<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 27, 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)
<TABLE>
<S> <C>
DELAWARE 31-1172814
--------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8509 BERK BOULEVARD
HAMILTON, OHIO 45015-2213
------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(513) 870-1900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- ----------
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practical date.
Common Stock, $0.10 Par Value 2,072,790.02 SHARES AS OF MARCH 27, 1999
- ----------------------------- ----------------------------------------
Page 1
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INDEX
<TABLE>
<CAPTION>
FINANCIAL INFORMATION (PART I)
PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED CONDENSED BALANCE SHEETS - MARCH 27, 1999
AND JUNE 27, 1998 3-4
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - THREE MONTHS
ENDED MARCH 27, 1999 AND MARCH 28, 1998 5
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - NINE MONTHS
ENDED MARCH 27, 1999 AND MARCH 28, 1998 6
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS'
DEFICIENCY - NINE MONTHS ENDED MARCH 27, 1999 7
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - NINE MONTHS
ENDED MARCH 27, 1999 AND MARCH 28, 1998 8
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 9-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 14-18
OTHER INFORMATION (PART II)
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
Page 2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOSLER INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Mar. 27, June 27,
1999 1998
========== ==========
(Unaudited) (Derived from
Audited
Financial
Statements)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 428 $ 537
Accounts receivable, net 96,265 56,980
Inventories 36,867 23,183
Other current assets 2,673 1,334
---------- ----------
Total current assets 136,233 82,034
Facilities:
Land and land improvements 854 802
Buildings 6,900 4,739
Machinery and equipment 37,913 32,779
Improvement in progress 2,128 466
---------- ----------
Gross facilities 47,795 38,786
Less accumulated depreciation 31,517 29,919
---------- ----------
Net facilities 16,278 8,867
Other assets:
Service agreements 5,640 9,025
Deferred debt issuance costs 3,689 2,714
Goodwill 12,374 3,039
Other intangible assets 94 94
Sundry 602 523
---------- ----------
Total Other Assets 22,399 15,395
$ 174,910 $ 106,296
========== ==========
</TABLE>
Page 3
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<TABLE>
<CAPTION>
Mar. 27, June 27,
1999 1998
========== ==========
Liabilities, redeemable stock and common (Unaudited) (Derived from
- ---------------------------------------- Audited
stockholders' deficiency Financial
------------------------ Statements)
<S> <C> <C>
Current liabilities:
Accounts payable $ 23,258 $ 16,581
Accrued liabilities:
Compensation & payroll taxes 5,695 5,552
Product warranty 1,684 837
Accrued workers' compensation 5,570 4,488
Accrued interest 3,526 5,832
Other 12,862 5,556
Unearned revenue 27,745 16,894
Income taxes payable 296 284
Long-term debt due within one year 213 1,298
---------- ----------
Total current liabilities 80,849 57,322
Long-term debt due after one year 188,619 132,493
Accrued pension and other benefit liabilities 453 453
Commitments and contingencies
Redeemable stock:
Series D increasing rate preferred stock 63,549 55,751
Series C adjustable rate preferred stock 45,886 42,850
Common stock 362 362
---------- ----------
Total redeemable stock 109,797 98,963
Common stockholders' deficiency:
Common stock 254 254
Accumulated deficit (198,695) (176,970)
Redemption value of common stock held by ESOP (362) (362)
Accumulated other comprehensive loss (1,508) (1,378)
Common stock held in treasury (4,497) (4,479)
---------- ----------
Total common stockholders' deficiency (204,808) (182,935)
---------- ----------
$ 174,910 $ 106,296
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
Page 4
<PAGE> 5
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended
========================
Mar. 27, Mar. 28,
1999 1998
========== ==========
<S> <C> <C>
Net sales:
Service $ 36,126 $ 25,792
Product 39,715 29,756
---------- ----------
75,841 55,548
Cost of sales:
Service 25,253 19,912
Product 33,126 23,477
---------- ----------
58,379 43,389
---------- ----------
Gross profit 17,462 12,159
Selling and administrative expense 14,594 9,755
Other (income) expense 237 (249)
---------- ----------
14,831 9,506
---------- ----------
Operating income 2,631 2,653
Debt expense:
Interest expense (Includes non cash interest on preferred
stock of $1,963 and $830, respectively) 6,722 4,502
Amortization of debt expense 269 146
Interest income (12) 4
---------- ----------
6,979 4,652
Net loss before income taxes and preferred stock charges (4,348) (1,999)
Provision for income taxes 25 3
---------- ----------
Loss before preferred stock charges (4,373) (2,002)
Preferred stock charges (non cash):
Preferred dividends (2,456) (2,858)
Amortization of preferred stock discount (121) (186)
---------- ----------
Net loss applicable to common stockholders ($6,950) ($5,046)
========== ==========
Basic and diluted net loss per common stock ($3.34) ($2.40)
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
Page 5
<PAGE> 6
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Nine months ended
========================
Mar. 27, Mar. 28,
1999 1998
========== ==========
<S> <C> <C>
Net sales:
Service $ 94,990 $ 77,727
Product 117,087 89,632
---------- ----------
212,077 167,359
Cost of sales:
Service 69,924 58,143
Product 96,289 72,151
Plant closing 1,589
---------- ----------
167,802 130,294
---------- ----------
Gross profit 44,275 37,065
Selling and administrative expense 38,688 27,571
Other expense 552 174
---------- ----------
40,829 27,745
---------- ----------
Operating income 5,035 9,320
Debt expense:
Interest expense (Includes non cash interest on preferred
stock of $5,231 and $2,564, respectively) 18,179 13,678
Amortization of debt expense 795 433
Interest income (27) 4
---------- ----------
18,947 14,115
---------- ----------
Loss before income taxes and preferred stock charges (13,912) (4,795)
Provision for income taxes 47 73
---------- ----------
Net loss before preferred stock charges (13,959) (4,868)
Preferred stock charges (non cash):
Preferred dividends (7,424) (7,924)
Amortization of preferred stock discount (342) (558)
---------- ----------
Net loss applicable to common stockholders ($21,725) ($13,350)
========== ==========
Basic and diluted net loss per common stock ($10.45) ($6.35)
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
Page 6
<PAGE> 7
MOSLER INC.
CONSOLIDATED CONDENSED STATEMENT OF COMMON STOCKHOLDERS' DEFICIENCY
NINE MONTHS ENDED MARCH 27, 1999
(Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Redemption
Common Value of Accumulated
Stock Common Other
$.10 Par Accumulated Stock held Comprehensive Treasury
Value Deficit by ESOP Loss Stock Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 27, 1998 $254 ($176,970) ($362) ($1,378) ($4,479) $182,935
Net loss before preferred stock charges (13,959) (13,959)
Amortization of Series D preferred stock discount (342) (342)
Dividends on Series D preferred stock (2,519) (2,519)
Dividends on Series C preferred stock (4,905) (4,905)
Foreign currency translation adjustment (130) (130)
Repurchase of ESOP common shares (18) (18)
----------------------------------------------------------------------------
Balance at March 27, 1999 $254 ($198,695) ($362) ($1,508) ($4,497) $204,808
============================================================================
</TABLE>
See accompanying notes to condensed financial statements.
Page 7
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MOSLER INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
========================
Mar. 27, Mar. 28,
1999 1998
========== ==========
<S> <C> <C>
Net loss $ (13,959) $ (4,868)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 1,871 1,937
Amortization 5,216 4,967
Loss on disposal of facilities (479)
Interest paid in shares of preferred stock 5,231 2,564
Provision for doubtful accounts 4 75
Decrease (increase) in:
Accounts receivable (14,095) (2,728)
Inventories (2,510) 190
Other current assets (1,952) (1,887)
Increase (decrease ) in:
Accounts payable 2,684 (2,873)
Accrued liabilities (1,480) (1,037)
Unearned revenue 3,230 (513)
Income taxes payable 12 4
---------- ----------
Net cash used in operating activities (15,748) (4,648)
Cash flows from investing activities:
Proceeds from sale of property and equipment 607
Purchase of net assets and business of LeFebure (34,000)
Capital expenditures (2,656) (1,076)
Decrease in other assets (97) 858
---------- ----------
Net cash (used in) provided by investing
activities (36,753) 389
Cash flows from financing activities
Purchase of ESOP stock (2,163) (2,008)
Net proceeds from revolving line of credit 56,309 6,997
Principal payment on long-term debt (1,624) (750)
---------- ----------
Net cash provided by financing activities 52,522 4,239
Effect of exchange rate changes on cash (130) (68)
---------- ----------
Net decrease in cash and cash equivalents (109) (88)
Cash and cash equivalents at beginning of period 537 389
---------- ----------
Cash and cash equivalents at end of period $ 428 $ 301
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
Page 8
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FINANCIAL INFORMATION
---------------------
ITEM 1. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
In the opinion of management, the unaudited consolidated condensed
financial statements include all adjustments (which consist of only normal,
recurring accruals) necessary to present fairly the consolidated financial
position as of March 27, 1999, and the results of operations for the three
months and nine months ended March 27, 1999 and March 28, 1998 and the cash
flows for the nine months ended March 27, 1999 and March 28, 1998. In
accordance with generally accepted accounting principles for interim
financial information, these statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete annual financial statements. Financial information
as of June 27, 1998 has been derived from the audited consolidated
financial statements of the Registrant. The results of operations for the
three months and nine months ended March 27, 1999 and March 28, 1998 and
cash flows for the nine months ended March 27, 1999 and March 28, 1998 are
not necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto for the year ended June 27, 1998, included in the
Registrant's Annual Report on Form 10-K.
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 $34 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 $12 million which is being amortized over a period of 15
years. The acquisition agreement also provided for an additional payment of
$1.1 million based on adjusted working capital levels at the date of
acquisition The final allocation of the purchase price of LeFebure will be
determined once all valuations and studies have been completed. LeFebure's
operating results are included in the Company's consolidated statements of
operations beginning on October 9, 1998.
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The unaudited consolidated results of operations for the nine months ended
March 27, 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):
<TABLE>
<CAPTION>
Nine Months Ended
March 27, 1999
--------------
<S> <C>
Net sales $247,426
Net loss (16,851)
Net loss per share (8.11)
</TABLE>
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. INVENTORIES
-----------
The Company's inventories are stated at the lower of cost (determined using
the first-in, first-out method) or market.
The components of inventories are as follows:
<TABLE>
<CAPTION>
March 27, June 27,
1999 1998
---- ----
(in thousands)
--------------
<S> <C> <C>
Finished products and service $35,634 $23,342
Products in Process 1,075 2,031
Raw materials 9,339 2,698
Less Allowance (9,181) (4,888)
------- -------
Total $36,867 $23,183
======= =======
</TABLE>
4. NET LOSS PER COMMON SHARE
-------------------------
Net loss per common share is computed based on the weighted average number
of common shares outstanding for the period after deducting preferred
dividend requirements including amortization of preferred stock discount.
The average number of common shares for the nine-month period of fiscal
1999 is 2,077,780 as compared to 2,100,823 shares for the same period of
fiscal 1998.
SFAS No. 128, "Earnings Per Share," was adopted during the quarter ended
December 26, 1997. The adoption of SFAS No. 128 did not have a material
effect on previously reported per share amounts. Additionally, there is no
difference in the calculation of basic and diluted net loss per common
share.
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5. CONTINGENCIES
-------------
The Internal Revenue Service (IRS) has conducted examinations of the
Company's federal income tax returns for fiscal years 1988 through 1993 and
has proposed various adjustments to increase taxable income. The Company
has agreed to certain adjustments and has previously recorded a provision
for additional income tax and interest in the accompanying consolidated
financial statements. Two issues remain unresolved, and the IRS has issued
deficiency notices on these issues. The issues related to 1) the allocation
of the Company's purchase price of assets from American Standard Inc. and
2) the value of the Company's Series C preferred stock contributed to its
ESOP.
The Company allocated approximately $70 million of the purchase price of
assets from American Standard to intangible assets, which are being
amortized over a period of generally 14 years. The IRS proposes to reduce
this allocation to approximately $45 million and increase the amortization
period to generally 45 years.
In 1990 and 1993, the Company contributed to its ESOP, and claimed a tax
deduction for, shares of Series C preferred stock having a value
aggregating approximately $9.6 million. The IRS proposes to reduce this
value to approximately $7.1 million.
Previously the IRS had informed the Company that if their proposed
adjustments are sustained, the Company would be liable for additional
income taxes of approximately $3.7 million plus interest through 1993.
However the IRS recently informed the Company that the additional income
taxes, for which the Company would be liable, is approximately $4.1
million. The Company would have a future tax liability of approximately
$2.4 million for the same issues carrying forward into, as yet, unaudited
years.
Management believes that it has meritorious defenses to the adjustment
proposed by the IRS and that the ultimate liability, if any, resulting from
this matter will have no material effect on the Company's consolidated
financial position. The significance of this matter on the Company's future
operating results depends on the level of future results of operations as
well as on the timing and amount of the ultimate outcome. On December 9,
1994 and October 6, 1995, the Company filed a protest to the proposed
adjustments of the IRS for the tax years ended June 1988 through June 1993.
An informal initial conference with the Northeast Region office of the
Internal Revenue Service was held on March 6, 1996. As a result of this
meeting, letters were issued on April 10, 1996 and April 29, 1996, from the
Internal Revenue Service Appeal Officer
Page 11
<PAGE> 12
requesting additional information on several issues. On February 10, 1998
the Company met with the Internal Revenue Appeals Officer to provide
additional information to support its position and to attempt to resolve
the matter. No resolution was reached, and subsequent to that meeting the
Company received a Final Deficiency Notice from the IRS. The Company filed
an appeal with the U.S. Tax Court on July 13, 1998 of the statutory Notice
of Deficiency. On April 8, 1999 the Tax Court notified the Company that it
has set a trial date of September 13, 1999. The Tax Court also instructed
the Company and the IRS prosecuting attorney's to initiate settlement
discussions in the hopes of reaching a settlement prior to the court date.
The Company intends to comply with that instruction. The Company maintains
its position that it has a meritorious defense to the adjustment, proposed
by the IRS.
The Company is involved in an audit by the Department of Labor ("DOL") of
its Employee Stock Ownership Plan. On June 23, 1995, the Department of
Labor issued an audit letter claiming the Company's Employee Stock
Ownership Plan engaged in a prohibited transaction. Essentially, the DOL
alleges that Series C Preferred Stock contributed to the Plan was not a
proper investment since it was neither stock nor a qualified equity as
required by ERISA. The Company has responded to the claim and intends to
pursue the matter vigorously as it believes the Series C Preferred Stock is
stock and, therefore, constitutes a proper investment for the Plan.
Various lawsuits and claims arising during the normal course of business
are pending against the Company. In the opinion of management, the ultimate
liability, if any, resulting from these matters will have no significant
effect on the Company's consolidated financial position, results of
operations or cash flows.
6. ACCOUNTING PRONOUNCEMENTS
-------------------------
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" was issued in June 1997 and is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes 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. The Company adopted this standard in the first quarter
of fiscal 1999.
The Company currently records as other comprehensive income the change in
cumulative translation adjustment resulting from changes in exchange rates
and the effect of those changes upon translation of the financial
statements of the Company's foreign operations as well as the change in the
excess of additional
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pension liability over unrecognized prior service cost. Comprehensive net
loss for the first nine months of fiscal 1999 and 1998 was ($14,089,000)
and ($4,936,000), respectively.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. The statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Adoption of this new standard may result in additional financial
statement disclosures.
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits," was issued February 1998 and is effective for
financial statements for periods beginning after December 15, 1997. The
statement suggests combined formats for presentation of pension and other
postretirement benefit disclosure. Adoption of this new standard may result
in additional financial statement disclosure.
Page 13
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MOSLER INC.
ITEM 2
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
Certain statements contained in the following Discussion and Analysis of
Financial Condition and Results of Operations are "Forward-looking statements"
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended. These forward-looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions that such
statements are necessarily based on certain assumptions which are subject to
risks and uncertainties, including, but not limited to, changes in general
economic conditions, increased competition, and the availability of production
capacity which could cause actual results to differ materially from those
indicated herein. Further information or these risk factors in included in the
Company's Annual Report on Form 10-K.
RESULTS OF OPERATIONS:
- ----------------------
THREE MONTHS ENDED MARCH 27, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 28,
- ------------------------------------------------------------------------------
1998
- ----
SALES
- -----
The Company's sales increased during the three months ended March 27, 1999 by
36.5% to $75.8 million from $55.5 million. Service sales increased by 40.1% to
$36.1 million from $25.8 million and product sales increased by 33.4% to $39.7
million from $29.7 for the three months ended March 27, 1999 as compared to the
three months ended March 28, 1998. Electronic Security Systems sales increased
73.2% and Physical Security Systems sales increased by 8.2%. The increases are
mainly attributed to the acquisition of LeFebure in October 1998.
GROSS PROFIT
- ------------
Gross profit for the three months ended March 27, 1999 increased by 43.6% to
$17.5 million from $12.2 million for the same period in the prior year. Gross
profit as a percentage of sales increased to 23.0% from 21.8% for the three
months ended March 27, 1999.
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<PAGE> 15
SELLING AND ADMINISTRATIVE EXPENSE
- ----------------------------------
Selling and administrative expense increased in the three months ended March 27,
1999 by 49.6% to $14.6 million from $9.8 million. The increase is a result of
the purchase of LeFebure. Selling and administrative expense as a percentage of
sales increased to 19.2% from 17.5%.
OPERATING INCOME
- ----------------
The Company's operating income for the three months ended March 27, 1999 of $2.6
million is $.1 million less than for the three months ended March 28, 1998.
Included in operating income were transition costs associated with the
acquisition of LeFebure amounting to $6.0 million.
DEBT EXPENSE
- ------------
Debt expense increased for the three months ended March 27, 1999 by 50.0% to
$7.0 million from $4.7 million for the same period in the prior year. The
increase was due to the interest on the additional debt required to purchase
LeFebure.
NET LOSS
- --------
Net loss before preferred stock charges increased $2.4 million for the three
months ended March 27, 1999 to $4.4 million as compared to a net loss of $2.0
million for the three months ended March 28, 1998.
NINE MONTHS ENDED MARCH 27, 1999 COMPARED TO THE NINE MONTHS ENDED MARCH 28,
- ----------------------------------------------------------------------------
1998.
- -----
SALES
- -----
The Company's sales increased by 26.7% during the nine months ended March 27,
1999 to $212.0 million from $167.4 million for the same period in fiscal 1998.
Service sales increased 22.2% to $95.0 million from $77.7 million. The increase
relates to the acquisition of LeFebure.
Page 15
<PAGE> 16
Product sales increased by 30.6% to $117.1 million for the nine months ended
March 27, 1999 from $89.6 million for the same period in the prior year.
Electronic Security Sales increased by 55.5% in the period. The increase relates
to revenues from the Port Authority project and from a retrofit of currency
handling equipment to meet the new twenty-dollar bill requirements. The
acquisition of LeFebure also contributed to the increased revenues. Physical
Security System sales increased 17.6% during the first nine months of fiscal
1999. The increase is principally attributable to the LeFebure acquisition.
GROSS PROFIT
- ------------
Gross profit increased during the nine months ended March 27, 1999 by 19.4% to
$44.3 million from $37.1 million for the nine months ended March 28, 1998. Gross
profit as a percentage of sales decreased to 20.8% from 22.1%. The decrease
relates to transition costs associated with the LeFebure acquisition.
Additionally, included in gross profit was a one-time charge of $1.6 million
associated with the closing of the Company's Wayne, NJ manufacturing facility,
primarily severance and fixed asset write-offs. The Company will outsource the
manufacturing of certain products produced in Wayne, while the remainder will be
produced in its newly acquired Mexico, MO manufacturing plant. The Wayne
facility was closed during the Company's third quarter of fiscal 1999.
SELLING AND ADMINISTRATIVE EXPENSE
- ----------------------------------
Selling and Administrative expenses increased by 39.6% to $38.7 million from
$27.6 million for the same nine-month period ending March 27, 1999. The increase
relates to the acquisition of LeFebure in October 1998.
OPERATING INCOME
- ----------------
The Company's operating income for the nine months ended March 27, 1999 of $5.0
million is $4.3 million less than the nine months ended March 28, 1998. Included
in operating income was a one-time charge of $1.6 million associated with the
future closing of the Company's Wayne, NJ manufacturing facility. The Company
will outsource the manufacturing of certain products produced in Wayne, while
the remainder will be produced by its newly acquired Mexico, MO manufacturing
plant. The Wayne facility was closed during the Company's third quarter of
fiscal 1999. Also, included in operating income were transition costs associated
with the acquisition of LeFebure amounting to $6.0 million.
DEBT EXPENSE
- ------------
Page 16
<PAGE> 17
Debt expense for the nine months ended March 27, 1999 increased by 34.2 % to
$18.9 million from $14.1 million for the same period of the prior year. The
increase was due to the interest on the additional funds required to purchase
LeFebure.
NET LOSS
- --------
Net loss before preferred stock charges increased by $9.1 million for the nine
months ended March 27, 1999 to $14.0 million from $4.9.
INFLATION
- ---------
The Company believes that its business is affected by inflation to approximately
the same extent as the national economy. Generally, the Company has been able to
offset the inflationary impact of wages and other costs through a combination of
improved productivity, cost reduction programs and price increases. The Company
has had difficulty in effecting significant price increases because of the
discounting practices of its competitors.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As more fully described in Item I, Note 2, the Company on October 9, 1998
acquired substantially all the assets and assumed substantially all the
liabilities of the LeFebure division of De La 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 to provide working capital for
operations. Under the terms of the Financing Agreement, a Credit facility was
established at $85.0 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 2.625% or at the prime lending rate plus 1.625%.
Cash used by operating activities was $15.7 million for the nine months ended
March 27, 1999 as compared to $4.6 million for the same period of fiscal 1998
for an unfavorable change of $11.1 million.
The Company's capital expenditures were $2.7 million for the first nine months
1999 as compared to $1.1 million in the previous year. The Company anticipates
capital expenditure for fiscal 1999 will be approximately $3.5 million. These
amounts do not include the actual assets purchased for LeFebure.
Page 17
<PAGE> 18
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.
YEAR 2000 DISCLOSURE
- --------------------
The Company is substantially complete with the process of conducting a
comprehensive review of its key internal financial, information and operational
systems to identify the systems that could be materially affected by the Year
2000 issue. The Company will be making appropriate modifications and conducting
compliance testing on these systems. The Company believes that with
modifications to, or replacement of, existing systems, the Year 2000 issue will
not pose significant operating problems. The Company will complete all known
modifications or replacements prior to December 31,1999. The total expenditure
for the modification to, or replacement of the existing systems is presently
estimated to be approximately $2.5 million. As of March 27, 1999 the Company
had spent approximately $2.2 million. Although the Company feels its efforts
will be successful, the Company makes no assurances as to the projects ultimate
cost and completion date. As such the Company has developed certain
contingency, plans that will enable the Company to continue to operate. The
plans include, but are not limited to, continued utilization of existing
systems complemented by certain manual approaches.
The Company is currently engaged in assessing the capability of its products to
handle the transition to and operate in the Year 2000. The Company believes that
its current products are Year 2000 compliant. The Company has assessed the
compatibility of products sold in the past and has provided information to it's
customers as to how these products can be made Year 2000 compliant. The Company
does not believe that it is legally responsible for the cost incurred by
customers related to ensuring their Year 2000 compatibility.
The Company is in the process of assessing the readiness of significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. While the Company currently does not anticipate problems related to
third party Year 2000 issues, the Company will continue to assess potential risk
from third parties. However, the Company cannot guarantee that the systems of
other companies will be converted in a timely manner, or that the conversion or
failure to convert systems, would not have an adverse material effect on the
Company.
Page 18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
There was no Form 8-K filed during the three months ended
March 27, 1999.
Page 19
<PAGE> 20
MOSLER INC.
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Mosler Inc.
(Registrant)
Date: May 10, 1999 /s/ Thomas J. Bell
------------------------------------
Thomas J. Bell
Chief Financial Officer
Page 20
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<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-END> MAR-27-1999
<CASH> 428,000
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<RECEIVABLES> 95,964,000
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0
109,435,000
<COMMON> 362,000
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