<PAGE>
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 27, 1998
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 2,080,407.8682 shares as of
June 27, 1998
<PAGE 1>
<TABLE>
<CAPTION>
Mosler Inc.
Index to Annual Report on Form 10-K
<S> <C> <C>
Part I Page
Item 1 Business 5-13
Item 2 Properties 14
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 17
Item 6 Selected Financial Data 18-20
Item 7 Management Discussion and Analysis 21-31
Item 8 Financial Statement and Supplementary Data 32
Item 9 Changes in and Disagreement with Accountants
on Accounting and Financial Disclosures 33
Part III
Item 10 Directors and Executive Officers of the Registrant 34-35
Item 11 Executive Compensation 36-40
Item 12 Security Ownership of Certain Beneficial Owners
and Management 41
Item 13 Certain Relationships and Related Transactions 42
Part IV
Item 14 Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 43-46
Signatures 47
</TABLE>
<PAGE 2>
Part I
Item 1 - Business
The Company
Mosler Inc. (the "Company" or "Mosler") is a 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 1998 approximately 51.5% 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.
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 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
<PAGE 3>
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 67% 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.
<PAGE 4>
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.
In fiscal 1997 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 had led to
conflicts between regions. As such, the Company has implemented a market
channel structure that eliminates the regional approach.
The Company's service business has been a reliable source of cash flow.
Approximately 43% 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
1,149 person service and sales organization operates through
approximately 64 offices located throughout the country.
<PAGE 5>
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:
<TABLE>
<CAPTION>
Percentage of total net sales
<S> <C> <C> <C>
1998 1997 1996
Service 46.0% 51.2% 49.0%
Electronic security systems 22.3% 18.8% 19.9%
Physical security products 27.6% 26.0% 26.7%
International 4.8% 4.4% 5.7%
Elimination of interdivisional sales (.7%) (.4)% (1.3)%
Total 100.0% 100.0% 100.0%
</TABLE>
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 46% of the Company's net
sales for fiscal 1998.
During fiscal 1998 service agreement sales declined $.2 million. Time and
material sales declined $2.4 million. The decline in time and material
revenue is a result of a refinement in the Company's method of recording
certain revenues and costs formerly classified as service and now allocated
directly to product lines. Approximately 43% of the Company's service
revenues for fiscal 1998 were generated by services performed under service
agreements. The Company offers various maintenance plans, ranging from
plans that provide 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 64 domestic
offices. The Company maintains a fleet of approximately 889 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
<PAGE 6>
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 22% of the Company's net sales for the year ended June 27,
1998.
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. (PACOM) Ltd. of Sydney, Australia, a supplier of the
Company. PACOM is a world leader in highly advanced security
communications, networking and systems development. In 1998 PACOM
was acquired by Bell Security Limited (BELL), Hertfordshire, Great Britain
in a transaction through which 100% of PACOM's common shares were
exchanged for common shares of Bell. As a result of this transaction,
Mosler now holds a 5% interest in Bell.
Through a distribution arrangement 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 also has 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.
<PAGE 7>
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 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. 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 physical security products
accounted for approximately 28% of the Company's net sales for the year
ended June 27,1998.
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 pretax charge of approximately $3.0 million.
The Company closed its Buffalo, New York manufacturing facility on August
1, 1997. The plant closing is part of the Company's ongoing efforts to
improve cost efficiencies. The product lines that had been manufactured at
the Buffalo, New York plant were transferred to another manufacturer who
<PAGE 8>
will build the product to the Company's specifications. The plant closing
and related shut down expenses resulted in a pretax charge of
approximately $.6 million.
In August of 1998 the Company announced it would shut down its leased
Wayne, New Jersey facility and outsource this production. In connection
with this shut down, the Company expects to take a restructuring charge of
approximately $1.6 million related to severance and fixed asset write-offs
during the first quarter of fiscal 1999. For additional information see
Note 1 to the Consolidated Financial Statements.
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 4.0%,
4.6%, and 4.0% of the Company's net sales in fiscal years 1998, 1997 and
1996 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,
nsurance companies and governmental collection offices, designed to permit
the payment of bills and the deposit of books and other packages during
non-business hours.
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 4.8% of the
Company's total net sales for fiscal 1998. The Company maintains direct
<PAGE 9>
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.
In July of 1998 the Company entered into a joint venture with three other
companies for the purposes of distributing products for China. Although
the company holds a minority position in the joint venture it has been
approved to supply technical and management expertise. The joint venture
CEO and Vice President of Operations are appointed by Mosler.
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.
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.
However, the first half of 1998 saw this trend reversing back towards full
service branches, a move that, if it continues, should positively impact
the Company's sales and earnings going forward.
As part of its strategy to expand its presence in the commercial and
industrial markets, the Company is attempting to expand sales of its
<PAGE 10>
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. The Company has also entered
into a contract to supply an integrated access control system to the New
York and New Jersey Port Authority. 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 the largest
providers of physical security products for financial institutions. 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 p.l.c., 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
<PAGE 11>
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 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 $40.6 million at June
27, 1998 compared with $30.6 million at June 28, 1997. The Company
expects that substantially all of its backlog at June 27, 1998 will be
shipped in the next 12 months. Except for certain long-term contracts,
<PAGE 12>
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 1998 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.
Research and Development
The Company conducts a research and development program for electronic
security systems and physical security products. During fiscal 1998, the
Company's research and development costs for electronic security systems
and physical security products were $1.2 million and $.1 million, as
compared to $2.1 million and $.1 million for such purposes in fiscal 1997.
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 27, 1998, the Company employed 1,688 persons. Of this number 80
were employed in the manufacture of physical security products, 72 were
employed in the manufacture of electronic security systems, 1,149 were
employed in sales and service operations, 174 were employed in
international operations and the remainder provided management,
administrative and clerical support. Approximately 169 of the Company's
employees are located outside the United States. Employees at one of the
Company's two domestic manufacturing plants are covered by collective
bargaining agreements with various unions. This agreement expires in
2001.
<PAGE 13>
Item 2 Properties
The Company owns safe, vault door, safe-deposit box and other physical
security equipment manufacturing facilities in Franklinville, New York,
and Mexico City, Mexico. Electronic security surveillance systems and
remote transaction systems are manufactured at a leased facility located
in Wayne, New Jersey. A research and development facility for electronic
security is leased in Chatsworth, 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.
The Company leases approximately 75 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.
The Company leases and owns a fleet of approximately 889 service vehicles
for use by its service representatives. The majority of the fleet is
leased. The service vehicles consist of vans (approximately 50%),
automobiles (approximately 2%), pick-ups and light duty trucks
(approximately 44%), large installation trucks (approximately 3%) and
trailers (approximately 2%). The Company replaces approximately one-third
of the service vehicles each year.
<PAGE 14>
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.
<PAGE 15>
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 27, 1998.
<PAGE 16>
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 17, 1998, there were 115 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.
<PAGE 17>
<TABLE>
<CAPTION>
Item 6 Selected Consolidated Financial Data
Fiscal Year Ended Last Saturday In June
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
(dollars in thousands)
Consolidated Statement of Operations Data:
Net Sales $214,451 $216,913 $218,260 $208,583 $226,800
Restructuring charges(1) 2,989 581
Gross Profit 46,955 51,702 49,124 44,657 51,498
Selling and administrative
expenses 38,689 37,915 36,493 39,378 37,599
Gain on termination of post-
retirement benefit plan 11,889
Other (income) expenses 413 (11) (254) (489) 153
Operating income 7,853 13,798 12,885 5,768 25,635
Net interest expense(2) 17,198 17,021 18,267 18,850 20,856
Income (loss) before income
taxes, extraordinary item,
cumulative effect of
accounting change and
preferred stock charges. (9,345) (3,223) (5,382) (13,082) 4,779
Provision for income taxes 336 59 65 73 149
Income (loss) before
extraordinary item, cumulative
effect of accounting change
and preferred stock charges. (9,681) (3,282) (5,447) (13,155) 4,630
Extraordinary item(3) (3,054)
Cumulative effect of
accounting change(4) (10,300) 7,420
Net income (loss) (23,035) (3,282) (5,447) (5,735) 4,630
Preferred stock charges(5) (6,522) (8,285) (8,796) (9,344) (10,881)
Net loss applicable to common
stockholders ($29,557) ($11,567) ($14,243) ($15,079) ($6,251)
Loss before extraordinary item
and cumulative effect of
accounting change per
common share ($6.87) ($5.01) ($6.51) ($10.58) ($2.99)
Basic and diluted loss per
common share ($12.52) ($5.01) ($6.51) ($7.09) ($2.99)
</TABLE>
1 Includes costs for closing Hamilton, Ohio manufacturing plant of
approximately $3.0 million in 1996, and $581,000 in 1998 for the
closing of the Buffalo, NY plant.
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 cost 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.
<PAGE 18>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
Fiscal Year Ended Last Saturday In June
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
(dollars in thousands)
Consolidated Statement of Operations Data cont'd:
Consolidated Balance Sheet Data:
Total assets $122,198 $114,531 $109,125 $107,253 $106,296
Long-term debt, including
current portion 131,650 130,552 133,948 127,988 133,791
Redeemable preferred
stock 59,009 68,303 77,737 86,098 98,963
Total common
stockholders' deficiency6 (134,960) (148,622) (162,866) (176,465) (182,935)
6 Includes a reduction of $83.7 million attributable to the 1990
Transaction.
</TABLE>
(PAGE 19)
Results of Operations
The following table sets forth certain operating data of the Company for
fiscal 1998, 1997 and 1996. The following table and discussion separates
net sales and gross profit information for certain categories of the
Company's products.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED LAST
SATURDAY IN JUNE
<S> <C> <C> <C>
1998 1997 1996
(Dollars in Thousands)
Net sales:
Service $104,320 $106,880 $106,901
Electronic security systems 50,466 39,332 43,451
Physical security products 62,610 54,388 58,114
International 10,902 9,326 12,502
Elimination of interdivisional sales (1,498) (1,343) (2,708)
226,800 208,583 218,260
Gross profit:
Service 26,838 25,653 28,944
Electronic security systems 8,715 6,479 7,988
Physical security products 14,128 10,580 12,277
International 2,398 1,948 3,465
*52,079 44,657 *52,113
Net interest expense 20,856 18,850 18,267
Net income (loss) ** 4,630 (5,735) (5,447)
Change in Net Sales From Prior
Periods:
Service -2.4% 0.0% -1.3%
Electronic security systems .9% -6.6% -0.3%
Physical security products 43.3% -8.9% 9.9%
International 16.9% -25.4% -2.1%
Elimination of interdivisional sales 11.5% -50.4% 77.0%
Change in total net sales 8.7% -4.4% 0.6%
Operating data as a Percentage of
Product Net Sales:
Gross profit:
Service 25.7% 24.0% 27.1%
Electronic security systems 17.3% 15.6% 17.9%
Physical security products 22.6% 21.2% 22.2%
International 22.0% 20.9% 27.7%
Total gross profit 23.0% 21.4% 22.5%
Selling and administrative expense 16.6% 18.9% 16.7%
Operating income 6.3% 3.2% 7.5%
</TABLE>
* Does not include Hamilton, Ohio plant closing cost of approximately
$3.0 million in 1996 or Buffalo plant closing cost of approximately
$581,000 in 1998.
** Includes Buffalo restructuring cost of $581,000 and gain on
termination of post retirement benefits $11.9 million.
<PAGE 20>
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. Management's Discussion
and Analysis of Financial Condition and Results 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 1998 from $35.1 million to $8.4 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.
In addition to pursuing its strategy of reducing its reliance on financial
institutions, the Company continues to improve its cost position through
plant closings, product line rationalization and manufacturing process
improvements.
<PAGE 21>
Fiscal 1998 Compared with Fiscal 1997
Net Sales
The Company's sales increased during fiscal 1998 by 8.7% to $226.8 million
from $208.6 million in fiscal 1997. The increase in sales was due
primarily to improved shipments of Physical Security products
(excluding Government) of $9.5 million, Electronic Security Systems of
$11.1 million and International of $1.6 million. During the same period
sales of Government products declined by $1.3 million. Remote
Transaction Systems, produced in the Wayne, New Jersey, facility have
historically been classified as Electronic Security Systems in the
Company's Financial Statements. This product line is more appropriately
classified as Physical Security Product, and therefore the Company has
made a reclassification in the 1998 and 1997 financial statements to
reflect this change.
Service revenues declined in fiscal 1998 by $2.6 million to $104.3 million.
Service Agreement revenue declined $.2 million, while Time and Material
revenue declined $2.4 million. The decline in Time and Material revenue
is a result of a refinement in the Company's method of recording certain
revenues and costs formerly classified as Service and now allocated
directly to product lines.
Sales of Electronic Security Systems increased by 28.3% to $50.5 million
from $39.3 million. This increase can be attributed to higher sales of
COMSEC, Alarms, CCTV and Currency Handling products.
Sales of Physical Security products (excluding Government) increased by
21.4% to $54.2 million. This increase is attributed to improved sales of
Vault Systems, Night Depositories, Drive In Systems, Financial Furniture
and ATMs. In September, 1997, the Company entered into an agreement with
Triton Systems, Inc. to sell, install and service Triton's 9600 series
ATM. As part of the agreement with Triton, the Company will also become
the preferred service provider for Triton's installed base of ATMs.
Sales of Government products decreased by 14.3% to $8.4 million from $9.8
million. This decrease is attributed to a continued decline in defense
procurement spending as well as a decline in the number of large orders
received in 1998 as compared to 1997.
Sales of the Company's International operations increased 17.2% to $10.9
million. Improved sales to the Mexico, Export and Puerto Rico markets
were only partially offset by a sales decline in Canada.
Gross Profit
Gross profit improved by 16.6% to $52.1 million from $44.7 million in
fiscal 1997, before plant closing costs. Gross profit as a percentage
of sales increased to 23.0% for fiscal 1998 from 21.4% for fiscal 1997.
<PAGE 22>
Gross profit from Service revenues increased during fiscal 1998 by 4.6% to
$26.8 million from $25.7 million. Gross profit as a percentage of sales
increased in fiscal 1998 to 25.7% from 24.0% in fiscal 1997.
Gross profit from the sale of Electronic Security Systems increased by
34.6% to $8.7 million from $6.5 million. Gross profit as a percentage
of sales increased to 17.3% from 15.6% in 1997. The increase in gross
profit was due mainly to an increase in volume.
Gross profit from the sale of Physical Security products (excluding
Government) increased by 30.0% to $12.6 million from $9.7 million in fiscal
1997. Gross profit as a percentage of sales increased to 23.3% from 21.7%
in fiscal 1997. The increase in gross profit was due mainly to an
increase in volume with lower variances and overhead costs.
Gross Profit from the sale of Government products increased by 72.0% to
$1.5 million from $.9 million in fiscal 1997. Gross Profit as a
percentage of sales increased to 18.0% from 9.0% in fiscal 1997. A
decrease in product discounts and favorable product mix combined with
lower variances and overhead costs resulted in this improvement.
Gross profit from the Company's International operations increased by
23.1% to $2.4 million from $1.9 million for fiscal 1997. Gross profit
as a percentage of sales increased to 22.0% from 20.9% in fiscal 1997.
The improvement in gross profit resulted primarily from increased sales
volume and favorable mix due to higher sales volumes in Mexico and Export
where margins are higher.
Selling and Administrative Expense
Selling and administrative expenses decreased by 4.5% to $37.6 million
from $39.4 million in fiscal 1997. Selling and administrative expenses
as a percentage of sales decreased to 16.6% in fiscal 1998 from 18.9%
in fiscal 1997. This decrease was a result of lower selling and
Research and Development expenses.
Operating Income
The Company's operating income during fiscal 1998 increased by 341.4% to
$25.6 million from $5.8 million in fiscal 1997 (before restructuring
charges). Operating income as a percentage of sales increased to 6.3%
from 2.8% in fiscal 1997. Included in operating income in fiscal 1998
was a gain on the termination of post-retirement benefits of $11.9
million, offset by a restructuring charge of $.6 million.
<PAGE 23>
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
increased 10.0% to $20.8 million from $18.9 million in fiscal 1997.
The increase relates to increased interest on funds borrowed under
the Company's line of credit. The increased borrowings were used to
finance operating activities.
Net Income Before Preferred Stock Charges
Net income before preferred stock charges increased during fiscal 1998 to
$4.6 million from a net loss of $5.7 million in fiscal 1997. Included in
the net income of fiscal 1998 is a one time favorable adjustment of $11.9
million due to discontinuance of the Company's medical and insurance
benefit for retirees and an unfavorable adjustment of $.6 million for
Buffalo, New York plant closing costs. 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.
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 1998, 1997 and 1996
In August of 1998 the Company announced it would shut down its leased
Wayne, New Jersey Facility and outsource this production. In connection
with this shut down, the Company expects to take a restructuring charge of
approximately $1.6 million related to severance and fixed asset write-offs
during the first quarter of fiscal 1999. For additional information see
Note 1 to the Consolidated Financial Statements.
During the first quarter of fiscal 1998, the Company announced it would
shut down its leased Buffalo, New York facility and outsource this
production. The plant was closed on August 29, 1997. In connection with
this shut down, the Company experienced one time plant closing costs of
$.6 million related to severance, fixed asset write-offs, plant cleaning
and repair.
<PAGE 24>
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 was 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. The Hamilton plant was sold on July 29, 1996.
The sale resulted in a loss on 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.
<PAGE 25>
Fiscal 1997 Compared with Fiscal 1996
Net Sales
The Company's 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 products of $3.7 million,
Electronic Security Systems of $4.2 million and International of
$3.2 million. Management believes the decrease in sales in 1997 related
to delays in buy decisions by certain financial customers due to dynamic
conditions then present in the industry. In addition the implementation
of a complex customer service dispatch system diverted attention from
sales to administrative matters which arose due to defects in the system.
These defects have since been cured. Remote Transaction Systems,
produced in our Wayne, New Jersey, facility have historically been
classified as Electronic Security Systems on our Financial Statements.
This product line is more appropriately classified as Physical Security
Product, and therefore we have made a reclassification in the 1997 and
1996 financial statements to reflect this change.
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).
Sales of Electronic Security Systems decreased by 9.5% to $39.3 million
from $43.5 million. The decrease was attributed to decreases in COMSEC
and Access Control sales.
Sales of Physical Security products decreased by 6.4% to $54.4 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.
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.
<PAGE 26>
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 23.9% for fiscal 1996.
Gross profit from Service revenues decreased during fiscal 1997 by 11.4%
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.
Gross profit from the sale of Electronic Security Systems decreased by
18.9% to $6.5 million from $8.0 million. Gross profit as a percentage
of sales decreased to 16.5% from 18.4% 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
9.7% to $10.6 million from $11.7 million in fiscal 1996. Gross profit
as a percentage of sales decreased to 19.5% from 20.2% 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 Expenses
Selling and administrative expenses increased by 8.0% to $39.4 million
from $36.5 million in fiscal 1996. 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 an 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 2.8%
from 7.3% in fiscal 1996.
<PAGE 27>
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
increased 2.7% to $18.9 million from $18.3 million in fiscal 1996.
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.
Liquidity and Capital Resources
On June 8, 1998 the Company amended its Financing Agreement with Star
Bank N.A., under which the credit facility was adjusted to $31.25 million.
Borrowings under the amended credit facility will bear interest at the
prime lending rate plus 1.5%. The credit facility with Star Bank N.A.
is set to expire on October 1, 1998. As such the Company has secured a
commitment from a major financial institution for a credit facility of
comparable size for a term of 15 months. Financial Covenants and the
rate of interest will be established upon finalization of the agreement
but are not expected to be materially different from the existing terms.
Cash used by operating activities was $3.4 million for fiscal 1998
compared to cash provided of $14.5 million in fiscal 1997. The
decrease was due to increased working capital requirements generated by
increased revenue.
The Company's unfinanced capital expenditures were $1.5 million for fiscal
1998 as compared to $2.7 million for fiscal 1997. 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 1999 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.
The Company was in compliance with the financial covenants related to its
line of credit and term loan .
<PAGE 28>
Contingencies
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. 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 and 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.
Previously the IRS had informed the Company that if their proposed
adjustments are sustained, the Company would be liable for additional
income taxes of approximately $3.7 million plus interest through 1993.
However the IRS recently informed the Company that the additional income
taxes, for which the Company would be liable, is approximately $4.1
million. 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. On February 10,
1998 the Company met with the Internal Revenue Appeals Officer to
provide additional information to support its position and to attempt
to resolve the matter. No resolution was reached, and subsequent to that
meeting the Company received a Final Deficiency Notice from the IRS. The
<PAGE 29>
Company will file a petition for a Tax Court hearing. The Company
maintains its position that it has a meritorious defense to the
adjustment, proposed by the IRS.
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.
New Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997
and is effective for the Company's 1999 fiscal year. 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 the Company's
1999 fiscal year. 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.
Year 2000
The Company is substantially complete with the process of conducting a
comprehensive review of its key internal financial, information and
operational systems to identify the systems that could be materially
affected by the Year 2000 issue. The Company will be making appropriate
modifications and conducting compliance testing on these systems.
<PAGE 30>
The Company believes that with modifications to, or replacement of, existing
systems, the Year 2000 issue will not pose significant operating problems.
Based upon current information, the costs of addressing internal problems
are not expected to have a material adverse impact on the Company's
financial position, results of operations, or cash flows in future
periods. Accordingly, the cost for Year 2000 problems will be funded
through operating cash flows.
The Company is currently engaged in assessing the capability of its
products to handle the transition to and operate in the Year 2000.
The Company is in the process of assessing the readiness of significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company cannot guarantee that the systems of other companies
will be converted in a timely manner, or the conversion or failure to
convert systems, would not have an adverse material effect on the Company.
<PAGE 31>
Item 8 Financial Statements and Supplementary Data
<TABLE>
<S> <C>
Page
Report of Independent Auditors F-1
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997 F-3, F-4
Consolidated Statements of Operations for the years ended
June 27, 1998, June 28, 1997 and June 29, 1996 F-5
Consolidated Statements of Common Stockholders' Deficiency for the
years ended June 27, 1998, June 28, 1997 and June 29, 1996 F-6
Consolidated Statements of Cash Flows for the years ended June 27, 1998,
June 28, 1997 and June 29 1996 F-7
Notes to Consolidated Financial Statements F-8 to F-23
</TABLE>
<PAGE 32>
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE 33>
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 27, 1998.
<TABLE>
<S> <C> <C> <C>
Name Age Position Position Since
Michel Rapoport 56 Chief Executive Officer, 1995
President and Director
Thomas J. Bell 52 Senior Vice President, Finance 1997
George W. Werden 49 General Counsel and Secretary 1997
Ronald L. Watson 52 Senior Vice President, Sales and 1997
Marketing
Alfred R. Rabasca 49 Senior Vice President, Human 1981
Resources
James O. Griffin 42 Senior Vice President Installation 1997
And Service
William A. Marquard 78 Director 1986
Thomas R. Wall IV 40 Director 1990
Nicholas M. Georgitsis 63 Director 1991
Robert A. Young III 57 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. Bell was appointed Senior Vice President, CFO & Treasurer in October
of 1997. Mr. Bell has been CEO and CFO of a number of companies in the
restaurant and produce industry prior to joining Mosler and was formerly
with Arthur Young & Company.
Mr. Werden was appointed General Counsel and Secretary of the Company in
May 1997.
Mr. Watson joined Mosler in November 1997 as Senior Vice President of
Sales and Marketing. Mr. Watson has held various positions with
Sensormatic electronics corporation prior to joining Mosler.
<PAGE 34>
Mr. Rabasca is currently Senior Vice President of Human Resources. Mr.
Rabasca has held a variety of positions of increasing responsibility with
Mosler since he joined Mosler in June of 1981.
Mr. Griffin joined Mosler in April of 1987 as Vice President of Service and
Installation. Mr. Griffin has held various positions with Simplex Inc.
prior to joining Mosler.
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, mostly as managing
director. He is a director of AMF Bowling Inc., each of the Charter
Managed Companies,(a) Consolidated Vision Group, Inc., Cygnus Publishing,
Inc., Hillside Broadcasting of NC, IXL Holdings, Inc., Mitchell Supreme
Fuel Company, Peebles, Inc., TransDigm Inc., and 21st Century Newspaper,
Inc.
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. a 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 Treadco, Inc.
(a) The Charter Managed Companies include the following companies
managed by Charter Communications, Inc.: CCA Holdings
Corp., CCT Holdings Corp. and Charter Communications Long Beach.
<PAGE 35>
Item 11 Executive Compensation
The following table discloses compensation paid by the Company for fiscal
years, 1998, 1997, and 1996 to its chief executive officer and other
executive officers whose compensation was in excess of $100,000 for
fiscal 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
<S> <C> <C> <C>
Fiscal Annual Compensation
Name and Principal Position Year Salary (1) Bonus (2) (3)
($) ($)
Michel Rapoport 1998 $324,172 $66,330
President and 1997 $320,004 $165,000
Chief Executive Officer 1996 $303,334 $75,000
Thomas J. Bell 1998(4) $105,602
Senior Vice President, Finance
Al Rabasca 1998 $103,941 $10,510
Senior Vice President 1997 $90,675 $5,000
Human Resources 1996 $86,865
James O. Griffin 1998(5) $135,565 $5,063
Senior Vice President
Installation and Service
</TABLE>
(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 in October 1997 as Chief Financial Officer.
(5) Joined the Company as Senior Vice President, Service and
Installation in April 1997.
<PAGE 36>
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 no options to officers in fiscal 1998.
<PAGE 37>
Fiscal 1998 Year-End Options Values
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:
Number of Underlying
Unexercised Value of Unexercised
Options at Fiscal In-The-Money Options at
1998 Year-End Fiscal 1998 Year-End
Name Exercisable Unexercisable Exercisable Unexercisable
Michel Rapoport -0- -0- -0- -0-
Note: Options are exercisable at $10.00 per share. The Company common
stock has been appraised as of June 27, 1998 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.
<PAGE 38>
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Highest 5-Year Years of Service
Average Compensation 5 10 15 20 25 30 35 40
$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>
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 $3.5 million in fiscal 1999, 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
<PAGE 39>
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. 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 Executive Officer of the Company
as of March 15, 1996. Pursuant to the agreement as amended, if prior to
June 30, 1999, Mr. Rapoport's employment 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.
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 1998 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 1998 followed the same pattern as
fiscal 1997.
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.
<PAGE 40>
Item 12 Security Ownership of Certain Beneficial Owners and
Management
The following table presents certain information concerning ownership of
equity securities of the Company as of August 1, 1998 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
William A. Marquard 15,000 *
Nicholas M. Georgitsis 2,000 *
Robert A. Young III 5,000 *
Thomas R. Wall IV (b) 1,400,000 67.3% 126,208 64.7%
Directors and Executive Officers 1,422,000 68.4% 126,208 64.7%
as a Group (7 persons)
Kelso Investment Associates II, L.P. 85,000 43.6%
Kelso Mosler Partners, L.P. 41,208 21.1%
Kelso Investment Assoc. IV, L.P. 1,330,000 63.9%
Kelso Equity Partners II, L.P. 70,000 3.4%
Joseph S. Schuchert (b) 1,400,000 67.3% 126,208 64.7%
Frank T. Nickell (b) 1,400,000 67.3% 126,208 64.7%
George E. Matelich (b) 1,400,000 67.3% 126,208 64.7%
BancBoston Capital Inc. 13,784 7.1%
Mosler Inc. Employee Stock Ownership
Plan 168,352 427,916 99.9% 7,229 3.7%
</TABLE>
* 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.
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 320 Park Avenue, New York, New
York 10022. The address of all other persons listed above is 8509 Berk
Boulevard, Hamilton, Ohio 45015-2213.
<PAGE 41>
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.
<PAGE 42>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
Page
1. Financial Statements are included in pages F1-F23
2. Schedule II - Valuation and Qualifying Accounts 43
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.
** 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.
</TABLE>
<PAGE 43>
<TABLE>
<S> <C>
* 10.11 Agreement Plan of Merger and Plan of
Reorganization between Kelso Mosler
Acquisition, Inc. and Mosler Inc. dated
May 1, 1990.
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.
<PAGE 44>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES MOSLER INC.
(In Thousands)
<TABLE>
<S> <C> <C> <C>
Balance at Charged to Deductions Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts(1) of Period
Year ended June 27, 1998
Allowance for doubtful accounts 872 35 (70) 837
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
</TABLE>
(1) Represents amounts charged against the allowance net of recoveries.
<PAGE 45>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Jurisdiction of Incorporation
Mosler de Mexico S.A. de C.V. Mexico
Mosler Canada Inc. Canada
Mosler of Alabama, Inc. Alabama
<PAGE 46>
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: 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: By: /S/ Michel Rapoport
Michel Rapoport
President and
Chief Executive Officer
(Principal Executive Officer)
Date: By: /S/ Thomas J. Bell
Thomas J. Bell
Senior Vice President, Finance
and Chief Financial Officer
Date: By: /S/ Nicholas M. Georgitsis
Nicholas M. Georgitsis
Director
Date: By: /S/ William A. Marquard
William A. Marquard
Director
Date: By: /S/ Thomas R. Wall IV
Thomas R. Wall IV
Director
Date: By: /S/ Robert A. Young III
Robert A. Young III
Director
<PAGE 47>
MOSLER INC.
Consolidated Financial Statements for the Years
Ended June 27, 1998, June 28, 1997, and
June 29, 1996 and Independent Auditors' Report
<PAGE 48>
MOSLER INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 27, 1998,
JUNE 28, 1997, AND JUNE 29, 1996:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Common Stockholders' Deficiency 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
</TABLE>
<PAGE 49>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated balance sheets of Mosler
Inc. as of June 27, 1998 and June 28, 1997 and the related consolidated
statements of operations, common stockholders' deficiency and cash flows
for each of the three years in the period ended June 27, 1998. Our
audits also included the financial statement schedule listed in the
Index at Item 14(a) for the years ended June 27, 1998, 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 27, 1998 and June 28, 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended June 27, 1998, 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.
September 18, 1998
Cincinnati, Ohio
- -1-
<PAGE 50>
MOSLER INC.
CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997 (In Thousands of Dollars Except Share Data)
<TABLE>
<S> <C> <C>
June 27, June 28,
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 537 $ 389
Accounts receivable 56,980 49,408
Inventories 23,183 21,429
Other current assets 1,334 1,237
Total current assets 82,034 72,463
FACILITIES:
Land and land improvements 802 802
Buildings 4,739 4,809
Machinery and equipment 32,779 37,852
Improvements in progress 466 296
Gross facilities 38,786 43,759
Less accumulated depreciation 29,919 32,935
Net facilities 8,867 10,824
OTHER ASSETS:
Service agreements (net of accumulated amortization of $54,214 at
June 27, 1998 and $49,702 at June 28, 1997) 9,025 13,537
Deferred debt issuance costs (net of accumulated amortization of $5,997
at June 27, 1998 and $5,420 at June 28, 1997) 2,714 3,291
Goodwill (net of accumulated amortization of $7,734 at June 27, 1998
and $6,225 at June 28, 1997) 3,039 4,548
Intangible pension asset 94 964
Other 523 1,626
TOTAL $ 106,296 $ 107,253
See accompanying notes to consolidated financial statements.
- -2-
</TABLE>
<PAGE 51>
MOSLER INC.
CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997 (In Thousands of Dollars Except Share Data)
<TABLE>
<S> <C> <C>
LIABILITIES, REDEEMABLE STOCK AND COMMON June 27, June 28,
STOCKHOLDERS' DEFICIENCY 1998 1997
CURRENT LIABILITIES:
Accounts payable $ 16,581 $ 17,574
Accrued liabilities:
Compensation and payroll taxes 5,552 4,274
Product warranty 837 857
Accrued workers' compensation 4,488 4,746
Accrued interest 5,832 5,772
Other 5,556 5,858
Unearned revenue 16,894 17,021
Income taxes payable 284 233
Current portion of long-term debt 1,298 1,317
Total current liabilities 57,322 57,652
OTHER LIABILITIES:
Long-term debt 132,493 126,671
Accrued pension and other benefit liabilities 453 13,297
Total other liabilities 132,946 139,968
REDEEMABLE STOCK:
Series D increasing rate preferred stock 55,751 47,135
Series C adjustable rate preferred stock 42,850 38,554
Common stock 362 409
Total redeemable stock 98,963 86,098
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $.10 par value; 4,000,000 shares authorized,
2,539,181 shares issued 254 254
Accumulated deficit (176,970) (170,719)
Excess of additional pension liability over unrecognized
prior service cost (13) (13)
Redemption value of common stock held by ESOP (362) (409)
Foreign currency translation adjustments (1,365) (1,200)
Total (178,456) (172,087)
Less treasury stock, at cost (458,773 shares at June 27, 1998 and
438,446 shares at June 28, 1997) (4,479) (4,378)
Total common stockholders' deficiency (182,935) (176,465)
TOTAL $ 106,296 $ 107,253
</TABLE>
See accompanying notes to consolidated financial statements.
- -3-
<PAGE 53>
MOSLER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(In Thousands of Dollars Except Share Data)
Years Ended
<TABLE>
<S> <C> <C> <C>
June 27, June 28, June 29,
1998 1997 1996
NET SALES:
Service $ 104,320 $ 106,880 $ 106,901
Products 122,480 101,703 111,359
Total net sales 226,800 208,583 218,260
COST OF SALES:
Service 77,482 81,227 77,957
Products 97,239 82,699 88,190
Restructuring 581 - 2,989
Total cost of sales 175,302 163,926 169,136
Gross profit 51,498 44,657 49,124
SELLING AND ADMINISTRATIVE EXPENSES (37,599) (39,378) (36,493)
GAIN ON TERMINATION OF
POSTRETIREMENT BENEFIT PLAN 11,889 0 0
OTHER INCOME (EXPENSE) (153) 489 254
OPERATING INCOME 25,635 5,768 12,885
DEBT EXPENSE:
Interest expense 20,283 18,317 17,526
Amortization of debt issuance costs and expense 577 76 876
Interest income (4) (43) (135)
Total 20,856 18,850 18,267
INCOME (LOSS) BEFORE INCOME TAXES, CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING AND PREFERRED
STOCK CHARGES 4,779 (13,082) (5,382)
PROVISION FOR INCOME TAXES 149 73 65
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING AND PREFERRED STOCK CHARGES 4,630 (13,155) (5,447)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - 7,420 -
NET INCOME (LOSS) BEFORE PREFERRED STOCK CHARGES 4,630 (5,735) (5,447)
PREFERRED STOCK CHARGES:
Dividends (10,243) (8,672) (7,819)
Amortization of discount (638) (672) (977)
Total (10,881) (9,344) (8,796)
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (6,251) $ (15,079) $ (14,243)
PER COMMON SHARE:
Loss before cumulative effect of change in accounting $ (2.99) $ (10.58) $ (6.51)
Cumulative effect of change in accounting - 3.49 -
Basic and diluted net loss applicable to common stockholders
$ (2.99) $ (7.09) $ (6.51)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,091,702 2,126,527 2,189,010
See accompanying notes to consolidated financial statements.
- -4-
</TABLE>
<PAGE 54>
MOSLER INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Common Currency
$.10 Par Accumulated Pension Stock Held Translation Treasury
Value Deficit Liability By ESOP Adjustments Stock Total
BALANCE AT JUNE 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 recognizing minimum pension
liability 963 963
Net increase in redemption value of common stock 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)
Reduction in connection with recognizing minimum pension
liability 533 533
Net increase in redemption value of common stock held by
ESOP 1,602 1,602
BALANCE AT JUNE 28, 1997 254 (170,719) (13) (409) (1,200) (4,378) (176,465)
Net income 4,630 4,630
Foreign currency translation adjustment (165) (165)
Purchase of 20,327 shares of common stock (101) (101)
Dividends on Series C preferred stock ($19.59 per share) (6,915) (6,915)
Dividends on Series D preferred stock ($16.00 per share) (3,328) (3,328)
Amortization of discount on Series D preferred stock (638) (638)
Net decrease in redemption value of common stock held by
ESOP 47 47
BALANCE AT JUNE 27, 1998 $254 $(176,970) $(13) $(362) $(1,365) $(4,479) $(182,935)
See accompanying notes to consolidated financial statements.
</TABLE>
- -5-
<PAGE 55>
MOSLER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
(In Thousands of Dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended
June 27, June 28, June 29,
1998 1997 1996
OPERATING ACTIVITIES:
Net income (loss) $ 4,630 $ (5,735) $ (5,447)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting (7,420)
Depreciation 2,564 3,003 2,490
Amortization 6,598 6,583 6,562
Gain on termination of postretirement plan (11,889) - -
Loss (gain) on disposal of facilities 308 382 (96)
Provision for doubtful accounts 35 128 432
Interest paid in shares of preferred stock 5,308 3,733 2,792
Decrease (increase) in:
Accounts receivable (7,537) 6,506 (8,720)
Inventories (1,754) (2,351) 3,503
Other current assets (97) (662) (53)
Increase (decrease) in:
Accounts payable (993) 7,651 579
Accrued liabilities and other (534) (921) (3,052)
Unearned revenue (127) 3,655 (421)
Income taxes payable 51 (66) (57)
Net cash (used in) provided by operating activities (3,437) 14,486 (1,488)
INVESTING ACTIVITIES:
Proceeds from sale of facilities and equipment 606 1,499
Capital expenditures (1,521) (2,655) (4,845)
Decrease (increase) in other assets 1,973 (427) 178
Net cash provided by (used in) investing activities 1,058 (3,082) (3,168)
FINANCING ACTIVITIES:
Purchase of common stock for treasury (101) (578) (761)
Purchase of Series C preferred stock (3,194) (3,091) (2,095)
Purchase of Series D preferred stock (83) (23) (66)
Net proceeds from (payments on) revolving line of credit 6,822 (6,245) 4,146
Principal payments on long-term debt (1,000) (1,000) (750)
Deferred debt issuance costs - - (170)
Net cash provided by (used in) financing activities 2,444 (10,937) 304
EFFECT OF EXCHANGE RATE CHANGES ON CASH 83 (78) (7)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 148 $ 389 $ (4,359)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 389 0 4,359
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 537 $ 389 $ 0
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Interest $14,825 $ 14,774 $ 14,597
Income taxes 98 139 140
Noncash investing and financing activities -
Capital lease obligations 1,285
See accompanying notes to consolidated financial statements.
- -6-
</TABLE>
<PAGE 56>
MOSLER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
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:
Land improvements 20 years
Buildings 20 to 40 years
Machinery and equipment 4 to 15 years
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. The carrying value of service agreements and goodwill
is evaluated periodically as events and circumstances indicate a
possible inability to recover its carrying amount. 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.
<PAGE 57>
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 $1,150,000,
$971,000, and $1,074,000 for the years ended June 27, 1998, June 28,
1997 and June 29, 1996, respectively.
Research and Development - Research and development costs, included
in selling and administrative expenses, are expensed as incurred and
amounted to $1,313,000, $2,178,000, and $2,653,000 for the years ended
June 27, 1998, June 28, 1997 and June 29, 1996, 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 adopted during fiscal year 1998.
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. The adoption of SFAS No. 128 had no
effect on previously reported per share amounts. Additionally, there
is no difference in the calculation of basic and diluted net loss per
common share.
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.
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 1998 and 1997 each contained 52 weeks. Fiscal
year 1996 contained 53 weeks.
Restructuring - In August 1998, the Company committed to shut down its
leased Wayne, N.J. production facility. In connection with this shut
down, the Company expects to record a charge of approximately $1,582,000
in fiscal 1999 for certain exit costs related to severance and fixed
asset write-off.
In July 1997, the Company shut down its leased Buffalo
production facility. In connection with this shut down, the Company
recorded a charge of approximately $581,000 in fiscal 1998 for certain
exit costs related to severance and fixed asset write offs.
Substantially all costs have been paid as of June 27, 1998.
During fiscal 1996, the Company recorded restructuring charges of
$2,989,000 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 the Company's 1999 fiscal year.
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
<PAGE 58>
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 the Company,s
1999 fiscal year. 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.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued in February 1998 and is effective
for the Company's 1999 fiscal year. Disclosures for earlier periods
provided for comparative purposes is required. The statement revises
employers' disclosures about pension and other postretirement benefit
plans. Adoption of this new standard will result in additional
financial statement disclosures.
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<S> <C> <C>
June 27 June 28,
1998 1997
(In Thousands)
Billed $33,219 $32,617
Accrued and unbilled 24,598 17,663
Total 57,817 50,280
Less llowance for doubtful accounts (837) (872)
Net accounts receivable $56,980 $49,408
</TABLE>
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
At June 27, 1998 and June 28, 1997, 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>
<S> <C> <C>
June 27 June 28,
1998 1997
(In Thousands)
Finished products and service parts $23,342 $20,895
Products in process 2,031 2,126
Raw materials 2,698 2,268
Less allowance for slow moving and
obsolete inventory (4,888) (3,860)
Total $23,183 $21,429
</TABLE>
<PAGE 59>
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.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C> <C>
June 27 June 28,
1998 1997
(In Thousands)
Amounts payable to banks $ 17,889 $ 11,703
11% Series A Senior Notes 115,000 115,000
Capitalized lease obligations 902 1,285
Total 133,791 127,988
Less current portion (1,298) (1,317)
Total $132,493 $126,671
</TABLE>
On October 1, 1996, and as subsequently amended, the Company established
a credit facility, comprised of a $29.75 million revolving line of credit
including 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 1.5%
(10.0% at June 27, 1998). In conjunction with the credit facility, the
Company pays a monthly commitment fee of 1/2 of 1% per annum on the
average daily unused portion of the commitment. After factoring in
approximately $6.175 million letters of credit issued against the
credit facility, the Company has approximately $5.7 million of
available borrowing capacity against this facility at June 27,
1998. 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. 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
<PAGE 60>
fiscal year 1999 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. 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%. Annual contractual maturities
of long-term debt and capital lease payments are as follows:
<TABLE>
<S> <C>
Amount
In Thousands
1999 $ 1,298
2000 17,254
2001 239
2002 -
2003 115,000
</TABLE>
The Company has received a commitment from a bank to refinance the
Company's current credit facility on a long-term basis. Accordingly,
the Company's outstanding revolving line of credit of $16,889,000, due
in fiscal 1999, has been classified as long term as of June 27, 1998.
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 $101,200,000 at June 27, 1998 and $97,750,000 at June
28, 1997.
5. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par value preferred
stock. Of the 2,000,000 shares, 500,000 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 1,290,000 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
Series D increasing rate preferred stock consists of the following:
<TABLE>
<S> <C> <C>
June 27, June 28,
1998 1997
(In Thousands)
Series D increasing rate preferred stock, $.01 par value, 210,000
shares authorized, 195,022 shares outstanding in 1998 and
195,957 in 1997, net of unamortized discount of $.7 million
in 1998 and $1.4 million in 1997, $100 per share liquidation
preference, aggregating approximately $19.5 million in 1998
and 1997 $ 18,792 $ 18,237
Unpaid dividends on Series D increasing rate redeemable preferred
stock, $189.54 per share in 1998 and $148.23 per share in 1997 36,959 28,898
Total $ 55,751 $ 47,135
</TABLE>
The holders of the shares of Series D preferred stock are entitled to
receive cumulative dividends semi-annually at the rate of 16.0% per
annum, increasing 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
<PAGE 61>
dividends are not paid due to the restrictions in the debt agreements
described in Note 4 will accumulate and accrue additional dividends (at
25.3% for the year ended June 27, 1998) 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. 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. Changes in Series D
Preferred Stock are as follows:
<TABLE>
<S> <C>
Amount
(In Thousands)
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
Purchase of 935 shares of Series D preferred stock (83)
Dividends on Series D preferred stock 3,328
Amortization of discount on Series D preferred stock 638
Additional dividends on unpaid dividends 4,733
Balance at June 27, 1998 $ 55,751
</TABLE>
<PAGE 62>
7. SERIES C ADJUSTABLE RATE PREFERRED STOCK
<TABLE>
<S> <C>
June 27, June 28,
1998 1997
(In Thousands)
Series C adjustable rate cumulative preferred stock, $.01 par
value, 500,000 shares authorized, 428,506 shares outstanding in
1998 and 385,542 in 1997, $100 per share liquidating preference,
aggregating approximately $42,850,000 in 1998 and $38,554,000
in 1997 $ 42,850 $ 38,554
</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 (18.50% at June 27, 1998) 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 1998,
the Company issued 74,902 shares of Series C preferred stock in payment
of $6,915,000 of dividends and $575,000 of interest on unpaid dividends.
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 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. 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. Changes in Series C preferred
stock are as follows:
<TABLE>
<S> <C>
Amount
(In Thousands)
Balance at 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
Issuance of 74,902 shares of Series C preferred stock 7,490
Purchase of 31,938 shares of Series C preferred stock (3,194)
Balance at June 27, 1998 $ 42,850
</TABLE>
<PAGE 63>
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.
Changes in redeemable common stock are as follows:
<TABLE>
<S> <C> <C>
Number of Amount
Shares (In Thousands)
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
Redemption of common stock (20,532) (47)
Balance at June 27, 1998 157,247 $ 362
</TABLE>
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.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<S> <C> <C>
June 27, June 28,
1998 1997
(In Thousands)
Deferred tax assets:
Net operating loss carryforwards $ 15,472 $ 12,262
Inventories, principally due to obsolescence reserves and
additional inventories cost for tax purposes pursuant to the
Tax Reform Act of 1986 1,931 740
Accounts receivable, principally due to allowance for doubtful
Accounts 311 325
Accrued warranty 419 342
Accrued employee benefits 1,190 5,942
Alternative minimum tax credit carryforwards 371 371
Other 280 437
Total deferred tax assets 19,974 20,419
Less valuation allowance (19,320) (19,513)
Net deferred tax assets 654 906
Deferred tax liabilities -
Facilities, principally due to differences in depreciation 654 906
Net deferred taxes $ 0 $ 0
</TABLE>
<PAGE 64>
The components of income (loss) before income taxes and provision for
income taxes are as follows:
<TABLE>
<S> <C> <C> <C>
June 27, June 28, June 29,
1998 1997 1996
(In Thousands)
Income (loss) before income taxes:
Domestic $ 5,082 $ (12,541) $ (5,348)
Foreign (303) (541) (34)
Total $ 4,779 $ (13,082) $ (5,382)
Provision for income taxes:
State and local $ 113 $ 73 $ 65
Foreign 36 - -
Total $ 149 $ 73 $ 65
</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:
<TABLE>
<S> <C> <C>
June 27, June 28, June 29,
1998 1997 1996
(In Thousands)
Tax provision (credit) at statutory rate $1,672 $(4,579) $(1,884)
State and local income taxes, net of federal effect 96 44 42
Permanent differences, principally goodwill amortization 761 781 584
Losses (income) for which tax benefit not provided, net
of change in valuation allowance (2,380) 3,827 1,323
Provision for income taxes $ 149 $ 73 $ 65
</TABLE>
At June 27, 1998, the Company had unused U.S. net operating loss carry
forwards of $38,681,000 which expire in the years 2009 through 2012.
No provision was made in 1998 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.
<PAGE 65>
Net defined benefit pension expense includes the following components:
<TABLE>
<S> <C> <C> <C>
June 27, June 28, June 29,
1998 1997 1996
(In Thousands)
Service cost $ 86 $ 74 $ 103
Interest cost on projected benefit obligaion 793 737 797
Return on plan assets (2,806) (881) (1,526)
Net amortization and deferral 2,228 262 1,055
Net defined benefit pension expense $ 301 $ 192 $ 429
</TABLE>
The following table presents defined benefit pension plans funded status
as of April 1, 1998 and 1997, the most recent measurement dates:
<TABLE>
<S> <C> <C> <C>
April 1, April 1, April 1,
1998 1998 1997
(In Thousands)
Assets Accumulated
exceed benefit
accumulated exceeds
benefit assets
Actuarial present value of:
Vested benefits $ 2,966 $ 8,019 $ 10,001
Nonvested benefits 104 238 285
Accumulated benefit obligation $ 3,070 $ 8,257 $ 10,286
Projected benefit obligation $ 3,070 $ 8,257 $ 10,286
Less plan assets at fair value 3,367 8,110 9,231
Projected benefit obligation in excess of plan assets (297) 147 1,055
Adjustment required to recognize minimum liability 107 977
Unrecognized net gain (loss) 530 796 189
Unrecognized past service cost (749) (832)
Less unrecognized net obligation (154) (193)
Net pension liability $ 233 $ 147 $ 1,196
</TABLE>
The discount rate used in determining the actuarial present value of
benefit obligations was 7.0% in 1998 and 7.50% in 1997. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
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 27, 1998, June 28, 1997 and June 29, 1996.
<PAGE 67>
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 27, 1998, June 28, 1997 and June 29, 1996.
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. During fiscal
1998, the Company notified its employees that the Company had terminated
its health care and life insurance benefits for retired employees.
In connection with this plan termination, the Company recorded a gain
of $11,889,000 upon the reversal of its postretirement benefit
obligation. The Company has no obligation to fund these benefits in
the future. Prior to 1998, the Company provided certain health care
and life insurance benefits for retired employees. Entitlement to
these benefits was contingent on years of service with the Company,
age at retirement and collective bargaining agreements. Cost
sharing provisions were also based on these same conditions.
The following table represents the components of the Company's
liability for future postretirement benefits other than pensions as
of June 28, 1997:
<TABLE>
<S> <C>
June 28,
1997
(In Thousands)
Accumulated post-retirement benefit obligation
Retirees $ 2,038
Fully eligible active participants 996
Other active participants 5,330
Total 8,364
Unrecognized net gain 2,826
Total $ 11,190
</TABLE>
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. Under the provisions of SFAS No. 106, the
postretirement benefit obligation for fiscal 1997 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.
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.
<PAGE 68>
11. LEASES
Minimum future rent payments approximating $6.6 million under commitments
for noncancelable operating leases with initial lease terms greater than
one year as of June 27, 1998, principally for sales and service
facilities, are payable $2.1 million, $1.6 million, $1.3 million, $1.0
million and $0.6 million from fiscal 1999 through fiscal 2003,
respectively. Rent expense was $6.5 million, $6.9 million and $7.9 million
for the years ended June 27, 1998, June 28, 1997 and June 29, 1996,
respectively.
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. A summary of the stock
option transactions for the years ended June 27, 1998, June 28, 1997
and June 29, 1996 follows:
<TABLE>
<S> <C>
Outstanding
Stock
Options
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
Canceled/expired (400)
Balance at June 27, 1998 42,450
</TABLE>
At June 27, 1998, 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 cost for the Company's Stock Option Plan
been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net loss
would have been increased (income decreased) by $13,000 for the years
ended June 27, 1998 and June 28, 1997, respectively and $5,000 for the
year ended June 29, 1996. Net income (loss) per common share would not
have been affected for either year. Compensation expense reflected in
these pro-forma disclosures is not indicative of future amounts when
the SFAS No. 123 prescribed method will apply to all outstanding
nonvested awards.
<PAGE 69>
The weighted-average fair value of options granted under the Stock
Option Plan during 1997 and 1996 was $5.66 and $5.25, respectively.
No options were granted in fiscal 1998. 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>
<S> <C> <C>
June 28, 1997 June 29, 1996
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>
Information regarding options outstanding at June 27, 1998 is as follows:
<TABLE>
<S> <C> <C> <C>
Options Outstanding
Weighted
Remaining
Contractual Options
Exercise Price Number Life Exercisable
$10.00 42,450 3.81 35,850
</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 5% of net sales for the year ended June 27, 1998 and
approximately 6% of net sales for the years ended June 28, 1997
and June 29, 1996, respectively. Total assets outside the United
States were approximately 3% of total assets at June 27, 1998 and
approximately 4% of net assets for the years ended June 28, 1997 and
June 29, 1996, respectively. Sales to United States government agencies
and contractors amounted to approximately 4% of net sales for each of
the years ended June 27, 1998, June 28, 1997 and June 29, 1996.
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 1998, 1997, and 1996, the Company issued shares of
Series C preferred stock in payment of $6,915,000, $5,785,000, and
$5,275,000 in dividends which were accrued on the Series C preferred
stock, and recorded dividends of $3,328,000, $2,887,000 and $2,544,000
on shares of Series D preferred stock, respectively.
<PAGE 70>
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. Two 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 and 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. 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 $4.1
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.
* * * * * *
<PAGE 71>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> JUN-27-1998
<CASH> 537,000
<SECURITIES> 0
<RECEIVABLES> 57,817,000
<ALLOWANCES> 837,000
<INVENTORY> 23,183,000
<CURRENT-ASSETS> 1,334,000
<PP&E> 38,786,000
<DEPRECIATION> 29,919,000
<TOTAL-ASSETS> 106,296,000
<CURRENT-LIABILITIES> 57,322,000
<BONDS> 132,493,000
<COMMON> 362,000
0
98,963,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 106,296,000
<SALES> 122,480,000
<TOTAL-REVENUES> 226,800,000
<CGS> 97,239,000
<TOTAL-COSTS> 175,302,000
<OTHER-EXPENSES> 26,436,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,283,000
<INCOME-PRETAX> 4,779,000
<INCOME-TAX> 149,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,630,000
<EPS-PRIMARY> (2.99)
<EPS-DILUTED> 0
</TABLE>
