) (Unaudited) 1995 1994 Operating Activities: Loss from Continuing Operations $ (13,868) $ (26,321) Loss from Discontinued Operations - (11,887) Adjustments to Reconcile Net Loss to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 3,412 19,328 Amortization of Unearned Compensation 416 4,101 Other, Net 480 (1,002) Changes in Operating Assets and Liabilities: Trade Accounts Receivable (2,242) 563 Allowance for Uncollectible Accounts 126 484 Finance Receivables 391 4,699 Inventories (4,154) (4,344) Prepaid Items 5,214 (6,280) Prepaid Pension Cost (647) (800) Other Assets 5,205 16,418 Accounts Payable (2,614) (15,349) Accrued Liabilities and Expenses (4,386) (10,156) Accrued Income Taxes 15,269 16,331 Other Liabilities (4,234) 429 Net Cash Used by Operating Activities (1,632) (13,786) Investing Activities: Capital Expenditures for Continuing Operations (3,448) (7,785) Capital Expenditures for Discontinued Operations (18,202) (9,596) Proceeds from Sale of Property, Plant and Equipment 10,858 4,613 Proceeds from Business Divestitures 87,441 35,651 (Purchases) Sales of Securities by Insurance Subs. (303) (63) Net Cash Provided by Investing Activities 76,346 22,820 Financing Activities: Proceeds from Debt 3,874 2,722 Principal Payments on Debt (103,327) (6,666) Borrowings Under Notes Payable, Net - 38,518 Common Stock Transactions, Net (174) (348) Net Cash (Used) Provided by Financing Activities (99,627) 34,226 Net Increase in Cash and Cash Equivalents (24,913) 43,260 Cash and Cash Equivalents at Beginning of Year 68,300 33,816 Cash and Cash Equivalents at End of Period $ 43,387 $ 77,076 - Continuing Operations - Unrestricted $ 9,615 $ 67,764 - Continuing Operations - Restricted $ 16,599 $ 1,862 - Discontinued Operations $ 10,873 $ 10,450 - Deferred Divestiture Proceeds $ 6,300 $ - See Notes to Consolidated Financial Statements. 8 FIGGIE INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The financial information included herein has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and properly reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present a fair statement of the financial position and results of operations for the periods covered by this report. The results of operations for the three months and six months ended June 30, 1995 are not necessarily indicative of the results to be expected for the entire year. (1) Summary of Significant Accounting Policies: The financial statements for the three months and six months ended June 30, 1995 have been prepared in accordance with the accounting policies described in Note 1 of the Notes to Consolidated Financial Statements appearing in Figgie International Inc.'s 1994 Form 10-K, except that the pro forma column of the balance sheet also gives effect to the proceeds of recent dispositions (See Note 2). (2) Discontinued Operations: On February 15, 1995, the Company announced that the Board of Directors had approved a strategic business plan, effective December 31, 1994, designed to restore the Company to profitability. Under the plan, the Company will operate four technology-driven manufacturing companies, aggressively cut corporate overhead, sell its fourteen other businesses in 1995 and use the sale proceeds to reduce debt and operating lease obligations. The entities to be sold have been reported as discontinued operations for the year ended December 31, 1994. Through June 30, 1995, the Company sold through unrelated sales transactions the following businesses: Figgie Acceptance; Figgie Power Systems; Spaceguard Products; Figgie/Alfa Packaging Systems; Figgie Financial Services; Medcenter Management Services; and American LaFrance. Proceeds and other considerations from sales transactions 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. Amounts consist principally of cash held in bank escrow accounts or held back by purchasers to support indemnification provisions and final purchase price determinations and cash due to the Company from future tax benefits under tax sharing agreements with purchasers. 9 (2) Discontinued Operations: - continued On July 21, 1995, the Company completed the sale of Safway Steel Products and Figgie Fire Protection Services in unrelated transactions. The sales price was $126 million, net of transaction expenses, of which $39 million was used to pay off operating leases. Of the remaining $87 million, $7 million represents cash deposited in escrow accounts as deferred divestiture proceeds, $41 million represents cash retained by the Company, $32 million was applied to repay bank debt and $7 million represents cash restricted as collateral for letters of credit. The pro forma presentation gives effect to the July 21 transactions as if they had occured as of June 30, 1995. Net Assets Related to Discontinued Operations consist primarily of accounts receivable, contracts in process, oil and gas interests, inventory, property, plant and equipment, and significant, specialized machinery, net of current liabilities of these businesses. Realization of these discontinued assets is based on management's best estimate and is subject to market conditions, timing and negotiations. (3) Inventories: Inventories are summarized as follows: (in thousands) June 30, Dec. 31, 1995 1994 Manufacturing Inventories: Raw materials $ 22,542 $ 21,509 Work in process 9,218 6,138 Finished goods 13,273 11,219 Inventory reserves (2,130) (1,532) Total manufacturing inventories 42,903 37,334 Inventories applicable to government contracts 215,411 207,632 Less: Progress payments (215,078) (206,121) Net contracts in process 333 1,511 Total Inventories $ 43,236 $ 38,845 (4) Debt Refinancing: On August 1, 1994, the Company executed an agreement ("Override Agreement") with its significant unsecured institutional lenders to refinance approximately $315 million in indebtedness, letters of credit and related facilities ("Override Debt") of which $278 million was outstanding. At the same time, the Company refinanced approximately $172 million in outstanding operating leases. The Override Debt bears interest at a base rate plus 2% and a restructuring fee of 3 1/2%. Mortgages, the 9-7/8% Senior Notes, the 10-3/8% Subordinated Debentures and certain other debt and 10 4) Debt Refinancing: continued leases were not part of the refinanced debt. The Override Agreement precludes the Company from paying dividends and secures Override Debt with security interests in shares of certain subsidiaries of the Company and substantially all of the Company's accounts receivable, inventory, intellectual property and related assets. In December 1994, the Override Agreement was amended to permit the Company to obtain additional letter of credit facilities. On March 31, 1995, the Override Agreement was amended (the "Second Amendment"), to extend the expiration date to January 1, 1996, set principal amortization payments throughout 1995, reset the net worth, cash flow and capital expenditure financial covenants with amounts applicable to the Company's continuing operations and to permit the Company to incur additional indebtedness as defined. Also, effective March 31, 1995, the 2% interest payment deferral was terminated and the amount due was paid in April. Fees due under the original agreement and extension fees will require a refinancing cost of approximately $11.6 million in 1995 of which $10.1 million was expensed as of June 30, 1995. Pursuant to the Second Amendment, the Company has agreed to repay in 1995 a substantial portion of all of the remaining amounts outstanding under the Override Agreement, with any remaining amounts due January 1, 1996. The Company expects to fund these payments through the proceeds of the divesture of those businesses whose net assets are presented in the Company's balance sheet as Net Assets Related to Discontinued Operations; however, all Company sources, including cash reserves, working capital generated, and short-term facilities can be accessed for this purpose. At June 30, 1995, all required restrictions and financial covenants have been satisfied. (5) Debt Due Within One Year: Debt due within one year is as follows: (in thousands) 6/30/95 12/31/94 Average Average Outstanding Rate Outstanding Rate Override Debt $ 81,448 11.0% $167,364 10.50% Other Debt 332 9.0% 4,277 9.85% Total $ 81,780 $171,641 The Company has a receivable-based credit facility which permits borrowings of up to $20.0 million based on the balances of certain divisions' receivables. No amounts were borrowed during the six- month period ended June 30, 1995. At June 30, 1995, $13.0 million was available under this facility. 11 (6) Long-Term Debt: Total long-term debt at June 30, 1995 and December 31, 1994 consisted of the following: (in thousands) 1995 1994 9.875% Senior Notes due 1999 $174,000 $174,000 10.375% Debentures due 1998 8,000 9,500 Mortgage notes 46,787 53,076 Obligations under capital leases 3,291 4,889 Other debt and notes - 205 Total 232,078 241,670 Less - current maturities (5,931) (7,179) Long-term debt $226,147 $234,491 Mortgage notes secured by real property are due at various dates through 2009 and bear interest at rates ranging from 7.5% to 12.25%. During the period ended June 30, 1995, $4.2 million of mortgage notes were paid-off in connection with divested business units. (7) Leases: The Company leases a substantial amount of manufacturing equipment under operating lease arrangements. All monthly rent and other payments due under all leases have been made, and are current through June 30, 1995. On August 1, 1994, and concurrently with entering into the Override Agreement, the Company executed agreements with certain lessors to restructure approximately $172 million of outstanding leases. Effective March 31, 1995, the Company and those lessors amended certain financial covenants of the leases to conform to the financial covenants contained in the Second Amendment to the Override Agreement, and to accelerate certain fees and to amend other terms consistent with the Override Agreement. 12 (7) Leases: - continued The changes in rental commitments under operating leases from those as of December 31, 1994 to those as of June 30, 1995 are as follows (in millions): Actual Pro Forma (Note 2) Rental commitments under operating leases at December 31, 1994, including $120.6 related to discontinued operations $155.7 $155.7 Payments to lessors 18.3 18.3 Elimination of rental commitments through sale of underlying assets or assignment of leases to purchasers 36.6 75.6 Rental commitments under operating leases at June 30, 1995, including $70.4 million ($31.4 million pro forma) related to discontinued operations $100.8 $ 61.8 Funds to pay the $70.4 million ($31.4 million pro forma) of lease obligations related to discontinued operations are expected to be provided primarily through the divestiture proceeds of those businesses. With respect to machinery and equipment that is not purchased or is presently not utilized or underutilized, the Company expects to satisfy the rental payments through its internal funds until such equipment is sold, subleased or assigned. 13 (8) Contingent Liabilities: As previously reported, the Federal Trade Commission sought consumer redress in connection with the sale of heat detectors manufactured by the Company's Interstate Engineering division. The Company paid consumer refunds totaling approximately $3.9 million through a previously established letter of credit pursuant to a redress program which has been substantially concluded. The Company had established an accrual and no additional material charges are anticipated. In a class action suit filed on April 18, 1994, in the U.S. District Court for the Northern District of Ohio against the Company and two former officers and directors, the plaintiff stockholder alleged that the defendants disseminated false and misleading information to the investing public concerning the Company's business, management, financial condition, and future prospects in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. A separate class action suit was filed by another stockholder on May 11, 1994, in the same court against the Company and certain former and present officers and directors setting forth similar allegations. Both suits seek monetary damages and costs and have been consolidated into one case. In two separate suits reported in the Company's 1993 Form 10-K Annual Report, three stockholders of the Company filed derivative complaints on October 13 and December 2, 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 consolidated the two suits and subsequently dismissed them with respect to all defendants. The plaintiffs appealed the Court's decision and the parties reached an agreed upon setttlement, the principal terms of which were included in a notice mailed to the Company's stockholders of record. The notice also provided information for the procedure to be followed by any stockholder who wished to object to the terms of the settlement. The approval of the terms of the settlement is presently under consideration by the Court. On October 11, 1994 Deloitte & Touche LLP filed suit against the Company in the Cuyahoga County Common Pleas Court of Ohio alleging that the Company was in breach of contract for failure to pay for consulting services rendered by Deloitte & Touche in the approximate amount of $30 million plus interest. On the same date, the Company filed in the same court its complaint against Deloitte & Touche (and later against Deloitte & Touche LLP) alleging that in connection with consulting services rendered to the Company, Deloitte & Touche was liable for breach of contract, negligent misrepresentation, breach of fiduciary duty, professional 14 (8) Contingent Liabilities: - continued negligence and fraudulent inducement. The Company seeks $250 million in compensatory damages as well as punitive damages, declaratory relief and an accounting. The Company also filed a counterclaim containing similar allegations, as well as claims of breach of warranty and the unlicensed and unauthorized practice of engineering, in response to the suit filed by Deloitte & Touche LLP. Deloitte & Touche LLP has counterclaimed in the Company's action and the Court has now consolidated the two cases. On December 19, 1994 the Company, its subsidiary Figgie Properties Inc. and the Richard E. Jacobs Group filed an action against the City of Cleveland seeking specific performance of a 1989 Master Development Agreement pertaining to a proposed real estate project known as Chagrin Highlands. The Company's complaint also seeks a declaratory judgment that the Master Development Agreement is in full force and effect and asks for an injunction preventing the City from interfering with the rights of the plaintiffs under that Agreement as well as compensatory damages in the amount of $100 million. The City of Cleveland filed a motion to dismiss the Company's complaint and on May 1, 1995, the Court denied the City's motion to dismiss the complaint and granted its motion to dismiss the Jacobs Group as a party plaintiff. 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 all known cases. In the opinion of management, any additional liability with respect to these matters will not have a material adverse 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. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SUMMARY 1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. (in thousands) 1995 1995 1995 1994 1994 Net Sales $85,266 $88,690 $173,956 $153,141 $80,030 Cost of Sales 63,013 66,747 129,760 117,545 61,159 Gross Profit on Sales 22,253 21,943 44,196 35,596 18,871 % of Net Sales 26.1% 24.7% 25.4% 23.2% 23.6% Operating Expenses: Selling, General & Admin.13,830 12,491 26,321 35,897 15,431 Research and Development 3,510 2,997 6,507 11,411 8,574 Total Operating Expenses 17,340 15,488 32,828 47,308 24,005 Operating Income (Loss) $ 4,913 $ 6,455 $ 11,368 $(11,712) $(5,134) % of Net Sales 5.8% 7.3% 6.5% (7.6%) (6.4%) Discussion of 1995 Compared to 1994: For the first six months of 1995, net sales increased $20.8 million from the same period in 1994, or 14%, to $174.0 million. Sales increases were achieved at the Snorkel and Scott/Taylor segments, and a small decrease in sales occurred at Interstate Electronics. The 1995 second quarter sales were $8.7 million or 11% higher when compared to 1994 second quarter. Net Sales increased $3.4 million or 4% to $88.7 million in the second quarter as compared to the first quarter. Gross Profit for the six months improved $8.6 million to $44.2 million and represented 25.4% to net sales as compared to 23.2% in 1994. All three segments achieved gross profit dollar improvement. Selling, General and Administrative expenses improved dramatically. As a percentage of net sales, selling, general and administrative expenses were 15.1% in 1995, compared to 23.4% in 1994. Lower Corporate G&A expense was responsible for substantially all of the improvement. Operating Income amounted to $11.4 million in 1995, as compared to an operating loss of $11.7 million in 1994. The loss from continuing operations and the net loss for the six months and three months ended June 30, 1995 was $13.9 million and $5.8 million, respectively, as compared with a loss from continuing operations of $26.3 million and $13.1 million for comparable periods in 1994, and a net loss of $38.2 million and $17.9 million for the six months and three months ended June 30, 1994. SEGMENT INFORMATION The Company is a manufacturer of technology-driven products with operations in three reporting segments, Interstate Electronics Corporation, Scott/Taylor Environmental, and Snorkel. The results of operations are most meaningful when analyzed and discussed in this manner. 16 INTERSTATE ELECTRONICS CORPORATION Interstate Electronics develops and produces sophisticated telemetry, instrumentation, and data recording systems and position measuring systems, Global Positioning Systems ("GPS") for the U.S. Navy's Polaris/Poseidon, TRIDENT, and TRIDENT II ships; precise GPS for aircraft and turnkey test ranges; and GPS for commercial and business aircraft navigation and landing systems. Interstate Electronics also designs and produces plasma, liquid crystal, and cathode-ray tube display systems for a variety of shipboard and aircraft applications. In addition, Interstate Electronics develops sophisticated bandwidth-on-demand satellite communication modems and terminals for both government and commercial applications. The results of operations for Interstate Electronics were as follows: 1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. (in thousands) 1995 1995 1995 1994 1994 Net Sales $24,787 $26,934 $51,721 $53,301 $26,818 Cost of Sales 17,888 19,627 37,515 40,543 20,373 Gross Profit on Sales 6,899 7,307 14,206 12,758 6,445 % of Net Sales 27.8% 27.1% 27.5% 23.9% 24.0% Operating Expenses: Selling, General & Admin. 2,677 3,110 5,787 5,720 3,021 Research and Development 2,187 1,748 3,935 8,667 7,148 Total Operating Expenses 4,864 4,858 9,722 14,387 10,169 Operating Income (Loss) $ 2,035 $ 2,449 $ 4,484 $(1,629) $(3,724) % of Net Sales 8.2% 9.1% 8.7% (3.1%) (13.9%) Discussion of 1995 Compared to 1994: Net Sales declines for the six months continues to reflect the general slowdown in the military business. Both the Strategic Weapons Systems ("SWS") and the Displays businesses have experienced decreased sales in the first six months, $2.2 million and $2.6 million, respectively. In the second quarter, however, the GPS business achieved an increase of sales by $4.5 million due to the Manching Range Program (for Germany) and the Low Rate Initial Production Program (for Eglin Air Force Base). This performance, coupled with an improved gross profit in both SWS and Displays, accounted for the overall gross profit improvement in the 1995 amounts. Research and Development expenses were much higher in 1994 due to the initial product development phase of two major commercial ventures: 1) a bandwidth-on-demand Time Divided Multiple Access ("TDMA") mesh network product from the Satellite Communication Systems business, and 2) a Flight Management and Navigation Landing Systems ("FMS") from the GPS business. The 1995 expenses primarily reflect the costs necessary to finalize these products. The TDMA is scheduled for a public demonstration in the Fall of 1995, while the FMS is undergoing FAA certification. 17 SCOTT/TAYLOR ENVIRONMENTAL Scott manufactures the Scott Air Pak and other life support products for fire fighting and personal protection against industrial contaminants. The air-purifying products provide protection against environmental and safety hazards. Scott is the largest manufacturer of protective breathing equipment, pilot and crew oxygen masks plus emergency oxygen for passengers on commercial, government and private aircraft. Scott is also a leading manufacturer of instruments to detect the presence of combustible or toxic gases and lack of oxygen. Taylor is a manufacturer of consumer thermometers, barometers and hygrometers. Taylor also manufactures and sells temperature and environmental measuring and testing devices. In addition to use in scientific laboratories, hospitals and universities, these devices are used in heating, ventilation and air conditioning (HVAC), food service and industrial applications. The results of operations for Scott/Taylor Environmental were as follows: 1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. (in thousands) 1995 1995 1995 1994 1994 Net Sales $30,510 $32,056 $62,566 $57,475 $29,213 Cost of Sales 20,565 21,838 42,403 38,534 19,379 Gross Profit on Sales 9,945 10,218 20,163 18,941 9,834 % of Net Sales 32.6% 31.9% 32.2% 33.0% 33.7% Operating Expenses: Selling, General & Admin. 3,764 3,947 7,711 7,563 3,809 Research and Development 772 664 1,436 1,821 963 Total Operating Expenses 4,536 4,611 9,147 9,384 4,772 Operating Income $ 5,409 $ 5,607 $11,016 $ 9,557 $ 5,062 % of Net Sales 17.7% 17.5% 17.6% 16.6% 17.3% Discussion of 1995 Compared to 1994: Net Sales for the first six months of 1995 increased by 9% compared to last year (10% increase for the second quarter) due to strong orders for oxygen products from Aviation customers, as well as orders for emergency breathing equipment from Government customers. Gross Margin for the six months and second quarter periods is down slightly due to the lower margin of Aviation and Government sales compared to Health/Safety and commercial thermometer products. Selling, General and Administrative expenses have increased slightly. Research and Development expenses are lower due to completion of major new programs commencing in prior years. 18 SNORKEL Snorkel manufacturers self-propelled aerial work platforms and scissorlifts for use in construction and maintenance activities and self-propelled telescopic and articulating booms. Snorkel also fabricates and services booms that are mounted on fire apparatus to deliver large quantities of water from elevated positions. The results of operations for Snorkel were as follows: 1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. (in thousands) 1995 1995 1995 1994 1994 Net Sales $29,969 $29,700 $59,669 $42,365 $23,999 Cost of Sales 24,560 25,282 49,842 34,750 19,765 Gross Profit on Sales 5,409 4,418 9,827 7,615 4,234 % of Net Sales 18.0% 14.9% 16.5% 18.0% 17.6% Operating Expenses: Selling, General & Admin. 1,850 1,989 3,839 3,056 1,487 Research and Development 551 585 1,136 923 463 Total Operating Expenses 2,401 2,574 4,975 3,979 1,950 Operating Income $ 3,008 $ 1,844 $ 4,852 $ 3,636 $ 2,284 % of Net Sales 10.0% 6.2% 8.1% 8.6% 9.5% Discussion of 1995 Compared to 1994: Net Sales increased 41% for the six months (24% for the second quarter) compared to last year due to high domestic market demand for aerial work platforms ("AWP"), rebounding international AWP markets and continued improvement in plant output. Gross Profit amounts improved as compared with 1994 periods due to increased sales. However, as a percentage of net sales, gross profits for both the six months and the second quarter declined due to higher manufacturing costs. This is due to longer-than- anticipated outsourcing of parts, manufacturing inefficiencies and inventory costing adjustments. Selling, General and Administrative expenses, as a percentage of net sales, remained favorable over the same six months in 1994 with higher sales. Research and Development expenses increased due to new product expenditures in both articulating booms and fire service products. 19 CORPORATE AND UNALLOCATED COSTS AND EXPENSES Corporate activity and unallocated costs and expenses were as follows: 1st Qtr. 2nd Qtr. Six Mos. Six Mos. 2nd Qtr. (in thousands) 1995 1995 1995 1994 1994 Cost of Sales $ - $ - $ - $ 3,718 $ 1,642 Selling, General & Admin. $5,539 $3,445 $8,984 $19,558 $ 7,114 Other Expenses (Income): Refinancing Costs 4,522 5,528 10,050 7,948 4,517 Interest Expense 9,074 7,555 16,629 21,070 10,300 Interest Income (844) (581) (1,425) (1,534) (950) Other, Net 199 (217) (18) (58) 233 Discussion of 1995 Compared to 1994: Cost of Sales were primarily associated with the centralized manufacturing and technology centers ("Centers") created as part of the factory automation program. These Centers were shut down in 1994 to reduce costs. The 1994 costs represent machinery-related rental expenses and inventory that was written off. Selling, General and Administrative expenses were reduced significantly in 1995. These reductions included numerous cost- cutting measures, principally, legal and professional fees, a 40% reduction in corporate staff and the elimination of corporate aircraft and, in the second quarter of 1995, the reversal of the 1994 bonus accrual ($1.4 million). In the second quarter, the Company paid only required bonuses and did not pay discretionary bonuses following the 1994 consolidated loss; accordingly, the accrual was reversed. Refinancing Costs are for professional and lender fees related to the liquidity crisis of late 1993 and the first half of 1994 and the resultant Override Agreement which restructured $487 million of debt and leases on August 1, 1994. The 1995 expenses are predominantly lender fees, while 1994 expenses were for professional fees. Interest Expense decreased due to lower Override debt, offset somewhat by higher interest rates, a short-term line in 1994 that was unused in 1995 and lower mortgage interest. 20 FINANCIAL POSITION AND LIQUIDITY Accounts Receivable at June 30, 1995 are at approximately the same level as of the end of the year. Given the increase in sales, this demonstrates an improvement in collections, as Days Sales Outstanding improved from 45 to 43 days. Inventories increased by $4.4 million due to a shortage of vendor supplied quality parts which resulted in unfinished production remaining in inventory. Cash from operations and working capital required $1.6 million, consisting of a loss from operations (due to refinancing and interest payments) mostly offset by the tax refund. The paydown of debt required $99.5 million, which was funded by proceeds from divestitures, miscellaneous asset sales, and the tax refund. Expenditures for property, plant and equipment were $3.4 million for continuing operations ($18.2 million for discontinued operations) in 1995. Continuing operations' expenditures are anticipated to be between $9.0 and $15.0 million for the year. The primary focus of 1995 expenditures is for improvements in manufacturing efficiencies and tooling related to the production of new products. Capital for these expenditures is expected to be provided from internally generated funds. As discussed in Note 4 to the Consolidated Financial Statements, the Company completed a complex debt refinancing, which was initiated in December, 1993, completed on August 1, 1994 and amended on December 5, 1994 and March 31, 1995. This refinancing precludes the Company from incurring additional indebtedness and did not provide additional financing to the Company; rather, it specifies repayment and other terms through January 1, 1996. The Company has been selling in 1995 those businesses whose net assets are presented in the Company's balance sheet as Net Assets Related to Discontinued Operations, and using a substantial portion of the proceeds to amortize the debt throughout the remainder of 1995. The Override agreement allows the Company to operate in a more orderly manner in enhancing the profitability of the continuing business segments and in divesting the discontinued businesses and reducing corporate overhead. The Company continues to make progress in implementing actions aimed at restoring overall profitability. Net Assets Related to Discontinued Operations at June 30, 1995 is $204 million, a decrease of $94 million from $298 million at the beginning of the year. The divestitures of seven businesses -- Figgie/Alfa Packaging Systems, Figgie Power Systems, Figgie Acceptance, American LaFrance, Medcenter Management Services, Spaceguard Products, and Figgie Financial Services -- account for this decrease. The proceeds from these divestitures, a tax refund of $15 million, offshore cash, and operating cash were used to pay 21 FINANCIAL POSITION AND LIQUIDITY - continued down Override debt and mortgages by $99 million since year-end 1994. The $77 million of debt amortization in the second quarter was made by June 30 in accordance with the Override agreement. All financial covenants have been satisfied. Liquidity from unrestricted cash as of June 30, 1995 was $9.6 million. Cash requirements from operations, along with the high but diminishing costs of interest and fees to service outstanding debt, requires the timely divestiture of the rest of the discontinued operations. As these entities are divested, the Company will continue to paydown its outstanding debt and benefit from lower operating expenses. In addition to unrestricted cash, as of June 30, 1995, the Company also had additional unused borrowing facilities of approximately $13.0 million. On July 21, 1995, the Company completed the sales of two material businesses that materially improved its liquidity and reduced its debt and lease obligation levels. As stated in Footnote 2 to the Consolidated Financial Statements, on July 21, 1995, the Company completed the sale of Safway Steel Products and Figgie Fire Protection Services. The sales price was $126 million, net of transaction expenses, of which $39 million was used to pay off operating leases. Of the remaining $87 million, $7 million represents cash deposited in escrow accounts as deferred divestiture proceeds, $41 million represents cash retained by the Company, $32 million was applied to repay bank debt, and $7 million represents cash restricted as collateral for letters of credit. The pro forma balance sheet presentation gives effect to the July 21 transactions as if they had occured as of June 30, 1995. 22 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits 27.0 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter None. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Figgie International Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIGGIE INTERNATIONAL By: /s/ Steven L. Siemborski Steven L. Siemborski Senior Vice President and Chief Financial Officer (Duly Authorized and Principal Financial Officer) Date: August 8, 1995 EX-27 2
5 0000720032 FIGGIE INTERNATIONAL 1,000 U.S. DOLLARS 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 1 26,214 0 44,826 376 43,236 321,437 142,189 48,336 517,370 213,586 226,147 1,834 0 0 50,065 517,370 173,956 173,956 129,760 162,588 10,032 117 15,204 (13,868) 0 (13,868) 0 0 0 (13,868) (0.77) (0.77)