<PAGE> 1
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 25, 1999
------------------------------------------------------
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 ------------------------------------
incorporation or organization) (I.R.S. Employer Identification No.)
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 2,239,823.8622 shares as of September 7, 1997
- --------------------------------------------------------------------------------
1
<PAGE> 2
Mosler Inc.
Index to Annual Report on Form 10-K
<TABLE>
<CAPTION>
Part I Page
<S> <C> <C>
Item 1 Business 3-14
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 17
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6 Selected Financial Data 19-20
Item 7 Management Discussion and Analysis 22-34
Item 7a Quantitative & Qualitative Disclosures About Market Risk 35
Item 8 Financial Statement and Supplementary Data 36
Item 9 Changes in and Disagreement with Accountants
on Accounting and Financial Disclosures 37
Part III
Item 10 Directors and Executive Officers of the Registrant 38,39
Item 11 Executive Compensation 40-44
Item 12 Security Ownership of Certain Beneficial Owners and Management 45
Item 13 Certain Relationships and Related Transactions 46
Part IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K 47-50
Signatures 51
</TABLE>
2
<PAGE> 3
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 1999 approximately 54% 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
3
<PAGE> 4
aggregate of 1,400,000 shares of common stock. Also in connection with the
Merger, the Company purchased from BancBoston Capital Inc. ("BancBoston") all
shares of a previously outstanding series of preferred stock of the Company. All
of the transactions described above are collectively referred to herein as the
"1990 Transaction."
Sources of funds for the 1990 Transaction included approximately $80 million
from proceeds of borrowings under a Credit Agreement dated as of May 19, 1990
and approximately $14 million from KIA IV and its affiliate. In conjunction with
the 1990 Transaction, Mosler solicited and obtained from the holders of its 12
1/2% Senior Subordinated Debentures due 1998 a consent to amend in certain
respects the indenture relating to such Debentures including, but not limited
to, increasing the interest rate from 12 1/2% to 13 5/8% for interest accruing
after May 23, 1990. The 1990 Transaction resulted in an increase of the
indebtedness of the Company from $83.3 million to $163.3 million. The 1990
Transaction was not considered by generally accepted accounting principles to
result in a change of control of the Company due to the significant continuing
interest of certain stockholders and this resulted in a decrease in the
Company's Common stockholders' equity of $83.7 million.
On July 29, 1993, the Company completed a refinancing transaction whereby it
issued $115 million principal amount of 11% Series A Senior Notes due April 15,
2003. A portion of the net proceeds from the notes were deposited in trust to
redeem all of the Company's 13 5/8% Senior Subordinated Debentures ($80 million)
plus accrued and unpaid interest.
On October 9, 1998, the Company acquired substantially all the assets and
assumed substantially all the liabilities of the LeFebure Division of De La Rue
Cash Systems, Inc. ("LeFebure") for approximately $39.2 million. Like Mosler,
LeFebure specialized in the manufacture, distribution and service of security
equipment. Unlike Mosler, the majority of LeFebure business was with financial
institutions, with a minimal amount of business with other commercial and
government entities. LeFebure's operating results are included in the Company's
consolidated financial statements of operations beginning on October 9, 1998.
As of the date hereof, affiliates of Kelso own approximately 62.5% 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.
4
<PAGE> 5
BUSINESS
GENERAL
Mosler's broad array of security systems and products includes its proprietary
COMSEC/Invisicom monitoring system, which incorporates multi-point alarm, CCTV
monitoring, and access control 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 and service
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 continues to expand its sales in the commercial and industrial market.
The Company's service business has been a reliable source of cash flow.
Approximately 42% 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 1,594 person service and sales
organization operates through approximately 65 offices located throughout the
country.
5
<PAGE> 6
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
-----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service 45.1% 46.0% 51.2%
Electronic security systems 28.2% 22.3% 18.8%
Physical security products 24.2% 27.6% 26.0%
International 2.7% 4.8% 4.4%
Elimination of interdivisional sales (.2%) (.7%) (.4%)
----- ----- -----
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 45% of the Company's net sales for fiscal 1999.
During fiscal 1999 service agreement sales increased $11.0 million. Time and
material sales increased $12.3 million. The increases in revenue for service
agreements and for time and material are due to the acquisition of LeFebure.
Approximately 41.6% of the Company's service revenues for fiscal 1999 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 1300 field service personnel. A majority of
the service personnel are located in the Company's 65 domestic offices. The
Company maintains a fleet of 1271 service vehicles for use by its service
personnel.
6
<PAGE> 7
To meet increased electronic security systems service requirements and
accommodate changes in technology, the Company will be required to increase its
servicing capability by continuing and expanding the practice of providing
electronic security systems training to a substantial percentage of its existing
field personnel, providing follow-up training sessions and recruiting new
personnel with electronics systems experience.
ELECTRONIC SECURITY SYSTEMS
The Company engineers and manufactures electronic security systems for both
financial institutions and commercial and industrial customers. The Company also
engineers and manufactures drive-up banking systems for financial institutions.
Sales of electronic security systems accounted for approximately 28% of the
Company's net sales for the year ended June 25, 1999.
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. After the transaction,
Mosler held a 5% interest in Bell, 30% of which was sold in the fourth quarter
of 1999, for a gain of approximately $1.1 million, leaving the Company with a
3.5% 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.
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
7
<PAGE> 8
facilities. These products, which are sourced from outside suppliers, include
automated security portals, turnstiles and metal detectors. The security portals
and turnstiles can be integrated with the access control system to ensure only
authorized personnel are allowed entry while also reducing requirements for
guards. The security portals can also be integrated with metal detectors to
provide screening for weapons without direct and continual involvement of a
guard.
The Company's electronic security systems are generally assembled by Company
personnel from components manufactured by others, including circuit boards, data
processing products and other components purchased both under general contracts
and pursuant to specific purchase orders.
On July 29, 1993, the Company purchased Security Control Systems, Inc. ("Linx")
for $6.8 million plus the assumption of certain liabilities and obligations of
Linx.
Linx is a developer of micro-computer based access control systems with an
installed base of approximately 250 systems. Linx has provided security services
for the U.S. space program as well as various Fortune 500 companies, hospitals,
financial institutions and correctional institutions. The Linx acquisition
provided the Company with a greater presence in the commercial and industrial
sector of the market for electronic security systems.
PHYSICAL SECURITY PRODUCTS
The Company engineers, purchases and manufactures modular vaults, vault doors,
night depositories, safe-deposit boxes, drive-in windows and counter systems for
financial institutions. The Company also 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 24%
of the Company's net sales for the year ended June 25, 1999.
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 million.
The Company closed its Buffalo, New York manufacturing facility on August 1,
1997. The plant closing is part of the Company's ongoing
8
<PAGE> 9
efforts to improve cost efficiencies. The product lines that had been
manufactured at the Buffalo, New York plant were transferred to another
manufacturer who 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.
On January 31, 1999 the Company closed its leased Wayne, New Jersey facility and
outsourced this production. In connection with this shut down, the Company took
a one-time restructuring charge of approximately $1.8 million related primarily
to severance and fixed asset write-offs. For additional information see Note 1
to the Consolidated Financial Statements.
On August 23, 1999 the Company announced that the Mexico, Missouri location, a
property acquired as part of the acquisition of the LeFebure Division (LeFebure)
of De La Rue Cash Systems, Inc., will be closed. The Company plans to move
certain of the production of the facility to other Mosler locations while
outsourcing the remainder. Although final studies and estimates have not been
completed, the Company expects to incur plant closing costs of approximately
$2.0 million of which approximately $1.6 million will be allocated to the
purchase price of LeFebure.
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 2.6%, 4%, and 4.6% of the Company's net sales in
fiscal years 1999, 1998 and 1997 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
9
<PAGE> 10
sold primarily to food and drug retail chain stores, educational institutions
and insurance companies. The Company also manufactures a line of Dropository
units, used by utilities, libraries, schools, insurance companies and
governmental collection offices, designed to permit the payment of bills and the
deposit of books and other packages during non-business hours.
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 2.7% of the Company's total net sales for
fiscal 1999. The Company maintains direct sales and service offices in Mexico,
Canada and the Caribbean and a manufacturing facility for physical security
products in Mexico. The Company has also entered into agreements with licensees
in Indonesia and the Philippines pursuant to which the licensees are authorized
to manufacture and sell certain of the Company's products in accordance with
designs, specification and quality standards established by the Company in
exchange for the payment of specified fees and royalties. The Company markets
products in other international locations through independent dealers. Due to
high transportation costs, the Company exports only a limited number of physical
security products from its facilities in the United States.
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.
For financial information about the Company's international operations, see Note
15 to 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.
10
<PAGE> 11
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
has continued and has positively impacted the Company's sales and results of
operations.
In addition, the acquisition of LeFebure has enhanced Mosler's position in the
financial institution market, since all of LeFebure's significant customers were
banks.
As part of its strategy to expand its presence in the commercial and industrial
markets, the Company is attempting to expand sales of its electronic security
systems (including access control systems) to commercial and industrial
facilities for use in retail chain stores and office and other commercial
buildings. The Company has installed integrated electronic security systems at
American Honda, Oracle and United Healthcare and continues to provided
electronic security systems to K-Mart and J.C. Penney retail chains. In 1998,
the Company entered into a contract to supply an integrated access control
system to the New York and New Jersey Port Authority, which will be completed in
fiscal 2000. 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
11
<PAGE> 12
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
competitor in this market is Diebold, Inc., Canton, Ohio. The financial
institutions market is also shared by a number of smaller regional and national
manufacturers. The Company has experienced significantly greater competition in
the commercial and industrial sector for its physical security products and
electronic security systems than in the financial institution market.
The Company believes that it is the largest provider of Government Containers in
the U.S. The Company's principal competitor in the production of these
Government Containers is Hamilton Products, Amelia, Ohio. Overly Co., located in
Greensburg, PA, manufactures security vault doors for United States government
agencies in competition with the Company. Competitors in this market must comply
with government specifications applicable to each product.
The Company competes with a number of major manufacturers in the commercial and
industrial markets for integrated electronic security systems, including ADT
Security Systems, Honeywell Inc. and Litton Industries, Inc. The principal
methods of competition in this market are product design features (including
customized applications), price and service.
The Company focuses its marketing efforts for its electronic security systems on
customers whose primary concern is security (as opposed to control of heating,
ventilation and air-conditioning) and for whom a stand-alone proprietary system
may be appropriate. In contrast, many of the Company's competitors emphasize
systems controlling heating, ventilation and air-conditioning (with certain
security features) or systems which are linked to a central alarm station. Many
of the Company's competitors in this market have substantially greater financial
resources than the Company and have developed reputations for system design
capability.
SOURCES OF SUPPLY
The Company is not substantially dependent on any one supplier except that the
Company purchases electronic locks for Government Containers
12
<PAGE> 13
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," "Autobanker,"
"Magna" and "Dropository".
The Company holds patents for 30 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 $39 million at June 25, 1999
compared with $40.6 million at June 27, 1998. The Company expects that
substantially all of its backlog at June 25, 1999 will be shipped in the next 12
months. Except for certain long-term contracts, revenue from the sale of the
Company's products, after provision for installation, is recognized when
products to be installed for customer orders are shipped from the plants.
GOVERNMENT CONTRACTS
Approximately 2.6% of the Company's net sales in fiscal 1999 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.
RESEARCH AND DEVELOPMENT
The Company conducts a research and development program for electronic security
systems and physical security products. During fiscal 1999, the Company's
research and development costs for electronic security systems and physical
security products were $1.8 million and $.1 million, as compared to $1.2 million
and $.1 million for such purposes in fiscal 1998.
13
<PAGE> 14
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 25, 1999, the Company employed 2,264 persons. Of this number 212 were
employed in the manufacture of physical security products, 37 were employed in
the manufacture of electronic security systems, 1,594 were employed in sales and
service operations, 185 were employed in international operations and the
remainder provided management, administrative and clerical support.
Approximately 180 of the Company's employees are located outside the United
States.
14
<PAGE> 15
ITEM 2 PROPERTIES
The Company owns safe, vault doors, safe-deposit box, drive-up window and other
physical security equipment manufacturing facilities in Franklinville, New York;
Farmington and Mexico, Missouri; and Mexico City, Mexico. The Farmington,
Missouri and Mexico, Missouri plants were acquired from LeFebure. The Company
announced the closing of the Mexico, Missouri facility on August, 23, 1999. The
closing is scheduled to be completed no later than the end of the Company's
third fiscal quarter in 2000. Certain of the production will be placed in other
Company manufacturing facilities and the remainder will be outsourced. The
Company closed its leased Wayne, New Jersey facility in January, 1999. A
research and development facility for electronic security is leased in
Northridge, California. Warehousing facilities for these products are maintained
at the above locations. The Company's headquarters is located in Hamilton, Ohio,
as is a training and educational center for the Service Division.
The Company leases approximately 80 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 1271 service vehicles for use by its
service representatives. The majority of the fleet is leased. The service
vehicles consist of vans (approximately 62%), automobiles (approximately 1%),
pick-ups and light duty trucks (approximately 34%), large installation trucks
(approximately 1%) and trailers (approximately 2%). The Company replaces
approximately one-third of the service vehicles each year.
15
<PAGE> 16
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.
16
<PAGE> 17
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 25, 1999.
17
<PAGE> 18
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 7,
1999, there were 126 holders of the Company's Common Stock. No dividends have
been paid on the Company's Common Stock in the last four 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 9, 1998, as
amended on September 15, 1999, between the Company and Fleet Bank as
Administrative Agent and five other participating banks (the "Credit Agreement")
the Company is limited in paying cash dividends on its Common Stock & Preferred
Stock.
18
<PAGE> 19
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
June 24, 1995 June 29, 1996 June 28, 1997 June 27, 1998 June 25, 1999
------------- ------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net Sales $ 216,913 $ 218,260 $ 208,583 $ 226,800 $ 301,743
Restructuring charges(1) 2,989 581 1,824
Gross Profit 51,702 49,124 44,657 51,498 63,173
Selling and administrative expenses 37,915 36,493 39,378 37,599 55,593
Gain on termination of
post-retirement benefit plan 11,889
Gain on sale of securities 1,094
Other (income) expenses (11) (254) (489) 153 (564)
Operating income 13,798 12,885 5,768 25,635 8,110
Net interest expense(2) 17,021 18,267 18,850 20,856 25,839
Income (loss) before
income taxes, cumulative
effect of accounting change
and preferred stock charges (3,223) (5,382) (13,082) 4,779 (17,729)
Provision for income taxes 59 65 73 149 958
Income (loss) before
cumulative effect of
accounting change and
preferred stock charges (3,282) (5,447) (13,155) 4,630 (18,687)
Cumulative effect of accounting change(3) 7,420
Net income (loss) (3,282) (5,447) (5,735) 4,630 (18,687)
Preferred stock charges(4) (8,285) (8,796) (9,344) (10,881) (10,296)
Net loss applicable to common stockholders ($ 11,567) ($ 14,243) ($ 15,079) ($ 6,251) ($ 28,983)
Loss before cumulative effect
of accounting change per common share ($ 5.01) ($ 6.51) ($ 10.58) ($ 2.99) ($ 13.87)
Basic and diluted loss per common share ($ 5.01) ($ 6.51) ($ 7.09) ($ 2.99) ($ 13.87)
</TABLE>
- --------
(1) Includes costs for closing Hamilton, Ohio manufacturing plant of
approximately $3.0 million in 1996, $581,000 in 1998 for the closing of the
Buffalo, NY plant, and $1.8 million in 1999 for the closing of the Wayne,
NJ 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 costs resulting
from the acquisition of the Company from American Standard Inc. in 1986 and
the 1990 Transaction.
(3) Includes cumulative effect of a change in the method of accounting for
service van inventories in 1997.
(4) 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.
19
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
June 24, 1995 June 29, 1996 June 28, 1997 June 27, 1998 June 25, 1999
------------- ------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data cont'd:
Consolidated Balance Sheet Data:
Total assets $ 114,531 $ 109,125 $ 107,253 $ 106,296 $ 178,072
Long-term debt, including current portion 130,552 133,948 127,988 133,791 189,135
Redeemable preferred stock 68,303 77,737 86,098 98,963 112,939
Total common stockholders' deficiency(5) (148,622) (162,866) (176,465) (182,935) (208,637)
</TABLE>
- --------
5 Includes a reduction of $83.7 million attributable to the 1990 Transaction.
20
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth certain operating data of the Company for fiscal
1999, 1998 and 1997. 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
-----------------
June 25, 1999 June 27, 1998 June 28, 1997
(Dollars in Thousands)
<S> <C> <C> <C>
Net sales:
Service $ 135,518 $ 104,320 $ 106,880
Electronic security systems 85,311 50,466 39,332
Physical security products 73,374 62,610 54,388
International 8,082 10,902 9,326
Elimination of interdivisional sales (542) (1,498) (1,343)
---------- ---------- ---------
301,743 226,800 208,583
Gross profit:
Service 34,663 26,838 25,653
Electronic security systems 14,831 8,715 6,479
Physical security products 13,696 14,128 10,580
International 1,807 2,398 1,948
---------- ---------- ---------
*64,997 *52,079 44,657
Net interest expense 25,839 20,856 18,850
Net income (loss) **(18,687) **4,630 (5,735)
Change in Net Sales From Prior Periods:
Service 30.7% -2.4% 0.0%
Electronic security systems 69.0% .9% -6.6%
Physical security products 17.2% 43.3% -8.9%
International -25.9% 16.9% -25.4%
Elimination of interdivisional sales 13.8% 11.5% -50.4%
Change in total net sales 33.4% 8.7% -4.4%
Operating data as a Percentage of Product
Net Sales:
Gross profit:
Service 26.1% 25.7% 24.0%
Electronic security systems 17.4% 17.3% 15.6%
Physical security products 18.7% 22.6% 21.2%
International 22.4% 22.0% 20.9%
Total gross profit 21.8% 23.0% 21.4%
Selling and administrative expense 18.3% 16.6% 18.9%
Operating income 3.3% 6.3% 3.2%
</TABLE>
* Does not include Buffalo plant closing cost of approximately $581,000 in
1998 or Wayne, NJ plant closing of approximately $1.8 million in 1999.
** Includes Buffalo restructuring cost of $581,000 and gain on termination of
post retirement benefits $11.9 million in 1998 and Wayne, NJ restructuring
cost of approximately $1.8 million in 1999.
21
<PAGE> 22
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include, without limitations,
the Company's beliefs about trends in the Company's industries, and its views
about the long-term future of these industries and the Company. The following
factors, among others, could cause the Company's financial performance to differ
materially from that expressed in such statements: (i) changes in consumer
preferences resulting in a decline in the demand for product and service, (ii)
the inability to reduce SG&A expenses as expected, (iii) an increase in the
price of raw materials, (iv) political and/or economic instability in foreign
countries where the Company has operations or has suppliers who supply the
Company, (v) an unexpected increase in interest rates, (vi) a shift in strength
of the overall U.S. economy thereby possibly reducing purchases, and, (vii)
failure to remedy in a timely manner any Year 2000 issues that might arise.
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 has and
will benefit its business because it creates 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. Further, the acquisition of
LeFebure has strengthened the Company's position in the physical financial
security portion of its business.
Historically, the Company has also generated significant revenues from the sale
of Government Containers. Sales of Government Containers declined from fiscal
1988 to fiscal 1999 from $35.1 million to $7.8 million. The Company believes
that the decline in these sales roughly parallels defense procurement spending.
Although the Company does not expect the sale of Government Containers to be a
source of revenue growth, the Company continues to take steps to make sales of
Government Containers profitable at current sales levels.
22
<PAGE> 23
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.
FISCAL 1999 COMPARED WITH FISCAL 1998
NET SALES
The Company's sales increased during fiscal 1999 by 33.4% to $301.7 million from
$226.8 million in fiscal 1998. The increase in sales was due primarily to the
acquisition of LeFebure. Increased shipments of Physical Security products
(excluding Government) were $11.3 million and Electronic Security Systems
increased $34.8 million. During the same period sales of Government products
declined by $0.6 million and International declined $2.8 million.
Service revenues increased in fiscal 1999 by $31.2 million to $135.5 million.
The increase in service revenue is attributed to the increase in service
contracts due to the LeFebure acquisition.
Sales of Electronic Security Systems increased by 69.1% to $85.3 million from
$50.5 million. This increase can be attributed to higher sales of COMSEC,
Alarms, CCTV and Currency Handling products, as well as Access Control Systems,
including approximately $9 million attributable to the Company's contract with
the Port Authority of New York. Further, these increases are partially
attributable to the acquisition of LeFebure. 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
became the preferred service provider for Triton's installed base of ATMs. In
addition one of the Company's largest financial institution customers merged
with another financial institution which led to electronic conversion sales in
the acquired branches.
Sales of Physical Security products (excluding Government) increased by 21% to
$65.6 million. This increase is attributed to increased sales of Vault Systems,
Night Depositories, Drive In Systems, Financial Furniture and ATMs.
Sales of Government products decreased by 7.1% to $7.8 million from
23
<PAGE> 24
$8.4 million. This decrease is attributed to a continued decline in defense
procurement spending.
Sales of the Company's International operations decreased 25.9% to $8.1 million.
Sales declines were experienced in Export markets and in Mexico and Canada, and
were only partially offset by a sales increase in Puerto Rico.
GROSS PROFIT
Gross profit increased by 26.6% to $65.0 million from $52.1 million in fiscal
1998, before plant closing costs. Gross profit as a percentage of sales
decreased to 21.8% for fiscal 1999 from 23.0% for fiscal 1998.
Gross profit from Service revenues increased during fiscal 1999 by 32.6% to
$34.6 million from $26.8 million. Gross profit as a percentage of sales
increased in fiscal 1999 to 26.1% from 25.7% in fiscal 1998.
Gross profit from the sale of Electronic Security Systems increased by 70.2% to
$14.8 million from $8.7 million. Gross profit as a percentage of sales increased
to 17.4% from 17.3% in 1998. The increase in gross profit was due mainly to an
increase in volume, due to the purchase of LeFebure..
Gross profit from the sale of Physical Security products (excluding Government)
decreased by 6.3% to $11.8 million from $12.6 million in fiscal 1998. Gross
profit as a percentage of sales decreased to 18.0% from 23.3% in fiscal 1998.
The decrease in gross profit was due mainly to higher overhead variances,
partially offset by increased volume.
Gross Profit from the sale of Government products increased by 26.7% to $1.9
million from $1.5 million in fiscal 1998. Gross Profit as a percentage of sales
increased to 24.6% from 18.0% in fiscal 1998. 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 decreased by 24.6% to
$1.8 million from $2.4 million for fiscal 1998. Gross profit as a percentage of
sales increased to 22.4% from 22.0% in fiscal 1998. The decline in gross profit
is due to a decrease in sales volume in Export, Mexico, and Canada, with a
decline in margins in Export and Puerto Rico. These were partially offset by a
higher gross margin in Canada and increased sales in Puerto Rico.
SELLING AND ADMINISTRATIVE EXPENSE
Selling and administrative expenses increased by 65.9% to $55.6 million from
$37.6 million in fiscal 1998. Selling and administrative expenses as
24
<PAGE> 25
a percentage of sales increased to 18.3% in fiscal 1999 from 16.6% in fiscal
1998. The increases in the percentage relates to transition costs associated
with the acquisition of LeFebure.
OPERATING INCOME
The Company's operating income during fiscal 1999 decreased by 68.0% to $8.1
million from $25.6 million in fiscal 1998. Operating income as a percentage of
sales decreased to 3.3% from 6.3% in fiscal 1998. Fiscal 1999 includes a charge
of $1.8 million related to the closing of a plant and transition charges related
to the acquisition of LeFebure of approximately $8.1 million. 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.
25
<PAGE> 26
NET INTEREST EXPENSE
Net interest expense, including amortization of debt issuance costs, increased
24.3% to $25.8 million from $20.8 million in fiscal 1998. The increase relates
to increased interest on a higher debt level under the Company's line of credit.
The increased borrowings were used for the acquisition of LeFebure and for
operating activities.
NET LOSS BEFORE PREFERRED STOCK CHARGES
Net loss before preferred stock charges decreased during fiscal 1999 to an $18.7
million loss from net income of $4.6 million in fiscal 1998. Included in the net
loss of fiscal 1999 is a charge of approximately $8.1 million for transition
costs related to the acquisition of LeFebure and plant closing costs of $1.8
million for Wayne, NJ. 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.
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 1999, 1998, AND 1997
In August, 1999 the Company announced its decision to shut down the Mexico,
Missouri facility. This facility was acquired from LeFebure as part of the
October 9, 1998 purchase. Although final studies and estimates have not been
completed, the Company expects restructuring costs of approximately $2 million.
The majority of these costs will be recorded as an adjustment to the purchase
price of LeFebure.
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 took a restructuring charge of approximately $1.8 million
related to severance and fixed asset write-offs. 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
26
<PAGE> 27
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.
27
<PAGE> 28
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 by 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.
28
<PAGE> 29
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 profits 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.
29
<PAGE> 30
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 LOSS BEFORE PREFERRED STOCK CHARGES
Net loss 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 was 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.
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in Item I, the Company on October 9, 1998 acquired
substantially all the assets and assumed substantially all the liabilities of
the LeFebure division of De Le Rue Cash Systems Inc. and De La Rue Systems
Americas Corporation. Coincident with the acquisition the Company entered into a
Financing Agreement with a group of lenders, led by Fleet National Bank, to
finance the acquisition and provide working capital for operations. Under the
terms of the Financing Agreement, a Credit facility of $85 million was
established. Effective September 15, 1999, this was increased to $90 million.
The Company also agreed to certain financial covenants. The Company believes
that this facility will provide adequate financial resources for its operations.
Borrowing under the credit facility bears interest at LIBOR plus 2.65% or at the
prime lending rate plus 1.625%.
Cash used by operating activities was $8.7 million for fiscal 1999 compared to
cash used of $3.4 million in fiscal 1998. The decrease was due to increased
working capital requirements generated by increased revenue.
The Company's unfinanced capital expenditures were $3.7 million for fiscal 1999
as compared to $1.5 million for fiscal 1998. 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 2000 anticipates capital expenditures of $2.2 million.
30
<PAGE> 31
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 .
31
<PAGE> 32
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.
The IRS has issued deficiency notices on these 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 17
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.
In September 1999, the Company agreed to settle these issues with the IRS. Under
the terms of the settlement, the Company will pay additional taxes of
approximately $576,000 along with related interest. The Company will also, for
tax purposes, reduce the allocated value of its intangibles to $45 million and
increase the amortization period to 17 years.
The Company has recorded a provision for the additional tax and interest it
expects to pay in the accompanying financial statements. Management believes
that the payment of this additional tax and interest effectively resolves the
matter.
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.
32
<PAGE> 33
NEW ACCOUNTING STANDARDS
Statement of Financial 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 was 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 resulted 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 resulted 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
was required. The statement revises employers' disclosures about pension and
other post-retirement benefit plans. Adoption of this new standard resulted in
additional financial statement disclosures.
YEAR 2000
The Year 2000 problem is a result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which would result in miscalculations
or system failures.
The Company's major computer systems consist of third-party software. The
conclusion of the Company's research is that the latest existing releases of
this software contain the necessary changes to correct any significant Year 2000
problems. As a matter of ongoing policy, in order to assure continuing
contractual vendor support, the Company promptly installs and implements new
releases of third-party software. To date, the Company has implemented
third-party releases that it believes are Year 2000 compliant for substantially
all of its software. The Company has spent approximately $1.6 million on these
releases during 1999, which amounts were planned expenditures irrespective of
any Year 2000 issues. The Company has tested and has further plans to test its
software for
33
<PAGE> 34
compliance. Costs of addressing potential problems have not and are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods.
The Company's compliance plan includes review of Year 2000 readiness of its
major manufacturing equipment, products, suppliers, and customers. The Company
has no Electronic Data Interchange (EDI) interfaces with either its customers or
vendors. To date, the Company has not discovered any significant Year 2000
issues in these areas and does not anticipate any significant problems.
Therefore, the Company has not developed specific contingency plans in
preparation for the year 2000. As the Company continues to evaluate and test its
readiness for the year 2000, the Company will assess whether there are any
specific areas where a contingency plan could help alleviate possible adverse
effects from the year 2000. If so, the Company will develop contingency plans in
those areas prior to the end of 1999. Accordingly, the Company plans to devote
the necessary resources to resolve all significant Year 2000 issues in a timely
manner.
The most likely Year 2000 problems that the Company may face appear to arise
from the possible noncompliance of third parties. Possible difficulties could
arise in receiving materials from suppliers or from failures in the operation of
the Company's customers. The Company has documented and confirmed (in writing)
Y2K compliance of the services and products provided to Mosler by our vendors.
In addition, in the event that the Year 2000 would cause widespread loss of
power or other utilities in areas where the Company, its suppliers or customers
operate, the Company's business and operations could be disrupted. Such events
could have a material adverse impact on the Company.
34
<PAGE> 35
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed is interest rates on
debt.
At June 25, 1999, the carrying value of the Company's debt totaled $189 million.
Approximately $74 million was at variable interest rates. For such floating rate
debt, interest rate changes generally do not affect the fair market value but do
impact earnings and cash flows, assuming other factors are held constant.
Holding other variables constant (such as debt levels), the earnings and cash
flows impact for the next year resulting from a one percentage point increase in
interest rates on variable rate debt would be approximately $.7 million. The
Company has limited its risk related to interest rate increases by purchasing an
interest rate cap as discussed in Note 6 to the Consolidated Financial
Statements.
35
<PAGE> 36
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets as of June 25, 1999 and June 27, 1998 F-3, F-4
Consolidated Statements of Operations for the years ended June 25, 1999
June 27, 1998 and June 28, 1997 F-5
Consolidated Statements of Common Stockholders' Deficiency for the years ended
June 25, 1999, June 27, 1998 and June 28, 1997 F-6
Consolidated Statements of Cash Flows for the years ended June 25, 1999,
June 27, 1998 and June 28 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-22
</TABLE>
36
<PAGE> 37
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 38
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
25, 1999.
<TABLE>
<CAPTION>
Name Age Position Position Since
- ---- --- -------- --------------
<S> <C> <C> <C>
Michel Rapoport 57 Chief Executive Officer, President 1995
and Director
Thomas J. Bell 53 Senior Vice President, Finance, 1997
Chief Financial Officer & Treasurer
S. Peter Fogg 52 Senior Vice President Installation, 1998
and Service
Alfred R. Rabasca 50 Senior Vice President, Human Resources 1981
Ronald L. Watson 53 Senior Vice President, Sales and Marketing 1997
Pamela S. Meyers 48 General Counsel and Secretary 1998
William A. Marquard 79 Director 1986
Thomas R. Wall, IV 41 Director 1990
Robert A. Young, III 58 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, Chief Financial Officer and
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. Fogg joined the Company in September 1998 as Vice President, Installation
and Service. From May 1997 through September 1998, Mr. Fogg was Regional General
Manager for the Northeast Region for Securitylink from Ameritech, and prior
thereto, he was Regional General Manager for the New York metropolitan area for
ADT Security Systems, Inc., both providers of electronic security systems.
38
<PAGE> 39
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. 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.
Ms. Meyers was elected General Counsel and Secretary of the Company in August
1998. She was Legal Counsel for Citizens Federal Bank, a federal savings bank,
from December 1997 through August 1998, and prior thereto, she was Staff Vice
President and Assistant General Counsel for American Premier Underwriters, Inc.,
a property and casualty insurer.
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 a Director of
Kelso, an investment banking firm. He is also a Director of Earthshell Container
Corp., Earle M. Jorgensen Company, and Treadco, Inc.
Mr. Wall has been associated with Kelso since 1983, most recently as managing
director. He is a director of AMF Bowling Inc., Consolidated Vision Group, Inc.,
Cygnus Publishing, Inc., IXL Enterprises, Inc., Mitchell Supreme Fuel company,
Peebles, Inc., TransDigm Inc., 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. He is also Director of Arkansas Best Corporation
and First National Bank of Ft. Smith, Arkansas.
39
<PAGE> 40
ITEM 11 EXECUTIVE COMPENSATION
The following table discloses compensation paid by the Company for fiscal years,
1999, 1998, and 1997 to its chief executive officer and other executive officers
whose compensation was in excess of $100,000 for fiscal 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Fiscal Annual Compensation
Name and Principal Position Year Salary (1) Bonus (2) (3)
----------------------------
($) ($)
<S> <C> <C> <C>
Michel Rapport 1999 $380,003 $540,000
President and 1998 $324,172 $ 66,330
Chief Executive Officer 1997 $320,004 $165,000
Thomas J. Bell 1999 $163,340 $ 40,000
Senior Vice President, Finance 1998(4) $105,602
Al Rabasca 1999 $115,168 $ 17,000
Senior Vice President 1998 $103,941 $ 10,510
Human Resources 1997 $ 90,675 $ 5,000
Peter Fogg 1999(5) $103,048
Senior Vice President
Installation and Service
Ronald L. Watson 1999 $166,672 $ 40,000
Senior Vice President 1998(6) $ 96,634
Sales and Marketing
</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
September 1998.
(6) Joined the Company as Senior Vice President, Sales and Marketing, in
November 1997.
40
<PAGE> 41
STOCK OPTION PLAN
On May 4, 1999, the Board of Directors adopted the Mosler Inc. Stock Incentive
Plan ("the Plan"). The purpose of the Plan is to foster and promote the
long-term financial success of the Company and its subsidiaries and materially
increase stockholder value by (i) motivating superior performance by means of
performance-related incentives, (ii) encouraging and providing for the
acquisition of an ownership interest in the Company by officers and other key
employees, and (iii) enabling the Company and its subsidiaries to attract and
retain the services off an outstanding management team upon whose judgment,
interest and special effort the successful conduct of its and their operations
is largely dependent. The Plan requires that each employee selected for
participation enter into a non competition and confidentiality agreement with
the Company as a condition of participation. At the date hereof, there are 52
participants in the Plan.
The Plan provides for awards to key employees through (i) percentage
participation in a performance pool established with respect to a performance
period or (ii) the grant of stock options to purchase shares of Common Stock. In
the former case, the Company credits to the performance pool the aggregate
amount of incentive compensation, if any, accrued with respect to a performance
period in respect of actual performance against pre-established EBITDA (as
defined in the Plan) objectives. The Board of Directors has established an
initial three-year performance period which extends from June 28, 1998 to June
30, 2001, subject to the performance objective that EBITDA must be at least $24
million for each fiscal year of such period, with the performance pool credited
annually with an amount equal to 15% of the amount, if any, by which EBITDA for
each year in the performance period exceeds $24 million.
The stock option portion of the Plan provides for the grant of stock options to
key employees of the Company or its subsidiaries to purchase up to 300,000
shares of the Company's Common Stock at not less than 100% of the fair market
value on the date of grant of shares covered by the options granted, with no
option exercisable on or after the tenth anniversary of the date on which it is
granted. Options awarded to a participant under the Plan shall be exercisable at
such times and subject to such restrictions and conditions as specified in the
applicable option agreement. The Board of Directors granted options on May 4,
1999 to purchase an aggregate of 200,000 shares at a purchase price per share of
$2.40 per share, each designated an "incentive stock option" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended.
Prior to the adoption of the Mosler Inc. Stock Incentive Plan on May 4, 1999,
the Company's stock option plan provided for the granting of options to purchase
up to 160,000 shares of common stock. Options were 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 60,550
shares of common stock.
41
<PAGE> 42
FISCAL 1999 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:
<TABLE>
<CAPTION>
Number of Underlying
Unexercised Value of Unexercised
Options at Fiscal In-The-Money Options at
1999 Year-End Fiscal 1999 Year-End
-------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Michel Rapoport 180,000 $144,000
Thomas J. Bell 25,000 20,000
Ronald L. Watson 15,000 12,000
S. Peter Fogg 15,000 12,000
Alfred R. Rabasca 10,000 8,000
Pamela S. Meyers 5,000 4,000
</TABLE>
Options are exercisable at $2.40 per share. The Company common stock has been
appraised as of June 25, 1999 at $3.20 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.
42
<PAGE> 43
As of August 31, 1994, the individuals named in the Summary Compensation Table
have the following years of credited service for purposes of this plan: Michel
Rapoport - 1 year.
<TABLE>
<CAPTION>
Highest 5-Year Years of Service
Average Compensation 5 10 15 20 25 30 35 40
- -------------------- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 7,500 $15,000 $22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500 $ 60,000
$150,000 11,250 22,500 33,750 45,000 56,250 67,500 78,750 90,000
$200,000 15,000 30,000 45,000 60,000 75,000 90,000 105,060 120,000
$250,000 18,750 37,500 56,250 75,000 93,750 112,500 131,250 150,000
$300,000 22,500 45,000 67,500 90,000 112,500 135,000 157,500 180,000
$350,000 26,250 52,500 78,750 105,000 131,250 157,500 183,750 210,000
</TABLE>
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 $3.7 million in fiscal
2000, in order to fund payments to retired, terminated and deceased employees.
In fiscal 1993, the trustee of the ESOP elected to defer participant
distributions in substantially equal annual payments over a period of five years
in order to minimize cash contributions by the Company to the ESOP.
Voting rights for share held by the ESOP are generally exercised by the
Administrative Committee of the Board of Directors except with respect to
certain major proposals, in which case the participants have the right to
exercise voting rights.
Savings Plan. The Company maintains a savings plan under Section 401(k) of the
Internal Revenue Code of 1986 under which designated groups of non-union
employees with one year of service, including all executive officers, may
participate. Under the savings plan, a participant may contribute from 2% to 10%
of compensation, which is eligible for 50% matching contributions from the
Company. A participant may contribute over 6% but any excess will not be matched
by the Company. Participants became vested in Company contributions to the
extent of 20% after 3 year and thereafter at the rate of 20% per year.
43
<PAGE> 44
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 Mr. Rapoport's
employment is terminated because of his death, disability, change in control of
the Company or is terminated without cause, he will receive one year's salary,
the annual bonus he would have been entitled to receive for the fiscal year in
which his employment is terminated and the portion of the long term incentive
compensation attributable to the period employed by the Company.
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 1999 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 1999 followed the same
pattern as fiscal 1998.
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.
44
<PAGE> 45
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 6, 1999 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>
<CAPTION>
Series C Series D
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Shares Shares Shares
Beneficially Percent Beneficially Percent Beneficially Percent
Owned (a) of class Owned (a) of class Owned (a) of class
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Name
- ------------------------------------
Michel Rapoport 66,666 3.0%
Thomas J. Bell 4,200 *
S. Peter Fogg 17,466 *
Alfred R. Rabasca 11,232 *
Ronald L. Watson 14,583 *
William A. Marquard 15,000 *
Robert A. Young III 5,000 *
Thomas R. Wall IV (b) 1,400,000 62.5% 126,208 64.9%
Directors and Executive Officers 1,542,063 68.8% 126,208 64.9%
as a Group (9 persons)
Kelso Investment Associates II, L.P. 85,000 43.7%
Kelso Mosler Partners, L.P. 41,208 21.2%
Kelso Investment Assoc. IV, L.P. 1,330,000 59.4%
Kelso Equity Partners II, L.P. 70,000 3.1%
Joseph S. Schuchert (b) 1,400,000 62.5% 126,208 64.9%
Frank T. Nickell (b) 1,400,000 62.5% 126,208 64.9%
George E. Matelich (b) 1,400,000 62.5% 126,208 64.9%
Michael B. Goldberg (b) 1,400,000 62.5% 126,208 64.9%
Frank K. Bynum, Jr. (b) 1,400,000 62.5% 126,208 64.9%
Philip E. Berney (b) 1,400,000 62.5% 126,208 64.9%
David I. Wahrhaftig (b) 1,400,000 62.5% 126,208 64.9%
BancBoston Capital Inc. 13,784 7.1%
Mosler Inc. Employee Stock Ownership Plan 155,670 7.0% 392,062 99.8% 6,673 3.4%
</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. 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.
45
<PAGE> 46
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.
46
<PAGE> 47
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 49
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.
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.
47
<PAGE> 48
* 10.11 Agreement Plan of Merger and Plan of
Reorganization between Kelso Mosler
Acquisition, Inc. and Mosler Inc. dated May
1, 1990.
***** 10.12 Asset Purchase Agreement, executed October
9, 1998 and dated as of September 30, 1998
by and among Mosler Inc., De La Rue Systems
Americas Corporation and De La Rue Cash
Systems Inc.
***** 10.13 Credit Agreement, dated October 9, 1998,
among Mosler Inc. and the Lenders named
therein.
21 Subsidiaries of the Registrant
27.0 Financial Data Schedule
* 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
***** Incorporated by reference to Form 8-K filed on October 22, 1998.
(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 1998.
48
<PAGE> 49
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES MOSLER INC.
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts(1) of Period
- ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Year ended June 25, 1999
Allowance for doubtful accounts $837 $2004(2) $(275) $2566
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
</TABLE>
(1) Represents amounts charged against the allowance net of recoveries.
(2) Includes transfer of reserves from LeFebure in the amount of $398.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Mosler Inc.
-----------
(Registrant)
Date: October 1, 1999 By: /S/ Michel Rapoport
- --------------------------------------------------------------------------------
Michel Rapoport
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: October 1, 1999 By: /S/ Michel Rapoport
- --------------------------------------------------------------------------------
Michel Rapoport
President and
Chief Executive Officer
(Principal Executive Officer)
Date: October 1, 1999 By: /S/ Thomas J. Bell
- --------------------------------------------------------------------------------
Thomas J. Bell
Senior Vice President, Finance
and Chief Financial Officer
Date: October 1, 1999 By: /S/ William A. Marquard
- --------------------------------------------------------------------------------
William A. Marquard
Director
Date: October 1, 1999 By: /S/ Thomas R. Wall IV
- --------------------------------------------------------------------------------
Thomas R. Wall IV
Director
Date: October 1, 1999 By: /S/ Robert A. Young III
- --------------------------------------------------------------------------------
Robert A. Young III
Director
<PAGE> 51
MOSLER INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 25, 1999, JUNE 27, 1998 AND JUNE 28, 1997:
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> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated balance sheets of Mosler Inc. as
of June 25, 1999 and June 27, 1998 and the related consolidated statements of
operations, common stockholders' deficiency and cash flows for each of the three
years in the period ended June 25, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a) for the years ended June
25, 1999, June 27, 1998 and June 28, 1997. 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 consolidated financial position of Mosler Inc. at June
25, 1999 and June 27, 1998 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 25, 1999, 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 5 to the consolidated financial statements, effective June
30, 1996, the Company changed its method of accounting for service van
inventory.
/S/ Deloitte & Touche LLP
September 27, 1999
Cincinnati, Ohio
<PAGE> 53
MOSLER INC.
CONSOLIDATED BALANCE SHEETS
JUNE 25, 1999 AND JUNE 27, 1998
(In Thousands of Dollars Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 25, June 27,
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 363 $ 537
Securities available for sale (amortized cost at June 25, 1999 - $101) 3,117 --
Accounts receivable 99,629 56,980
Inventories 31,754 23,183
Other current assets 2,088 1,334
-------- --------
Total current assets 136,951 82,034
-------- --------
FACILITIES:
Land and land improvements 1,107 802
Buildings 7,142 4,739
Machinery and equipment 39,938 32,779
Improvements in progress -- 466
-------- --------
Gross facilities 48,187 38,786
Less accumulated depreciation 32,254 29,919
-------- --------
Net facilities 15,933 8,867
-------- --------
OTHER ASSETS:
Service agreements (net of accumulated amortization of $58,727 at
June 25, 1999 and $54,214 at June 27, 1998) 4,512 9,025
Deferred debt issuance costs (net of accumulated amortization of
$6,964 at June 25, 1999 and $5,997 at June 27, 1998) 3,518 2,714
Goodwill (net of accumulated amortization of $9,993 at June 25,
1999 and $7,734 at June 27, 1998) 16,514 3,039
Other 644 617
-------- --------
TOTAL $178,072 $106,296
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 54
MOSLER INC.
CONSOLIDATED BALANCE SHEETS
JUNE 25, 1999 AND JUNE 27, 1998
(In Thousands of Dollars Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES, REDEEMABLE STOCK AND COMMON June 25, June 27,
STOCKHOLDERS' DEFICIENCY 1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 27,615 $ 16,581
Accrued liabilities:
Compensation and payroll taxes 8,454 5,552
Product warranty 1,788 837
Accrued workers' compensation 4,534 4,488
Accrued interest 6,318 5,832
Other 7,435 5,556
Unearned revenue 26,732 16,894
Income taxes payable 1,144 284
Current portion of long-term debt 414 1,298
--------- ---------
Total current liabilities 84,434 57,322
--------- ---------
OTHER LIABILITIES:
Long-term debt 188,721 132,493
Accrued pension and other liabilities 615 453
--------- ---------
Total other liabilities 189,336 132,946
--------- ---------
REDEEMABLE STOCK:
Series D increasing rate preferred stock 66,235 55,751
Series C adjustable rate preferred stock 46,241 42,850
Common stock 463 362
--------- ---------
Total redeemable stock 112,939 98,963
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $.10 par value; 4,000,000 shares authorized,
2,539,181 shares issued 254 254
Accumulated deficit (205,953) (176,970)
Redemption value of common stock held by ESOP (463) (362)
Accumulated other comprehensive income (loss) 1,621 (1,378)
--------- ---------
Total (204,541) (178,456)
Less treasury stock, at cost (299,357 shares at June 25, 1999 and
458,773 shares at June 27, 1998) (4,096) (4,479)
--------- ---------
Total common stockholders' deficiency (208,637) (182,935)
--------- ---------
TOTAL $ 178,072 $ 106,296
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 55
MOSLER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 25, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(In Thousands of Dollars Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------------
June 25, June 27, June 28,
1999 1998 1997
<S> <C> <C> <C>
NET SALES:
Service
Product $ 135,518 $ 104,320 $ 106,880
Total net sales 166,225 122,480 101,703
----------- ----------- -----------
301,743 226,800 208,583
----------- ----------- -----------
COST OF SALES:
Service 100,855 77,482 81,227
Product 135,891 97,239 82,699
Restructuring 1,824 581 --
----------- ----------- -----------
Total cost of sales 238,570 175,302 163,926
----------- ----------- -----------
Gross profit 63,173 51,498 44,657
SELLING AND ADMINISTRATIVE EXPENSES (55,593) (37,599) (39,378)
GAIN ON TERMINATION OF
POSTRETIREMENT BENEFIT PLAN -- 11,889 --
GAIN ON SALE OF SECURITIES 1,094
OTHER INCOME (EXPENSE) (564) (153) 489
----------- ----------- -----------
OPERATING INCOME 8,110 25,635 5,768
----------- ----------- -----------
DEBT EXPENSE:
Interest expense 24,908 20,283 18,317
Amortization of debt issuance costs and expense 967 577 576
Interest income (36) (4) (43)
----------- ----------- -----------
Total 25,839 20,856 18,850
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING AND PREFERRED STOCK CHARGES (17,729) 4,779 (13,082)
PROVISION FOR INCOME TAXES 958 149 73
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING AND PREFERRED STOCK CHARGES (18,687) 4,630 (13,155)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING -- -- 7,420
----------- ----------- -----------
NET INCOME (LOSS) BEFORE PREFERRED STOCK CHARGES (18,687) 4,630 (5,735)
----------- ----------- -----------
PREFERRED STOCK CHARGES:
Dividends (9,833) (10,243) (8,672)
Amortization of discount (463) (638) (672)
----------- ----------- -----------
Total (10,296) (10,881) (9,344)
----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (28,983) $ (6,251) $ (15,079)
=========== =========== ===========
PER COMMON SHARE:
Loss before cumulative effect of change in accounting $ (13.87) $ (2.99) $ (10.58)
Cumulative effect of change in accounting -- -- 3.49
----------- ----------- -----------
Basic and diluted net loss applicable to common stockholders $ (13.87) $ (2.99) $ (7.09)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,090,063 2,091,702 2,126,527
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE> 56
MOSLER INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 25, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION
COMMON VALUE OF ACCUMULATED
STOCK COMMON COMPREHENSIVE OTHER
$.10 PAR ACCUMULATED STOCK HELD INCOME COMPREHENSIVE
VALUE DEFICIT BY ESOP (LOSS) INCOME (LOSS)
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 29, 1996 $ 254 $(155,640) $ (2,011) $(1,669)
Net loss (5,735) $ (5,735)
Foreign currency translation adjustment (77) (77)
Charge in connection with recognizing minimum
pension liability 533 533
---------
Comprehensive income (loss) $ (5,279)
=========
Purchase of 56,558 shares of common stock
Dividends on Series C preferred stock
($17.81 per share) (5,785)
Dividends on Series D preferred stock
($14.50 per share) (2,887)
Amortization of discount on Series D preferred stock (672)
Net decrease in redemption value of common stock
held by ESOP 1,602
-------- --------- -------- -------
BALANCE AT JUNE 28, 1997 254 (170,719) (409) (1,213)
Net income 4,630 $ 4,630
Foreign currency translation adjustment (165) (165)
---------
Comprehensive income (loss) $ 4,465
=========
Purchase of 20,327 shares of common stock
Dividends on Series C preferred stock
($19.59 per share) (6,915)
Dividends on Series D preferred stock
($16.00 per share) (3,328)
Amortization of discount on Series D preferred stock (638)
Net decrease in redemption value of common stock
held by ESOP 47
-------- --------- -------- -------
BALANCE AT JUNE 27, 1998 254 (176,970) (362) (1,378)
Net loss (18,687) $ (18,687)
Foreign currency translation adjustment (20) (20)
Charge in connection with recognizing minimum
pension liability 3 3
Change in unrealized gain on available for
sale securities 3,016 3,016
---------
Comprehensive income (loss) $ (15,688)
=========
Purchase of 12,682 shares of common stock
Issuance of 172,098 shares of common stock
Dividends on Series C preferred stock
($16.50 per share) (6,491)
Dividends on Series D preferred stock
($17.50 per share) (3,342)
Amortization of discount on Series D preferred stock (463)
Net increase in redemption value of common stock
held by ESOP (101)
-------- --------- -------- -------
BALANCE AT JUNE 25, 1999 $ 254 $(205,953) $ (463) $ 1,621
======== ========= ======== =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
<S> <C> <C>
BALANCE AT JUNE 29, 1996 $(3,800) $(162,866)
Net loss (5,735)
Foreign currency translation adjustment (77)
Charge in connection with recognizing minimum
pension liability 533
Comprehensive income (loss)
Purchase of 56,558 shares of common stock (578) (578)
Dividends on Series C preferred stock
($17.81 per share) (5,785)
Dividends on Series D preferred stock
($14.50 per share) (2,887)
Amortization of discount on Series D preferred stock (672)
Net decrease in redemption value of common stock
held by ESOP 1,602
------- ---------
BALANCE AT JUNE 28, 1997 (4,378) (176,465)
Net income 4,630
Foreign currency translation adjustment (165)
Comprehensive income (loss)
Purchase of 20,327 shares of common stock (101) (101)
Dividends on Series C preferred stock
($19.59 per share) (6,915)
Dividends on Series D preferred stock
($16.00 per share) (3,328)
Amortization of discount on Series D preferred stock (638)
Net decrease in redemption value of common stock
held by ESOP 47
------- ---------
BALANCE AT JUNE 27, 1998 (4,479) (182,935)
Net loss (18,687)
Foreign currency translation adjustment (20)
Charge in connection with recognizing minimum
pension liability 3
Change in unrealized gain on available for
sale securities 3,016
Comprehensive income (loss)
Purchase of 12,682 shares of common stock (30) (30)
Issuance of 172,098 shares of common stock 413 413
Dividends on Series C preferred stock
($16.50 per share) (6,491)
Dividends on Series D preferred stock
($17.50 per share) (3,342)
Amortization of discount on Series D preferred stock (463)
Net increase in redemption value of common stock
held by ESOP (101)
------- ---------
BALANCE AT JUNE 25, 1999 $(4,096) $(208,637)
======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 57
MOSLER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 25, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------
JUNE 25, JUNE 27, JUNE 28,
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(18,687) $ 4,630 $ (5,735)
Adjustments to reconcile (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting -- -- (7,420)
Depreciation 3,529 2,564 3,003
Amortization 7,733 6,598 6,583
Gain on sale of available for sale securities (1,094)
Gain on termination of postretirement plan -- (11,889) --
Loss (gain) on disposal of facilities -- 308 382
Provision for doubtful accounts 1,606 35 128
Interest paid in shares of preferred stock 7,192 5,308 3,733
Decrease (increase) in:
Accounts receivable (19,580) (7,537) 6,506
Inventories 226 (1,754) (2,351)
Other current assets (834) (97) (662)
Increase (decrease) in:
Accounts payable 5,705 (993) 7,651
Accrued liabilities and other 3,368 (534) (921)
Unearned revenue 1,246 (127) 3,655
Income taxes payable 860 51 (66)
-------- -------- --------
Net cash (used in) provided by operating activities (8,730) (3,437) 14,486
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of facilities and equipment -- 606 --
Proceeds from sale of investment securities 1,237
Capital expenditures (3,746) (1,521) (2,655)
Decrease (increase) in other assets (24) 1,973 (427)
Acquisition of LeFebure, net of cash acquired (39,235)
-------- -------- --------
Net cash provided by (used in) investing activities (41,768) 1,058 (3,082)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 413
Purchase of common stock for treasury (30) (101) (578)
Purchase of Series C preferred stock (3,558) (3,194) (3,091)
Purchase of Series D preferred stock (55) (83) (23)
Net proceeds from (payments on) revolving line of credit 55,701 6,822 (6,245)
Principal payments on long-term debt (357) (1,000) (1,000)
Deferred debt issuance costs (1,770) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 50,344 2,444 (10,937)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (20) 83 (78)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (174) $ 148 $ 389
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 537 389 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 363 $ 537 $ 389
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the year for:
Interest $ 17,230 $ 14,825 $ 14,774
Income taxes 88 98 139
Noncash investing and financing activities:
Capital lease obligations -- -- 1,285
Liabilities assumed in acquisition 23,852 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 58
MOSLER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 25, 1999, JUNE 27, 1998 AND JUNE 28, 1997
- --------------------------------------------------------------------------------
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"). All significant
inter-company 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., Mexico, Missouri, Farmington,
Missouri, 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.
INVESTMENT SECURITIES - Investments in equity securities with readily
determinable fair values, are accounted for at fair value. The Company's
investment portfolio is classified as available-for-sale.
INVENTORIES - The Company's inventories are stated at the lower 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 period. 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
-7-
<PAGE> 59
INTANGIBLES - Cost allocated to service agreements at the date of
acquisition is carried at cost and is 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, 15 and 40
years. The carrying value of service agreements and goodwill are 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.
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 $1,291,000,
$1,150,000 and $971,000 for the years ended June 25, 1999, June 27, 1998
and June 28, 1997, respectively.
RESEARCH AND DEVELOPMENT - Research and development costs, included in
selling and administrative expenses, are expensed as incurred and amounted
to $1,900,000, $1,313,000 and $2,178,000 for the years ended June 25,
1999, June 27, 1998 and June 28, 1997, 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. 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 Friday in
June. During 1998 and 1997, the Company's fiscal year ended on the last
Saturday in June. Fiscal years 1999, 1998 and 1997 each contained 52
weeks.
RESTRUCTURING - In August 1998, the Company committed to shut down its
leased Wayne, N.J. production facility. In connection with the shut down,
the Company recorded a charge of approximately $1,824,000 in fiscal 1999
for certain exit costs related to severance of approximately $1,400,000
and fixed asset write-off of approximately $424,000. Approximately
$1,800,000 has been incurred during fiscal 1999 for this shutdown. At June
25, 1999, $30,000 remains to be written-off.
-8-
<PAGE> 60
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 had been
paid as of June 27, 1998.
RECLASSIFICATION - 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 was 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 (deficit) and additional paid-in
capital in the equity section of the balance sheet. Adoption of this new
standard resulted 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 resulted 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 was required. The statement revises employers'
disclosures about pension and other post-retirement benefit plans.
Adoption of this new standard resulted in additional financial statement
disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as subsequently amended, is effective for the Company's 2001
fiscal year. The statement revises the accounting for derivative
instruments and requires, among other things, that all derivative
instruments be recorded within the financial statements. The Company has
not yet determined the impact of adopting this standard.
2. ACQUISITION
On October 9, 1998, the Company acquired substantially all the assets and
assumed substantially all the liabilities of the LeFebure Division of De
La Rue Cash Systems Inc. ("LeFebure") for approximately $39 million.
LeFebure specializes in the manufacture, distribution and service of
security equipment for financial institutions. The acquisition of LeFebure
has been accounted for by the purchase method of accounting. The cost of
the acquisition has been allocated on the basis of the fair market value
of assets acquired and liabilities assumed, resulting in goodwill of
approximately $17 million which is being amortized over a period of 15
years. The final allocation of the purchase price of LeFebure will be
determined once all valuations and studies have been finalized, which is
expected within one year from the date of acquisition. LeFebure's
operating results are included in the Company's consolidated statements of
operations beginning on October 9, 1998.
On August 23, 1999, as part of the Company's acquisition integration plan,
management announced the shut down of LeFebure's Mexico, Missouri plant.
The cost of this shut down, which will include fixed asset write-offs and
severance costs, will be recorded as an adjustment to the purchase price
once all studies have been completed and the affected employees have been
notified.
-9-
<PAGE> 61
The unaudited consolidated results of operations for the year ended June
25, 1999 on a pro forma basis as though LeFebure had been acquired as of
June 28, 1998 are as follows ($000's except per share amount):
Net sales $337,092
Net loss $(24,109)
Net loss per share $ (11.54)
The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the LeFebure acquisition been consummated as
of the above date, nor are they indicative of future operating results.
3. SECURITIES
Securities available for sale ($000):
<TABLE>
<CAPTION>
JUNE 25, 1999
---------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
<S> <C> <C> <C> <C>
Equity securities $101 $3,016 -- $3,117
</TABLE>
The fair value of securities is estimated based on quoted market prices.
The Company realized a gain of $1,094,000 upon the sale of a portion of
the securities during fiscal 1999.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
-----------------------
<S> <C> <C>
Billed $ 62,251 $33,219
Accrued and unbilled 39,944 24,598
-------- -------
Total 102,195 57,817
Less allowance for doubtful accounts (2,566) (837)
-------- -------
Net accounts receivable $ 99,629 $56,980
======== =======
</TABLE>
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. At June 25,
1999 and June 27, 1998, 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.
-10-
<PAGE> 62
5. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
-----------------------
<S> <C> <C>
Finished products and service parts $32,206 $23,342
Products in process 281 2,031
Raw materials 8,128 2,698
Less allowance for slow moving and
obsolete inventory (8,365) (4,888)
------- -------
Total $32,250 $23,183
======= =======
</TABLE>
During the fourth quarter of fiscal 1997, the Company changed its method
of accounting for service van inventory from immediately expensing the
cost of inventory placed in its service van fleet to that of capitalizing
such inventory and recording its usage through cost of sales. The
cumulative effect of this change as of June 30, 1996 was to increase
inventory and reduce net loss by $7,420,000 (net of reserve of
$1,466,000), or $3.43 per share, for the year ended June 28, 1997.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
-----------------------
<S> <C> <C>
Amounts payable to banks $ 73,590 $ 17,889
11% Series A Senior Notes 115,000 115,000
Capitalized lease obligations 545 902
-------- --------
Total 189,135 133,791
Less current portion (414) (1,298)
-------- --------
Total $188,721 $132,493
======== ========
</TABLE>
On October 9, 1998, and as subsequently amended, the Company established a
credit facility, comprised of a $90 million revolving line of credit
including a $10 million letter of credit sub-facility of the revolving
line of credit (of which $3,410,000 was drawn upon at June 25, 1999).
Borrowings under the credit facility bear interest at the prime lending
rate plus 1.625% (9.375% at June 25, 1999) or the LIBOR rate plus 2.625%
(7.80% at June 25, 1999). In conjunction with the credit facility, the
Company pays a monthly commitment fee at a rate per annum equal to 0.5% on
the average daily unused revolving credit commitment. The credit facility
is secured by substantially all the assets of the Company. The Company has
entered into an interest rate swap on approximately $35 million in order
to manage its interest rate exposure. Under the terms of the swap, the
Company pays a fixed rate of 4.99% and receives from the counterparty
variable rate LIBOR. The terms permit quarterly settlements and expires on
November 30, 2000. The swap is not secured by collateral; however, the
Company believes the risk of default by the counterparty is minimal. The
Company does not enter into derivative instruments for speculative
purposes.
-11-
<PAGE> 63
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 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). The Company may repurchase
capital stock distributed from the ESOP to terminated or retired employees
in amounts not to exceed $4,500,000 in a twelve-month period, such
twelve-month period being calculated from the last day of the month in
which such purchase is made. Also, the Company may purchase capital stock
from terminated or retired employees in amounts not to exceed $700,000 in
any fiscal year. To the extent such purchases are less than $700,000, such
difference may be carried over to subsequent years, but any such purchases
may not exceed $1,000,000 in any fiscal year and in no event may such
purchases be made before May 1, 2000. 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, payable monthly or
quarterly, through June 2002. 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:
AMOUNT
(IN THOUSANDS)
2000 $ 414
2001 69
2002 62
2003 188,590
Given the variable nature of the Company's line of credit and considering
comparable agency ratings for similar debt issuances, its carrying value
is a reasonable estimate of its fair value. Based on market quotations,
the fair value of the Company's 11% Series A Senior Notes was $97,750,000
at June 25, 1999 and $101,200,000 at June 27, 1998. The fair value of the
Company's interest rate swap was not material at June 25, 1999.
7. 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
8 and 9. The
-12-
<PAGE> 64
remaining 1,290,000 shares may be issued with rights and preferences as
may be determined by the Board of Directors of the Company.
8. SERIES D INCREASING RATE PREFERRED STOCK
Series D increasing rate preferred stock consists of the following:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
-----------------------
<S> <C> <C>
Series D increasing rate preferred stock, $.01 par value, 210,000
shares authorized, 194,467 shares outstanding in 1999 and
195,022 shares in 1998, net of unamortized discount of
approximately $250,000 and $710,000 in 1999 and 1998, respectively,
$100 per share liquidation preference, aggregating approximately
$19.5 million in 1999 and 1998 $19,200 $18,792
Unpaid dividends on Series D increasing rate redeemable preferred
stock, $242.42 per share in 1999 and $189.54 per share in 1998 47,035 36,959
------- -------
Total $66,235 $55,751
======= =======
</TABLE>
The holders of the shares of Series D preferred stock are entitled to
receive cumulative dividends semiannually at the rate of 17.5% per annum,
increasing on July 1, 1999 to 19%, and on July 1, 2000 to 20.5%. Any
dividend periods for which cash dividends are not paid due to the
restrictions in the debt agreements described in Note 6 will accumulate
and accrue additional dividends (at 17.50% for the year ended June 25,
1999) 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 6.
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.
-13-
<PAGE> 65
Changes in Series D Preferred Stock are as follows:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
<S> <C>
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
Purchase of 555 shares of Series D preferred stock (55)
Dividends on Series D preferred stock 3,342
Amortization of discount on Series D preferred stock 463
Additional dividends on unpaid dividends 6,734
--------
Balance at June 25, 1999 $ 66,235
========
</TABLE>
9. SERIES C ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
--------------------------
<S> <C> <C>
Series C adjustable rate cumulative preferred stock, $.01 par value, 500,000
shares authorized, 462,412 shares outstanding in 1999 and 428,506 in 1998,
$100 per share liquidating preference, aggregating approximately $46,241,000
in 1999 and $42,850,000 in 1998 $ 46,241 $42,850
======== =======
</TABLE>
The ESOP holds all outstanding shares of Series C preferred stock. 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
(15.75% at June 25, 1999) 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 1999, the
Company issued 69,641 shares of Series C preferred stock in payment of
$6,491,000 of dividends and $458,000 of interest on unpaid dividends.
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. 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 the stock redeemed by the Company. The Series C preferred stock is
non-voting.
-14-
<PAGE> 66
Changes in Series C preferred stock are as follows:
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
<S> <C>
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
Issuance of 69,641 shares of Series C preferred stock 6,949
Purchase of 35,585 shares of Series C preferred stock (3,558)
--------
Balance at June 25, 1999 $ 46,241
========
</TABLE>
10. 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>
<CAPTION>
NUMBER OF AMOUNT
SHARES (IN THOUSANDS)
<S> <C> <C>
Balance at June 29, 1996 197,156 $ 2,011
Decrease in appraised 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
Increase in appraised value of common stock 131
Redemption of common stock (12,682) (30)
-------- -------
Balance at June 25, 1999 144,565 $ 463
======== =======
</TABLE>
11. 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.
-15-
<PAGE> 67
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
(IN THOUSANDS)
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 9,908 $ 15,472
Intangible asset 1,242 --
Inventories, principally due to obsolescence reserves and
additional inventories cost for tax purposes pursuant to the
Tax Reform Act of 1986 3,444 1,931
Accounts receivable, principally due to allowance for doubtful
accounts 1,000 311
Accrued warranty 694 419
Accrued employee benefits 1,435 1,190
Alternative minimum tax credit carryforwards 371 371
Other 234 280
-------- --------
Total deferred tax assets 18,328 19,974
Less valuation allowance (17,599) (19,320)
-------- --------
Net deferred tax assets 729 654
Deferred tax liabilities - Facilities, principally due to differences
in depreciation 729 654
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
The components of income (loss) before income taxes and provision for
income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
1999 1998 1997
(IN THOUSANDS)
---------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $(17,429) $ 5,082 $(12,541)
Foreign (300) (303) (541)
-------- ------- --------
Total $(17,729) $ 4,779 $(13,082)
======== ======= ========
Provision for income taxes:
Federal $ 870
State and local 70 $ 113 $ 73
Foreign 18 36 --
-------- ------- --------
Total $ 958 $ 149 $ 73
======== ======= ========
</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:
-16-
<PAGE> 68
<TABLE>
<CAPTION>
JUNE 25, JUNE 27, JUNE 28,
1999 1998 1997
(IN THOUSANDS)
-------------------------------------------
<S> <C> <C> <C>
Tax provision (credit) at statutory rate $(6,205) $ 1,672 $(4,579)
State and local income taxes, net of federal effect 40 96 44
Permanent differences, principally goodwill amortization 903 761 781
Losses (income) for which tax benefit not provided, net
of change in valuation allowance 6,220 (2,380) 3,827
------- ------- -------
Provision for income taxes $ 958 $ 149 $ 73
======= ======= =======
</TABLE>
At June 25, 1999, the Company had unused U.S. net operating loss
carry-forwards of $24,771,000 which expire in the years 2009 through 2013.
No provision was made in 1999 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.
12. 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.
The Company adopted SFAS No. 132, "Employees' Disclosures about Pensions
and Other Postretirement Benefits" on June 28, 1998. Accordingly, all
historical disclosures have been restated to comply with current reporting
formats.
The following table sets forth the change in benefit obligation, change in
plan assets, funded status, Consolidated Balance Sheet presentation, net
periodic pension benefit cost and the relevant assumptions for the
Company's defined benefit pension plans.
-17-
<PAGE> 69
<TABLE>
<CAPTION>
JUNE 25, JUNE 27,
1999 1998
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 11,327 $ 10,286
Service cost 87 86
Interest cost 723 793
Liability (gain)/loss (560) 969
Benefits paid (966) (807)
-------- --------
Benefit obligation at end of year $ 10,611 $ 11,327
======== ========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 11,442 $ 9,150
Employer contributions 99 293
Benefits paid (966) (807)
Investment return 1,859 2,806
-------- --------
Fair value of plan assets at end of year $ 12,434 $ 11,442
======== ========
Funded Status:
Funded status $ 1,823 $ 115
Unrecognized net gain (2,991) (1,292)
Prior service costs not yet recognized 665 749
Unrecognized net transition obligation 117 154
-------- --------
Accrued pension cost $ (386) $ (274)
======== ========
Amounts Recognized in Consolidated Balance Sheets:
Accrued benefit liabilitiy $ (398) $ (381)
Intangible asset 2 94
Accumulated other comprehensive income 10 13
-------- --------
Net amount recognized $ (386) $ (274)
======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net Periodic Pension Benefit Cost:
Service cost $ 87 $ 86 $ 74
Interest cost 723 793 737
Expected return on assets (757) (2,806) (881)
Prior service cost amortization and other 123 2,228 262
----- ------- -----
Net periodic pension cost $ 176 $ 301 $ 192
===== ======= =====
Weighted-average assumptions:
Discount rate 7.00 % 7.00 % 7.50 %
Long-term rate of return on plan assets 8.50 % 8.50 % 8.50 %
Rate of increase in compensation level 3.00 % 3.00 % 3.00 %
</TABLE>
The aggregate benefit obligation for plans with benefit obligations in
excess of plan assets was $71 in 1999 and $8,257 in 1998. The fair value
of plan assets for plans with benefit obligations in excess of plan assets
was $69 in 1999 and $8,110 in 1998.
Plan assets consist primarily of investments in common trust funds of a
bank.
-18-
<PAGE> 70
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.
The Company also sponsors several defined contribution plans.
Contributions of $409,000 were made during 1999. No Company contributions
were made to these plans for the years ending June 27, 1998 and June 28,
1997.
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 25, 1999, June 27, 1998 and June 28, 1997.
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 6),
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 post-retirement 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 post-retirement 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.
During 1999, the Company's Board of Directors approved a deferred
compensation plan for certain members of management under which
compensation accrues based on the attainment of certain profitability and
cash flow targets. During fiscal 1999, the Company accrued approximately
$309,000 under the plan.
13. LEASES
Minimum future rent payments approximating $11.3 million under commitments
for non-cancelable operating leases with initial lease terms greater than
one year as of June 25, 1999, principally for sales and service
facilities, are payable $3.3 million, $2.5 million, $2.3 million, $1.7
million and $.9 million from fiscal 2000 through fiscal 2004,
respectively, and $.6 thereafter.
Rent expense was $7.7 million, $6.5 million and $6.9 million for the years
ended June 25, 1999, June 27, 1998 and June 28, 1997, respectively.
-19-
<PAGE> 71
14. 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 option 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. During fiscal 1999, the Company's
Board of Directors approved a new stock incentive plan (the "1999 Stock
Incentive Plan"). The 1999 Stock Incentive Plan provides for the granting
of options to purchase up to 300,000 shares of $.10 par value common
stock. Options are granted at an exercise price not less than the fair
market price of the common stock at the date of grant. The options become
exercisable after 3 years. Options under the 1999 Stock Option Plan expire
at the end of 10 years from the date of grant.
A summary of the stock option transactions for the years ended June 25,
1999, June 27, 1998 and June 28, 1997 follows:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED
STOCK AVERAGE EXERCISE
OPTIONS PRICE
<S> <C> <C>
Balance at June 29, 1996 65,050 10.00
Granted 6,600 10.00
Canceled/expired (28,800) 10.00
-------
Balance at June 28, 1997 42,850 10.00
Canceled/expired (400) 10.00
-------
Balance at June 27, 1998 42,450 10.00
Granted 249,250 3.90
Canceled/expired (45,900) 10.00
-------
Balance at June 25, 1999 245,800 3.82
=======
</TABLE>
At June 25, 1999, 114,200 shares of common stock are reserved for issuance
under the 1990 Stock Option Plan and 100,000 are reserved for issuance
under the 1999 Stock Incentive Plan.
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 $88,000 for the year ended June 25, 1999 and $13,000
for the years ended June 27, 1998 and June 28, 1997. Net income (loss) per
common share would not have been affected. 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
non-vested awards.
The weighted-average fair value of options granted under the Stock Option
Plan during 1999 and 1997 was $1.13 and $5.66, 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.
-20-
<PAGE> 72
<TABLE>
<CAPTION>
JUNE 25, 1999 JUNE 28, 1997
<S> <C> <C>
Expected volatility 158% 30%
Risk-free interest rate 6.49% 6.58%
Expected term of options 10 years 10 years
Expected dividend yield 0% 0%
</TABLE>
Information regarding options outstanding at June 25, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED
REMAINING
CONTRACTUAL OPTIONS
EXERCISE PRICE NUMBER LIFE EXERCISABLE
<S> <C> <C> <C>
$ 2.40 200,000 10 years 0
$ 10.00 45,800 6.01 years 24,300
</TABLE>
15. SEGMENT INFORMATION, FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
during fiscal 1999. Statement 131 requires companies to report information
about the revenues derived from the enterprise's segments, about the
geographical divisions in which the enterprise earns revenue and holds
assets, and about major customers.
<TABLE>
<CAPTION>
ELECTRONIC PHYSICAL
SECURITY SECURITY CORPORATE
SERVICE SYSTEMS PRODUCTS AND OTHER ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C> <C>
(Amounts in 000's)
1999 Segment Information:
Customer revenue 135,518 85,311 73,374 8,082 (542) 301,743
Operating profit 5,627 2,396 2,213 (2,126) 8,110
Identifiable assets 66,465 46,267 34,147 31,193 178,072
1998 Segment Information:
Customer revenue 104,320 50,466 62,610 10,902 (1,498) 226,800
Operating profit 7,462 2,423 3,928 11,822 25,635
Identifiable assets 40,526 22,225 28,287 15,258 106,296
1997 Segment Information:
Customer revenue 106,880 39,332 54,388 9,326 (1,343) 208,583
Operating profit 4,413 1,312 1,569 (1,526) 5,768
Identifiable assets 39,996 21,934 27,918 17,405 107,253
</TABLE>
The Corporate and Other segment includes international sales, certain
financing and employee benefit costs, and other general corporate income
and expense items. Corporate and Other assets primarily include investment
securities, goodwill and facilities. Operating profit for Corporate and
Other for 1998 includes an $11,889,000 gain related to the termination of
certain post retirement benefits.
-21-
<PAGE> 73
Operations outside the United States accounted for approximately, 3% of
net sales for the year ended June 25, 1999, 5% of net sales for the year
ended June 27, 1998 and approximately 6% of net sales for the year ended
June 28, 1997, respectively. Total assets outside the United States were
approximately 3% of total assets at June 25, 1999 and June 27, 1998 and
approximately 4% of net assets for the year ended June 28, 1997,
respectively.
Sales to United States government agencies and contractors amounted to
approximately 3% of net sales for the year ended June 25, 1999 and 4% of
net sales for each of the years ended June 27, 1998 and June 28, 1997.
16. 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
bonafide 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.
17. SUPPLEMENTAL CASH FLOW DISCLOSURES
During fiscal years 1999, 1998, and 1997, the Company issued shares of
Series C preferred stock in payment of $6,491,000 $6,915,000, and
$5,785,000 in dividends which were accrued on the Series C preferred
stock, and recorded dividends of $3,342,000, $3,328,000, and $2,887,000 on
shares of Series D preferred stock, respectively.
18. 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 had agreed to certain issues and had paid all tax due with respect
to those issues. Two issues remained unresolved, and the IRS has issued a
notice of proposed adjustment 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. On September 8, 1999, the Company settled these
issues with IRS and agreed to pay additional tax of approximately $576,000
plus related interest of approximately $575,000. These amounts have been
accrued as of June 25, 1999.
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.
* * * * * *
-22-
<PAGE> 1
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
Mosler of Indiana LLC Indiana
50
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-25-1999
<CASH> 363,000
<SECURITIES> 3,117,000
<RECEIVABLES> 102,195,000
<ALLOWANCES> 2,566,000
<INVENTORY> 31,754,000
<CURRENT-ASSETS> 2,088,000
<PP&E> 48,187,000
<DEPRECIATION> 32,254,000
<TOTAL-ASSETS> 178,072,000
<CURRENT-LIABILITIES> 84,434,000
<BONDS> 188,172,000
112,476,000
0
<COMMON> 463,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 178,072,000
<SALES> 166,225,000
<TOTAL-REVENUES> 301,743,000
<CGS> 135,891,000
<TOTAL-COSTS> 238,570,000
<OTHER-EXPENSES> 55,603,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,839,000
<INCOME-PRETAX> (17,729,000)
<INCOME-TAX> 958,000
<INCOME-CONTINUING> (18,687,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,983,000)
<EPS-BASIC> (13.87)
<EPS-DILUTED> 0
</TABLE>
