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Does The House Of Figgie Need Cleaning?


Finance

DOES THE HOUSE OF FIGGIE NEED CLEANING?

Making fire-fighting equipment has always been one of Figgie International's core businesses. But lately, it seems that Harry E. Figgie Jr., founder and chief executive of the publicly owned but family-dominated conglomerate, has all he can do to snuff out the figurative blazes flaring up around him at the company's Willoughby (Ohio) headquarters.

Most immediately, Figgie International Inc. faces what company Director Dale S. Coenen terms "a liquidity squeeze, pure and simple." After three years of declining earnings, the company is expected shortly to report what it calls "a significant loss" in the fourth quarter and a loss for the full year. The company acknowledges that some trade creditors are demanding cash on delivery. "We're paying those who need to be paid to be sure there is no disruption," says Joseph J. Skadra, controller and senior vice-president for finance, who claims there hasn't been one yet. One former official notes that "many division presidents are spending an inordinate amount of time trying to procure equipment and calm vendors down."

FAMILY MATTERS. Coenen insists that the cash crunch is "a temporary situation" and the worst is probably over. But when asked whether the company will make its debt payments this year, Skadra responds: "I do not have a forecast that says whether we'll meet them or not meet them." That clearly will depend on Figgie's banks, with which it is negotiating a new agreement. Skadra says they've already waived some covenants. The company is encouraged by the talks and says it's not in default on any of its $455 million in debt. Few believe that Harry Figgie, author of the 1992 best-seller Bankruptcy 1995, which forecasts a national financial collapse, will let that happen to his company.

Figgie also is battling a lawsuit filed last fall by Charles B. Miner, a Figgie group vice-president who was dismissed in 1992. The suit alleges that Harry Figgie and his son, Vice-Chairman Dr. Harry E. Figgie III, have run the company as a private fiefdom. Among other charges, the suit claims the Figgies have diverted company assets for their personal use, inflated the company's financial results, and engaged in self-dealing with family-owned Clark-Reliance Corp., a maker of valves and controls that Harry bought before he started Figgie International. It charges that the Figgies engaged in "improper transactions" that "benefited Clark at Figgie International's expense." Former Figgie executives corroborate some of these allegations.

Figgie International declines comment on the suit's specific allegations but claims it has no merit and is seeking to have it dismissed.

Few would dispute that Figgie International has always been Harry's baby. Founded in 1963, when he acquired "Automatic" Sprinkler Corp. of America in a leveraged buyout, Figgie, unlike many diversified companies, emerged from the tumultuous 1980s more or less intact.

Solidifying his control by creating two classes of stock, one with supervoting rights, Figgie reigned supreme over more than two dozen divisions that made everything from aerial fire-fighting platforms and Rawlings sporting goods to steel scaffolding and packaging equipment. Even Figgie's critics acknowledge that he is brilliant and personable.

"TIRE 'EM, FIRE 'EM." Figgie's management style, though, can be brutal, say his detractors. Although he served as an infantryman in General George S. Patton's Army during World War II, Figgie rejects the tough-guy label, saying he's more fair than tough. He pays his managers well, sets goals in what the company called "hard core" sessions, and dumps those who don't deliver. "The phrase around the building got to be 'Hire 'em, tire 'em, and fire 'em,'" says one former official. "It's basically a house of fear," says Donald L. Bottom, a former group vice-president who left at the end of 1990.

In the 1980s, Figgie's management style seemed to be a formula for success. Yet critics claim it has become a liability and contributed to Figgie's troubles. Figgie concedes that since 1989, "we haven't done very well for the shareholders." In the first nine months of 1993, the company netted $1.2 million, after accounting changes, on sales of $847 million. It lost $4.7 million before changes. But he blames a host of special factors: floods that inundated three Midwestern plants, causing at least $15 million in operating losses; ill-conceived contracts that resulted in poor quality at Fred Perry sportswear; and extra spending at a defense division to upgrade its processes and controls. He also cites weak markets, the economy's stops and starts, and the company's big campaign to overhaul its manufacturing operations through heavy investment in new equipment. That revamping, overseen by son Harry, resulted in 47 plant closings and is supposed to bring huge benefits. Figgie insists an upturn will begin in the third quarter. "I see the problems now as temporary problems."

Temporary or not, Figgie was not around much when they surfaced last year. In an interview with BUSINESS WEEK, Figgie acknowledged that for 15 months through Oct. 11, 1993, he was out ill [suffering from bacterial pneumonia, others say] and remained out of touch with the board. The company admits this was never disclosed to shareholders. A Figgie spokesman says shareholder disclosure of the illness wasn't required because Figgie was in control throughout the period and in regular contact with the vice-chairman. He now says he is in good health.

SMALL POTATOES. Other detractors depict Figgie as a man who has not always been able to separate his publicly owned company from his personal interests. According to the lawsuit, Clark-Reliance has fed off Figgie International's business. For instance, Figgie International provided staff services to Clark. "Were they [Figgie] reimbursed? Sometimes yes, sometimes no. Most of the time, no," says T.S. Porter, former manager of real estate for Figgie. Another former manager says: "We never understood how [Figgie's auditors were] able to certify the books with that relationship as it was." Harry Figgie responds that Figgie International kept an arms-length relationship with Clark, which served as a technology lab for Figgie.

The suit also alleges that Figgie International provided landscapers and gardeners to the Figgies. Perhaps the suit's most serious charge is that the company gverstated its balance sheet by more than $100 million. Among the items that were allegedly inflated were the value of loans made by a finance subsidiary, property valuations, and about $36 million in inventories. Former executives say that inventory sometimes was not written down because it would hurt their budgets. Arthur Andersen & Co., the company's auditors, declined to comment.

So far, though, Harry Figgie and his board haven't seen any reason to make drastic changes. Not long after the shareholder suit was filed, the company named Figgie's 27-year-old son, Matthew, as director of mergers and acquisitions. In July, the board appointed Harry's wife, Nancy, as vice-president for facilities planning. Harry E. Figgie III was appointed vice-chairman in 1990. Figgie Jr. defends all three, including Matthew--"a tremendous financial analyst"--and his wife, who plans to work with architects on the design of a new headquarters. Yet Director Coenen admits that while he voted for Nancy's appointment and thinks she deserves it, "it certainly opens [us] up for criticism."

Relatives on the payroll is small potatoes compared with Figgie's cash-flow woes. The company has hired two investment bankers to help sell or spin off operations that will let Figgie raise $150 million to $200 million. Outsiders agree that with its diverse units, Figgie has plenty to sell. The money would be used to pay down debt and placate its bank group, led by Bank of Boston. "My assessment is, the banks are willing to lend but at a higher cost," says Juanita J. Mayr, an analyst at Moody's Investors Service. Bank of Boston officials declined to comment.

Meanwhile, Harry Figgie says he has every intention of staying on. "The last thing I'd want to do is leave the company when it's had tough times," says Figgie. Coenen agrees it's legitimate to ask if the company is being run as it should be. But, he says, "Harry built a company from $20 million to what it is [today]. You don't just kick out talent right away. I would not support any strong movement away from the present management situation." But if it's just a rough spot that Figgie has hit, as Coenen maintains, it's going to take more than a small amount of smoothing.

THE CLOUD OVER FIGGIE

CASH CRUNCH The company is experiencing a liquidity squeeze and is seeking to negotiate new bank credit lines. "Cash is tight," says Chairman Figgie.

FAMILY TIES Three Figgies are officers: Harry E. Figgie Jr. is CEO; Harry III is vice-chairman; Figgie Jr.'s wife, Nancy, is vice-president in charge of facilities planning. His 27-year-old son Matthew is director of mergers and acquisitions.

FAMILY DEALS Former executives say Figgie International personnel and equipment were extensively used by Clark-Reliance, a company owned by the Figgie family, often without clear accounting. Company says dealings were at arms-length.

FAMILY FINAGLING? The Figgies are accused in a derivative lawsuit of using corporate resources for personal benefit, including gardeners and landscapers, and laborers to construct a house. Company says suit is without merit.

FISCAL DECEPTION? The derivative suit contends that the company's financial statements are misstated by more than $100 million, reflecting overvalued inventories and real estate.

HEALTH DISCLOSURE Though Chairman Figgie says he was "out of touch with the board for 15 months" because of health problems, the company did not officially disclose his medical condition. Company says Figgie remained in control throughout.

DATA: COURT AND COMPANY DOCUMENTS, BUSINESS WEEKZachary Schiller in Cleveland


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