<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
( X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
MOSLER INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1172814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8509 Berk Boulevard
Hamilton, Ohio 45012
(Address of principal executive offices)(Zip Code)
(513) 870-1900
(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 Exchange Act of
1934 during the preceding 12 months (or for such shorter periods 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 latest practical date.
Outstanding shares as of
Class March 30, 1996
Common Stock, $0.10 Par Value 2,185,130.3777
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MOSLER INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets - June 24, 1995
and March 30, 1996 3-4
Consolidated condensed statements of operations - Three
months ended March 25, 1995 and March 30, 1996 5
Consolidated condensed statements of operations - Nine
months ended March 25, 1995 and March 30, 1996 6
Consolidated condensed statement of common stockholders'
deficiency - Nine months ended March 30, 1996 7
Consolidated condensed statement of cash flows - Nine months
ended March 25, 1995 and March 30, 1996 8
Notes to consolidated condensed financial statements 9-11
Item 2. Management's Discussion and Analysis of Financial
Conddition and Results of Operations 12-19
PART II. Other Information
Item 1.Legal Proceedings 20
Signatures 21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MOSLER INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(in thousands)
Assets June 24, March 30
1995 1996
(Derived from Audited (Unaudited)
Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,359 $ - 0 -
Accounts receivable, net 46,002 49,514
Inventories 17,165 16,309
Other current assets 530 677
Total current assets 68,056 66,500
Facilities:
Land and land improvements 1,223 1,076
Buildings 8,168 8,168
Machinery and equipment 42,103 42,620
Improvement in progress 454 2,844
Gross facilities 51,948 54,708
Less accumulated depreciation 41,495 42,756
Net facilities 10,453 11,952
Other assets:
Service agreements 22,562 19,177
Deferred debt issuance costs 4,559 3,993
Goodwill 7,537 6,434
Intangible pension asset 876 876
Sundry 488 834
$ 114,531 $ 109,766
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</TABLE>
<PAGE>
June 24, 1995 March 30, 1996
(Derived from Audited (Unaudited)
Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities, redeemable stock and
common stockholders' deficiency
Current liabilities:
Accounts payable $ 9,390 $ 8,735
Accrued liabilities:
Compensation & payroll taxes 5,020 3,529
Product warranty 1,689 1,224
Acc. employee benefit plan contrib. 63 293
Accrued workers' compensation 5,500 5,493
Accrued interest 8,307 10,102
Unearned revenue 13,786 16,331
Income taxes payable 358 302
Long-term debt due within one year 750 1,000
Total current liabilities 50,688 49,691
Long-term debt due after one year 129,802 134,664
Post retirement health benefits 11,975 10,614
Pension liability 2,385 3,152
Commitments and contingencies
Redeemable stock:
Series D incr. rate preferred stock 34,399 38,814
Series C incr. rate preferred stock 31,900 30,700
Common Stock 2,004 2,004
68,303 71,518
Common stockholders' deficiency:
Common stock 254 254
Accumulated deficit (141,397) (151,877)
Excess of additional pension liability
over unrecognized prior service cost (1,509) (1,508)
Redemption value of common stock
held by ESOP (2,004) (2,004)
Foreign currency translation adj. (927) (1,205)
Common stock held in treasury (3,039) (3,533)
Total common stockholders' deficiency (148,622) (159,873)
$ 114,531 $ 109,766
</TABLE>
See accompanying notes
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands except per share amounts)
Three months ended
<TABLE>
<CAPTION>
<S> <C> <C>
March 25, March 30,
1995 1996
Net sales:
Service $ 26,103 $ 27,047
Product 24,834 28,215
50,937 55,262
Cost of sales:
Service 19,863 19,897
Product 20,117 21,855
Plant closing cost 0 1,937
Gain on pension and benefit plan
curtailment (1,616)
39,980 42,073
Gross profit 10,957 13,189
Selling and administrative expense 8,686 9,079
Other expense (income) (55) (212)
8,631 8,867
Operating income 2,326 4,322
Debt expense:
Interest expense 4,042 4,418
Amortization of debt expense 183 159
Interest income (36) (31)
4,189 4,546
Loss before income taxes (1,863) (224)
Provision for income taxes 18 5
Net Loss (1,881) (229)
Preferred dividends (1,915) (1,944)
Amortization of preferred stock discount (195) (308)
Net loss applicable to common stockholders $ (3,991) $ (2,481)
Net loss per common share ($1.72) ($1.13)
</TABLE>
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Nine months ended
<S> <C> <C>
March 25, March 30,
1995 1996
Net sales:
Service $ 80,022 $ 81,063
Product 81,975 82,336
161,997 163,399
Cost of sales:
Service 58,806 59,874
Product 66,011 65,717
Plant closing cost 0 2,608
Gain on pension and benefit plan
curtailment (1,616)
124,817 126,583
Gross profit 37,180 36,816
Selling and administrative expense 27,865 26,966
Other expense (income) 128 (74)
27,993 26,892
Operating income 9,187 9,924
Debt expense:
Interest expense 12,191 13,086
Amortization of debt expense 549 735
Interest income (100) (112)
12,640 13,709
Loss before income taxes (3,453) (3,785)
Provision for income taxes 55 15
Net Loss (3,508) (3,800)
Preferred dividends (5,638) (5,948)
Amortization of preferred stock discount (547) (734)
Net loss applicable to common stockholders $ (9,693) $ (10,482)
Net loss per common share ($4.16) ($4.77)
</TABLE>
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED MARCH 30, 1996
(in thousands of dollars except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Common Stock Currency
$.10 Par Accum. Pens held Trans. Treasury
Value Deficit Liab by ESOP Adj. Stock Total
Balance at
June 24, $254 ($141,397) ($1,509) ($2,004) ($927) ($3,039) ($148,622)
1995
Net Loss (3,800) (3,800)
Amortization of
Series D preferred
stock discount (734) (734)
Dividends on
Series D
preferred stock (1,921) (1,921)
Dividends on
Series C
preferred stock (4,027) (4,027)
Foreign currency
translation adj. (278) (278)
Repurchase of
55,683.4 shares
of Common stock (493) (493)
Other 2 1 (1) 2
Balance at
March 30,
1996 $254 ($151,877) ($1,508) ($2,004) ($1,205) ($3,533) ($159,873)
</TABLE>
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Nine months ended
<TABLE>
<CAPTION>
<S> <C> <C>
March 25, March 30,
1995 1996
Net loss $ (3,508) $ (5,416)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 1,789 1,702
Amortization 5,114 5,222
Gain on pension & benefit plan curtailment 0 (1,616)
Gain on disposal of facilities (61) (18)
Interest paid in shares of
preferred stock 1,536 1,784
Provision for doubtful accounts 822 637
Decrease (increase) in:
Accounts receivable (5,073) (4,256)
Inventories 590 724
Other current assets (435) (155)
Increase (decrease) in:
Accounts payable (1,198) (590)
Accrued liabilities 116 (3,002)
Accrued dividends (3,034) (3,464)
Unearned revenue 2,698 2,542
Income Taxes payable (310) (56)
Net cash used by operating activities (954) (4,346)
Cash flows from investing activities:
Proceeds from sale of property
and equipment 66 158
Capital expenditures (719) (3,072)
Decrease (increase) in other assets 179 (348)
Net cash used by investing activities (474) (3,262)
Cash flows from financing activities
Purchase of common stock (860) (431)
Purchase of preferred stock (653) (1,313)
Proceeds on debt 2,404 5,112
Net cash provided by
financing activities 891 3,368
Effect of exchange rate changes on cash (98) (119)
Net decrease in cash and cash equivalents (635) (4,359)
Cash and cash equivalents at beginning of period 2,851 4,359
Cash and cash equivalents at end of period 2,216 0
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 30, 1996
(Third Quarter of Fiscal 1996)
1. The consolidated condensed financial statements included herein have
been prepared by the Company, without audit. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. While the Company believes that the disclosures
presented are adequate to make the information not misleading, it is
suggested that these consolidated condensed financial statements be read
in conjunction with the financial statements and notes included in the
Company's latest audited Annual Financial Statements.
2. In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial
position as of March 30, 1996, and June 24, 1995, the results of
operations for the three months and nine months ended March 30, 1996,
and March 25, 1995, and the cash flows for the nine months ended
March 30, 1996, and March 25, 1995.
3. The results of operations for the nine months ended March 30, 1996 are
not necessarily indicative of the results to be expected for the full
year.
4. On September 1, 1995, the Company entered into a new $29.5 million
credit facility with a group of banks represented by Star Bank, N.A. of
Cincinnati, Ohio. The proceeds of the facility were used to refinance
the Company's existing bank indebtedness and for general corporate
purposes. Included in the $29.5 million credit facility is a
$4.0 million term loan payable quarterly for four years. As of
March 30, 1996, after considering outstanding letters of credit,
guarantees and other obligations which limit the availability of the
credit facility, available borrowing capacity under this facility was
$5.1 million. Borrowings under the credit facility will bear interest
at the prime lending rate plus 0.5% or LIBOR plus 3.0%. The Company's
ongoing cash requirements in addition to normal operations consist
primarily of interest payments on the notes, capital expenditures and
ESOP related payments.
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5. Inventories
The Company's inventories are stated at the lower of cost (determined
using the first-in, first-out method) or market.
The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 24, Mar. 30,
1995 1996
(in thousands)
Finished products and service $ 9,592 $ 9,746
Products in Process 3,068 3,554
Raw materials 4,505 3,009
$17,165 $16,309
</TABLE>
6. Net Loss per share
Net loss per share is computed based on the weighted average number of
common shares outstanding for the period after deducting preferred
dividend requirements including amortization of preferred stock
discount. The average number of shares for the nine month period of
fiscal 1996 is 2,196,195 as compared to 2,328,326 shares for the same
period of fiscal 1995.
7. Contingencies
The Internal Revenue Service (IRS) has conducted examinations of the
Company's federal income tax returns for the fiscal years 1988 through
1993 and has proposed various adjustments to increase taxable income.
The Company has agreed to certain issues and has recorded a provision
for additional income tax and interest in the accompanying consolidated
condensed financial statements. Three issues remain unresolved, and the
IRS has issued deficiency notices on these issues. The issues relate
to 1) the allocation of the Company's purchase price of assets from
American Standard Inc., 2) the value of the Company's Series C
preferred stock contributed to its ESOP and 3) the deduction of certain
costs incurred in connection with a 1990 transaction. This matter
should not affect liquidity in fiscal year 1996.
The Company allocated approximately $70 million of the purchase price
of assets from American Standard to intangible assets which are being
amortized over a period of generally 14 years. The IRS proposes to
reduce
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<PAGE>
this allocation to approximately $45 million and increase the
amortization period to generally 45 years.
From 1990 through 1993, the Company contributed to its ESOP, and claimed
a tax deduction for, shares of Series C preferred stock having a value
aggregating approximately $9.6 million. The IRS proposes to reduce this
value to approximately $7.1 million.
The Company capitalized costs amounting to approximately $7.1 million in
connection with a 1990 recapitalization transaction involving debt and
common stock, and is amortizing such costs over the life of the related
debt. The IRS has taken the position that all costs incurred in
connection with a redemption of stock are non-deductible and proposes to
disallow the full amount.
If the IRS's proposed adjustments are sustained, the Company would be
liable for additional income taxes of approximately $5.3 million plus
interest through 1993. The Company would have a future tax liability of
approximately $2.9 million for the same issues carrying forward into, as
yet, unaudited years.
Management believes that it has meritorious defenses to the adjustments
proposed by the IRS and that the ultimate liability, if any, resulting
from this matter will have no material effect on the Company's
consolidated financial position. The significance of the matter on the
Company's future operating results depends on the level of future
results of operations as well as on the timing and amount of the
ultimate outcome. On December 9, 1994, and October 6, 1995, the Company
filed protests to the proposed adjustments of the IRS for the tax years
ended June 1988 through June 1993. An informal initial conference with
the Northeast Region office of the Internal Revenue Service was held on
March 6, 1996. As a result of this meeting letters were issued on
April 10, 1996, and April 29, 1996, from the Internal Revenue Service
Appeal Officer requesting additional information on several issues. The
Company is currently responding to these questions.
The Company is involved in an audit by the Department of Labor ("DOL")
of its Employee Stock Ownership Plan. On June 23, 1995, the Department
of Labor issued an audit letter claiming the Company's Employee Stock
Ownership Plan engaged in a prohibited transaction. Essentially, the
DOL alleges that Series C Preferred Stock contributed to the Plan was
not a proper investment since it was neither stock nor a qualified
equity as required by ERISA. The Company has responded to the claim and
intends to pursue the matter vigorously as it believes the Series C
Preferred Stock is stock and, therefore, constitutes a proper investment
for the Plan.
<11>
<PAGE>
MOSLER INC.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three months Ended March 30, 1996 Compared to the Three Months Ended
March 25, 1995
Sales
The Company's sales increased during the three months ended
March 30, 1995 by 8.5% to $55.3 million from $50.9 million. Service
sales increased by 3.6% to $27.0 million from $26.1 million due to a
increase in time and material sales partially offset by a decline in
service contract sales.
Product net sales increased during the three months ended March 30, 1996
by 13.6% to $28.2 million from $24.8 million. Electronic Security sales
increased 14% with increases across all major product lines. Physical
Security product sales increased 10% primarily due to an increase in
government product sales of $0.8 million.
Gross Profit
Gross profit increased during the three months ended March 30, 1996 by
20.4% to $13.2 million from $11.0 million. Gross profit as a
percentage of sales increased to 23.9% for the three months ended
March 30, 1995 from 21.5% for the three months ended March 25, 1995.
These decreases in gross profit and gross profit as a percentage
of sales were primarily attributable to the increase in sales volume.
Cost associated with the closing of the Hamilton Ohio plant in the
amount of $1.9 million were partially offset by a net gain of
$1.6 millon on the curtailment of post retirement health benefits and
pension liabilities.
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<PAGE>
Selling and Administrative Expenses
Selling and administrative expenses increased in the three months ended
March 30, 1996 by 4.5% to $9.1 million from $8.7 million for the three
months ended March 25, 1995. Increased selling and advertising expenses
were partially offset by a decline in administrative expense.
Operating Income
The Company's operating income for the three months ended March 30, 1996
of $4.3 million is $2.0 million more than the three months ended
March 25, 1995.
Debt Expense
Debt expense increased for the three months ended March 30, 1996 by
8.5% to $4.5 million from $4.2 million for the three months ended
March 25, 1995. The increase was due to an increase in interest on the
unpaid dividends for preferred stock and a 4% increase in average
borrowings. Average interest expense for the third quarter of fiscal
1996 is 9.6% as compared to 9.9% for the same period of fiscal 1995.
Net loss
Net loss decreased $1.7 million for the three months ended
March 30, 1996 to $0.2 million as compared to $1.9 million for the
same period of fiscal 1995 as discussed above.
Nine Months Ended March 30, 1996 Compared with the Nine Months Ended
March 25, 1995
Sales
The Company's sales increased during the nine months ended
March 30, 1996 by 0.9% to $163.4 million from $162.0 million. Service
sales increased by 1.3% to $81.1 million from $80.0 million due to an
increase in time and material sales.
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<PAGE>
Product net sales increased during the nine months ended March 30, 1996
by 0.4% to $82.3 million from $82.0 million. Physical Security bank
product sales increased $2.7 million and CCTV sales were $1.1 million
more than the same period of last year. These favorable variances were
offset by a decline in commercial product sales and Mexico sales.
Backlog
Product orders backlog decreased during the nine months ended
March 30, 1996 by 6.2% to $25.0 million from $26.6 million primarily due
to Electronic Security orders backlog which decreased $1.8 million.
Government security container orders backlog decreased by $0.6 million
due to improved factory production and shipments. These unfavorable
variances were partially offset by increased financial institution
orders backlog.
Gross Profit
Gross profit decreased during the nine months ended March 30, 1996
by 1.0% to $36.8 million from $37.2 million. Gross profit without the
cost of the plant closing increased 1.7% or $0.6 million. Gross profit
as a percentage of sales decreased to 22.5% for the nine months ended
March 30, 1996 from 23.0% for the nine months ended March 25, 1995.
Gross profit as a percentage of sales without the cost of the plant
closing increased slightly to 23.1% from 23.0% for the same period of
last year. These decreases in gross profit and gross profit as a
percentage of sales were attributable to the one time costs for closing
the Hamilton Ohio plant.
Selling and Administrative Expenses
Selling and administrative expenses decreased in the nine months ended
March 30, 1996 by 3.2% to $27.0 million from $27.9 million for the nine
months ended March 25, 1995. The decrease was attributable to cost
reduction programs and a decrease in executive severance expenses.
Operating Income
The Company's operating income for the nine months ended March 30, 1996
of $9.9 million is $0.7 million more than the nine months ended
March 25, 1995. Operating income without the cost of the plant closing
would be $10.9 million or 18.8% improvement over the same period of
fiscal 1995.
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Debt Expense
Debt expense increased for the nine months ended March 30, 1996 by 8.5%
to $13.7 million from $12.6 million for the nine months ended
March 25, 1995. The increase was due to an increase in interest on the
unpaid dividends for preferred stock and an increase in prime lending
rates. Interest expense on unpaid preferred stock dividends increased
29.4% to $2.0 million from $1.5 million for the nine months of fiscal
1995. Average interest expense for the nine months of fiscal 1996 is
10.0% as compared to 9.0% for the same period of fiscal 1995.
Net loss
Net loss increased $0.3 million for the nine months ended
March 30, 1996 to $3.8 million as compared to the same period of fiscal
1995 as discussed above. Net loss without the cost of the plant closing
decreased 20% or $0.7 million.
Inflation
The Company believes that its business is affected by inflation to
approximately the same extent as the national economy. Generally, the
Company has been able to offset the inflationary impact of wages and
other costs through a combination of improved productivity, cost
reduction programs and price increases. The Company has had difficulty
in effecting significant price increases because of the discounting
practices of its competitors
Plant Closings
On January 26, 1996 the Company announced its decision to restructure
its manufacturing operations resulting in the closing of its Hamilton
Ohio manufacturing facility. The plant was closed on April 2, 1996.
The Company's headquarters will remain on Berk Boulevard in Hamilton
Ohio. The plant closing is part of the Company's ongoing efforts
intended to improve its competitive position in the industry. The
marketplace has changed in recent years and after reviewing all aspect
of the operations, including the 350,000 square foot Hamilton plant
which opened in 1891 the decision was made to close the plant. The
size, age and condition of the Hamilton plant made it virtually
impossible to continue to manufacture in a cost effective manner. As
part of the restructuring plan, the product lines that have been
manufactured at the Hamilton plant will be transferred to other Company
facilities or built to the
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Company's specifications by other manufacturing companies. The plant
closing affected approximately 140 of the Company's 1,900 employees.
The Company estimates that the one-time plant closing costs,
severance and other related expenses will amount to approximately
$3.0 million of which $2.6 million was paid in the first nine months
of fiscal 1996. The balance is expected to be paid in the fourth
quarter of fiscal 1996. The plant closing resulted in a curtailment of
the post retirement health benefit and pension liabilities resulting in
a net gain of $1.6 million. Net loss per common share for the third
quarter of fiscal 1996 would have been $0.92 per share instead of
$1.13 per share and for the nine month period the loss per share would
have been $4.32 per share instead of $4.77 without the cost of the plant
closing. The Company also estimates that the yearly savings would be
approximately $4.0 million. During the first week of April 1996 the
Company received an advance payment of $1.0 million for the auction
of the remaining equipment at the Hamilton Ohio plant to be held on
May 22, 1996, and May 23, 1996.
Liquidity and Capital Resources
On September 1, 1995 the Company entered into a new $29.5 million
credit facility with a group of banks represented by Star Bank, N. A.
of Cincinnati, Ohio. The proceeds of the facility were used to
refinance the Company's existing bank indebtedness and for general
corporate purposes. Included in the $29.5 million credit facility is a
$4.0 million term loan payable quarterly for four years. As of
March 30, 1996, after considering outstanding letters of credit,
guarantees and other obligations which limit the availability of the
credit facility, available borrowing capacity under this facility was
$ 5.1 million. Borrowings under the credit facility will bear interest
at the prime lending rate plus 0.5% or LIBOR plus 3.0%. The Company's
ongoing cash requirements in addition to normal operations consist
primarily of interest payments on the notes, capital expenditures and
ESOP related payments.
Cash used by operating activities was 4.3 million for the nine months
ended March 30, 1996 as compared to $1.0 million for the same period of
fiscal 1995 for an unfavorable variance of $3.4 million. This
unfavorable variance is due to an increase in net loss of $1.9 million,
the June 30, 1995 payroll of $2.4 million included in fiscal 1996,
payment of executive severance and relocation accrued in fiscal 1995
and reduced warranty reserves.
The Company's capital expenditures were $3.1 million for the nine months
ended March 30, 1996 as compared to $0.7 million for the nine months
ended March 25, 1995. The Company anticipates capital expenditures in
the fourth quarter of $1.4 million for a total of $4.5 million for
fiscal 1996. Included in fiscal 1996 capital expenditures are two major
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projects. One project is to install a field technicians central
dispatch and information system andthe other project is to replace the
Company's order entry and general ledger system.
During the month of March 1996 the Company acquired a minority interest
in Pacom Data Pty. Ltd. of Sydney, Australia. Pacom is a world leader
in highly advanced security communications, networking and systems
development. Operating since 1983, Pacom has over 14,000 installations
in banks and commercial premises in the United States, Australia,
Ireland and the United Kingdom.
The Company currently makes cash contributions to the ESOP only to the
extent necessary to fund the cash needs of the ESOP for payments to
retired, terminated and deceased participants and for administrative
expenses.
The following table compares the Company's actual condition at
March 30, 1996 with the required financial debt covenants which the
Company is required to maintain under the September 1, 1995 credit
agreement. Due to the cost of the Hamilton Ohio plant closing, the
Company was in violation of several financial debt covenants. The
Company has received on May 8, 1996 a waiver of these violations.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Actual Required Covenants
Covenants F/Y 96 F/Y 96
$ (000,s) 3rd Qtr 6/29/96
Ratio of total liabilities to Actual 9.51:1
Tangible Net Worth Covenant 10.00:1 4.25:1
Turnover Ratio not to 85 85
exceed 85 days
Fixed Charge Coverage Actual 1.11:1
Covenant no less than 1.15:1 1.15:1
Interest Expense Actual 1.53:1
Coverage Ratio Covenant 1.60:1 1.70:1
Minimum EBITDA Actual $22,552
Covenant not less than $23,800 $25,000
</TABLE>
The Internal Revenue Service (IRS) has conducted examinations of the
Company's income tax returns for fiscal years 1988 through 1993 and has
proposed various adjustments to increase taxable income. The Company
<17>
<PAGE>
has agreed to certain issues and has recorded a provision for additional
income tax and interest in the accompanying consolidated financial
statements. Three issues remain unresolved, and the IRS has issued
deficiency notices on these issues. The issues relate to 1) the
allocation of the Company's purchase price of assets from American
Standard, 2) the value of the Company's Series C preferred stock
contributed to its ESOP and 3) the deduction of certain costs incurred
in connection with the 1990 transaction. This matter should not affect
liquidity in fiscal year 1996.
The Company allocated approximately $70 million of the purchase price of
assets from American Standard to intangible assets which are being
amortized over a period of generally 14 years. The IRS proposes to
reduce this allocation to approximately $45 million and increase the
amortization period to generally 45 years.
In 1990 and 1993, the Company contributed to its ESOP, and claimed a tax
deduction for, shares of Series C preferred stock having a value
aggregating approximately $9.6 million. The IRS proposes to reduce this
value to approximately $7.1 million.
The Company capitalized costs amounting to approximately $7.1 million in
connection with a 1990 transaction involving debt and common stock, and
is amortizing such costs over the life of the related debt. The IRS has
taken the position that all costs incurred in connection with a
redemption of stock are non-deductible and propose to disallow the full
amount.
If the IRS's proposed adjustments are sustained, the Company would be
liable for additional income taxes of approximately $5.3 million plus
interest through 1993. The Company would have a future tax liability of
approximately $2.9 million for the same issues carrying forward into, as
yet, unaudited years.
Management believes that it has meritorious defenses to the adjustment
proposed by the IRS and that the ultimate liability, if any, resulting
from this matter will have no material effect on the Company's
consolidated financial position. The significance of this matter on the
Company's future operating results depends on the level of future
results of operations as well as on the timing and amount of the
ultimate outcome. On December 9, 1994 and October 6, 1995, the
Company filed a protest to the proposed adjustments of the IRS for the
tax years ended June 1988 through June 1993. An informal initial
conference with the Northeast Region office of the Internal Revenue
Service was held on March 6, 1996. As a result of this meeting letters
were issued on April 10, 1996, and April 29, 1996, from the Internal
Revenue Service Appeal Officer requesting additional information on
several issues. The Company is currently responding to these questions.
<18>
<PAGE>
The Company is involved in an audit by the Department of Labor ("DOL")
of its Employee Stock Ownership Plan. On June 23, 1995, the Department
of Labor issued an audit letter claiming the Company's Employee Stock
Ownership Plan engaged in a prohibited transaction. Essentially, the
DOL Alleges that Series C Preferred Stock contributed to the Plan was
not proper investment since it was neither stock nor a qualified equity
as required by ERISA. The Company has responded to the claim and
intends to pursue the matter vigorously as it believes the Series C
Preferred Stock is stock and, therefore, constitutes a proper investment
to the Plan.
The devaluation of the Mexican peso in the month of December 1994
resulted in a charge to common stockholders' deficiency of $1.2 million.
The Mexico subsidiary intercompany accounts payable to the Company was
calculated as a translation adjustment by the equity method of
reporting. Intercompany transactions and balances for which settlement
is not planned were considered to be part of the net investments.
<19>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 11, 1995, the Company was named as a party in an action filed
in the Superior Court of Contra County, California by SMF Systems
Corporation alleging that the plaintiff was damaged in the amount of
$3.0 million because of the Company's failure to perform a supply
contract timely. The Company answered denying the claims of the
complaint and filed counterclaims in the amount of $0.3 million for
non-payment for equipment supplied under the supply contract and for
$0.6 million for a claim arising from another contract related to the
supply of equipment to the Nashville Airport. The Company settled
action on March 15, 1996, in the amount of $0.1 million in cash and
$0.1 million in credit against future product purchases an amount which
will not have a material impact on the future result of operations or
financial position.
<20>
<PAGE>
MOSLER INC.
Signature
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Mosler Inc.
(Registrant)
Date: 5/10/96 /s/ Paul F. Jeanmougin
Paul F. Jeanmougin
Chief Financial Officer
and Treasurer
<21>
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> MAR-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 49,514,000
<ALLOWANCES> 1,546,000
<INVENTORY> 16,309,000
<CURRENT-ASSETS> 677,000
<PP&E> 54,708,000
<DEPRECIATION> 42,756,000
<TOTAL-ASSETS> 109,766,000
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<BONDS> 134,664,000
<COMMON> 254,000
0
69,514,000
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<TOTAL-LIABILITY-AND-EQUITY> 109,766,000
<SALES> 82,336,000
<TOTAL-REVENUES> 163,399,000
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