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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 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 3367908
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 45015-2213
(Address of principal executive offices) (Zip Code)
(513) 870-1900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if
changed since last report)
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
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practical date.
Common Stock, $0.10 Par Value
2,146,267.8553 shares as of September 28, 1996
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INDEX
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Financial Information (Part I) Page
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets - June 29, 1996
and September 28, 1996 3-4
Consolidated condensed statements of operations - Three months
ended September 30, 1995 and September 28, 1996 5
Consolidated condensed statement of common stockholders'
deficiency - Three months ended September 28, 1996 6
Consolidated condensed statements of cash flows - Three months
ended September 30, 1995 and September 28, 1996 7
Notes to consolidated condensed financial statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-13
Item 4. Submission of Matters to a Vote of Security Holders 14
Other information (Part II)
Item 1. Legal Proceedings 15
Signatures 16
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOSLER INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<S> <C> <C>
Sep 28, June 29,
1996 1996
(Unaudited) (Derived from Audited
Financial Statements)
Assets
Current assets:
Cash and cash equivalents $ 374 $ - 0 -
Accounts receivable, net 49,100 52,490
Inventories 12,835 13,528
Other current assets 754 575
Total current assets 63,063 66,593
Facilities:
Land and land improvements 925 1,146
Buildings 4,124 7,853
Machinery and equipment 35,196 34,257
Improvement in progress 1,019 1,236
Gross facilities 41,264 44,492
Less accumulated depreciation 30,678 33,091
Net facilities 10,586 11,401
Other assets:
Service agreements 16,921 18,049
Deferred debt issuance costs 3,708 3,853
Goodwill 5,680 6,057
Other intangible assets 405 291
Sundry 2,430 2,881
$102,793 $109,125
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Sep 28, June 29,
1996 1996
Liabilities, redeemable stock and common (Unaudited) (Derived from Audited
stockholders' deficiency
Financial Statements)
Current liabilities:
Accounts payable $ 10,034 $ 9,923
Accrued liabilities:
Compensation & payroll taxes 5,056 3,101
Product warranty 1,025 1,240
Accrued workers' compensation 4,555 5,011
Accrued interest 2,663 5,962
Other 6,715 8,988
Unearned revenue 11,911 13,366
Income taxes payable 310 299
Long-term debt due within one year 1,000 1,000
Total current liabilities 43,269 48,890
Long-term debt due after one year 135,689 132,948
Post retirement health benefits 10,991 10,812
Pension liability 1,604 1,604
Commitments and contingencies
Redeemable stock
Series D increasing rate preferred stock 41,972 40,302
Series C adjustable rate preferred stock 35,423 35,424
Common Stock 2,011 2,011
79,406 77,737
Common stockholders' deficiency:
Common stock 254 254
Accumulated deficit (160,857) (155,640)
Excess of additional pension liability over
unrecognized prior service cost (546) (546)
Redemption value of common stock held by ESOP (2,011) (2,011)
Foreign currency translation adjustments (1,096) (1,123)
Common stock held in treasury (3,910) (3,800)
Total common stockholders' deficiency (168,166) (162,866)
$ 102,793 $ 109,125
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<S> <C> <C>
Three months ended
Sept. 28, Sept. 30,
1996 1995
Net sales:
Service $ 26,200 $ 26,840
Product 24,258 26,760
50,458 53,600
Cost of sales:
Service 20,757 20,557
Product 18,928 21,938
39,685 42,495
Gross profit 10,773 11,105
Selling and administrative expense 9,240 9,489
Other (income) expense (220) 13
9,020 9,502
Operating income 1,753 1,603
Debt expense:
Interest expense 4,506 4,275
Amortization of debt expense 143 183
Interest income (12) (42)
4,637 4,416
Loss before income taxes (2,884) (2,813)
Provision for income taxes 20 24
Net loss (2,904) (2,837)
Preferred dividends (2,198) (2,060)
Amortization of preferred stock discount (115) (221)
Net loss applicable to common stockholders ($5,217) ($5,118)
Net loss per common share ($2.43) ($2.31)
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED SEPTEMBER 28, 1996
(In thousands of dollars except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Common Currency
$.10 Par Accumulated Pension Stock held Translation Treasury
Value Deficit Liability by ESOP Adjustments Stock Total
Balance at June 29, 1996 $254 ($155,640) ($546) ($2,011) ($1,123) ($3,800) ($162,866)
Net loss (2,904) (2,904)
Amortization of Series D
preferred stock discount (115) (115)
Dividends on Series D
preferred stock (693) (693)
Dividends on Series C
preferred stock (1,505) (1,505)
Foreign currency
translation adjustment 27 27
Repurchase of 11124
shares of Common stock (110) (110)
Balance at September 28, 1996 $254 ($160,857) ($546) ($2,011) ($1,096) ($3,910) ($168,166)
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<S> <C> <C>
Three months ended
Sept. 28, Sept. 30,
1996 1995
Net loss $ (2,904) $ (2,837)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 594 553
Amortization 1,656 1,689
Gain on disposal of facilities 1 3
Interest paid in shares of preferred stock 825 599
Provision for doubtful accounts 374 205
Decrease (increase) in:
Accounts receivable 3,023 (1,402)
Inventories 696 142
Other current assets (179) (547)
Increase (decrease ) in:
Accounts payable 108 264
Accrued liabilities (4,309) (6,729)
Unearned revenue (1,455) (665)
Income taxes payable 11 (22)
Net cash used by operating activities (1,559) (8,747)
Cash flows from investing activities:
Capital expenditures (1,167) (705)
Decrease (increase) in other assets 451 (62)
Net cash provided by investing activities (716) (767)
Cash flows from financing activities
Purchase of common stock (110) (380)
Purchase of preferred stock (1) (6)
Proceeds on debt 2,741 5,565
Net cash provided by financing activities 2,630 5,179
Effect of exchange rate changes on cash 19 (24)
Net increase (decrease) in cash and cash equivalents 374 (4,359)
Cash and cash equivalents at beginning of period 0 4,359
Cash and cash equivalents at end of period $ 374 $ 0
See accompanying notes to financial statements.
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FINANCIAL INFORMATION
Item 1. Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management, the unaudited consolidated
financial statements include all adjustments (which consist
of only normal, recurring accruals) necessary to present
fairly the consolidated financial position as of September
28, 1996, and the results of operations and cash flows for
the three months ended September 28, 1996 and
September 30, 1995. In accordance with generally
accepted accounting principles for interim financial
information, these statements do not include all of the
information and footnotes required by generally accepted
accounting principles for complete annual financial
statements. Financial information as of June 29, 1996 has
been derived from the audited consolidated financial
statements of the Registrant. The results of operations and
cash flows for the three months ended September 28, 1996
and September 30, 1995 are not necessarily indicative of
the results to be expected for the full year. For further
information, refer to the consolidated financial statements
and footnotes thereto for the year ended June 29, 1996,
included in the Registrant's Annual Report on Form 10-K.
2. Accounting Method Changes
The Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," effective June 30, 1996. This statement
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying
amounts of these assets may not be recoverable. The
adoption of SFAS No. 121 did not have a material effect on
the Consolidated Financial Statements.
The Registrant adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," effective June 30, 1996. This
statement encourages, but does not require, adoption of a
fair-value-based accounting method for employee stock-
based compensation arrangements. Management has
elected to disclose in the fiscal 1997 annual Consolidated
Financial Statements pro forma net income and net income
per share as if the fair-value-based method had been
applied in measuring compensation cost.
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3. 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:
Sep. 28, June 29,
1996 1996
(in thousands)
Finished products and service $ 9,372 $10,096
Products in Process 4,220 4,251
Raw materials 1,470 1,318
Less Allowance (2,227) (2,137)
Total $ 12,835 $13,528
4. 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 three month period of
fiscal 1997 is 2,154,177 as compared to 2,212,610 shares
for the same period of fiscal 1996.
5. 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 agreed to certain issues and has paid all tax with
respect to those issues. Three issues remain unresolved,
and the IRS has issued a proposed adjustment 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 a 1990 transaction.
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.
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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
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, and would lose
the benefit of substantial deductions in future 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 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.
Various lawsuits and claims arising during the normal
course of business are pending against the company. In
the opinion of management, the ultimate liability, if any,
resulting from these matters will have no significant effect
on the company's consolidated financial position, results
of operations or cash flows.
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.
6. Reclassification
Certain prior year's data has been reclassified to conform
to current presentation.
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MOSLER INC.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three months Ended September 28, 1996 Compared to
the Three Months Ended September 30, 1995
Sales
The Company's sales decreased during the three
months ended September 28, 1996 by 5.9% to $50.5
million from $53.6 million. Service sales decreased by
2.4% to $26.2 million from $26.8 million due to a decline
in service contract sales of $0.4 million and time and
material sales of $0.2 million.
Product net sales decreased during the three months
ended September 28, 1996 by 9.4% to $24.3 million from
$26.8 million. Electronic Security sales decreased 14%
with decreases in COMSEC sales of $1.1 million and
Currency Handling sales of $0.7 million. Physical
Security product sales decreased 9.8% primarily due to a
decrease in financial institution product sales.
Gross Profit
Gross profit decreased during the three months
ended September 28, 1996 by 3.0% to $10.8 million from
$11.1 million. Gross profit as a percentage of sales
increased to 21.4% for the three months ended
September 28, 1996 from 20.7% for the three months
ended September 30, 1995. The decrease in gross profit
was primarily attributable to the loss in gross margin due
to the decline in sales volume partially offset by cost
reductions.
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Selling and Administrative Expenses
Selling and administrative expenses decreased in the
three months ended September 28, 1996 by 2.6% to
$9.2 million from $9.5 million for the three months ended
September 30, 1995. Included in administrative expense
for the three months ended September 30, 1995 was
$0.2 million of plant closing expenses which did not occur
in fiscal 1997.
Operating Income
The Company's operating income for the three
months ended September 28, 1996 of $1.8 million is $0.2
million more than the three months ended September 30,
1995.
Debt Expense
Debt expense increased for the three months ended
September 28, 1996 by 5.0% to $4.6 million from $4.4
million for the three months ended September 30, 1995.
The increase was due to an increase in interest on the
unpaid dividends for preferred stock. Average interest
expense for the first quarter of fiscal 1997 is 9.5% as
compared to 10.9% for the same period of fiscal 1996.
Net loss
Net loss increased $0.1 million for the three months
ended September 28, 1996 to $2.9 million as compared
to $2.8 million for the same period of fiscal 1996 as
discussed above.
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.
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Liquidity and Capital Resources
On October 1, 1996 the Company entered into a
$32.5 million amended and restated financing
agreement with a group of banks represented by Star
Bank, N.A. of Cincinnati, Ohio. The original agreement
dated September 1, 1995 was for $29.5 million. Included
in the $32.5 million amended credit facility is a $3.5
million term loan payable in consecutive equal quarterly
installments of $250,000 commencing December 1,
1996. As of November 1, 1996, after considering
outstanding letters of credit, guarantees and other
obligations which limit the availability of the credit facility,
available borrowing capacity under this amended facility
was $ 6.9 million. Borrowings under the credit facility will
bear interest at the prime lending rate plus 0.5%. 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 $1.6 million for
the three months ended September 28, 1996 as
compared to $8.7 million for the same period of fiscal
1996 for an favorable variance of $7.1 million. This
favorable variance is due to a decrease in accounts
receivable of $3.0 million as compared to an increase of
$1.4 million in fiscal 1996. Inventories decreased $0.7
million as compared to a decrease of $0.1 million in fiscal
1996.
The Company's capital expenditures were $1.2 million
for the first quarter ended September 28, 1996 as
compared to $0.7 million for the first quarter September
30, 1995. The Company anticipates capital expenditures
for fiscal 1997 will be approximately $2.5 million.
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 Company is required to maintain certain financial
debt covenants under its credit agreement, as amended
on October 1, 1996. On September 28, 1996 the
Company was in violation of the accounts receivable
turnover financial covenant. On November 8, 1996 the
Company received a waiver for this violation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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Item 4. Submission of Matters to a Vote of Security Holders
The following are the results of voting by stockholders present or
represented by proxy at the Annual Meeting of Stockholders held on
September 5, 1996:
Election of Directors: The following directors were elected:
Votes For Votes Against Term
Nicolas M. Georgitsis 1,866,853.8816 284,338.55338 1997
William A. Marquard 1,866,853.8816 284,338.55338 1997
Michel Rapoport 1,866,141.2816 285,051.15338 1997
Thomas R. Wall IV 1,866,853.8816 284,338.55338 1997
Robert A. Young III 1,866,853.8816 284,338.55338 1997
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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: 11/11/96 /s/ W. M. McGee
W. M. McGee
Vice-President,
CFO/Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> SEP-28-1996
<CASH> 374,000
<SECURITIES> 0
<RECEIVABLES> 49,100,000
<ALLOWANCES> 1,332,000
<INVENTORY> 12,835,000
<CURRENT-ASSETS> 754,000
<PP&E> 41,264,000
<DEPRECIATION> 30,678,000
<TOTAL-ASSETS> 102,793,000
<CURRENT-LIABILITIES> 43,269,000
<BONDS> 135,689,000
<COMMON> 254,000
0
77,395,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102,793,000
<SALES> 24,258,000
<TOTAL-REVENUES> 50,458,000
<CGS> 18,928,000
<TOTAL-COSTS> 39,685,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,506,000
<INCOME-PRETAX> (2,884,000)
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,904,000)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> 0
</TABLE>
