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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended June 28, 1997.
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: 33-67908
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no market for the Company's common stock.
Common Stock, $0.10 Par Value 2,103,584 shares as of June 28, 1997
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Mosler Inc.
Index to Annual Report on Form 10-K
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Part I Page
Item 1 Business 3-14
Item 2 Properties 14,15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 16
Part II
Item 5 Market for Registrant's common Equity and Related
Stockholder Matters 16
Item 6 Selected Financial Data 17-19
Item 7 Management Discussion and Analysis 20-30
Item 8 Financial Statement and Supplementary Data 31
Item 9 Changes in and Disagreement with Accountants
on Accounting and Financial Disclosures 32
Part III
Item 10 Directors and Executive Officers of the Registrant 33,34
Item 11 Executive Compensation 35-38
Item 12 Security ownership of Certain Beneficial Owners
and Management 39
Item 13 Certain Relationships and Related Transactions 40
Part IV
Item 14 Exhibits, Financial Statements Schedule, and Reports
on Form 8-K 41-45
Signatures 46
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Part I
Item 1 - Business
The Company
Mosler Inc. (the Company) is major provider and servicer of security
systems and product. The Company manufactures, markets, installs and services
security systems and products used by financial institutions and other
commercial and industrial entities. Founded in 1867, the Company's business
historically was based on the manufacture and sale of vaults, safes and other
physical security products. In recent years, the service of such products and
the manufacture, marketing, installation and service of electronic security
systems has become increasingly important to the Company. The Company
estimates that during fiscal year 1997 approximately 57% of its gross profit
was generated through the repair and service of security systems and products
provided by the Company and others. The Company currently manufactures and
sells electronic security systems, access control systems, CCTV systems,
burglar alarms, currency handling equipment, drive-in banking systems,
modular vaults, vault doors, security containers and safes.
In 1967, the Company's predecessor in interest, the Mosler Safe
Company, was acquired by American Standard Inc. In 1986, The Company was
incorporated as a Delaware corporation by an investor group comprised of
senior management of the Security Products Division of American Standard Inc.
and affiliates of Kelso & Co., Inc. ("Kelso"). In July 1986, the Company
acquired the assets and business of the Security Products Division, including
the stock of The Mosler Safe Company, from American Standard Inc. for
approximately $156 million. The acquisition was financed with approximately
$150 million of debt and approximately $15 million of equity.
On May 23, 1990, the Company merged (the "Merger") with a corporation
organized by Kelso Investment Associates IV, L.P. ("KIA IV"), a Delaware
limited partnership, and an affiliate. In connection with the Merger and
intermediate transactions, all of the shares of the Company's Class A Common
Stock (the "Old Common Stock"), were exchanged, at the option of the holder,
for either (i) $79 in cash plus .17 shares of the Company's Series D
Preferred Stock (the "Cash and Preferred Stock Consideration") or
(ii) 7.9 shares of Common stock and .17 shares of Series D Preferred Stock
(the "Common and Preferred Stock Consideration"). Approximately 1,068,127
shares of Old Common Stock, representing 89.4% of the Old Common Stock
outstanding prior to the Merger on a fully-diluted basis, were exchanged
for the Cash and Preferred Stock Consideration and approximately
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127,498 shares of Old Common Stock representing 10.6% of the Company's Old
Common Stock outstanding prior to the Merger on fully-diluted basis, were
exchanged for the Common and Preferred Stock Consideration. In the Merger,
KIA IV and the affiliate purchased an aggregate of 1,400,000 shares of
common stock. Also in connection with the Merger, the Company purchased
from BancBoston Capital Inc. ("BancBoston") all shares of a previously
outstanding series of preferred stock of the Company. All of the
transactions described above are collectively referred to herein as the
"1990 Transaction."
Sources of funds for the 1990 Transaction included approximately
$80 million from proceeds of borrowings under a Credit Agreement dated as
of May 19, 1990 and approximately $14 million from KIA IV and its affiliate.
In conjunction with the 1990 Transaction, Mosler solicited and obtained from
the holders of its 12 1/2% Senior Subordinated Debentures due 1998 a consent
to amend in certain respects the indenture relating to such Debentures
including, but not limited to, increasing the interest rate from 12 1/2%
to 13 5/8% for interest accruing after May 23, 1990. The 1990 Transaction
resulted in an increase of the indebtedness of the Company from $83.3 million
to $163.3 million. The 1990 Transaction was not considered by generally
accepted accounting principles to result in a change of control of the
Company due to the significant continuing interest of certain stockholders
and this resulted in a decrease in the Company's Common stockholders' equity
of $83.7 million.
On July 29, 1993, the Company completed a refinancing transaction
whereby it issued $115 million principal amount of 11% Series A Senior Notes
due April 15, 2003. A portion of the net proceeds from the notes were
deposited in trust to redeem all of the Company's 13 5/8% Senior Subordinated
Debentures ($80 million) plus accrued and unpaid interest.
As of the date hereof, affiliates of Kelso own approximately 65% of the
common stock of the Company. The remaining common stock is owned by
management, directors and employees of the Company (including shares held in
the Company's 401(k) Savings Plan for their benefit, and the Company's ESOP).
The Company's principal executive offices are located 8509 Berk
Boulevard, Hamilton, Ohio 45015 and its telephone number is (513) 870-1900.
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Business
General
Mosler's broad array of security systems and products includes its
proprietary COMSEC/Invisicom monitoring system, which incorporates multi-point
alarm and CCTV monitoring and permits a customer with multiple branch
locations to report security data to a central location without interfering
with the customer's data processing network; the Autobanker drive-in banking
system, which delivers transactions efficiently via pneumatic tubes; a
microprocessor controlled currency handling system, which improves
productivity through high speed counting, sorting, bill facing and
counterfeit detection; and bullet resistant teller protection windows and
counters. As part of its strategy to expand its electronic security
business, Mosler continues to develop technologically sophisticated
electronic security products.
The Company built its reputation as a major provider and servicer of
security systems and products by developing and marketing products to meet
the demanding security requirements of commercial banks and other financial
institutions. The Company believes that the technological expertise it has
developed to meet the standards of financial institutions should provide it
with competitive advantage as it attempts to expand its sales in the
commercial and industrial market.
To keep pace with the ever changing market conditions, the Company has
made several significant changes in its management structure. Historically
the Company's sales, service and installation management had been structured
geographically. Each region had full profit and loss responsibility for
sales, service and installation. With the continued consolidation in the
banking industry as well as the commercial sector, the geographical approach
has lead to conflicts between regions. As such, the Company has implemented
a market channel structure that eliminates the regional approach. To support
this change as well as other management goals, the Company is currently
implementing a new computer system that will allow it to better manage its
operations. In conjunction with the new system, the Company will be changing
certain procedures in order to implement a job cost management system. This
will improve the matching of revenue and expenses. The system will also allow
the Company to better track the performance of projects.
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The Company's service business has been a reliable source of cash flow.
Approximately 40% of the Company's service revenues are derived from service
agreements for providing ongoing maintenance. Although the majority of the
Company's service revenues are derived from servicing products provided by
the Company, the Company's service organization is equipped to handle the
products of other manufacturers. The Company's 1,110 person service and sales
organization operates through approximately 68 offices located throughout the
country.
Products
The Company's two primary products are physical security and electronic
security systems.
The Company's operations can be divided into four general categories:
service, electronic security systems, physical security products and
international operations. The following table sets forth the Company's net
sales from each of these four categories as a percentage of total net sales
for each of the last three fiscal years:
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Percentage of total net sales
1997 1996 1995
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Service 51.2% 49.0% 49.9%
Electronic security systems 23.9 24.6 24.8
Physical security products 20.9 22.0 20.1
International 4.4 5.7 5.9
Elimination of interdivisional sales (.4) (1.3) (0.7)
Total 100.0% 100.0% 100.0%
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Service
The Company believes that the capabilities of its service organization
significantly enhance the sale of its products. The Company services
electronic security systems, remote drive-in systems and physical security
products it produces, as well as products produced by other manufacturers.
Service revenues accounted for approximately 51% of the Company's net sales
for fiscal 1997.
During fiscal 1997 service agreement sales decreased $.7 million.
Time and material sales remained constant in fiscal 1997. Approximately
40% of the Company's service revenues for fiscal 1997 were generated by
services performed under service agreements. The Company offers six
maintenance plans, ranging from plans that provide
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service only during business hours to plans that provide service at any
time. Service plans generally require advance payment of a specified
service fee. The remaining service revenues were generated by individual
customer service calls for which the customer was charged for labor and
materials.
The Company employs approximately 956 field service personnel. A
majority of the service personnel are located in the Company's 68 domestic
offices. The Company maintains a fleet of approximately 875 service vehicles
for use by its service personnel.
To meet increased electronic security systems service requirements and
accommodate changes in technology, the Company will be required to increase
its servicing capability by continuing and expanding the practice of
providing electronic security systems training to a substantial percentage
of its existing field personnel, providing follow-up training sessions and
recruiting new personnel with electronics systems experience.
Electronic Security Systems
The Company engineers and manufactures electronic security systems for
both financial institutions and commercial and industrial customers. The
Company also engineers and manufactures drive-up banking systems for financial
institutions. Sales of electronic security systems accounted for
approximately 23.9% of the Company's net sales for the year ended
June 28, 1997.
The Company produces alarm and surveillance systems designed primarily
for financial institutions and retail stores. A principal product in this area
is the COMSEC security communications system. COMSEC is a central monitoring
and control security system designed for use in a single building or a group
of buildings anywhere in the United States. COMSEC utilizes two-way
communications equipment to enable a console guard to monitor security and
fire alarms, control access to remote areas, receive reports and initiate
security checks and inquiries. A customer may purchase COMSEC on a modular
basis, so that additional system functions and additional remote locations
can be added to a COMSEC system at a later date.
During fiscal 1996 the Company acquired a minority interest in
PACOM DATA PTY. Ltd. of Sydney, Australia, a supplier of the Company.
PACOM is a world leader in highly advanced security communications, networking
and systems development.
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The Company also provides drive-in and walk-up transaction systems for
financial institutions, including equipment permitting sight-and-sound
communications between tellers and customers and customer identification.
Through a partnership with Toshiba, the Company also markets a line of
currency handling equipment including a micro-processor controlled currency
handling system which improves productivity through high speed counting,
sorting, bill facing and counterfeit detection. The Company also offers
burglar alarms that provide signals locally or to a central station.
Mosler has recently introduced a line of products which provide a
higher level of security at both the entrance sites of facilities and also
within the facilities. These products, which are sourced from outside
suppliers, include automated security portals, turnstiles and metal
detectors. The security portals and turnstiles can be integrated with the
access control system to ensure only authorized personnel are allowed entry
while also reducing requirements for guards. The security portals can also
be integrated with metal detectors to provide screening for weapons without
direct and continual involvement of a guard.
The Company's electronic security systems are generally assembled by
Company personnel from components manufactured by others, including circuit
boards, data processing products and other components purchased both under
general contracts and pursuant to specific purchase orders.
On July 29, 1993, the Company purchased Security Control Systems, Inc.
("Linx") for $6.8 million plus the assumption of certain liabilities and
obligations of Linx.
Linx is a developer of micro-computer based access control systems
with an installed base of approximately 250 systems. Linx has provided
security services for the U.S. space program as well as various Fortune 500
companies, hospitals, financial institutions and correctional institutions.
The Linx acquisition provided the Company with a greater presence in the
commercial and industrial sector of the market for electronic security
systems.
Physical Security Products
The Company engineers, purchases and manufactures modular vaults,
vault doors, night depositories, safe-deposit boxes, drive-in windows and
counter systems for financial institutions. The Company also engineers
and manufactures money and record safes and insulated vault doors for
financial institutions, United States government agencies
and contractors and other commercial and industrial customers. Sales of
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physical security products accounted for approximately 21% of the
Company's net sales for the year ended June 28, 1997.
The Company closed its Hamilton, Ohio manufacturing facility on
April 2, 1996. The plant closing is part of the Company's ongoing efforts
intended to improve its competitive position in the industry. The product
lines that had been manufactured at the Hamilton, Ohio plant were transferred
to other Company facilities or built to the Company's specifications by
other manufacturing companies. The plant closing and related shutdown
expenses resulted in a before tax charge of approximately $3.0 million.
The Company believes that it is the largest provider of Government
Containers in the United States. Government Containers are secured file
drawers, used by United States government agencies, including branches of
the United States armed forces, to protect documents, weapons and other
materials from espionage, theft and destruction. The Company also sells
its Government Containers to government contractors. United States sales
to government agencies and contractors accounted for approximately
4.6%, 4.0% and 4.0% of the Company's net sales in fiscal years, 1997, 1996
and 1995 respectively. Due to increased competition in the physical
security product market and anticipated defense and federal government
budget levels, the Company does not anticipate any significant future
growth in sales to government agencies and contractors.
The Company manufactures and purchases a variety of physical security
products used by financial institutions, including vault doors, night
depositories, safe-deposit boxes, drive-in windows, counter systems and
safes. The Company also sells certain physical security products, like
modular vaults, manufactured by others. The Company's counter systems for
financial institutions include bank counters, check desks, coupon booths,
under counter steel cabinets, currency storage equipment and a variety of
protective devices constructed from bullet resistant material.
The Company also manufactures and purchases a line of fire and burglary
resistant products for commercial and industrial customers designed to
protect currency, securities and records. The principal products in this
line are money and record safes and insulated vault doors. These products
are sold primarily to food and drug retail chain stores, educational
institutions and insurance companies. The Company also manufactures a line
of Dropository units, used by utilities, libraries, schools, insurance
companies and governmental collection offices, designed to permit the payment
of bills and the deposit of books and other packages during non-business
hours.
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International
The Company markets security products primarily to customers in
Mexico, Canada, the Caribbean basin, South America and the Far East.
The Company's international sales accounted for approximately 4.4% of the
Company's total net sales for fiscal 1997. The Company maintains direct
sales and service offices in Mexico, Canada and the Caribbean and a
manufacturing facility for physical security products in Mexico. The
Company has also entered into agreements with licensees in Indonesia and
the Philippines pursuant to which the licensees are authorized to
manufacture and sell certain of the Company's products in accordance with
designs, specification and quality standards established by the Company in
exchange for the payment of specified fees and royalties. The Company
markets products in other international locations through independent
dealers. Due to high transportation costs, the Company exports only a
limited number of physical security products from its facilities in the
United States.
The Company is attempting to develop new products and services for
the international market through participation in ventures with other
manufacturers.
For financial information about the Company's international operations,
see Note 13 of the Consolidated Financial Statements.
Principal Markets
As a result of recent trends in the financial institutions market,
the Company believes that sales of electronic security systems to financial
institutions will show greater growth than sales of physical security
products. Sales of electronic security systems are cost justified by a
number of factors, including the need for greater security at remote
locations, the desire for centralized monitoring and the reduction of
personnel and other costs resulting from the implementation of improved
technology. Sales of physical security products are primarily dependent
upon branch openings and renovations. In addition, as a result of branch
mergers and consolidations, the Company has experienced increased interest
by merged banks in integrating existing security systems and implementing
labor saving security systems.
With respect to sales of physical products, the trend toward banking
deregulation has resulted in the increased use of "limited branch" operations.
In contrast to a full service operation, limited branches are smaller
and require fewer physical security products.
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The Company estimates that the revenues generated from initial security
product sales to a new limited branch and in connection with a branch
renovation are approximately 25% and 50%, respectively, of the revenues
generated from initial security product sales to a new full service branch.
As part of its strategy to expand its presence in the commercial and
industrial markets, the Company is attempting to expand sales of its
electronic security systems (including access control systems) to commercial
and industrial facilities for use in retail chain stores and office and other
commercial buildings. The Company has installed integrated electronic
security systems at American Honda, Oracle and United Healthcare and
continues to provided electronic security systems to K-Mart and J.C. Penney
retail chains. Mosler is pursuing the segment of the commercial and
industrial electronic security market in which customers have a requirement
for a high level of security. Included in this segment are technology firms,
brokerage firms, retail chains with large stores, defense contractors,
museums and universities. The Company expects access control and CCTV to be
a major source of growth in the commercial and industrial electronic
security business.
With the exception of Government Containers, which are sold to a
limited group of government agencies and contractors, sales of the Company's
products and services are not dependent upon a single customer or a few
customers. The Company provides products and services on a nationwide basis,
and its business is not dependent on any particular geographic region. The
Company's sales are not subject to significant seasonal variations.
Warranty and Service
The Company generally warrants its products for periods ranging up to
one year against defective material and workmanship under normal use and
service. The Company's obligations under such warranties are limited to
repairing or replacing, free of charge, any defective parts. In negotiating
specific sales contracts, the Company may increase or otherwise modify its
standard warranties.
Competition
The Company is subject to competition in the sale and service of
physical security products and electronic security systems. Price and
service are the principal methods of competition for physical security
product sales in the financial institution market. The Company is one of
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the largest providers of physical security products for financial
institutions although in recent years it's share of this market had declined
slightly. The Company's principal competitors in this market are
Diebold, Inc., Canton, Ohio and the LeFebure division (Cedar Rapids, Iowa)
of De La Rue Co. p.l.c., the United Kingdom. The financial institutions
market is also shared by a number of smaller regional and national
manufacturers. The Company's principal competitors for physical security
products internationally are Chubb & Son plc, the United Kingdom, and
Fichet Bauche, France. The Company has experienced significantly greater
competition in the commercial and industrial sector for its physical security
products and electronic security systems than in the financial institution
market.
The Company believes that it is the largest provider of Government
Containers in the U.S. The Company's principal competitor in the production
of these Government Containers is Hamilton Products, Amelia, Ohio. Overly
Co., located in Greensburg, PA, manufactures security vault doors for United
States government agencies in competition with the Company. Competitors in
this market must comply with government specifications applicable to each
product.
The Company competes with a number of major manufacturers in the
commercial and industrial markets for integrated electronic security
systems, including ADT Security Systems, Honeywell Inc. and Litton
Industries, Inc. The principal methods of competition in this market are
product design features (including customized applications), price
and service.
The Company focuses its marketing efforts for its electronic security
systems on customers whose primary concern is security (as opposed to control
of heating, ventilation and air-conditioning) and for whom a stand-alone
proprietary system may be appropriate. In contrast, many of the Company's
competitors emphasize systems controlling heating, ventilation and
air-conditioning (with certain security features) or systems which are
linked to a central alarm station. Many of the Company's competitors in
this market have substantially greater financial resources than the Company
and have developed reputations for system design capability.
Sources of Supply
The Company is not substantially dependent on any one supplier
except that the Company purchases electronic locks for Government Containers
from the only currently government approved supplier of these
electronic locks. The Company believes its sources of supply for
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materials used in manufacturing and assembling its products are adequate
for its needs.
Trademarks and Patents
The Company's principal trademark is the "Mosler" name. The Company
has been doing business under the Mosler name since 1867 and has developed a
reputation as a major supplier of quality security products. The Company
also has a number of other trademarks, including the names "COMSEC,"
"Invisicom," "Linx," "Autobanker," "Magna" and "Dropository".
The Company holds patents for 27 security products, including certain
remote transaction systems, vault doors, night depositories, locks and
safe-deposit boxes. No patent or group of patents is, in the opinion of the
Company's management, of material importance to its business.
Backlog
The Company's backlog of orders was approximately $30.6 million at
June 28, 1997 compared with $23.4 million at Junes 29, 1996. The Company
expects that substantially all of its backlog at June 28, 1997 will be
shipped in the next 12 months. Except for certain long-term contracts,
revenue from the sale of the Company's products, after provision for
installation, is recognized when products to be installed for customer orders
are shipped from the plants.
Government Contracts
Approximately 4% of the Company's net sales in fiscal 1997 and fiscal
1996 were made under contracts with United States government agencies or
contractors. Most government contracts are subject to the provisions of the
regulatory statutes applicable to government defense program contracts or
subcontracts and contain standard terms, including provisions for price
redetermination as well as termination for the convenience of the government.
The Company's sales to United States government agencies and contractors are
dependent upon the continued approval of its products by the GSA. The Company
has been subject to governmental audits of costs under contracts with United
States government agencies and contractors. The most recent of such audits
was concluded in 1991.
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Research and Development
The Company conducts a research and development program for electronic
security systems and physical security products. During fiscal 1997, the
Company's research and development costs for electronic security systems and
physical security products were $2.1 million and $.1 million, as compared to
$2.6 million and $.1 million for such purposes in fiscal 1996.
Environmental Regulation
Certain of the Company's operations are subject to federal, state and
local environmental laws and regulations. The Company believes that the
Company is currently in material compliance with all environmental and
pollution control laws applicable to the conduct of its business.
Employees
At June 28, 1997, the Company employed 1703 persons. Of this number
98 were employed in the manufacture and sale of physical security products,
99 were employed in the manufacture and sale of electronic security systems,
1110 were employed in sales and service operations, 195 were employed in
international operations and the remainder provided management, administrative
and clerical support. Approximately 201 of the Company's employees are
located outside the United States. Employees at two of the Company's four
manufacturing plants are covered by collective bargaining agreements with
various unions. These agreements expire at various times in 1997.
Item 2 Properties
The Company owns safe, vault doors, safe-deposit box and other physical
security equipment manufacturing facilities in Franklinville, New York, and
Mexico City, Mexico. The Company also leases facilities for production of
physical security products in Buffalo, New York. Electronic security
surveillance systems, remote transaction systems and film cameras are
manufactured at a leased facility located in Wayne, New Jersey. A research
and development facility for electronic security is leased in Northridge,
California. Warehousing facilities for these products are maintained at
the above locations. The Company's headquarters is located in Hamilton,
Ohio, as is a training and educational center for the Service Division.
During 1996, the Company's plant in Hamilton, Ohio was closed as part of
the Company's announced restructuring.
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During the first quarter of fiscal 1998, the Company announced it
would shut down its leased Buffalo, New York facility and outsource this
production. In connection with this shut down, the Company expects to take
a restructuring charge of approximately $360,000 related to severance and
fixed asset write-offs.
The Company leases approximately 77 offices in various locations
throughout the United States. These facilities are used for office, warehouse
and servicing purposes. The lease terms range from one to seven years and
many of the leases are renewable at the Company's option.
The Company believes that its properties are suitable to its business
and have productive capacities adequate for its anticipated needs. However,
the Company believes that it may have excess manufacturing capacity and is
evaluating various alternatives to address this situation.
The Company leases and owns a fleet of approximately 875 service
vehicles for use by its service representatives. The majority of the fleet
is leased. The service vehicles consist of vans (approximately 46%),
automobiles (approximately 4%), pick-ups and light duty trucks (approximately
47%), large installation trucks (approximately 1%) and trailers
(approximately 2%). The Company replaces approximately one-third of the
service vehicles each year.
Item 3 Legal Proceedings
The Company is involved in routine litigation arising in the ordinary
course of its business including claims against the Company involving alleged
thefts from facilities in which the Company's security products were installed.
The Company does not expect any of such actions to result in a finding that
would have a material adverse effect on the Company's financial condition,
results of operations, or cash flows.
The Company is from time to time subject to lawsuits arising out of
automobile accidents involving the Company's vehicles. The Company is also a
party to various other actions arising out of the normal course of its
business. The Company maintains liability insurance against risks arising
out of the normal course of its business.
On April 29, 1997 the Company settled a law suit with Dun & Bradstreet
Inc. The settlement was favorable to the Company . The case centered around
the performance of business and financial software purchased by the Company.
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Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the quarter ended June 28, 1997.
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's equity securities are not traded in any market. As of
September 26, 1997, there were 112 holders of the Company's Common Stock.
No dividends have been paid on the Company's Common Stock in the last three
fiscal years.
The Company intends to utilize earnings to pay down debt and fund
growth of its business and does not anticipate paying any cash dividends on
its Common Stock. Under the various covenants in the Credit Agreement of
October 1, 1996, as amended, between the Company and Star Bank (the "Credit
Agreement") the Company is limited in paying cash dividends on its Common
Stock & Preferred Stock.
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Item 6 Selected Consolidated Financial Data
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Fiscal Year Ended Last Saturday In June
1993 1994 1995 1996 1997
(dollars in thousands)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net Sales $210,622 $214,451 $216,913 $218,260 $208,583
Gross Profit 50,130 46,955 51,702 49,124 44,657
Selling and administrative
expenses 35,549 38,689 37,915 36,493 39,378
Restructuring charges(1) 2,989
Other (income) expenses (378) 413 (11) (254) (489)
Operating income 14,959 7,853 13,798 12,885 5,768
Net interest expense(2) 19,009 17,198 17,021 18,267 18,850
Loss before income taxes,
extraordinary item,
cumulative effect of
accounting change and
preferred stock charges. (4,050) (9,345) (3,223) (5,382) (13,082)
Provision for income taxes 700 336 59 65 73
Loss before extraordinary
item, cumulative effect of
accounting change and
preferred stock charges. (4,750) (9,681) (3,282) (5,447) (13,155)
Extraordinary item(3) (3,054)
Cumulative effect of
accounting change(4) (10,300) 7,420
Net loss (4,750) (23,035) (3,282) (5,447) (5,735)
Preferred stock charges(5) (6,664) (6,522) (8,285) (8,796) (9,344)
Net loss applicable to
common stockholders ($11,414)($29,557)($11,567)($14,243)($15,079)
Loss before extraordinary
item and cumulative effect
of accounting change per
common share ($4.71) ($6.87) ($5.01) ($6.51) ($10.58)
Loss per common share ($4.71) ($12.52) ($5.01) ($6.51) ($7.09)
<FN>
(1) Includes costs for closing Hamilton, Ohio manufacturing plant of
approximately $3.0 million in 1996.
(2) Represents interest expense applicable to the 13 5/8% Debentures
(including amortization of debt discount), the 11% Senior Notes due 2003,
interest expense applicable to the indebtedness under the Credit
Agreement, cost of interest rate protection agreements, miscellaneous
interest expense and non-cash interest expense accrued on unpaid
dividends applicable to the Company's preferred stock, all net of
interest income. Includes amortization of debt discount and deferred
debt issuance costs resulting from the acquisition of the Company from
American Standard Inc. in 1986 and the 1990 Transaction.
(3) Includes write-off of debt costs for early retirement of
13 5/8% Debentures.
(4) Includes cumulative effect of adoption of Statement of Financial
Accounting Standards No. 106 in 1994 and a change in the method of
accounting for service van inventories in 1997.
(5) Includes dividends declared and paid on the Series C Preferred Stock,
undeclared and unpaid dividends on the Series D Preferred Stock and
amortization of discount on the Series D Preferred Stock. Excludes
interest on accrued but unpaid dividends on the preferred stock. The
Company has not paid any preferred dividends in cash since fiscal 1990.
</FN>
</TABLE>
<17>
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Fiscal Year Ended Last Saturday In June
1993 1994 1995 1996 1997
(dollars in thousands)
Consolidated Statement of Operations Data cont'd:
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets $117,792 $122,198 $114,531 $109,125 $107,253
Long-term debt, including
current portion 123,417 131,650 130,552 133,948 127,988
Redeemable preferred stock 53,440 59,009 68,303 77,737 86,098
Total common
stockholders' deficiency(6) (108,190)(134,960)(148,622)(162,866)(176,465)
<FN>
(6) Includes a reduction of $83.7 million attributable to
the 1990 Transaction.
</FN>
</TABLE>
<18>
<PAGE>
<TABLE>
Results of Operations
The following table sets forth certain operating data of the Company for
fiscal 1997, 1996 and 1995. The following table and discussion separates
net sales and gross profit information for certain categories of the Company's
products.
<CAPTION>
FISCAL YEAR ENDED LAST
SATURDAY IN JUNE
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Net sales:
Service $106,880 $106,901 $108,307
Electronic security systems 50,038 53,599 53,742
Physical security products 43,682 47,966 43,628
International 9,326 12,502 12,766
Elimination of interdivisional sales (1,343) (2,708) (1,530)
Total Sales 208,583 218,260 216,913
Gross profit:
Service 25,653 28,944 30,598
Electronic security systems 7,792 9,611 9,681
Physical security products 9,264 10,093 8,003
International 1,948 3,465 3,420
Total Gross Profit 44,657 *52,113 51,702
Net interest expense 18,850 18,267 17,021
Net loss (5,735) (5,447) (3,282)
Change in Net Sales From Prior
Periods:
Service 0.0% -1.3% 1.0%
Electronic security systems -6.6% -0.3% 7.0%
Physical security products -8.9% 9.9% -5.1%
International -25.4% -2.1% -7.6%
Elimination of interdivisional sales -50.4% 77.0% 45.8%
Change in total net sales -4.4% 0.6% 1.1%
Operating data as a Percentage of
Product Net Sales:
Gross profit:
Service 24.0% 27.1% 28.3%
Electronic security systems 15.6% 17.9% 18.0%
Physical security products 21.2% 22.2% 18.3%
International 20.9% 27.7% 26.8%
Total gross profit 21.4% 22.5% 23.8%
Selling and administrative expense 18.9% 16.7% 17.5%
Operating income 3.2% 7.5% 6.4%
<FN>
* Does not include Hamilton, Ohio plant closing of approximately $3.0 million.
</FN>
</TABLE>
<19>
<PAGE>
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements included elsewhere in the
Form 10-K. Management's Discussion and Analysis of Financial Condition and
Result of Operations contains forward looking statements that are subject
to risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance,
fluctuations in operating results and other risks detailed from time to time
in the Company's filings with the Securities and Exchange Commission.
Overview
The Company is a major provider and servicer of security systems and products
to financial institutions. While consolidation within the banking industry
has reduced the pace of bank branch construction and intensified competition
among providers of security products, the Company believes that consolidation
will ultimately benefit its business by creating additional demand both for
physical security products as merged branches are remodeled and for electronic
security products and services as merged banks continue to integrate and
upgrade their electronic security systems. Additionally, the Company believes
that its broad product line and technologically sophisticated service and sales
organization, combined with its nationwide presence, position it to continue
to be a preferred supplier as financial institutions consolidate.
Historically, the Company has also generated significant revenues from the
sale of Government Containers. Sales of Government Containers declined from
fiscal 1988 to fiscal 1997 from $35.1 million to 9.8 million. The Company
believes that the decline in these sales roughly parallels defense procurement
spending. Although the Company does not expect the sale of Government
Containers to be a source of revenue growth, the Company continues to take
steps to make sales of Government Containers profitable at current sales levels.
While the Company has begun to benefit from the recent improvement in banking
industry profitability, management continues to pursue a strategy designed to
reduce its dependence on the financial institution security market by
increasing its focus on the commercial and industrial electronic security
systems markets in order to expand its product line to include user-friendly
products suited to the specific needs of commercial and industrial customers.
<20>
<PAGE>
In addition to pursuing its strategy of reducing its reliance of financial
institutions, the Company continues to improve its cost position through
plant closings, product line rationalization and manufacturing process
improvements.
For certain internal reporting purposes, the Company periodically estimates
the operating income attributable to its service and international operations
and the sale of electronic security systems and physical security products.
Such estimates are at best somewhat subjective approximations, in that they
involve inexact allocations of overhead and other expenses that are not
directly attributable to specific activities. Subject to the foregoing,
internal operating income estimates indicate that for the last several years,
the sale of both electronic security systems and physical security products
have not been profitable; however, when the service operating income is added
to them, the Company was profitable on an operating basis. Any profits from
international operations have been insignificant. It should be noted that
the Company's management increasingly views its operations on an integrated
basis.
<21>
<PAGE>
Fiscal 1997 Compared with Fiscal 1996
Net Sales
The Company's net sales decreased during fiscal 1997 by 4.5% to $208.6 million
from $218.3 million in fiscal 1996. The decrease in sales was due primarily
to decreases in physical security bank products of $4.3 million, electronic
security products of $3.6 million and international of $3.2 million.
Service revenues remained constant in fiscal 1997. There was however a
slight shift from service agreement revenue (down $.7 million) to time and
material revenue (up $.7 million).
Net sales of electronic security systems decreased by 6.7% to $50.0 million
from $53.6 million. The decrease was attributed to decreases in COMSEC and
card access sales.
Net sales of physical security products decreased by 9.0% to $43.7 million.
Financial institution sales decreased by $2.9 million and commercial products
decreased by $1.4 million. In fiscal 1997, financial institutions reduced
investment in full service branches and began "in-store/mini-branch"
programs. The "in-store/mini-branch" contains one-half the Company's product
content versus a full service facility. This resulted in lower Physical
Security product orders. As "in-store/mini-branch" programs accelerate, the
Company anticipates that the increasing number of locations will offset the
lower dollar amount of content per location.
Net sales of the Company's International operations decreased 25.4% to
$9.3 million. Continued declines in the Mexican market lead the reduction
in sales of $1.9 million. Export sales also trailed the prior year by $1.5
million. This was due primarily to changes in the Company's dealer network.
Gross Profit
Gross profits declined by 14.2% to $44.7 million from $52.1 million in fiscal
1996, before plant closing costs. Gross profit as a percentage of sales
decreased to 21.4% for fiscal 1997 from 22.5% for fiscal 1996.
Gross profit from service revenues decreased during fiscal 1997 by 11.0% to
$25.7 million from $28.9 million. Gross profit as a percentage of sales
decreased in fiscal 1997 to 24.0% from 27.1% in fiscal 1996. The decrease
in gross profit dollars as a percentage of sales is due to increases in labor
and travel costs.
<22>
<PAGE>
Gross profit from the sale of electronic security systems decreased by
18.9% to $7.8 million from $9.6 million. Gross profit as a percentage of
sales decreased to 15.6% from 17.9% in fiscal 1996. The decrease in gross
profit as a percentage and in dollars was due to a decline in volume and
increased installation costs. Gross profit from the sale of physical security
products decreased by 8.2% to $9.3 million from $10.0 million in fiscal 1996.
Gross profit as a percentage of sales decreased to 21.2% from 22.2% in fiscal
1996. The decrease in gross profit was due primarily to a decrease in volume
and lower overall product gross margin due to increased price competition.
Gross profit from the Company's International operations decreased by 43.8%
to $1.9 million from $3.5 million for fiscal 1996. Gross profit as a
percentage of sales decreased to 20.9% from 27.7% in fiscal 1996. The
decline in gross profit was primarily due to the reduced volume.
Selling and Administrative Expense
Selling and administrative expenses increased by 8.0% to $39.4 million
from $36.5 million. Selling and administrative expenses as a percentage of
sales increased to 18.9% in fiscal 1997 from 16.7% in fiscal 1996. The
increase was primarily due to increase in personnel associated with service
administration.
Operating Income
The Company's operating income during fiscal 1997 decreased by 63.5% to
$5.8 million from $15.9 million in fiscal 1996 (before restructuring
charges). Operating income as a percentage of sales decreased to 3.2% from
7.5% in fiscal 1996.
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
increased 2.7% to $18.8 million from $18.3 million in fiscal 1996.
<23>
<PAGE>
Net loss Before Preferred Stock Charges
Net loss before preferred stock charges increased during fiscal 1997 to
$5.7 million from $5.4 million in fiscal 1996. Included in the net loss
of fiscal 1997 was a one time adjustment of $7.4 million for the cumulative
effect of a change in accounting method relating to the capitalization of the
service van inventory. Included in the net loss of fiscal 1996 is a one time
adjustment of $3.0 million for the Hamilton, Ohio plant closing costs.
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 - Fiscal Years 1997 and 1996
During the first quarter of fiscal 1998, the Company announced it would shut
down its leased Buffalo, New York facility and outsource this production.
In connection with this shut down, the Company expects to take a
restructuring charge of approximately $360,000 related to severance and
fixed asset write-offs.
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 remains 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 aspects 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 were transferred to other Company facilities or are being
built to the Company's specifications by other manufacturing companies. The
plant closing affected approximately 140 employees. The one time plant
closing costs, severance and other related expenses amounted to $3.6 million.
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.
<24>
<PAGE>
The Hamilton plant was sold on July 29, 1996 for $500.00 resulting in a
reserve for the loss on the disposal in the amount of $1.7 million included
in the $3.6 million plant closing costs for fiscal 1996. Net loss per common
share for fiscal 1996 would have been $4.31 per share instead of $5.75
without the cost of the plant closing.
Fiscal 1996 Compared with Fiscal 1995
Net Sales
The Company's net sales increased during fiscal 1996 by 0.6% to $218.3
million from $216.9 million. The increase in sales was due primarily to
improvement in physical security bank product sales of $3.7 million.
Service revenues decreased during fiscal 1996 by 1.3% to $106.9 million from
$108.3 million. The decrease was attributable to a decline in service
agreement sales resulting from continued financial institution mergers and
competitive pricing.
Net sales of electronic security systems decreased by 0.3% to $53.6 million
from $53.7 million. This decrease was primarily attributable decreases in
COMSEC and card access sales partially offset by improved remote transaction
and commercial alarm sales.
Net sales of physical security products increased 9.9% to $48.0 million from
$43.6 million. Financial institution sales increased 16.8% and counter
systems sales increased 7.6% in fiscal 1996 partially offset by a decline in
commercial physical product sales. Sales of government security containers
increased slightly in fiscal 1996.
Net sales of the Company's International operations decreased 2.1% to $12.5
million from $12.8 million. The decrease was primarily attributable to
economic problems and the devaluation of the peso in Mexico. The decrease in
the value of the peso was partially offset by an increase in export sales.
Gross Profit
Gross profit before plant closing costs increased during fiscal 1996 by 1.9%
to $52.1 million from $51.7 million. Gross profit as a percentage of sales
decreased to 22.5% for fiscal 1996 from 23.8% for fiscal 1995.
Gross profit from service revenues decreased during fiscal 1996 by 5.4%
to $28.9 million from $30.6 million. Gross profit as a percentage of
<25>
<PAGE>
service revenues decreased in fiscal 1996 to 27.1% from 28.3% in fiscal
1995. The decrease in gross profit and gross profit as a percentage of
revenues is due to the decrease in sales volume without an offset in labor
and travel costs partially offset by reduced parts costs.
Gross profit from the sale of electronic security systems decreased 0.7%
to $9.6 million from $9.7 million. Gross profit as a percentage of sales
from the sales of electronic systems products decreased to 17.9% for fiscal
1996 from 18.0% for fiscal 1995.
Gross profit from the sale of physical security products increased by 25.0%
to $10.0 million from $8.0 million. Gross profit as a percentage of sales
from the sale of physical security products increased to 22.2% from 18.3% for
fiscal 1995. The increase in gross profit and the percentage of gross
profit is due to additional gross margins on the increase in sales volume and
reduced warranty costs.
Gross profit from the Company's International operations increased by 1.3%
to $3.5 million from $3.4 million for fiscal 1995. Gross profit as a
percentage of sales from the Company's International operations increased
to 27.7% from 26.8% for fiscal 1995. The increase in gross profit was
primarily due to improved margins.
Selling and Administrative Expenses
Selling and administrative expenses decreased during fiscal 1996 by 3.8%
to $36.5 million from $37.9 million. Selling and administrative expenses
as a percentage of sales decreased to 16.7% from 17.5% for fiscal 1995.
The decrease was primarily due to reduced administrative expense partially
offset by an increase in marketing communications and selling expense.
Operating Income
The Company's operating income during fiscal 1996 before plant closing costs
increased 18.8% to $16.4 million from $13.8 million. Operating income as a
percentage of sales increased to 7.5% in fiscal 1996 from 6.4% for fiscal
1995. The increase in operating income was due to the increase in gross
profit and the reduction in selling and administrative expenses.
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
increased 7.6% to $18.3 million from $17.0 million.
<26>
<PAGE>
Net Loss Before Preferred Stock Charges
Net loss before preferred stock charges increased during fiscal 1996
to $5.4 million from $3.3 million in fiscal 1995. Included in the net loss
of fiscal 1995 is a one time adjustment of $3.0 million for Hamilton Ohio
plant closing costs.
Liquidity and Capital Resources
On October 9, 1997 the Company entered into an Amendment to its
Financing Agreement with the bank group, Agented by Star Bank, N.A., whereby
previous financial covenant defaults were waived and future financial
covenants were reset. Under the terms of the Amendment, the credit facility
would be reduced to $25 million if Star Bank acquires its co-lender's share
of the credit facility. The reduction in the size of the credit facility
would not impact the Company's current borrowing capacity because of the
recent decrease in current assets, arising from improved cash management, has
already caused a decline in the amount that the Company could borrow under
the Financing Agreement. Effective January 2, 1998 and provided no event
of default has occurred, the credit facility will be increased to $27.75
million. Borrowings under the credit facility continue to bear interest at
the prime lending rate plus 0.5%.
Cash provided by operating activities was $14.5 million for fiscal
1997 as compared to cash used of $1.5 million in fiscal 1996 for a favorable
variance of $16.0 million. The favorable variance was due to overall cash
management techniques implemented by the corporation. The Company has
increased its efforts in cash collection as well as improved the controls
over cash disbursements. The Company has increased the use of billing terms
which require down payments on receipt of order. It has also improved the
management of past due accounts. Accounts receivable decreased $6.5 million
in fiscal 1997 as compared to an increase of $8.7 million in fiscal 1996.
The decrease was due to lower revenue levels and increased collection efforts.
The Company's unfinanced capital expenditures were $2.7 million for
fiscal 1997 as compared to $4.8 million for fiscal 1996. Funds required for
the Company's future capital expenditures will come from several sources,
including operating cash flow, the Company's revolving credit facility and
third-party financing to the extent permitted by the Company's debt
instruments. The Company's operating plan for fiscal 1998 anticipates
capital expenditures of $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.
<27>
<PAGE>
The Company was not in compliance with the financial covenants
related to its line of credit and term loan and has obtained a waiver on
such covenants as of the date of the most recent balance sheet. Such
covenants have since been amended.
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 has
agreed to certain issues and has previously 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 related 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 1998.
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 the 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. In August,
1996, Congress passed the Small Business Act. Act Section 1704 (p) amended
Internal Revenue Code Section 162 (k) retroactive to 1986. The amendment
added an exception to IRC 162 (k) for "amounts that are properly allocated to
indebtedness and amortized over the term of such indebtedness." This
exception should eliminate a substantial portion of the IRS' assessment for
stock redemption - related costs.
If the IRS's proposed adjustments are sustained, the Company would be
liable for additional income taxes of approximately $3.7 million
<28>
<PAGE>
plus interest through 1993. The Company would have a future tax liability of
approximately $2.4 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 responded to the questions relating to the
intangible asset valuation issue on June 28, 1996.
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.
New Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997
and is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. Adoption of this new standard will
result in additional financial statement disclosures.
<29>
<PAGE>
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Adoption of this new standard may result in additional financial
statement disclosures.
<30>
<PAGE>
Item 8 Financial Statements and Supplementary Data
<TABLE> Page
<S> <C>
Report of Independent Auditors (Deloitte & Touche LLP) F-1
Report of Independent Auditors (Ernst & Young LLP) F-2
Consolidated Balance Sheets as of June 28, 1997 and June 29, 1996 F-3, F-4
Consolidated Statements of Operations for the years ended June 28, 1997
June 29, 1996 and June 24, 1995 F-5
Consolidated Statements of Common Stockholders' Deficiency for the
years ended June 28, 1997, June 29, 1996 and June 24, 1995 F-6
Consolidated Statements of Cash Flows for the years ended June 28, 1997,
June 29, 1996 and June 24 1995 F-7
Notes to Consolidated Financial Statements F-8 to F-23
</TABLE>
<31>
<PAGE>
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<32>
<PAGE>
Part III
Item 10 Directors and Executive Officers of the Registrant
The following are the directors and executive officers of the Company as
of June 28, 1997.
<TABLE>
<CAPTION>
Name Age Position Position Since
<S> <C> <C> <C>
Michel Rapoport 55 Chief Executive Officer, 1995
President and Director
John W. Castle 32 Acting CFO, Treasurer 1997
and Assistant Secretary
George W. Werden 48 General Counsel and Secretary 1997
William A. Marquard 77 Director 1986
Thomas R. Wall IV 39 Director 1990
Nicholas M. Georgitsis 62 Director 1991
Robert A. Young III 56 Director 1988
</TABLE>
Mr. Rapoport was elected President and Chief Executive Officer in
March 1995. Mr. Rapoport was formerly Vice President, Pitney Bowes
International and Chairman, Pitney Bowes France since 1986.
Mr. Castle was appointed Acting CFO, Treasurer and Assistant
Secretary in April 1997.
Mr. Werden was appointed General Counsel and Secretary of the
Company in May 1997.
Mr. Marquard is Chairman of the Board of Arkansas Best Corporation,
primarily engaged, through its motor carrier subsidiaries, in less-than
truckload shipments of general commodities, Chairman Emeritus of American
Standard Inc. a producer of air conditioning systems, bathroom and kitchen
fixtures, and fittings, and braking systems for heavy trucks and buses, and
Vice Chairman of Kelso, an investment banking firm. He is also a Director
of Americold Corporation, Earle M. Jorgensen Company, and Treadco, Inc.
Mr. Wall has been associated with Kelso since 1983, most recently
as Managing Director. He is also a Director of Lebanon Valley Offset, Inc.,
Mitchell Supreme Fuel Company, Tyler Refrigeration Inc., Club Car, Inc. and
King Broadcasting Corporation.
<33>
<PAGE>
Mr. Young has been a member of the Board of Directors of the Company
since 1988. Mr. Young has been President since 1973 and Chief Executive
Officer since 1988 of Arkansas Best Corporation, Chief Executive Officer of
Treadco, Inc., a company engaged in tire retreading and commercial truck tire
sales, since 1991, and President of ABF Freight System, Inc. company which
concentrates on long-haul transportation of general commodities freight,
since 1979. He is also Director of Treadco, Inc., ABF Freight System, Inc.
and Arkansas Best Corporation.
Mr. Georgitsis has been a member of the Board of Directors of the
Company since 1991. Mr. Georgitsis has been an independent business
consultant since his retirement from American Standard Inc. in 1992. Since
his retirement he has also provided services for Kelso. Prior to that time,
he was associated with American Standard in various executive positions since
1979, most recently as Senior Vice President, Transportation Products. He is
also a Director of Tyler Refrigeration Inc. and Treadco, Inc.
<34>
<PAGE>
Item 11 Executive Compensation
<TABLE>
The following table discloses compensation paid by the Company for
fiscal years, 1997, 1996, and 1995 to its chief executive officer and other
executive officers whose compensation was in excess of $100,000 for fiscal
1997.
<CAPTION>
Summary Compensation Table
Fiscal Annual Compensation
Name and Principal Position Year Salary (1) Bonus (2)
($) ($)
<S> <C> <C> <C>
Michel Rapoport 1997 $320,004 $165,000
President and 1996 $303,334 $75,000
Chief Executive Officer 1995(4) 88,654 -0-
Paul F. Jeanmougin 1997(5) $ 90,258 $ 9,900
CFO, Treasurer and 1996 90,584 18,933
Assistant Secretary 1995 82,617 -0-
<FN>
(1) Amounts listed as salary include premiums paid on health and life
insurance polices.
(2) Bonuses are paid to management employees based upon a percentage of
each employee's salary range midpoint. Such percentage varies with
the position of the employee in the Company.
(3) The Company also provides certain incidental benefits, but the
aggregate amount of such benefits does not exceed 10% of the total
annual salary and bonus for the named individual.
(4) Joined the Company as President and Chief Executive Officer in
March 1995.
(5) Mr. Jeanmougin was no longer employed by the Company effective
December, 1996.
</FN>
</TABLE>
Stock Option Plan
The Company's stock option plan provides for the granting of options
to purchase up to 160,000 shares of common stock. Options are granted with
exercise prices and vesting schedules established by the Stock Option
Committee of the Board of Directors, and expire ten years after grant. To
date, the Company has granted options, with exercise prices of $10.00 per
share, to purchase a total of 42,850 shares of common stock. The Company
granted 2,500 options to officers in fiscal 1997.
<35>
<PAGE>
Fiscal 1997 Year-End Options Values
<TABLE>
The following table provides information on the number of common
shares underlying unexercised options held by the executive officers named
on the Summary Compensation Table:
<CAPTION>
Number of Underlying
Unexercised Value of Unexercised
Options at Fiscal In-The-Money Options at
1997 Year-End Fiscal 1997 Year-End
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Michel Rapoport -0- -0- -0- -0-
</TABLE>
Note: Options are exercisable at $10.00 per share. The Company common stock
has been appraised as of June 30, 1997 at $2.40 per share.
Benefit Plans
Retirement Plan. The Company maintains a non-contributory defined
benefit retirement plan (the "Retirement Plan") for salaried employees,
including executive officers. The Retirement Plan provides retirement
benefits based on credit years of service and average compensation, comprised
solely of the Salary portion of Annual Compensation reported on the Summary
Compensation Table, for the highest five consecutive calendar years of the
final ten calendar years of employment. Service with American Standard Inc.
is included in calculating credit years of service.
On August 31, 1994, the Company froze the Retirement Plan. As a
consequence, the accrual of the benefits for covered employee's ceased on
that date and years of service after that date will not be included in
calculating credit years of service.
Benefits payable pursuant to the plan are reduced by Social Security
Benefits and other benefits payable under the American Standard Inc. plans
and the pension equivalent of monthly pension payments, subject to approval
by the Administrative Committee of the Board of Directors in certain cases
and, in the case of officers, the additional approval of the Board of
Directors.
As of August 31, 1994, the individuals named in the Summary
Compensation Table have the following years of credited service for purposes
of this plan: Michel Rapoport - 1 year.
<TABLE>
<CAPTION>
Highest
5-Year
Average Years of Service
Compensation 5 10 15 20 25 30 35 40
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $7,500 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000
$150,000 11,250 22,500 33,750 45,000 56,250 67,500 78,750 90,000
$200,000 15,000 30,000 45,000 60,000 75,000 90,000 105,060 120,000
$250,000 18,750 37,500 56,250 75,000 93,750 112,500 131,250 150,000
$300,000 22,500 45,000 67,500 90,000 112,500 135,000 157,500 180,000
$350,000 26,250 52,500 78,750 105,000 131,250 157,500 183,750 210,000
</TABLE>
<36>
<PAGE>
Employee Stock Ownership Plan. The ESOP is a noncontributory defined
contribution stock bonus plan in which all of the Company's domestic
employees not covered by a collective bargaining agreement are eligible. The
ESOP primarily invests in the Company's Series C Preferred Stock and common
stock. Company contributions are discretionary but will not exceed 15% of
aggregate total compensation to participating employees. The Company has
made contributions to the ESOP in shares of Series C Preferred Stock and in
cash, and prior to the 1990 Transaction made contributions of Class "A"
Common Stock. The ESOP received 225,000 shares of Common Stock as part of
the 1990 Transaction and received shares of Series D Preferred Stock in
connection with the 1990 Transaction. Contributions to the ESOP are
allocated to individual accounts in proportion to the participant's
compensation and vest over a seven-year period. No contributions were made
to the ESOP by the Company on behalf of the named individuals included in
the Summary Compensation Table.
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 estimates that its cash purchases from ESOP will be
approximately $3.2 million in fiscal 1997, in order to fund payments to
retired, terminated and deceased employees. In fiscal 1993, the trustee of
the ESOP elected to defer participant distributions in substantially equal
annual payments over a period of five years in order to minimize cash
contributions by the Company to the ESOP.
Voting rights for share held by the ESOP are generally exercised by
the Administrative Committee of the Board of Directors except with respect
to certain major proposals, in which case the participants have the right to
exercise voting rights.
Savings Plan. The Company maintains a savings plan under Section
401(k) of the Internal Revenue Code of 1986 under which designated groups
of non-union employees with one year of service, including all executive
officers, may participate. Under the savings plan, a participant may
contribute from 2% to 10% of compensation, which is eligible for 50% matching
contributions from the Company. A participant may contribute over 6% but
any excess will not be matched by the Company. On February 1, 1992, the
matching contribution was suspended indefinitely by the Company.
Participants became vested in Company contributions to the extent of 20%
after 3 year and thereafter at the rate of 20% per year.
No amounts were deferred pursuant to the savings plan by the named
individuals included in the Summary Compensation Table.
Executive Severance Agreement
The Company entered into an employment agreement on February 13, 1996
with Michel Rapoport, President and Chief Financial Officer of the Company
as of March 15, 1996. Pursuant to the agreement, prior to July 1, 1998, if
Mr. Rapoport's employment is terminated because of his death, disability,
change in control of the Company or is terminated without cause, he will
receive one year's salary, the annual bonus he would have been entitled to
receive for the fiscal year in which his employment is terminated and the
portion of the long term incentive compensation attributable to the period
employed by the Company.
<37>
<PAGE>
Director Compensation
The Company pays an annual retainer plus a per meeting fee to those
directors who are not employees of the Company or Kelso. Currently, the
Company pays an annual retainer of $15,000 plus $500 per day for each
director's meeting attended. The Company also reimburses such persons for
travel and incidental expenses incurred in connection with attending
directors' meetings. Employees of the Company and Kelso do not receive any
additional compensation for serving as director.
The Compensation Committee of the Board of Directors (the "Committee")
is composed of three independent, outside directors. The members of the
Committee for fiscal 1996 were Messrs. Georgitsis, Marquard and Wall. The
Committee had the overall responsibility of reviewing and recommending
specific compensation levels for executive officers to the full Board of
Directors. The Committee also receives and reports to the Board on Company
programs for developing senior management personnel. Compensation decisions
for fiscal 1997 followed the same pattern as fiscal 1996.
The performance incentive compensation, which is paid out in the
form of an annual cash bonus, was established by the Committee to provide a
direct financial incentive to achieve corporate and operating goals. At the
beginning of each fiscal year, the Committee establishes a target bonus for
executive officers based on individual performance goals and on Company
performance.
<38>
<PAGE>
Item 12 Security Ownership of Certain Beneficial Owners and Management
<TABLE>
The following table presents certain information concerning ownership
of equity securities of the Company as of August 1, 1997 by (I) Directors,
(ii) Executive Officers named in the Summary Compensation Table, (iii) all
Directors and Executive Officers as a group and (iv) all persons known by the
Company to beneficially own more than 5% of each class.
<CAPTION>
Series C Series D
Common Stock Preferred Stock Preferred Stock
Shares Shares Shares
Beneficially Percent Beneficially Percent Beneficially Percent
Owned (a) of class Owned (a) of class Owned (a) of class
Name
<S> <C> <C> <C> <C> <C> <C>
William A. Marquard 15,000 *
Nicholas M. Georgitsis 2,000 *
Robert A. Young III 5,000 *
Thomas R. Wall IV (b) 1,400,000 66.6% 126,208 63.8%
Directors and Executive Officers 1,422,000 67.6% 126,208 63.8%
as a Group (7 persons)
Kelso Investment Associates II, L.P. 85,000 43.0%
Kelso Mosler Partners, L.P. 41,208 20.8%
Kelso Investment Assoc. IV, L.P. 1,330,000 63.2%
Kelso Equity Partners II, L.P. 70,000 3.3%
Joseph S. Schuchert (b) 1,400,000 66.6% 126,208 63.8%
Frank T. Nickell (b) 1,400,000 66.6% 126,208 63.8%
George E. Matelich (b) 1,400,000 66.6% 126,208 63.8%
BancBoston Capital Inc. 13,784 7.0%
Mosler Inc. Employee
Stock Ownership Plan 188,883 9.0% 338,270 100% 8,114 4.1%
<FN>
* Less than 1%
(a) Beneficial ownership includes shares of common stock which may be
acquired pursuant to currently exercisable options or options which
become exercisable within sixty (60) days and includes shares of common
stock held in the Employees Savings Plan.
(b) Messrs. Schuchert, Nickell, Matelich and Wall may be deemed to share
beneficial ownership of shares of Company common stock and Series D
Preferred Stock owned of record by Kelso Investment Associates II, L.P.,
Kelso Mosler Partners, L.P., Kelso Investment Associates IV, L.P. and
Kelso Equity Partners II, L.P. by virtue of their status as general
partners of such partnerships. Messrs. Schuchert, Nickell, Matelich
and Wall share investment and voting power with respect to securities
owned by the Kelso affiliates.
</FN>
</TABLE>
The address of Mr. Marquard is Eaglestone Farm, 6600 Walnut Grove Road,
Carlisle, Kentucky, 40311. The address of Mr. Georgitsis is 736 Lake Avenue,
Greenwich, Connecticut 06830. The address of Mr. Young is 1000 South 21st
Street, Fort Smith, Arkansas 72901. The address of Mr. Wall and the Kelso
entities is 350 Park Avenue, New York, New York 10022. The address of all
other persons listed above is 8509 Berk Boulevard, Hamilton, Ohio 45015-2213.
<39>
<PAGE>
Item 13 Certain Relationship and Related Transactions.
From time to time the Company has had transactions with its
directors, executive officers and principal shareholders. The Company
believes that these transactions have been on terms no less favorable to the
Company than could have been obtained from an unaffiliated third party. The
Company has adopted a policy that all transactions with affiliates, including
directors and shareholders owning more than 5% of the common stock, will be
on terms no less favorable to the Company than could be obtained from an
unaffiliated third party and must be approved by a majority of the
disinterested independent directors. The Company is party to a management
agreement with Kelso pursuant to which Kelso has been paid fees of $200,000
in each of the last three fiscal years. This continuing agreement was
approved by all directors including the disinterested directors.
<40>
<PAGE>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) The following documents are filed as part of this Report:
<S> <C>
Page
1. Financial Statements are included in pages F1-F23
2. Schedule II - Valuation and Qualifying Accounts 43
</TABLE>
All other schedules have been omitted as they are not applicable, not
required, or the information required thereby is set forth in the financial
statements or the notes thereto.
<TABLE>
<S> <C>
3. Exhibits Description
*** 3.1 Certificate of Incorporation, as amended of Mosler.
* 3.2 By-laws of Mosler.
*** 3.3 Certificate of Incorporation, as amended by Security
Control Systems, Inc.
*** 3.4 By-laws of Security Control Systems, Inc.
*** 4 Indenture for 11% Series A Senior Notes due 2003 and
11% Senior Notes due 2003 dated as of July 29, 1993.
**** 10.1 Credit Agreement September 1, 1995.
*** 10.2 1990 Stock Option Plan.
* 10.3 Employee Stock Ownership Plan, dated June 1, 1987.
* 10.4 Amendment No. 1 to Employee Stock Ownership Plan,
dated December 6, 1988.
*** 10.5 Mosler Employee's Savings Plan and Trust, Amended
and Restated through July 1, 1992.
*** 10.6 Securities Purchase Agreement by and between each of
the Common Shareholders of Security Control Systems,
Inc., as Sellers and Mosler Inc. as Purchaser with
Respect to the Acquisition of Security Control Systems,
Inc.
*** 10.9 Securities Purchase Agreement by and between El
Dorado Ventures, a California Limited Partnership, and
Mosler, Inc. as Purchaser with Respect to the
Acquisition of Security Control Systems, Inc. dated
July 21, 1993.
</TABLE>
<41>
<PAGE>
<TABLE>
<S> <C>
** 10.10 Agreement of Sale and Purchase, The Security Products
Division of American Standard, Inc., including
the Mosler Safe Company, a subsidiary of
American Standard, Inc.
* 10.11 Agreement Plan of Merger and Plan of
Reorganization between Kelso Mosler Acquisition,
Inc. and Mosler Inc. dated May 1, 1990.
18 Letter re: Change in Method of Accounting
21 Subsidiaries of the Registrant
27.0 Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibits to Securities Act of 1933
Form S-18 Registration No. 33-36426
** Incorporated by reference to the exhibits to Securities Act of 1933
Form S-1 Registration No. 33-5184
*** Incorporated by reference to the exhibits to Securities Act of 1933
Form S-1 Registration No. 33-67908
**** Incorporated by reference to June 24, 1995 Form 10-K
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the fourth quarter.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
1. THE REGISTRANT DID NOT SEND AN ANNUAL REPORT TO ITS
SECURITY HOLDERS FOR FISCAL 1997.
<42>
<PAGE>
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES MOSLER INC.
(In Thousands)
<CAPTION>
Balance at Charged to Deductions Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts(1) of Period
<S> <C> <C> <C> <C>
Year ended June 28, 1997
Allowance for doubtful accounts 993 128 (249) 872
Year ended June 29, 1996
Allowance for doubtful accounts 1,158 432 (597) 993
Year ended June 24, 1995
Allowance for doubtful accounts 1,158 463 (463) 1,158
<FN>
(1) Represents amounts charged against the allowance net of recoveries.
</FN>
</TABLE>
<43>
<PAGE>
Exhibit 18
October 2, 1997
The Board of Directors
Mosler Inc.
We have audited the consolidated balance sheets of Mosler Inc. as of
June 28, 1997 and June 29, 1996 and the related consolidated statements of
operations, common stockholders' deficiency and cash flows for the years then
ended, included in your Annual Report on Form 10-K to the Securities and
Exchange Commission and have issued our report thereon dated October 2, 1997.
Note 3 to such consolidated financial statements contains a description of
your adoption during the year ended June 28, 1997 of a change in the method
of accounting for service van inventories. In our judgment, such change is
to an alternative accounting principle that is preferable under the
circumstances.
Yours truly,
/S/ DELOITTE & TOUCHE LLP
Cincinnati, Ohio
<44>
<PAGE>
Exhibit 21
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Subsidiary Jurisdiction of Incorporation
<S> <C>
Mosler de Mexico S.A. de C.V. Mexico
Mosler Canada Inc. Canada
Mosler of Alabama, Inc. Alabama
</TABLE>
<45>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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: October 14, 1997 By: /S/ Michel Rapoport
Michel Rapoport
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date: October 14, 1997 By: /S/ Michel Rapoport
Michel Rapoport
President and
Chief Executive Officer
(Principal Executive Officer)
Date: October 14, 1997 By: /S/ John W. Castle
John W. Castle
Acting Chief Financial Officer
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: October 14, 1997 By: /S/ Nicholas M. Georgitsis
Nicholas M. Georgitsis
Director
Date: October 14, 1997 By: /S/ William A. Marquard
William A. Marquard
Director
Date: October 14, 1997 By: /S/ Thomas R. Wall IV
Thomas R. Wall IV
Director
Date: October 14, 1997 By: /S/ Robert A. Young III
Robert A. Young III
Director
<46>
<PAGE>
MOSLER INC.
Consolidated Financial
Statements for the Years Ended June 28, 1997,
June 29, 1996, and June 24, 1995
and Independent Auditors' Report
<PAGE>
MOSLER INC.
<TABLE>
TABLE OF CONTENTS
<S> <C>
Page
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 28, 1997,
JUNE 29, 1996, AND JUNE 24, 1995:
Consolidated Balance Sheets F3
Consolidated Statements of Operations F5
Consolidated Statements of Common Stockholders' Deficiency F6
Consolidated Statements of Cash Flows F7
Notes to Consolidated Financial Statements F8
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated balance sheets of Mosler Inc.
as of June 28, 1997 and June 29, 1996 and the related consolidated statements
of operations, common stockholders' deficiency and cash flows for the years
then ended. Our audits also included the financial statement schedule listed
in the Index at Item 14(a) for the years ended June 28, 1997 and June 29,
1996. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mosler Inc. at June 28, 1997
and June 29, 1996 and the consolidated results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 16 to the consolidated financial statements, the Company
is currently undergoing an audit of its federal income tax returns for the
years 1988 through 1993.
As discussed in Note 3 to the consolidated financial statements, effective
June 30, 1996, the Company changed its method of accounting for service van
inventory.
/S/ DELOITTE & TOUCHE LLP
October 2, 1997
Cincinnati, Ohio
<F1>
<PAGE>
Report of Independent Auditors
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated statements of operations,
common stockholders' deficiency and cash flows of Mosler Inc. for the year
ended June 24, 1995. Our audit also included the information relating to the
year ended June 24, 1995 reported on the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operation and cash
flows of Mosler Inc. for the year ended June 24, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the
information related to the year ended June 24, 1995 on the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 16 to the consolidated financial statements, the Company
is currently undergoing an audit of its federal income tax returns for the
years 1988 through 1991. The ultimate outcome of the IRS audit cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the consolidated financial statements.
/S/ ERNST & YOUNG LLP
September 8, 1995
Cincinnati, Ohio
<F2>
<PAGE>
MOSLER INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
(In Thousands of Dollars Except Share Data)
<CAPTION>
June 28, June 29,
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 389 $ -
Accounts receivable 47,538 54,172
Inventories 23,299 13,528
Other current assets 1,237 575
Total current assets 72,463 68,275
FACILITIES:
Land and land improvements 802 1,146
Buildings 4,809 7,853
Machinery and equipment 37,852 34,257
Improvements in progress 296 1,236
Gross facilities 43,759 44,492
Less accumulated depreciation 32,935 33,091
Net facilities 10,824 11,401
OTHER ASSETS:
Service agreements (net of accumulated
amortization of $49,702 at June 28, 1997
and $45,190 at June 29, 1996) 13,537 18,049
Deferred debt issuance costs (net of
accumulated amortization of $5,420 at
June 28, 1997 and $4,858 at June 29, 1996) 3,291 3,853
Goodwill (net of accumulated amortization
of $6,225 at June 28, 1997 and $4,716
at June 29, 1996) 4,548 6,057
Intangible pension asset 964 291
Other 1,626 1,199
TOTAL $ 107,253 $ 109,125
</TABLE>
See accompanying notes to consolidated financial statements.
<F3>
<PAGE>
MOSLER INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND JUNE 29, 1996
(In Thousands of Dollars Except Share Data)
<CAPTION>
LIABILITIES, REDEEMABLE STOCK AND COMMON June 28, June 29,
STOCKHOLDERS' DEFICIENCY 1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 17,574 $ 9,923
Accrued liabilities:
Compensation and payroll taxes 4,274 3,101
Product warranty 857 1,240
Accrued workers' compensation 4,746 5,011
Accrued interest 5,772 5,962
Other 5,858 8,988
Unearned revenue 17,021 13,366
Income taxes payable 233 299
Current portion of long-term debt 1,317 1,000
Total current liabilities 57,652 48,890
OTHER LIABILITIES:
Long-term debt 126,671 132,948
Accrued pension and other benefit
liabilities 13,297 12,416
Total other liabilities 139,968 145,364
REDEEMABLE STOCK:
Series D increasing rate preferred stock 47,135 40,302
Series C adjustable rate preferred stock 38,554 35,424
Common stock 409 2,011
Total redeemable stock 86,098 77,737
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $.10 par value; 4,000,000
shares authorized, 2,539,181 shares issued 254 254
Accumulated deficit (170,719) (155,640)
Excess of additional pension liability over
unrecognized prior service cost (13) (546)
Redemption value of common stock
held by ESOP (409) (2,011)
Foreign currency translation adjustments (1,200) (1,123)
Total (172,087) (159,066)
Less treasury stock, at cost (438,446
shares at June 28, 1997 and 381,888 shares
at June 29, 1996) (4,378) (3,800)
Total common stockholders' deficiency (176,465) (162,866)
TOTAL $ 107,253 $ 109,125
</TABLE>
See accompanying notes to consolidated financial statements.
<F4>
<PAGE>
MOSLER INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 28, 1997 AND JUNE 29, 1996 AND JUNE 24, 1995
(In Thousands of Dollars Except Share Data)
<CAPTION>
Years Ended
June 28, June 29, June 24,
1997 1996 1995
<S> <C> <C> <C>
NET SALES:
Service $ 106,880 $ 106,901 $ 108,307
Products 101,703 111,359 108,606
Total net sales 208,583 218,260 216,913
COST OF SALES:
Service 81,227 77,957 77,709
Products 82,699 88,190 87,502
Restructuring - 2,989 -
Total cost of sales 163,926 169,136 165,211
Gross profit 44,657 49,124 51,702
SELLING AND ADMINISTRATIVE EXPENSES (39,378) (36,493) (37,915)
OTHER INCOME 489 254 11
OPERATING INCOME 5,768 12,885 13,798
DEBT EXPENSE:
Interest expense 18,317 17,526 16,477
Amortization of debt issuance costs
and expense 576 876 732
Interest income (43) (135) (188)
Total 18,850 18,267 17,021
LOSS BEFORE INCOME TAXES, CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING AND
PREFERRED STOCK CHARGES (13,082) (5,382) (3,223)
PROVISION FOR INCOME TAXES 73 65 59
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING AND PREFERRED
STOCK CHARGES (13,155) (5,447) (3,282)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING 7,420 - -
NET LOSS BEFORE PREFERRED STOCK CHARGES (5,735) (5,447) (3,282)
PREFERRED STOCK CHARGES:
Dividends (8,672) (7,819) (7,540)
Amortization of discount (672) (977) (745)
Total (9,344) (8,796) (8,285)
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $ (15,079) $ (14,243) $ (11,567)
PER COMMON SHARE:
Loss before cumulative effect of
change in accounting $ (10.58) $ (6.51) $ (5.01)
Cumulative effect of change
in accounting 3.49 - -
Net loss applicable to
common stockholders $ (7.09) $ (6.51) $ (5.01)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,126,527 2,189,010 2,308,267
</TABLE>
See accompanying notes to consolidated financial statements.
<F5>
<PAGE>
MOSLER INC.
<TABLE>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
(In Thousands of Dollars Except Share Data)
<CAPTION>
Redemption
Common Value of Foreign
Stock Common Currency
$.10 Par Accumulated Pension Stock Held Translation Treasury
Value Deficit Liability By ESOP Adjustments Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 24, 1994 $254 $(129,830) $(1,445) $(1,856) $41 $(2,124) $(134,960)
Net Loss (3,282) (3,282)
Foreign currency translation adjustment (968) (968)
Purchase of 105,554 shares of common stock (915) (915)
Dividends on Series C preferred
stock ($18.37 per share) (4,996) (4,996)
Dividends on Series D preferred
stock ($13.00 per share) (2,544) (2,544)
Amortization of discount on Series D
preferred stock (745) (745)
Charge in connection with minimum
pension liability (64) (64)
Net increase in redemption value
of common held by ESOP (148) (148)
BALANCE AT JUNE 24, 1995 254 (141,397) (1,509) (2,004) (927) (3,039) (148,622)
Net Loss (5,447) (5,447)
Foreign currency translation adjustment (196) (196)
Purchase of 83,253 shares of common stock (761) (761)
Dividends on Series C preferred
stock ($17.70 per share) (5,275) (5,275)
Dividends on Series D preferred
stock ($13.00 per share) (2,544) (2,544)
Amortization of discount on Series D
preferred stock (977) (977)
Charge in connection with minimum
pension liability 963 963
Net increase in redemption value
of common held by ESOP (7) (7)
BALANCE AT JUNE 29, 1996 254 (155,640) (546) (2,011) (1,123) (3,800) (162,866)
Net Loss (5,735) (5,735)
Foreign currency translation adjustment (77) (77)
Purchase of 56,558 shares of common stock (578) (578)
Dividends on Series C preferred
stock ($17.81 per share) (5,785) (5,785)
Dividends on Series D preferred
stock ($14.50 per share) (2,887) (2,887)
Amortization of discount on Series D
preferred stock (672) (672)
Charge in connection with minimum
pension liability 533 533
Net decrease in redemption value
of common held by ESOP 1,602 1,602
BALANCE AT JUNE 28, 1997 $254 $(170,719) $ (13) $ (409) $(1,200) $(4,378) $(176,465)
</TABLE>
See accompanying notes to consolidated financial statements
<F6>
<PAGE>
MOSLER INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
(In Thousands of Dollars)
<CAPTION>
Years Ended
June 28, June 29, June 24,
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,735) $ (5,447) $ (3,282)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting (7,420) - -
Depreciation 3,003 2,490 2,561
Amortization 6,583 6,562 6,782
Loss (gain) on disposal of facilities 382 (96) (74)
Provision for doubtful accounts 128 432 463
Interest paid in shares of preferred stock 3,733 2,792 2,207
Decrease (increase) in:
Accounts receivable 6,506 (8,720) (1,499)
Inventories (2,351) 3,503 323
Other current assets (662) (53) 107
Increase (decrease) in:
Accounts payable 7,651 579 (1,556)
Accrued liabilities and other (921) (3,052) 830
Unearned revenue 3,655 (421) (413)
Income taxes payable (66) (57) (343)
Net cash (used in) provided by
operating activities 14,486 (1,488) 6,106
INVESTING ACTIVITIES:
Proceeds from sale of facilities
and equipment 1,499 88
Capital expenditures (2,655) (4,845) (1,182)
Decrease (increase) in other assets (427) 178 122
Net cash used in investing activities (3,082) (3,168) (972)
FINANCING ACTIVITIES:
Purchase of common stock for treasury (578) (761) (915)
Purchase of Series C preferred stock (3,091) (2,095) (1,297)
Purchase of Series D preferred stock (23) (66) (60)
Net proceeds from (payments on) revolving
line of credit (6,245) 4,146 7,500
Principal payments on long-term debt (1,000) (750) (8,598)
Deferred debt issuance costs - (170)
Net cash provided by (used in)
financing activities (10,937) 304 (3,370)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (78) (7) (256)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 389 (4,359) 1,508
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 0 4,359 2,851
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 389 $ 0 $ 4,359
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Interest $ 14,774 $ 14,597 $ 14,460
Income taxes 139 140 383
Noncash investing and financing
activities - Capital lease obligations 1,285
</TABLE>
See accompanying notes to consolidated financial statements.
<F7>
<PAGE>
MOSLER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 28, 1997, JUNE 29, 1996 AND JUNE 24, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Mosler Inc. and its wholly-owned
subsidiaries (the Company). The Company's investments in less than
majority-owned entities, which are not material, are included in the
accompanying financial statements on the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in
consolidation. Kelso Investment Associates IV, L.P. (Kelso) is the majority
owner of the Company. The Company paid an affiliate of Kelso an annual
management fee of $200,000 for each of the last three fiscal years in
exchange for general corporate, financial and administrative advice.
Business Description - The Company is a major provider and servicer of
security systems and products. The Company manufactures, markets, installs
and services security systems and products used by financial institutions and
other commercial and industrial entities through its operations in Hamilton,
Ohio, Franklinville, N.Y., Wayne, N.J., and Mexico City, Mexico.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Translation of Foreign Currency Financial Statements - Assets and liabilities
of the Company's foreign subsidiaries are translated at balance sheet date
rates of exchange, and the statements of operations are translated at the
average rates of exchange for the period. Translation adjustments are
reflected as a separate component of common stockholders' deficiency.
Inventories - The Company's inventories are stated at the lower of cost
(determined using the first-in, first-out method) or market.
Facilities and Depreciation - Facilities are stated at cost, including
interest incurred during construction which is not material during any of
the periods. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Land improvements 20 years
Buildings 20 to 40 years
Machinery and equipment 4 to 15 years
</TABLE>
Intangibles - Cost allocated to service agreements at the date of acquisition
are carried at cost and are amortized over the 14 year estimated life of the
contracts using the straight-line method. Goodwill is amortized on the
straight-line method over periods of 5, 10 and 40 years.
<F8>
<PAGE>
The carrying value of service agreements and goodwill is evaluated
periodically as events and circumstances indicate a possible inability to
recover its carrying amount. In March 1995, the Financial Accounting
Standards Board issued 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," which 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 on
June 30, 1996 did not have a material effect on the Company's consolidated
financial statements.
Deferred debt issuance costs are amortized over the term of the related debt
using the interest method.
Product Warranty - The Company provides for estimated product warranty costs
at the time of sale.
Revenue Recognition - Except for certain long-term contracts, revenue from
the sale of manufactured products, after provision for installation, is
recognized when material to be installed for customer orders is shipped from
the plants. Revenue on certain long-term contracts is recognized on the
percentage-of-completion method.
Service revenues are recognized on the straight-line method over the
contractual period or as the services are performed.
Advertising - Advertising costs, included in selling and administrative
expense, are charged to expense as incurred and totaled $971,000, $1,074,000
and $545,000 for the years ended June 28, 1997, June 29, 1996 and
June 24, 1995, respectively.
Research and Development - Research and development costs, included in
selling and administrative expenses, are expensed as incurred and amounted
to $2,178,000, $2,653,000 and $2,884,000 for the years ended June 28, 1997,
June 29, 1996 and June 24, 1995, respectively.
Net Loss Per Common Share - Net loss per common share is computed by dividing
net loss applicable to common stockholders by the weighted average number
of common shares outstanding during the period.
SFAS No. 128, "Earnings Per Share," was issued in February 1997 and is
effective for financial periods ending after December 15, 1997. Earlier
application is not permitted. The statement requires dual presentation of
basic and diluted earnings per share on the face of the income statement and
provides guidance on other computational changes. Management has determined
that earnings per share amounts computed under the new standard will not be
materially different from the amounts reported herein.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has elected to continue to account for such transactions
under Accounting Principles Board Opinion ("APB") No. 25 "Accounting for
Stock Issued to Employees" and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of grant over
the exercise price.
<F9>
<PAGE>
Cash Flows - For purposes of the consolidated statement of cash flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Reporting Period - The Company's fiscal year ends on the last Saturday in
June. Fiscal years 1997 and 1995 each contained 52 weeks. Fiscal year 1996
contained 53 weeks.
Restructuring - In July 1997, the Company committed to shut down its leased
Buffalo production facility. In connection with this shut down, the Company
expects to take a charge of approximately $360,000 in the first quarter of
fiscal 1998 for certain exit costs related to severance and fixed asset
write offs.
During fiscal 1996, the Company recorded restructuring charges of $2,989,000
($1.37 per share) to close the Hamilton, Ohio plant. The restructuring
charges were comprised of termination benefits of $1,764,000 for
approximately 140 employees and other associated exit costs, substantially
all of which had been paid at June 29, 1996, and an accrual for plant
disposal of $1.6 million. In connection with the plant closing, the Company
also recorded a net gain of approximately $1.6 million for the curtailment
of certain pension and postretirement health care benefit liabilities
(Note 10). In addition, included in products cost of sales for 1996 are
charges of approximately $.5 million for the relocation of equipment,
inventory and personnel and related travel expenses associated with the
plant closure.
Reclassifications - Certain reclassifications have been made to the
financial statements for prior years to conform to the current year
classification.
Other - SFAS No. 130, "Reporting Comprehensive Income," was issued in
June 1997 and is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The statement requires that an
enterprise classify items of other comprehensive income by their nature in
a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. Adoption of
this new standard will result in additional financial statement disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Adoption of this new standard may result in additional financial
statement disclosures.
<F10>
<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Billed $ 32,617 $ 34,233
Accrued and unbilled 15,793 20,932
Total 48,410 55,165
Less allowance for doubtful accounts (872) (993)
Net accounts receivable $ 47,538 $ 54,172
</TABLE>
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. At June 28, 1997 and
June 29, 1996, accounts receivable from customers in the financial
institutions industry were approximately 70% of total receivables. Progress
payments are generally required and receivables generally are due within 30
days. Credit losses consistently have been within management's expectations.
Unbilled amounts are due upon installation or acceptable completion of the
contracts which normally does not extend beyond one year.
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Finished products and service parts $ 20,895 $ 10,096
Products in process 3,996 4,251
Raw materials 2,268 1,318
Less allowance for slow moving and obsolete inventory (3,860) (2,137)
Total $ 23,299 $ 13,528
</TABLE>
During the fourth quarter of fiscal 1997, the Company changed its method of
accounting for service van inventory from immediately expensing the cost of
inventory placed in its service van fleet to that of capitalizing such
inventory and recording its usage through cost of sales. The cumulative
effect of this change as of June 30, 1996 was to increase inventory and
reduce net loss by $7,420,000 (net of reserve of $1,466,000), or $3.43 per
share, for the year ended June 28, 1997. Given the nature of this change,
the pro-forma effects on net income (loss) and net income (loss) per share
for fiscal years prior to 1997 are not determinable. The effect of the
change on the first, second, and third quarters of fiscal 1997 is as follows:
<F11>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended (Unaudited)
September 28, December 28, March 29,
($000 except per share amounts) 1996 1996 1997
<S> <C> <C> <C>
Net loss as originally reported $ (5,217) $ (2,970) $ (6,332)
Effect of change in accounting (631) (1,146) 207
Loss before cumulative effect of
change in accounting (5,848) (4,116) (6,125)
Cumulative effect on prior years
of change in accounting 7,420 - -
Net income (loss) applicable to
common stockholders as restated $ 1,572 $ (4,116) $ (6,125)
Per share amounts:
Net loss as originally reported $ (2.43) $ (1.39) $ (3.01)
Effect of change in accounting (0.29) (0.53) 0.10
Loss before cumulative effect of
change in accounting (2.72) (1.92) (2.91)
Cumulative effect on prior years
of change in accounting 3.49 - -
Net Income (loss) applicable to
common stockholders as restated $ 0.77 $ (1.92) $ (2.91)
</TABLE>
4. LONG-TERM DEBT
<TABLE>
Long-term debt consists of the following:
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Amounts payable to banks $ 11,703 $ 18,948
11% Series A Senior Notes 115,000 115,000
Capitalized lease obligations 1,285 -
Total 127,988 133,948
Less current portion (1,317) (1,000)
Total $ 126,671 $ 132,948
</TABLE>
On October 1, 1996, the Company established a $32.5 million credit facility,
comprised of a $29.0 million revolving line of credit and term loans up to an
aggregate principal amount of $3.5 million. The agreement also provides for
a $10.0 million letter of credit subfacility of the revolving line of credit.
Borrowings under the credit facility bear interest at the prime lending rate
plus .5% (9.0% at June 28, 1997). In conjunction with the credit facility,
the Company pays a monthly commitment fee of 1/2 of 1% per annum on the
<F12>
<PAGE>
average daily unused portion of the commitment. The borrowings against the
new credit facility were used to retire the existing amounts payable to
banks. After factoring in approximately $3.6 million letters of credit
issued against the credit facility, the Company has approximately $17.2
million of available borrowing capacity against this facility at June 28,
1997. The line of credit and term loans are secured by substantially all
the assets of the Company.
On July 29, 1993, the Company completed a refinancing transaction whereby
it issued $115 million principal amount of 11% Series A Senior Notes due
April 15, 2003 (Notes). A portion of the net proceeds from the Notes were
deposited in trust to redeem all of the Company's 13 5/8% Senior Subordinated
Debentures ($80 million) plus accrued and unpaid interest. The Notes are
senior unsecured obligations of the Company and rank pari passu with all
other senior indebtedness of the Company.
The terms of debt agreements covering the line of credit, term loans and the
Notes provide, among other things, restrictions on the redemption of the
Company's common and preferred stock, additional indebtedness, lease
commitments and capital expenditures and provide that the Company meet
certain financial covenants including maintaining a minimum fixed charge
coverage ratio, interest expense coverage ratio, minimum turnover ratios,
maximum ratio of total consolidated liabilities to consolidated tangible net
worth and minimum earnings before interest, taxes, depreciation and
amortization. The terms of the debt agreements prohibit the Company from
declaring or paying dividends (other than dividends payable solely in shares
of capital stock of the Company), except the Company may pay cash dividends
on the preferred stock limited to retained excess cash flow (as defined) not
to exceed $1,000,000 in any fiscal year. To the extent prior year dividends
are less than $1,000,000, such difference may be used for dividends in
subsequent years. The Company is also prohibited from paying more than
$700,000 (plus cash proceeds from the sale of capital stock) in any fiscal
year to purchase, redeem or retire shares of capital stock of the Company.
To the extent prior year redemptions are less than $700,000, such difference
may be used for repurchase in subsequent years. In addition to the permitted
repurchases of capital stock described above, the Company may repurchase
capital stock distributed from the ESOP to terminated or retired employees
in amounts not to exceed $3,200,000 in fiscal year 1998 and for each fiscal
year, thereafter. Additionally, the agreements prohibit the sale of certain
assets, merger, or consolidation without the banking group's prior waiver of
the related covenant. The Company was not in compliance with the financial
covenants related to its line of credit and term loan and has obtained a
waiver on such covenants as of the date of the most recent balance sheet.
Such covenants have since been amended.
Capitalized lease obligations include long-term capital leases in the amount
of $1,285,000 entered into during fiscal 1997 primarily for new computer
software and telephone systems. The lease agreements provide for aggregate
annual payments, including interest, of approximately $410,000, payable
monthly or quarterly, through June 2001. The Company's obligations under
all capital leases carry an average interest rate of 9.0%.
<TABLE>
Annual contractual maturities of long-term debt and capital lease payments
are as follows:
<CAPTION>
Amount
In Thousands
<S> <C>
1998 $ 1,317
1999 11,147
2000 329
2001 195
2002 -
2003 115,000
</TABLE>
<F13>
<PAGE>
Given the variable nature of the Company's line of credit and term loans
and considering comparable agency ratings for similar debt issuances, its
carrying value is a reasonable estimate of its fair value. Based on market
quotations, the fair value of the Company's 11% Series A Senior Notes was
$97,750,000 at June 28, 1997 and $94,875,000 at June 29, 1996.
5. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par value preferred
stock. Of the 2,000,000 shares, 400,000 have been designated Series C
adjustable rate cumulative preferred stock and 210,000 have been designated
Series D increasing rate preferred stock as described in Notes 6 and 7.
The remaining 1,390,000 shares may be issued with rights and preferences as
may be determined by the Board of Directors of the Company.
6. SERIES D INCREASING RATE PREFERRED STOCK
<TABLE>
Series D increasing rate preferred stock consists of the following:
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Series D increasing rate preferred stock, $.01 par
value, 210,000 shares authorized, 195,957 shares
outstanding in 1997 and 196,238 in 1996, net of
unamortized discount of $1.4 million in 1997 and
$2.1 million in 1996, $100 per share liquidation
preference, aggregating approximately $19.6 million
in 1997 and 1996 $ 18,237 $ 17,547
Unpaid dividends on Series D increasing rate
redeemable preferred stock, $148.23 per share in
1997 and $115.80 per share in 1996 28,898 22,755
Total $ 47,135 $ 40,302
</TABLE>
The holders of the shares of Series D preferred stock are entitled to receive
cumulative dividends semi-annually at the rate of 14.5% per annum, increasing
on July 1, 1997 to 16%, on July 1, 1998 to 17.5%, on July 1, 1999 to 19%,
and on July 1, 2000 to 20.5%. Any dividend periods for which cash dividends
are not paid due to the restrictions in the debt agreements described in
Note 4 will accumulate and accrue additional dividends (at 17.9% for the
year ended June 28, 1997) until the total is paid in full. For financial
reporting purposes, such additional dividends are recorded as interest
expense. Unpaid dividends, including the additional dividends, are
classified as non-current since restrictions imposed by the debt agreements
would prohibit payment within the next twelve months. Except in certain
defined situations, the preferred stock is non-voting.
Subject to limitations imposed by the debt agreements, the Series D preferred
stock is redeemable at the option of the Company, in whole or in part at any
time. The redemption price is $100 per share. The preferred stock is
subject to mandatory redemption in full at $100 per share subject to any
restrictions under debt agreements, on the occurrence of a change of control
of the Company resulting in the Company's present largest stockholder owning
less than 30% of the common stock of the Company.
<F14>
<PAGE>
Holders of the Series D preferred stock, together with holders of the Series
C preferred stock, will be entitled to a preference as to dividends and
redemptions upon the liquidation of the Company. There are also certain
restrictions against the (1) declaration or payment of dividends (other than
dividends payable solely in capital stock) on capital stock other than the
preferred stock or (2) the purchase, redemption, or retirement of any shares
of the capital stock other than the preferred stock, as more fully described
in Note 4.
The carrying value of the Series D Preferred Stock represents the redemption
value less unamortized discount. The discount is being amortized to produce
a constant effective dividend cost of 20.5% on the carrying value.
In connection with retirements and terminations, the Company from time to
time repurchased shares of Series D preferred stock which had been issued
to the ESOP.
<TABLE>
Changes in Series D Preferred Stock are as follows:
<CAPTION>
Amount
(In Thousands)
<S> <C>
Balance at June 25, 1994 $ 29,300
Purchase of 404 shares of Series D preferred stock (49)
Dividends on Series D preferred stock 2,544
Amortization of discount on Series D preferred stock 745
Additional dividends on unpaid dividends 1,859
Balance at June 24, 1995 34,399
Purchase of 556 shares of Series D preferred stock (66)
Dividends on Series D preferred stock 2,544
Amortization of discount on Series D preferred stock 977
Additional dividends on unpaid dividends 2,448
Balance at June 29, 1996 40,302
Purchase of 281 shares of Series D preferred stock (23)
Dividends on Series D preferred stock 2,887
Amortization of discount on Series D preferred stock 672
Additional dividends on unpaid dividends 3,297
Balance at June 28, 1997 $ 47,135
</TABLE>
7. SERIES C ADJUSTABLE RATE PREFERRED STOCK
<TABLE>
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Series C adjustable rate cumulative preferred stock,
$.01 par value, 400,000 shares authorized, 385,542
shares outstanding in 1997 and 354,237 in 1996,
$100 per share liquidating preference, aggregating
approximately $38,554,000 in 1997 and $35,424,000
in 1996 $ 38,554 $ 35,424
</TABLE>
All outstanding shares of Series C preferred stock are held by the ESOP.
The holders of the Series C preferred stock are entitled to cumulative
dividends at an adjustable rate from the date of issue. The dividend rate
<F15>
<PAGE>
(17.25% at June 28, 1997) is adjusted quarterly in accordance with a formula
based on the prime rate. The dividends are payable annually on June 30 in
cash, or at the option of the Company in shares of Series C preferred stock.
Additional dividends on unpaid dividends accrue at the dividend rate and are
recorded as interest expense. During 1997, the Company issued 62,210 shares
of Series C preferred stock in payment of $5,785,000 of dividends and
$436,000 of interest on unpaid dividends. During fiscal 1996, the Company
issued 56,193 shares of Series C preferred stock in payment of $5,275,000 of
dividends and $344,000 of interest on unpaid dividends. During 1995, the
Company issued 53,438 shares of Series C preferred stock in payment of
$4,996,000 of dividends and $348,000 of interest on unpaid dividends. The
Series C preferred stock is redeemable at the option of the Company. The
redemption price is $100 per share. In addition, participating employees of
the ESOP who receive Series C preferred stock upon termination of service
from the Company are entitled to have that stock redeemed by the Company.
The Series C preferred stock is non-voting.
<TABLE>
Changes in Series C preferred stock are as follows:
<CAPTION>
Amount
(In Thousands)
<S> <C>
Balance at June 25, 1994 $ 27,853
Issuance of 53,438 shares of Series C preferred stock 5,344
Purchase of 12,972 shares of Series C preferred stock (1,297)
Balance of June 24, 1995 31,900
Issuance of 56,193 shares of Series C preferred stock 5,619
Purchase of 21,153 shares of Series C preferred stock (2,095)
Balance at June 29, 1996 35,424
Issuance of 62,210 shares of Series C preferred stock 6,221
Purchase of 30,905 shares of Series C preferred stock (3,091)
Balance at June 28, 1997 $ 38,554
</TABLE>
8. REDEEMABLE COMMON STOCK
Redeemable common stock represents the redemption value of common stock
held by the ESOP or by retired or terminated employees as a result of
distributions from the ESOP. The redemption value of common stock is
determined annually by an independent appraisal.
<TABLE>
Changes in redeemable common stock are as follows:
<CAPTION>
Number of Amount
Shares (In Thousands)
<S> <C> <C>
Balance at June 25, 1994 218,375 $ 1,856
Increase in market value of common stock 229
Redemption of common stock (9,595) (81)
Balance at June 24, 1995 208,780 2,004
Increase in market value of common stock 119
Redemption of common stock (11,624) (112)
Balance at June 29, 1996 197,156 2,011
Decrease in market value of common stock (1,404)
Redemption of common stock (19,377) (198)
Balance at June 28, 1997 177,779 $ 409
</TABLE>
<F16>
<PAGE>
9. INCOME TAXES
Deferred income taxes reflect the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 12,262 $ 3,464
Inventories, principally due to obsolescence
reserves and additional inventories cost for
tax purposes pursuant to the Tax Reform Act
of 1986 740 816
Accounts receivable, principally due to
allowance for doubtful accounts 325 371
Accrued warranty 342 473
Accrued employee benefits 5,942 6,072
Loss on sale of plant - 673
Alternative minimum tax credit carryforwards 371 371
Other 437 821
Total deferred tax assets 20,419 13,061
Less valuation allowance (19,513) (12,926)
Net deferred tax assets 906 135
Deferred tax liabilities -
Facilities, principally due to differences
in depreciation 906 135
Net deferred taxes $ 0 $ 0
</TABLE>
<TABLE>
The components of loss before income taxes and provision for income
taxes are as follows:
<CAPTION>
June 28, June 29, June 24,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Loss before income taxes:
Domestic $ (12,541) $ (5,348) $ (4,013)
Foreign (541) (34) 790
Total $ (13,082) $ (5,382) $ (3,223)
Provision (credit) for income taxes:
State and local $ 73 $ 65 $ 61
Foreign - - (2)
Total $ 73 $ 65 $ 59
</TABLE>
<F17>
<PAGE>
<TABLE>
A reconciliation of the provision for income taxes with amounts
determined by applying the U.S. statutory federal income tax rate of 35%
to loss before income taxes is as follows:
<CAPTION>
June 28, June 29, June 24,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Tax credit at statutory rate $ (4,579) $ (1,884) $ (1,128)
State and local income taxes, net of
federal effect 44 42 40
Permanent differences, principally
goodwill amortization 781 584 187
Losses for which tax benefit not provided 3,827 1,323 960
Provision for income taxes $ 73 $ 65 $ 59
</TABLE>
At June 28, 1997, the Company had unused U.S. net operating loss
carryforwards of $30,657,000 which expire in the years 2009 through 2012.
No provision was made in 1997 for U.S. income taxes on the undistributed
earnings of the foreign subsidiaries as it is the Company's intention to
utilize the earnings in foreign operations for an indefinite period of time.
10. EMPLOYEE BENEFIT PLANS
Defined benefit pension plans covering salaried employees generally provide
benefits based on years of service and compensation during an employee's last
years of employment. Plans covering hourly employees generally provide
benefits of stated amounts for each year of service. All defined benefit
pension plans are funded based on annual independent actuarial valuations.
<TABLE>
Net defined benefit pension expense includes the following components:
<CAPTION>
June 28, June 29, June 24,
1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
Service cost $ 74 $ 103 $ 403
Interest cost on projected
benefit obligation 737 797 847
Return on plan assets (881) (1,526) (384)
Net amortization and deferral 262 1,055 145
Net defined benefit pension expense $ 192 $ 429 $ 1,011
</TABLE>
<F18>
<PAGE>
<TABLE>
The following table presents defined benefit pension plans funded
status as of April 1, 1997 and 1996, the most recent measurement dates:
<CAPTION>
April 1, April 1,
1997 1996
(In Thousands)
<S> <C> <C>
Actuarial present value of:
Vested benefits $ 10,001 $ 9,907
Nonvested benefits 285 278
Accumulated benefit obligation $ 10,286 $ 10,185
Projected benefit obligation $ 10,286 $ 10,185
Less plan assets at fair value 9,231 8,898
Projected benefit obligation in excess of plan assets 1,055 1,287
Adjustment required to recognize minimum liability 977 837
Unrecognized net gain (loss) 189 (547)
Unrecognized past service cost (832) (59)
Less unrecognized net obligation (193) (231)
Net pension liability $ 1,196 $ 1,287
</TABLE>
The discount rate used in determining the actuarial present value of benefit
obligations was 7.50% in 1997 and 1996. The expected long-term rate of
return on plan assets was 8.5% in 1997 and 1996. Plan assets consist
primarily of investments in common trust funds of a bank.
Effective August 31, 1994, the Company froze pension benefits under its
defined benefit pension plan covering salaried employees. Accordingly, no
future accruals will be made for service subsequent to that date. In
connection with the Hamilton, Ohio plant closure (Note 1), the Company
recorded a loss of approximately $767,000 associated with the curtailment
of the Hourly Union Plan in 1996.
The Company also sponsors several defined contribution plans. No Company
contributions were made to these plans for the years ending June 28, 1997,
June 29, 1996 and June 24, 1995.
On May 13, 1987 the Company's Board of Directors adopted the Mosler Employee
Stock Ownership Plan (ESOP) effective July 2, 1986. The ESOP is a
noncontributory defined contribution stock bonus plan in which all domestic
employees not covered by a collective bargaining agreement of the Company
are eligible. The ESOP invests in the Company's Series C and Series D
preferred stock and common stock. Contributions are discretionary, but will
not exceed 15% of aggregate total compensation to participating employees.
Contributions to the ESOP are allocated to participants' accounts in
proportion to the participant's compensation and vest over a seven-year
period. No contributions were made for the years ending June 28, 1997,
June 29, 1996 and June 24, 1995.
Upon termination of service from the Company, participating employees of the
ESOP are entitled to have capital stock allocated to their ESOP account
redeemed by the Company. Under the credit agreement (see Note 4), the
Company is permitted, within limitations, to repurchase the capital stock
directly from the terminated or retired employees. During fiscal 1993, the
trustees of the ESOP elected to make participant distributions in
substantially annual equal payments over five years.
<F19>
<PAGE>
The Company provides certain health care and life insurance benefits for
retired employees. Entitlement to these benefits is contingent on years of
service with the Company, age at retirement and collective bargaining
agreements. Cost sharing provisions are also based on these same conditions.
<TABLE>
The following table represents the components of the Company's liability for
future postretirement benefits other than pensions:
<CAPTION>
June 28, June 29,
1997 1996
(In Thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation
Retirees $ 2,038 $ 2,048
Fully eligible active participants 996 1,126
Other active participants 5,330 5,294
Total 8,364 8,468
Unrecognized net loss 2,826 2,182
Total $ 11,190 $ 10,650
</TABLE>
The Company has made no commitments to increase these benefits for existing
retirees or for employees who may become eligible for these benefits in the
future. Currently, there are no plan assets and the Company funds benefits
as claims are paid.
The postretirement benefit cost for fiscal 1997 was $869,607, of which
service cost, interest cost, and net amortization (including deferrals) were
$521,706, $657,360 and ($309,459), respectively. The post-retirement benefit
cost for fiscal 1996 was $999,664, of which service cost, interest cost, and
net amortization (including deferrals) were $506,925, $667,712, and
($174,973), respectively. The post-retirement benefit cost for fiscal 1995
was $1,100,000, of which service cost, interest cost and net amortization
(including deferrals) were $540,000, $670,000 and ($110,000), respectively.
Under the provisions of SFAS No. 106, the postretirement benefit obligation
was determined by application of terms of medical and life insurance plans
together with relevant actuarial assumptions and health care cost trend rates
projected at annual rates ranging from 10% in fiscal 1997 declining to 5.5%
for fiscal 2002 and thereafter. The discount rate used in determining the
actuarial present value of benefit obligations was 7.50% in fiscal 1997 and
1996. In fiscal 1997, the effect of a one percentage point annual increase
in these assumed cost trend rates would increase the obligation by $765,587,
and would increase the annual net periodic postretirement health care benefit
cost by $148,136, of which service cost and interest cost would be $83,684
and $64,452, respectively.
In connection with the Hamilton, Ohio plant closure (Note 1), the Company
recorded a gain of $2,383,000 in 1996 associated with the curtailment of the
medical plans.
11. LEASES
Minimum future rent payments approximating $6.9 million under commitments
for noncancelable operating leases with initial lease terms greater than one
year as of June 28, 1997, principally for sales and service facilities, are
payable $2.1 million, $1.6 million, $1.2 million, $0.9 million and
$0.8 million from fiscal 1998 through fiscal 2002, respectively, and
$0.3 million thereafter.
Rent expense was $6.9 million, $7.9 million and $7.3 million for the years
ended June 28, 1997, June 29, 1996 and June 24, 1995, respectively.
<F20>
<PAGE>
12. STOCK OPTION PLAN
The Company's 1990 Stock Option Plan, as amended, provides for the granting
of options to purchase up to 160,000 shares of $.10 par value common stock.
Options may be granted at an exercise price of $10 per share. The options
generally become exercisable 50% three years after date of grant and 25%
annually thereafter. Options generally expire at the end of ten years from
the date of grant.
<TABLE>
A summary of the stock option transactions for the years ended
June 28, 1997, June 29, 1996 and June 24, 1995 follows:
<CAPTION>
Outstanding
Stock
Options
<S> <C>
Balance at June 25, 1994 136,977
Granted 6,700
Canceled/expired (73,000)
Balance at June 24, 1995 70,677
Granted 5,000
Canceled/expired (10,627)
Balance at June 29, 1996 65,050
Granted 6,600
Canceled/expired (28,800)
Balance at June 28, 1997 42,850
</TABLE>
At June 28, 1997, 160,000 shares of common stock are reserved for issuance.
During fiscal 1997, the Company adopted the disclosure-only provisions of
SFAS No. 123 and applies APB No. 25 and related Interpretations in accounting
for its Stock Option Plan. Accordingly, no compensation cost has been
recognized related to the Company's Stock Option Plan. Had compensation
costs for the Company's Stock Option Plan been determined based on the fair
value at the grant date for awards consistent with the method of SFAS
No. 123, the Company's net loss would have been increased by $13,000 and
$5,000 for the years ended June 28, 1997 and June 29, 1996, respectively.
Net loss per common share would not have been affected for either year.
Compensation expense reflected in the pro-forma disclosures is not indicative
of future amounts when the SFAS No. 123 prescribed method will apply to all
outstanding nonvested awards.
The weighted-average fair value of options granted under the Stock Option
Plan during fiscal 1997 and 1996 was $5.66 and $5.25, respectively.
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions.
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
<S> <C> <C>
Expected volatility 30.0% 30.0%
Risk-free interest rate 6.58% 6.79%
Expected term of options 10 years 10 years
Expected dividend yield 0 % 0 %
</TABLE>
<F21>
<PAGE>
<TABLE>
Information regarding options outstanding at June 28, 1997 is as follows:
<CAPTION>
Options Outstanding
Weighted
Remaining
Contractual Options
Exercise Price Number Life Exercisable
<S> <C> <C> <C>
$10.00 42,850 4.6 years 36,250
</TABLE>
13. SEGMENT INFORMATION, FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The business of the Company is conducted in one industry segment, consisting
of security products, security systems and the service thereof.
Operations outside the United States accounted for approximately 6% of net
sales for the years ended June 28, 1997, June 29, 1996 and June 24, 1995,
respectively. Total assets outside the United States were approximately 4%
of total assets at June 28, 1997, June 29, 1996 and June 24, 1995,
respectively.
Sales to United States government agencies and contractors amounted to
approximately 4%, of net sales for each of the years ended June 28, 1997,
June 29, 1996 and June 24, 1995.
14. STOCKHOLDER AGREEMENTS
The Company has buy-sell agreements with its stockholders that (1) require
an employee stockholder to sell to the Company and the Company to purchase
from an employee stockholder all outstanding shares held by the stockholder
in the event of termination for any reason, (2) restrict the transfer of
common stock of the Company and (3) provide the Company and/or its remaining
stockholders the right of first refusal in the event a bona fide offer from
a third party is received by a stockholder. The provisions of these buy-sell
agreements are modified in the event of an initial public offering of the
Company's common stock, or on the occurrence of a change of control of the
Company resulting in the Company's present largest stockholder owning less
than 30% of the common stock of the Company.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
During fiscal years 1997, 1996 and 1995, the Company issued shares of Series
C preferred stock in payment of $5,785,000, $5,275,000 and $4,996,000 in
dividends which were accrued on the Series C preferred stock, and recorded
dividends of $2,887,000, $2,544,000 and $2,544,000 on shares of Series D
preferred stock, respectively.
16. 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 due with respect to those
issues. Three issues remain unresolved, and the IRS has issued a notice of
proposed adjustment on these issues. The issues relate to 1) the allocation
of the Company' 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.
<F22>
<PAGE>
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.
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.
If the IRS's proposed adjustments are sustained, the Company would be liable
for additional income taxes of approximately $3.7 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.
* * * * * *
<F23>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> JUN-28-1997
<CASH> 389,000
<SECURITIES> 0
<RECEIVABLES> 47,538,000
<ALLOWANCES> 872,000
<INVENTORY> 23,299,000
<CURRENT-ASSETS> 1,237,000
<PP&E> 43,759,000
<DEPRECIATION> 32,935,000
<TOTAL-ASSETS> 107,253,000
<CURRENT-LIABILITIES> 57,652,000
<BONDS> 126,671,000
<COMMON> 254,000
0
85,689,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 107,253,000
<SALES> 101,703,000
<TOTAL-REVENUES> 208,583,000
<CGS> 82,699,000
<TOTAL-COSTS> 163,926,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,317,000
<INCOME-PRETAX> (13,082,000)
<INCOME-TAX> 73,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7,420,000
<NET-INCOME> (5,735,000)
<EPS-PRIMARY> (7.09)
<EPS-DILUTED> 0
</TABLE>
