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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 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 3367908
MOSLER INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1172814
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8509 Berk Boulevard
Hamilton, Ohio 45015-2213
(Address of principal executive offices) (Zip Code)
(513) 870-1900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practical date.
Common Stock, $0.10 Par Value 2,095,177.01332 shares as of
September 27, 1997
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INDEX
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Financial Information (Part I)
Page
Item 1.Financial Statements (Unaudited)
Consolidated condensed balance sheets - September 27, 1997
and June 28, 1997 3-4
Consolidated condensed statements of operations - Three months
ended September 27, 1997 and September 28, 1996 5
Consolidated condensed statement of common stockholders'
deficiency - Three months ended September 27, 1997 6
Consolidated condensed statements of cash flows - Three months
ended September 27, 1997 and September 28, 1996 7
Notes to consolidated condensed financial statements 8-11
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-14
Other information (Part II)
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Signatures 17
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOSLER INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<S> <C> <C>
Sept. 27, June 28,
1997 1997
(Unaudited) (Derived from Audited
Financial Statements)
Assets
Current assets:
Cash and cash equivalents $ 270 $ 389
Accounts receivable, net 43,999 47,538
Inventories 22,953 23,299
Other current assets 2,162 1,237
Total current assets 69,384 72,463
Property, plant & equipment
Land and land improvements 802 802
Buildings 4,809 4,809
Machinery and equipment 37,803 37,852
Improvements in progress 603 296
Gross property, plant & equipment 44,017 43,759
Less accumulated depreciation 32,688 32,935
Net property, plant & equipment 11,329 10,824
Other assets:
Service agreements 12,409 13,537
Deferred debt issuance costs 3,147 3,291
Goodwill 4,171 4,548
Other intangible assets 1,054 964
Sundry 759 1,626
$102,253 $107,253
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Sept. 27, June 28,
1997 1997
Liabilities, redeemable stock and common (Unaudited) (Derived from
Audited
stockholders' deficiency Financial
Statements)
Current liabilities:
Accounts payable $ 14,723 $ 17,574
Accrued liabilities:
Compensation & payroll taxes 5,609 4,274
Product warranty 944 857
Accrued workers' compensation 4,559 4,746
Accrued interest 2,494 5,772
Other 6,627 5,858
Unearned revenue 11,682 17,021
Income taxes payable 257 233
Long-term debt due within one year 1,317 1,317
Total current liabilities 48,212 57,652
Long-term debt due after one year 132,088 126,671
Post retirement health benefits 11,766 11,552
Pension liability 1,745 1,745
Commitments and contingencies
Redeemable stock
Series D increasing rate preferred stock 48,856 47,135
Series C adjustable rate preferred stock 40,337 38,554
Common Stock 409 409
89,602 86,098
Common stockholders' deficiency:
Common stock 254 254
Accumulated deficit (175,469) (170,719)
Excess of additional pension liability over
unrecognized prior service cost (13) (13)
Redemption value of common stock held by ESOP (409) (409)
Foreign currency translation adjustments (1,145) (1,200)
Common stock held in treasury (4,378) (4,378)
Total common stockholders' deficiency (181,160) (176,465)
$102,253 $107,253
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<S> <C> <C>
Three months ended
Sept. 27, Sept. 28,
1997 1996
Net sales: As Restated
Service $ 25,221 $ 26,200
Product 27,181 24,258
52,402 50,458
Cost of sales:
Service 19,782 21,187
Product 21,233 18,461
41,015 39,648
Gross profit 11,387 10,810
Selling and administrative expense 8,806 9,908
Other (income) expense 193 (220)
8,999 9,688
Operating income 2,388 1,122
Debt expense:
Interest expense 4,299 4,506
Amortization of debt expense 144 143
Interest income 0 (12)
4,443 4,637
Loss before income taxes, cumulative effect of change
in accounting, and preferred stock charges (2,055) (3,515)
Provision for income taxes 13 20
Loss before cumulative effect of change in accounting,
and preferred stock charges (2,068) (3,535)
Cumulative effect of change in accounting 0 7,420
Net income (loss) before preferred stock charges (2,068) 3,885
Preferred stock charges:
Preferred dividends (2,496) (2,198)
Amortization of preferred stock discount (186) (115)
Net income (loss) applicable to common stockholders ($4,750) $1,572
Loss before cumulative effect of change in accounting $(2.28) $(2.72)
Cumulative effect of changes in accounting 0 $3.49
Net income (loss) per common share ($2.28) $0.77
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED SEPTEMBER 27, 1997
(In thousands of dollars except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Common Currency
$.10 Par Accumulated Pension Stock held Translation Treasury
Value Deficit Liability by ESOP Adjustments Stock Total
Balance at June 28, 1997 $254 ($170,719) ($13) ($409) ($1,200) ($4,378) ($176,465)
Net loss before preferred stock charges (2,068) (2,068)
Amortization of Series D preferred stock discount (186) (186)
Dividends on Series D preferred stock (712) (712)
Dividends on Series C preferred stock (1,784) (1,784)
Foreign currency translation adjustment 55 55
Balance at September 27, 1997 $254 ($175,469) ($13) ($409) ($1,145) ($4,378) ($181,160)
See accompanying notes to financial statements.
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<S> <C> <C>
Three months ended
Sept. 27, Sept. 28,
1997 1996
As Restated
Net income (loss) before preferred stock charges $ (2,068) $ 3,885
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of change in accounting (7,420)
Depreciation 691 594
Amortization 1,655 1,656
Gain on disposal of facilities 1
Interest paid in shares of preferred stock 825 825
Decrease (increase) in:
Accounts receivable 3,539 3,397
Inventories 346 1,327
Other current assets (925) (179)
Increase (decrease ) in:
Accounts payable (2,851) 108
Accrued liabilities 3,691 (4,309)
Unearned revenue (5,339) (1,455)
Income taxes payable 24 11
Net cash used by operating activities (412) (1,559)
Cash flows from investing activities:
Capital expenditures (783) (1,167)
Decrease (increase) in other assets 771 451
Net cash used by investing activities (12) (716)
Cash flows from financing activities
Purchase of common stock (110)
Purchase of preferred stock (1)
Proceeds on debt 250 2,741
Net cash provided by financing activities 250 2,630
Effect of exchange rate changes on cash 55 19
Net increase (decrease) in cash and cash equivalents (119) 374
Cash and cash equivalents at beginning of period 389 0
Cash and cash equivalents at end of period $ 270 $ 374
See accompanying notes to financial statements.
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FINANCIAL INFORMATION
Item 1. Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation
In the opinion of management, the unaudited consolidated financial
statements include all adjustments (which consist of only norm
al, recurring accruals) necessary to present fairly the consolidated
financial position as of September 27, 1997, and the results of
operations for the three months ended September 27, 1997 and
September 28, 1996 and the cash flows for the three months
ended September 27, 1997 and September 28, 1996. In accordance with
generally accepted accounting principles for interim financial
information, these statements do not include all of the information
and footnotes required by generally accepted accounting principles for
complete annual financial statements. Financial information as of June
28, 1997 has been derived from the audited consolidated financial
statements of the Registrant. The results of operations and cash flows
for the three months ended September 27, 1997 and September 28, 1996 are
not necessarily indicative of the results to be expected for the full
year. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended June 28, 1997,
included in the Registrant's Annual Report on Form 10-K.
2. Accounting Method Changes
During the fourth quarter of fiscal 1997, the Company changed its method
ofaccounting 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). The effect of this restatement on the quarter ended
September 28, 1996 is as follows (amounts in thousands except per
share amounts):
As originally As Restated
Reported
Operating income $1,753 $1,122
Net income (loss) before
preferred stock charges ($2,813) $3,885
Net income (loss) applicable to
common stockholders ($5,217) $1,572
Net income (loss) per common
share ($2.43) $.77
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Statement of Financial Accounting Standards 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.
Statement of Financial Accounting Standards 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.
3. Inventories
The Company's inventories are stated at the lower of cost (determined
using the first-in, first-out method) or market.
The components of inventories are as follows:
Sept. 27, June 28,
1997 1997
(in thousands)
Finished products and service $19,437 $19,649
Products in Process 4,550 3,996
Raw materials 2,616 3,514
Less Allowance (3,650) (3,860)
Total $22,953 $23,299
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4. Net Loss per share
Net loss per share is computed based on the weighted average number of
common shares outstanding for the period after deducting preferred
dividend requirements including amortization of preferred stock
discount. The average number of shares for the three month period of
fiscal 1998 is 2,080,667 as compared to 2,154,177 shares for the same
period of fiscal 1997.
5. Contingencies
The Internal Revenue Service (IRS) has conducted examinations of the
Company's income tax returns for fiscal year 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. Two 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.
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.
If the IRS's proposed adjustments are sustained, the Company would be
liable for additional income taxes of approximately $3.7 million 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.
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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 has responded to these and several other questions from the
Internal Revenue Service but no substantive changes in this matter have
occurred.
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.
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.
6. Reclassification
Certain prior year's data has been reclassified to conform to current
presentation.
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Mosler Inc.
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 fillings with the Securities and Exchange
Commission.
Result of Operations
Three Months Ended September 27, 1997 Compared to the
Three Months Ended September 28, 1996
Sales
The Company's sales increased during the three months ended September 27,
1997 by 3.8% to $52.4 million from $50.5 million. Service Sales
decreased by 3.8% to $25.2 million from $26.2 million due to a decline
in time and material sales of $1.1 million offset by an increase in
service agreement revenue of $.1 million.
Product net sales increased during the three months ended September
27, 1997 by 12.0% to $27.2 million from $24.3 million. Electronic
Security product sales increased by 15.3% to $12.8 million from
$11.1 million. Physical Security product sales increased by 8.1% to
$12.0 million from $11.1 million.
Gross Profit
Gross profit increased during the three months ended September 27, 1997
by less than a percent. Gross profit as a percentage of sales increased
to 21.7% from 21.4% for the three months ended September 27, 1997.
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Selling and Administrative Expenses
Selling and administrative expenses decreased during the three months
ended September 27, 1997 by 11.1% to $8.8 million from $9.9 million for
the three months ended September 28, 1996. The lower spending was the
result of cost cutting measures implemented late in fiscal 1997.
Operating Income
The Company's operating income for the three months ended September 27,
1997 increased by 118% to $2.4 million from $1.1 million for the three
months ended September 28, 1996.
Debt Expense
Debt expense decreased for the three months ended September 27, 1997 by
4.3% to $4.4 million from $4.6 million. The decrease was primarily due
to lower interest costs on the lower bank debt.
Net Loss
Net loss before cumulative effect of change in accounting and preferred
stock charges decreased by $1.4 million for the three months ended
September 27, 1997 to $2.1 million from $3.5 million for the three
months ended September 28, 1996.
Inflation
The Company believes that its business is affected by inflation to
approximately the same extent as the national economy. Generally, the
Company has been able to offset the inflationary impact of wages and
other costs through a combination of improved productivity, cost
reduction programs and price increases. The Company has had difficulty
in effecting significant price increases because of the discounting
practices of its competitors.
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Liquidity and Capital Resources
On October 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 it
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 used by operating activities was $.4 million for the three months
ended September 27, 1997 as compared to $1.6 million for the same period
of fiscal 1997 for a favorable improvement of $1.2 million. The
favorable variance was due to overall cash management techniques
implemented by management. 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.
The Company's capital expenditures were $.8 million for the first
quarter of fiscal 1998 as compared to $1.2 million in the previous
year's first quarter. The Company anticipates capital expenditure for
fiscal 1998 will be approximately $2.5 million.
The Company currently makes cash contributions to the ESOP only to the
extent necessary to fund the cash needs of the ESOP for payments to
retired, terminated and deceased participants and for administrative
expenses.
As of September 27, 1997, the Company was not in compliance with the
financial covenants related to its line of credit and term loan and has
since obtained a waiver from the bank.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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Item 4. Submission of Matters to a Vote of Security Holders
The following are the results of voting by stockholders present or
represented by proxy at the Annual Meeting of Stockholders held on
September 16, 1997.
Election of Directors: The following directors were elected:
Votes For Votes Against Not Voting Term
Nicolas M. Georgitsis 1,847,018.97043 0 248,158.04289 1998
William A. Marquard 1,847,018.97043 0 248,158.04289 1998
Michel Rapoport 1,846,751.74543 267.2250 248,158.04289 1998
Thomas R. Wall IV 1,847,018.97043 0 248,158.04289 1998
Robert A. Young III 1,847,018.97043 0 248,158.04289 1998
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MOSLER INC.
Signature
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Mosler Inc.
(Registrant)
/s/ Thomas J. Bell
Date:________________________ ______________________________
Thomas J. Bell
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> SEP-27-1997
<CASH> 270,000
<SECURITIES> 0
<RECEIVABLES> 43,999,000
<ALLOWANCES> 874,000
<INVENTORY> 22,953,000
<CURRENT-ASSETS> 2,162,000
<PP&E> 44,017,000
<DEPRECIATION> 32,688,000
<TOTAL-ASSETS> 102,253,000
<CURRENT-LIABILITIES> 48,212,000
<BONDS> 132,088,000
<COMMON> 409,000
0
89,193,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 102,253,000
<SALES> 27,181,000
<TOTAL-REVENUES> 52,402,000
<CGS> 21,233,000
<TOTAL-COSTS> 41,015,000
<OTHER-EXPENSES> 9,143,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,299,000
<INCOME-PRETAX> (2,055,000)
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,068,000)
<EPS-PRIMARY> (2.28)
<EPS-DILUTED> 0
</TABLE>
