<PAGE>
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 December 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 (I.R.S. Employer Identification No.)
ofincorporation 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 2,131,848.55036 shares
as of December 28, 1996
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<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Financial Information (Part I)
Page
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets - June 29, 1996
and December 28, 1996 3-4
Consolidated condensed statements of operations -
Three months ended December 30, 1995 and December 28, 1996 5
Consolidated condensed statements of operations - Six months
ended December 30, 1995 and December 28, 1996 6
Consolidated condensed statement of common stockholders'
deficiency - Six months ended December 28, 1996 7
Consolidated condensed statement of cash flows - Six months
ended December 30, 1995 and December 28, 1996 8
Notes to consolidated condensed financial statements 9-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-16
Other information (Part II)
Item 1. Legal Proceedings 17
Signatures 18
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOSLER INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(in thousands)
<S> <C> <C>
Dec. 28, June 29,
1996 1996
(Unaudited) (Derived from Audited
Financial Statements)
Assets
Current assets:
Cash and cash equivalents $ 401 $ - 0 -
Accounts receivable, net 53,669 52,490
Inventories 13,196 13,528
Other current assets 910 575
Total current assets 68,176 66,593
Facilities:
Land and land improvements 721 1,146
Buildings 4,269 7,853
Machinery and equipment 35,320 34,257
Improvement in progress 1,652 1,236
Gross facilities 41,962 44,492
Less accumulated depreciation 31,271 33,091
Net facilities 10,691 11,401
Other assets:
Service agreements 15,793 18,049
Deferred debt issuance costs 3,580 3,853
Goodwill 5,302 6,057
Other intangible assets 399 291
Sundry 2,200 2,881
$ 106,141 $ 109,125
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Dec. 28, June 29,
1996 1996
Liabilities, redeemable stock and common (Unaudited) (Derived from Audited
stockholders' deficiency Financial Statements)
Current liabilities:
Accounts payable $ 11,003 $ 9,923
Accrued liabilities:
Compensation & payroll taxes 4,408 3,101
Product warranty 862 1,240
Accrued workers' compensation 4,627 5,011
Accrued interest 5,657 5,962
Other 7,714 8,988
Unearned revenue 22,502 13,366
Income taxes payable 282 299
Long-term debt due within one year 1,000 1,000
Total current liabilities 58,055 48,890
Long-term debt due after one year 127,006 132,948
Post retirement health benefits 11,170 10,812
Pension liability 1,604 1,604
Commitments and contingencies
Redeemable stock
Series D increasing rate preferred stock 43,693 40,302
Series C adjustable rate preferred stock 33,928 35,424
Common Stock 2,011 2,011
79,632 77,737
Common stockholders' deficiency:
Common stock 254 254
Accumulated deficit (163,827) (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 (1,139) (1,123)
Common stock held in treasury (4,057) (3,800)
Total common stockholders' deficiency (171,326) (162,866)
$ 106,141 $ 109,125
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended
Dec. 28, Dec. 30,
1996 1995
Net sales:
Service $ 26,702 $ 27,176
Product 26,029 27,361
52,731 54,537
Cost of sales:
Service 18,640 19,420
Product 21,020 22,101
39,660 41,521
Gross profit 13,071 13,016
Selling and administrative expense 9,158 9,069
Other (income) expense (88) (52)
9,070 9,017
Operating income 4,001 3,999
Debt expense:
Interest expense 4,454 4,393
Amortization of debt expense 144 393
Interest income (24) (39)
4,574 4,747
Loss before income taxes (573) (748)
Provision for income taxes 27 (14)
Net loss (600) (734)
Preferred dividends (2,151) (1,944)
Amortization of preferred stock discount (219) (205)
Net loss applicable to common stockholders ($2,970) ($2,883)
Net loss per common share ($1.39) ($1.34)
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Six months ended
Dec. 28, Dec. 30,
1996 1995
Net sales:
Service $ 52,902 $ 54,016
Product 50,287 54,121
103,189 108,137
Cost of sales:
Service 39,076 39,977
Product 40,269 43,862
79,345 83,839
Gross profit 23,844 24,298
Selling and administrative expense 18,398 18,558
Other (income) expense (308) 138
18,090 18,696
Operating income 5,754 5,602
Debt expense:
Interest expense 8,960 8,668
Amortization of debt expense 287 576
Interest income (36) (81)
9,211 9,163
Loss before income taxes (3,457) (3,561)
Provision for income taxes 47 10
Net loss (3,504) (3,571)
Preferred dividends (4,349) (4,004)
Amortization of preferred stock discount (334) (426)
Net loss applicable to common stockholders ($8,187) ($8,001)
Net loss per common share ($3.82) ($3.65)
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS' DEFICIENCY
SIX MONTHS ENDED DECEMBER 28, 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 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 (3,504) (3,504)
Amortization of Series D
preferred stock discount (334) (334)
Dividends on Series D
preferred stock (1,405) (1,405)
Dividends on Series C
preferred stock (2,944) (2,944)
Foreign currency translation
adjustment (16) (16)
Repurchase of 25539 shares
of Common stock (257) (257)
Balance at December 28, 1996 $254 ($163,827) ($546) ($2,011) ($1,139) ($4,057) ($171,326)
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Six months ended
Dec. 28, Dec. 30,
1996 1995
Net loss $ (3,504) $ (3,571)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 1,155 1,113
Amortization 3,296 3,587
Gain on disposal of facilities 1 (18)
Interest paid in shares of preferred stock 1,754 1,155
Provision for doubtful accounts 19 368
Decrease (increase) in:
Accounts receivable (1,112) 80
Inventories 360 (225)
Other current assets (363) (552)
Increase (decrease ) in:
Accounts payable 1,009 1,501
Accrued liabilities (1,793) (4,567)
Unearned revenue 9,115 (3,985)
Income taxes payable (2) (52)
Net cash (used) by operating activities 9,935 (5,166)
Cash flows from investing activities:
Proceeds from sale of property and equipment 51
Capital expenditures (2,316) (1,933)
Decrease in other assets 680 214
Net cash used by investing activities (1,636) (1,668)
Cash flows from financing activities
Purchase of common stock (257) (429)
Purchase of preferred stock (1,684) (1,188)
Proceeds (repayments) on debt (5,942) 4,065
Net cash provided (used) by financing activities (7,883) 2,448
Effect of exchange rate changes on cash (15) 27
Net increase (decrease) in cash and cash equivalents 401 (4,359)
Cash and cash equivalents at beginning of period 0 4,359
Cash and cash equivalents at end of period $ 401 $ 0
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
FINANCIAL INFORMATION
Item 1. Notes to Consolidated Condensed 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 December 28, 1996,
and the results of operations for the three months and six
months ended December 28, 1996 and December 30, 1995 and the
cashflows for the six months ended December 28, 1996 and
December 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 and six
months ended December 28, 1996 and December 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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<PAGE>
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:
Dec. 28, June 29,
1996 1996
(in thousands)
Finished products and service $ 9,883 $10,096
Products in Process 3,974 4,251
Raw materials 1,518 1,318
Less Allowance (2,179) (2,137)
Total $13,196 $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 six month period of
fiscal 1997 is 2,148,398 as compared to 2,201,649
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.
-10-
<PAGE>
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.
-11-
<PAGE>
MOSLER INC.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Three months Ended December 28, 1996 Compared to
the Three Months Ended December 30, 1995
Sales
The Company's sales decreased during the three
months ended December 28, 1996 by 3.3% to $52.7
million from $54.5 million. Service sales decreased by
1.8% to $26.7 million from $27.2 million due to a
decrease in time and material sales.
Product net sales decreased during the three months
ended December 28, 1996 by 4.8% to $26.0 million from
$27.3 million. Electronic Security sales decreased 9.5%
with decreases across all major product lines. Physical
Security product sales remained at previous year's
performance.
Gross Profit
Gross profit increased during the three months ended
December 28, 1996 slightly to $13.1 million from $13.0
million. Gross profit as a percentage of sales increased
to 24.8% for the three months ended December 28, 1996
from 23.9% for the three months ended December 30,
1995. The increases in gross profit and gross profit as a
percentage of sales were primarily attributable to cost
reduction programs resulting in better margins on
Physical Security as well as Service Revenue.
Selling and Administrative Expenses
Selling and administrative expenses increased in the
three months ended December 28, 1996 to $9.1 million from
$8.5 million for the three months ended December 30, 1995.
-12-
<PAGE>
Increased selling, advertising and administrative expenses
were partially offset by a decline in R&D and miscellaneous
cost. The 1995 selling and administrative expense of $8.5
million discussed above is shown net of $.5 million of non
recurring plant closing cost included in this caption in the
prior year.
Operating Income
The Company's operating income for the three months ended
December 28, 1996 of $4.0 million is $0.5 million less than
the three months ended December 30, 1995. This decrease is a
result of lower revenue in the second quarter of 1996 compared
to 1995.
Debt Expense
Debt expense decreased for the three months ended
December 28, 1996 by 3.6% to $4.6 million from $4.8
million for the three months ended December 30, 1995.
The increase was due to an increase in interest on the
unpaid dividends for preferred stock and a 63% decrease
in the amortization of debt expense. Average interest
expense for the second quarter of 1996 is 9.3% as
compared to 9.6% for the same period of 1995.
Net loss
Net loss decreased $0.1 million for the three months
ended December 28, 1996 to $.6 million as compared to
$0.7 million for the same period of fiscal 1996 as
discussed above
Six months Ended December 28, 1996 Compared to the
Six Months Ended December 30, 1995
Sales
The Company's sales decreased during the six
months ended December 28, 1996 by 4.5% to $103.2
million from $108.1 million. Service sales decreased by
2.1% to $52.9 million from $54.0 million due to a decline
in service contract sales of $0.9 million and time and
material sales of $0.2 million.
-13-
<PAGE>
Product net sales decreased during the six months
ended December 28, 1996 by 7.0% to $50.3 million from
$54.1 million. Electronic Security sales decreased 13.7%
with decreases in COMSEC sales of $2.2 million,
Currency Handling sales of $0.4 million, Access Control
sales of $1.4 million with RTS sales increasing by $0.4
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 six months ended
December 28, 1996 by 1.9% to $23.8 million from $24.3
million. Gross profit as a percentage of sales increased
to 23.1% for the six months ended December 28, 1996
from 22.5% for the six months ended December 30,
1995. The increase in gross profit was primarily
attributable to Currency Handling and Physical Security
Products with a slight increase in all other products. The
decline in sales volume has been partially offset by
continued cost improvements on all products.
Selling and Administrative Expenses
Selling and administrative expenses decreased in the
six months ended December 28, 1996 by less than .3%
to $18.1 million from $18.7 million for the six months
ended December 30, 1995. Included in administrative
expense for the six months ended December 30, 1995
was $0.7 million of plant closing expenses which did not
occur in fiscal 1997.
Operating Income
The Company's operating income for the six months
ended December 28, 1996 of $5.8 million is $0.2 million
more than the six months ended December 30, 1995.
The deviation from prior year is driven by the revenue
shortfall.
Debt Expense
Debt expense for the six months ended December
28, 1996 remained the same at $9.2 million as compared
to the previous year of $9.2 million for the six months
ended December 30, 1995. The slight increase was
interest on the unpaid dividends for preferred stock being
offset by less interest being paid on the bank note.
Average interest expense for the first two quarters of
fiscal 1997 is 9.1% as compared to 10.2% for the same
period of fiscal 1996.
-14-
<PAGE>
Net loss
Net loss decreased $0.1 million for the six months
ended December 28, 1996 to $3.5 million as compared
to $3.6 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
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 December 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 December 28, 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 $ 13.8 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 provided by operating activities was $9.9 million
for the six months ended December 28, 1996 as
compared to cash used of $5.2 million for the same
period of fiscal 1996 for an favorable variance of $15.1
million. This favorable variance is due to overall cash
management techniques implemented by the
corporation.
The Company's capital expenditures were $2.3 million
for the two quarters ended December 28, 1996 as
compared to $1.9 million for the six months ending
December 30, 1995. The Company anticipates capital
expenditures for fiscal 1997 will be approximately $3.1
million.
-15-
<PAGE>
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 Decemberr 28, 1996 the
Company was in violation of the liability to net worth ratio
financial covenant. The Company received a waiver for
this violation.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
-17-
<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: February 11, 1997 /s/ W. M. McGee
W. M. McGee
Vice-President,
CFO/Treasurer
-18-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> DEC-28-1996
<CASH> 401,000
<SECURITIES> 0
<RECEIVABLES> 53,669,000
<ALLOWANCES> 893,000
<INVENTORY> 13,196,000
<CURRENT-ASSETS> 910,000
<PP&E> 41,962,000
<DEPRECIATION> 31,271,000
<TOTAL-ASSETS> 106,141,000
<CURRENT-LIABILITIES> 58,055,000
<BONDS> 127,006,000
<COMMON> 2,011,000
0
77,621,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 106,141,000
<SALES> 50,287,000
<TOTAL-REVENUES> 103,189,000
<CGS> 40,269,000
<TOTAL-COSTS> 79,345,000
<OTHER-EXPENSES> 18,090,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,960,000
<INCOME-PRETAX> (3,457,000)
<INCOME-TAX> 47,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,504,000)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> 0
</TABLE>
