-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DWO1qH2DCghaXD07DzwbHUWolWkgcEt3O7ZWLr/tUtgl61hHO5m5+1jKgNeImRFB E9anJZ1bucZvdjKdhjpb6w== 0000950152-97-002551.txt : 19970401 0000950152-97-002551.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950152-97-002551 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONARCH MACHINE TOOL CO CENTRAL INDEX KEY: 0000067532 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 344307810 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01997 FILM NUMBER: 97571198 BUSINESS ADDRESS: STREET 1: 615 N OAK ST STREET 2: PO BOX 668 CITY: SIDNEY STATE: OH ZIP: 45365 BUSINESS PHONE: 5134924111 MAIL ADDRESS: STREET 1: 615 N OAK ST STREET 2: PO BOX 668 CITY: SIDNEY STATE: OH ZIP: 45365 10-K 1 MONARCH MACHINE TOOL COMPANY 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File No. 1-1997 THE MONARCH MACHINE TOOL COMPANY An Ohio Corporation Employer Identification No. 34-4307810 615 North Oak Street, Sidney, Ohio 45365 Telephone 937/492-4111 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common shares, without par value New York Stock Exchange, Inc. 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 twelve months, 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. [ ] The aggregate market value of the common shares held by nonaffiliates of the registrant as of the close of business on March 3, 1997 was $29,023,000. The number of common shares outstanding as of March 3, 1997, was 3,744,967. Documents Incorporated By Reference (1) Portions of the registrant's annual report to security holders for the year ended December 31, 1996 (Part II) (2) Portions of the registrant's definitive proxy statement to be filed in connection with the annual meeting of shareholders to be held on May 6, 1997. (Parts I & III) 2 Part I ------ Item 1 - Business - ----------------- The Monarch Machine Tool Company ("Monarch" or the "Company") was incorporated in 1909. Products - -------- The Company operates in three primary industries in which it designs and builds machinery, namely the machine tool, coil processing and paper converting industries. The Company's products are primarily used by manufacturers of industrial equipment and, directly or indirectly, consumer products. All Company products are sold by direct Company salesmen or independent agents throughout the United States and the world. The following is a description of the primary products produced by the Company: Machine Tools - ------------- Turning Machines - A metal cutting turning machine removes metal by engaging a stationary tool on the surface of a rotating part. Monarch manufactures different types of turning machines, including chuckers for short parts, shaft machines for long cylindrical parts, and bar machines for parts cut from bar stock. Both two axis (one cutting tool in the cut) and four axis (two cutting tools in the cut simultaneously) are available in most configurations. The machines are operated by computer numerical control (CNC). Once programs are stored in the control, all of the functions of the machine can be performed without operator assistance. Automatic part loading devices also built by Monarch can be added for further unassisted operation. Monarch also re-manufactures several models of manually operated conventional and CNC lathes. Machining Centers - A machining center is a multifunction machine that removes metal by milling, drilling, boring, or tapping with a rotating tool on a stationary part. Monarch manufactures vertical spindle machining centers in various sizes and configurations. All are computer numerically controlled and have automatic tool changers that change tools in the spindle without operator assistance. Automatic part loading devices have been developed by Monarch that can be added to most models. Coil Processing Machinery - ------------------------- Monarch engineers and manufactures a broad line of metal coil processing machinery. This equipment, generally sold as complete lines, is used by steel and aluminum mills, ferrous and non-ferrous supply centers, and end users of strip material. Monarch coil processing lines perform various operations, such as slitting, tension leveling, shearing, cleaning, forming, coating, galvanizing, annealing, and heat treating. Individual components are also manufactured for the upgrading of existing lines. 3 Part I ------ Item 1 - Business, continued - ---------------------------- Paper Converting Machinery - -------------------------- In 1995, the Company entered a new industry segment with its purchase of certain assets of the paper converting machinery segment of the Depiereux group of companies. The coating and laminating equipment, typically sold in complete lines, is used by paper, plastics and foil converters to further process these materials for use in flexible or medical packaging, pressure sensitives, adhesives products and wall coverings. The lines include continuous roll processing with in-line coating, drying, dry or wet laminating, slitting and rewinding. The coatings and adhesives applied are aqueous solvent, solventless, hot melt and wax. Individual components are also available for upgrading existing installations. Competition - ----------- Monarch actively competes with other machinery manufacturers, both domestic and foreign. The market for coil processing equipment, paper converting machinery and metal cutting machine tools is subject to normal price, service, and quality competition. Foreign machine tool manufacturers (primarily Japanese) continue to make serious inroads into the American market. Customers - --------- Monarch has a broad market base. Virtually all manufacturing plants that perform metal cutting operations are potential customers for Monarch turning machines and machining centers. Producers, suppliers, and users of strip metal generally have application for Monarch coil processing machinery. The Company's paper converting machinery is manufactured for use by potential customers in the packaging industry and many other producers of commercial and consumer products. The loss of any one customer would not have a materially adverse effect upon the Company. Backlog - ------- Monarch's backlog, segregated by industry segment is as follows (in thousands): DECEMBER 31, DECEMBER 31, 1996 1995 ------- ------- Machine Tools $18,914 $13,739 Coil Processing Machinery 41,901 45,879 Paper Converting Machinery -- -- ------- ------- $60,815 $59,618 ======= ======= 4 Part I ------ Item 1 - Business, continued - ---------------------------- The entire 1996 backlog can reasonably be expected to be shipped within twelve months. Seasonal factors are not significant to Monarch. Purchases of Raw Materials and Supplies - --------------------------------------- Monarch manufactures substantially all of the parts of its machines other than numerical controls, large gear boxes, motors, and electrical components. The principal materials purchased are obtained on a competitive basis from many different sources and are readily available. Monarch's numerically controlled machines are designed to be used with controls made by any one of the major control manufacturers that supply Monarch. Patents - ------- Patents, licenses, and franchises are not considered significant to the business. Since 1989, Monarch has had an exclusive agreement with Coremu, S.p.A., Rivanazzano, Italy, to manufacture computer numerically controlled vertical turning and boring machines of their design in the United States and to market them in the United States, Canada, and Mexico. This equipment handles larger diameter work than the horizontal turning machines built by Monarch. Engineering and Development - --------------------------- Monarch's engineering departments, which currently employ 123 persons, are responsible for engineering customer orders, the improvement of existing product lines, and the development of new product lines. Monarch's major product lines have been engineered and developed by Monarch personnel. Refer to the Notes to Consolidated Financial Statements, incorporated into this Form 10K by reference, for the amount of research and development expense in 1996, 1995 and 1994. Employees - --------- Monarch had 707 employees at December 31, 1996. Working Capital - --------------- Because of the long manufacturing time required to manufacture its products, Monarch is normally required to finance a substantial volume of work in process. Domestic and Foreign Operations and Export Sales - ------------------------------------------------ Amounts of revenue, profitability, and identifiable assets attributable to domestic and foreign operations for 1996, 1995, and 1994 are included in Notes to Consolidated Financial Statements incorporated by reference into this Form 10-K. 5 Part I ------ Item 2 - Properties - ------------------- Domestic - -------- Operations in Sidney, Ohio, corporate headquarters of Monarch, are conducted in a plant of 441,000 square feet. Manufacturing operations are also conducted in Cortland, New York, in a plant of 135,000 square feet and in New Bremen, Ohio, in a plant of 180,000 square feet. All facilities are owned by Monarch. Monarch's manufacturing facilities, both real estate and machinery, are in good condition. Foreign Subsidiaries - -------------------- Monarch Werkzeugmaschinen GmbH, in Dueren, Germany, serves as a sales and service headquarters for U.S. machine tools in Europe. The operations were conducted in owned facilities (10,000 square feet) in Hemsbach, Germany. As a result of the Company's decision to consolidate their German operations the Company decided to sell the property and equipment of the Hemsbach, Germany subsidiary as discussed in the Notes to the Consolidated Financial Statements. Stamco (U.K.), Ltd., engineers and sells strip processing machinery that is produced in the United Kingdom and operates from leased general purpose facilities located in Walsall, England. Stamco Depiereux GmbH, engineers and sells strip processing machinery and operates from leased general purpose facilities in Dueren, Germany. Monarch Busch GmbH, engineers and sells paper converting machinery and operates from leased general purpose facilities in Dueren, Germany. All of the facilities are in good condition. Item 3 - Legal Proceedings - -------------------------- In September 1988, the Company and several other potentially responsible parties, ("PRPs"), were ordered by the Environmental Protection Agency, under the Federal "Superfund" legislation to perform a removal action to dispose of waste materials at the Rosen site, a former scrap yard in Cortland, New York. Thereafter, the Company and certain other PRPs agreed to perform a Remedial Investigation, Risk Assessment, and Feasibility Study at the site. The Remedial Investigation, Risk Assessment, and Feasibility Study have now been completed by an engineering firm and submitted to EPA Region II. Six PRPs shared in the cost of the Remedial Investigation, Risk Assessment, and Feasibility Study. In 1992, five of these PRPs, including the Company, sued 15 additional companies and individuals that were considered to be potentially liable to share in the costs of the Remedial Investigation, Risk Assessment, and Feasibility Study and ultimate clean-up of the site. 6 Part I ------ Item 3 - Legal Proceedings, Continued - ------------------------------------- During 1993, it was preliminarily estimated that the minimum remedial efforts could cost from $6,000,000 to $8,500,000. Accordingly, during 1993, the Company accrued an additional $1,600,000 to cover its share of the estimated costs associated with the ultimate resolution of this matter. Because of financial difficulties experienced by one of the PRPs and because the suit against the potential additional PRPs is not settled, the Company computed its share of the estimated costs on the basis of five PRPs. During 1994, the estimated minimum costs of the remedial efforts did not materially change. However, because of the many uncertainties surrounding this issue the Company expensed approximately $300,000 of such costs instead of off-setting it against the accrued liabilities. Accordingly, at December 31, 1994 the Company maintained its accrual at $1,715,000 to absorb future costs associated with this matter. The attorneys for five PRPs have brought on Motions for Summary Judgment against several defendants in order to establish liability for clean-up costs on the part of these defendants. In the case of two of these defendants, the motions have been granted and liability thus established. Additional motions against three defendants have been made and are now pending. It is the opinion of the PRP's attorneys that these motions are also likely to be successful. In the opinion of counsel, this is significant since all defendants against which liability has been established will in all probability be included in the EPA order directing cleanup of the Rosen Site and will thereby be compelled to share in the costs of cleanup. During 1995, the aforementioned Risk Assessment concluded there was little, if any risk to human health at the site. The Feasibility Study concluded that a cap over a portion of the site, an asphalt cover over the remainder of the site, together with continual ground water monitoring would constitute an adequate remedy. During 1995 and 1996, the estimated minimum costs of the remedial efforts did not materially change. If the EPA accepts the recommendations described in the Feasibility Study, capital costs would be incurred in the early part of the remedial efforts and annual operating and maintenance costs primarily associated with ground-water monitoring and sampling would be incurred over a 30 year period. However, the EPA has given no indication that the remedy proposed in the Feasibility Study would be an acceptable one so that the final cost of the approved remedy should be considered highly speculative at this time. The ultimate liability of the Company will vary depending on the actual costs which will be incurred, the resolution of the lawsuit against the potential additional PRPs, the allocation of the costs of remediation among the various PRPs, and the financial viability of the existing PRPs. 7 Part I ------ Item 3 - Legal Proceedings, Continued - --------------------------- In prior years, the Company commenced an action against six insurance carrier's to secure defense and indemnification coverage for matters associated with defense costs and other costs associated with the clean up of the Rosen Site. In October 1995, the parties agreed to a settlement in which six of the insurance carriers, later amended to five, agreed to make a combined payment of $350,000 to the Company in exchange for a full site release. The Company is a defendant in various legal actions, primarily product liability claims, arising in the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from these matters will not have a material effect on the Company's consolidated financial position. The significance of these matters on the Company's future operating results will depend on the Company's level of future earnings as well as the timing and the amount of the ultimate disposition of these matters above the amounts covered by insurance. Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5 - Market for the Registrant's Common Equity and Related Shareholders - --------------------------------------------------------------------------- Matters - ------- The information required by this Item 5 is set forth under the heading "Selected Financial Data" on page 7 of the Annual Report. Such information is incorporated herein by this reference. Item 6 - Selected Financial Data - -------------------------------- The information required by Item 6 is set forth under the heading "Selected Financial Data" on page 7 of the Annual Report and is incorporated herein by this reference. Item 7 - Management's Discussion and Analysis of Financial Conditions and - ------------------------------------------------------------------------- Results of Operations - --------------------- The information required by this Item 7 is set forth under the heading "Management's Discussion and Analysis" on pages 4 through 6 of the Annual Report and is incorporated herein by this reference. 8 PART II Item 8 - Financial Statements and Supplementary Data - ---------------------------------------------------- The information required by this Item 8 is set forth on pages 8 through 18 of the Annual Report and is incorporated herein by this reference. Item 9 - Changes in and Disagreements with Accountants on Accounting - -------------------------------------------------------------------- and Financial Disclosure - ------------------------ None PART III -------- Item 10 - Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Executive Officers of the Registrant - ------------------------------------- The names and ages of all officers, all of whom are appointed for a term of one year and, except as noted, have been officers and employees of the registrant for the last five years, are as follows:
OFFICE NAME AGE - ------ ---- --- President Richard E. Clemens 47 President, Coil Processing and Robert J. Kindt 51 Paper Converting Vice President Robert A. Skodzinsky 52 Vice President, Domestic Coil Paul J. Maloney 59 Processing Treasurer Robert B. Riethman 49 Secretary Earl J. Hull 63
Mr. Clemens became President and Chief Executive Officer of Monarch on March 10, 1997. He was previously the Vice President and General Manager of the Frick Company, a manufacturer of compressors, heat exchangers, and process refrigeration equipment (a subsidiary of York International) from July 1995 to February 1997. Prior to working for the Frick Company, he was the President and Chief Executive Officer of Clark Material Handling Company, a manufacturer of lift trucks, from March 1994 to July 1995. Before working for Clark Material Handling Company, he was working for BMY Combat Systems, a division of Harsco Corporation as President from 1992 to 1994 and held various other management positions with the division from July 1985 to 1992. Mr. Kindt became President of the Coil Processing and Paper Converting Industry segments in November 1995 and was previously Vice President of The Monarch Machine Tool Company since March 1990. He was previously employed at Natco Incorporated as Vice President of Operations and Vice President/General Manager Plastics Group from August 1985 to February 1990. Prior to working for Natco Incorporated, he was employed at Lodge and Shipley as Vice President of Manufacturing from June 1984 to August 1985 and was Plant Manager from 1980 to June 1984. 9 PART III -------- Item 10 - Directors and Executive Officers of the Registrant, Continued - ----------------------------------------------------------------------- Executive Officers of the Registrant, Continued - ------------------------------------ Mr. Skodzinsky became Vice President of The Monarch Machine Tool Company in February 1995. He had been General Manager of the Monarch Cortland division since December 1994 and prior to that date was the Director of Marketing at the division. He was previously employed at Hunt Valve Company as President and Chief Operating Officer from November 1991 to August 1993. Prior to working for Hunt Valve Company has was employed at Industrial General Corporation as Vice President of operations from June 1982 to November 1991. Before working for Industrial General Corporation he was employed at The Warner and Swasey Company as Vice President of Manufacturing from October 1977 to June 1982. Mr. Maloney became Vice President of The Monarch Machine Tool Company in November 1995. He had been the Sales and Marketing manager for the Monarch Stamco division since July 1991. He was previously employed at the Ferguson division of Crane Corporation as Vice President of Sales from September 1989 to January 1991. Prior to working for Ferguson he was employed by Process Equipment Company as Sales Manager from September 1987 to September 1989. Before working for Process Equipment Company he was employed at National Machinery Company in various positions including Sales Engineer and Sales Manager from December 1962 to August 1987. Mr. Riethman has been Treasurer of the Company for more than five years. Mr. Hull has been Secretary of the Company for more than five years. Additional information required by this Item 10 is incorporated herein by reference from the Proxy Statement. Item 11 - Executive Compensation - -------------------------------- The information required by this Item 11 is set forth in the Proxy Statement and is incorporated herein by this reference. Item 12 - Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information required by this Item 12 is set forth in the Proxy Statement and is incorporated herein by this reference. Item 13 - Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this Item 13 is set forth to the extent applicable in the Proxy Statement and is incorporated herein by this reference. 10 PART IV -------
Item l4 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) List of Documents filed as part of this Report (1) Financial Statements: Report of Independent Accountants * Consolidated Balance Sheets, December 31, 1996 and 1995 * Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 * Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 * Notes to Consolidated Financial Statements * * Incorporated herein by reference from the appropriate portions of the Registrant's Annual Report to security holders for the year ended December 31, 1996 (2) Financial Statement Schedules: Report of Independent Accountants Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above are omitted for the reason that they are not applicable, or are not required. (3) Exhibits: See Index of Exhibits (b) No reports on Form 8-K have been filed during the last quarter of 1996. (c) See Index of Exhibits for location of filed exhibits (d) No other financial statements, other than those mentioned above, are required to be filed to comply with Regulation S-X.
11 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. THE MONARCH MACHINE TOOL COMPANY By /s/ Richard E. Clemens ----------------------------------------------- March 21, 1997 RICHARD E. CLEMENS Director, 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 Monarch Machine Tool Company and in the capacities and on the dates indicated: By /s/ Richard E. Clemens ----------------------------------------------- March 21, 1997 RICHARD E. CLEMENS Director, President and Chief Executive Officer By /s/ Robert B. Riethman ----------------------------------------------- March 21, 1997 ROBERT B. RIETHMAN Treasurer (Principal Financial and Accounting Officer By /s/ William A. Enouen ----------------------------------------------- March 21, 1997 WILLIAM A. ENOUEN Director By /s/ Waldemar M. Goulet ----------------------------------------------- March 21, 1997 WALDEMAR M. GOULET Director By /s/ David E. Lundeen ----------------------------------------------- March 21, 1997 DAVID E. LUNDEEN Director By /s/ Joseph M. Rigot ----------------------------------------------- March 21, 1997 JOSEPH M. RIGOT Director 12 By ----------------------------------------------- March 21, 1997 JOHN A. BERTRAND Director By ----------------------------------------------- March 21, 1997 KENNETH H. HOPKINS Director By ----------------------------------------------- March 21, 1997 JOHN M. RICHARDSON Director By ----------------------------------------------- March 21, 1997 JOHN R. TORLEY Director 13 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Monarch Machine Tool Company Our report on the consolidated financial statements of The Monarch Machine Tool Company and Subsidiaries has been incorporated by reference in this Form 10-K from page 19 of the 1996 Annual Report to Shareholders of The Monarch Machine Tool Company and Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Dayton, Ohio February 11, 1997 14 THE MONARCH MACHINE TOOL COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E -------------- -------------- ------------- ------------- ------------- ADDITIONS --------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD --------------- --------------- -------------- -------------- Year ended December 31, 1996: Allowance for doubtful trade accounts receivable $ 150 $ 463 $ (144)(a) $ 469 Inventory reserves 4,085 9,690 (259)(b) 13,516 --------------- --------------- -------------- -------------- Total $ 4,235 $ 10,153 $ (403) $ 13,985 =============== =============== ============== ============== Year ended December 31, 1995: Allowance for doubtful trade accounts receivable $ 313 $ 44 $ (207)(a) 150 Inventory reserves 3,727 757 (399)(b) 4,085 --------------- --------------- -------------- -------------- Total $ 4,040 $ 801 $ (606) $ 4,235 =============== =============== ============== ============== Year ended December 31, 1994: Allowance for doubtful trade accounts receivable $ 543 $ 140 (370)(a) 313 Inventory reserves 3,553 748 (574)(b) 3,727 --------------- --------------- -------------- -------------- Total $ 4,096 $ 888 $ (944) $ 4,040 =============== =============== ============== ==============
(a) Write-offs/Collections (b) Disposals/Sales 15 INDEX OF EXHIBITS (FILED WITH THE COMMISSION AND THE NEW YORK STOCK EXCHANGE)
"Assigned" Exhibit Number * DESCRIPTION - --------------- ----------- 3 Articles of Incorporation and Regulations ** 10 Material Contracts 10.1 1994 Employees Stock Option Plan + 10.2 Letter Agreement, dated February 13, 1997, between The Monarch Machine Tool Company and Richard E. Clemens + 10.3 Letter Agreement, dated May 7, 1996 between The Monarch Machine Tool Company and Robert J. Siewert + 11 Statement Re: Computation of Income (Loss) Per Share + 13 Annual Report to Security Holders for the fiscal year ended *** December 31, 1996 21 Subsidiaries of the Registrant + 23 Consent of Independent Accountants + 27 Financial Data Schedule +
+ Indicates Exhibit is being filed with this report * Exhibits 2, 4, 9, 12, 16, 18, 22, 24, 28, and 29 are either inapplicable to the Company or require no answer. ** Incorporated by reference to the Exhibits with the same number filed with the Company's Form 10-K for the year ended December 31, 1980. *** This Report, except for the portions incorporated by reference herein, is furnished for the information of the Commission and is not deemed "filed" as part of this Annual Report. EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 THE MONARCH MACHINE TOOL COMPANY 1994 EMPLOYEES STOCK OPTION PLAN Plan Adopted by the Board of Directors on February 1, 1994 Program Approved by the Shareholders on May 3, 1994 (As Amended through December 31, 1996) 1. PURPOSE. This 1994 Employees Stock Option Plan (the "Plan") is designed to promote the interest of the Company by enabling the Company, by grant of options to purchase Common Shares of the Company, to retain and attract key employees for the Company and its affiliates, and to provide additional incentive to those employees through increased stock ownership in the Company. Options granted under the Plan may be (a) incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, as now in effect or as further amended (the "Code"), (b) non-qualified stock options (all options other than incentive stock options), and (c) any combination of incentive and non-qualified stock options; except that no incentive stock options may be granted under the Plan more than ten years from the date the Plan was adopted. The term "affiliates" where used in the Plan means subsidiary corporations as defined in Section 424(a) of the Code. 2. ADMINISTRATION. The Plan shall be administered by a committee of not less than three directors of the Company to be appointed by and to serve during the pleasure of, the Board of Directors of the Company (the "Committee"). Each member of the Committee shall be a non-employee director within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934." The Committee shall have full power and authority to construe and interpret the provisions and to supervise the administration of the Plan, and to grant options under the Plan. The Committee shall determine, at the time options are granted, whether the options are incentive stock options, non-qualified stock options, or a combination. All decisions and designations made by the Committee pursuant to the provisions of the Plan shall be made by a majority of its members. 3. EMPLOYEES WHO MAY PARTICIPATE IN THE PLAN. Employees to whom options are granted shall be designated, from time to time, by the Committee. An option may be granted to any full-time salaried key employee of the Company or of an affiliate, including any director or officer who is a key employee. An employee may hold more than one option. No employee may, however, be granted incentive stock options under all plans of the Company and its affiliates that become exercisable for the first time by the employee during any calendar year for shares that exceed an aggregate fair market value (determined on the date of grant) of $100,000. 4. SHARES SUBJECT TO THE PLAN. The aggregate number of Common Shares that may be delivered upon the exercise of all options granted under the Plan may not exceed 2 100,000, subject, however, to adjustment as provided in Section 12. The Common Shares to be issued under the Plan shall be the Company's authorized Common Shares and may be unissued shares or treasury shares as the Committee, with the concurrence of the Board of Directors, may from time to time determine. To the extent the Company reacquires Common Shares for those purposes, shares may be reacquired at the time options are exercised, or from time to time in advance, whenever the Board of Directors may deem the purchase advisable. If an option is surrendered or for any other reason ceases to be exercisable in whole or in part, the Common Shares that are subject to the option, but as to which the option has not been exercised, shall again become available for offering under the Plan, subject to the limitations contained in the first sentence of this Section 4. 5. OPTION PRICE. The option price under each option shall be determined by the Committee or by the Board of Directors. In the case of incentive stock options, the option price shall be not less than 100% of the fair market value of the Common Shares subject to the option on the date the option is granted, except that, if the Optionee owns, at the time the option is granted, shares possessing more than 10% of the total combined voting power of all classes of stock of the Company or of an affiliate, the option price shall be not less than 110% of the fair market value of the shares on the date the option is granted. Likewise, in the case of non-qualified stock options, the option price shall be not less than 100% of the fair market value of the shares on the date the option is granted. For purposes of the Plan, "fair market value" of shares on any date shall be the mean between the high and low sale prices of the shares as reported for New York Stock Exchange - Composite Transactions on that date or, if no shares are traded on that date, the next preceding date on which trading occurred. In the event the shares cease to be traded on the New York Stock Exchange, the "fair market value" of the shares shall be as determined by the Committee or by the Board of Directors. In no event, however, may previously unissued shares by issued at a price less than that permitted be the Ohio General Corporation Law. 6. NOTICE OF GRANT OF OPTION. Promptly after the Committee grants any option to an employee, the Committee shall cause the employee to be notified of the fact that the option has been granted, that the option is an incentive stock option, a non-qualified stock option, or a combination of the two types, and of the terms of the option. The date on which the Committee approves the grant of an option shall be considered to be the date on which the option is granted. 7. EXERCISE OF OPTIONS. No option granted under the Plan may be exercised prior to the completion of one year of continuous employment with the Company or an affiliate after the date of grant, unless an option is accelerated as provided in Section 9(b), and under no circumstances later than the expiration date of the option. An option may be exercised only while the optionee is in the employ of the Company or an affiliate, except as otherwise provided in Section 8 or as may be permitted by the terms and provisions of substitute options granted under Section 13. An option shall become exercisable at such time or times, wholly or in such installments, as the Committee may determine at the time the option is granted. No fraction of a share may be purchased upon exercise of an option. The Committee may determine at the time -2- 3 the option is granted that an incentive stock option or any incentive stock option installment(s) shall not be exercisable while there is outstanding any incentive stock option or incentive stock option installment(s) previously granted to the employee by the Company or by a parent, subsidiary, or predecessor corporation. An option or option installment shall be treated as outstanding for this purpose until the option or option installment is exercised in full or expires by reason of the lapse of time. 8. EXERCISE OF OPTIONS AFTER TERMINATION OF EMPLOYMENT. No option may be exercised at any time after termination of the optionee's employment for any cause, except in the following situations: (a) If the termination of employment is due to retirement under the applicable retirement plan or policy of the Company or an affiliate, the optionee shall have the right within the period of three months next following the date of termination of employment, but not beyond the termination of the option as provided in Section 9(a), to purchase all or any part of the Common Shares that he would have been entitled to purchase if he had exercised his option on the date of termination of employment. (b) Upon the termination of employment of an optionee due to permanent and total disability, or upon the death of an optionee while in the employ of the Company or a subsidiary or within the three-month period referred to in paragraphs (a) and (c) of this Section 8, the optionee or the optionee's estate, personal representative, or beneficiary shall have the right to exercise the option in whole or in part within one year after the date of termination of employment or the optionee's death, but not beyond the termination of the option as provided in Section 9(a). (c) If, in the case of a non-qualified stock option, the termination of employment is due to any reason other than the optionee's retirement as specified in (a) above or the optionee's permanent and total disability or death as specified in (b) above, the optionee may, provided the Committee or the Board of Directors consents, exercise the option in whole or in part within the period of three months after the date of termination of employment, but not beyond the termination of the option as provided in Section 9(a). 9. Termination of Options. (a) An option granted under the Plan shall terminate, and the right of the optionee (or his estate, personal representative, or beneficiary) to purchase shares upon exercise of the option shall expire, on the date determined by the Committee at the time the option is granted. No option, however, may have a life of more than ten years after the date on which it is granted, and, in the case of an optionee who owns, at the time the option is granted, stock possessing more than 10% of the total combined voting power of -3- 4 all classes of stock of the Company or a subsidiary, no incentive stock option may have a life of more than five years after the date on which it is granted. (b) In the event of a proposed lease, sale, or other disposition of all or substantially all of the assets of the Company to other corporations, firms, or individuals or of a proposed merger, consolidation, combination [as defined in Section 1701.01(Q) of the Ohio Revised Code], or majority share acquisition [as defined in Section 1701.01(R) of the Ohio Revised Code] involving the Company and as a result of which the holders of shares of the Company prior to the transaction would become, by reason of the transaction, the holders of such number of shares of the surviving or acquiring corporation as entitle them to exercise less than one-third of the voting power of the surviving or acquiring corporation in the election of directors, the Board of Directors of the Company may accelerate the date on which any outstanding option or any portion of an outstanding option becomes exercisable. If the Board of Directors so accelerates the date, (i) the Board of Directors shall give the optionee written notice of the acceleration and the reasons therefor; (ii) the optionee may, not more than ten days prior to the anticipated effective date of the proposed transaction, exercise the option to purchase any or all shares then subject to the option; (iii) any such exercise shall be conditioned upon the consummation of the transaction and shall become effective immediately prior to the consummation date, in which event the employee need not make payment for the shares to be purchased upon exercise of the option until five days after written notice by the Company to the employee that the transaction has been consummated; (iv), if the proposed transaction is consummated, each option, to the extent not previously exercised prior to the date specified in the foregoing notice, shall terminate on the effective date of the consummation; and (v), if the proposed transaction is abandoned, the shares then subject to the option shall continue to be available for purchase in accordance with the other provisions of the Plan, and any acceleration of the date on which any outstanding option, or part thereof, becomes exercisable shall be deemed to have been rescinded. In addition to the foregoing, the Committee may authorize the purchase, from the optionee, of stock options previously granted to any person who, at the time of the transaction, is a director or officer of the Company for a price equal to the difference between the consideration per share payable pursuant to the terms of the transaction and the option price. 10. NOTICE OF EXERCISE; PAYMENT FOR COMMON SHARES. No certificate for Common Shares purchased upon exercise of an option shall be delivered until full payment of the purchase price for the Common Shares has been made. An employee to whom an option has been granted shall have none of the rights of a shareholder with respect to the Common Shares subject thereto until the option is exercised by delivery of written notice of exercise to the Company. Following exercise of the option, the employee shall have all of the rights of a shareholder with respect to the Common Shares purchased upon the exercise, except that he shall not have the right to vote the shares or to receive dividends with respect to the shares until payment for the shares has been made in full. Payment of the option price may, at the election of -4- 5 the optionee, be made in cash, by delivery of shares of the Company's Common Shares (taken at their fair market value as defined in Section 5) on the date of exercise, by (in the case of non-qualified stock options) the surrender of all or part of the shares for which the option is being exercised, or partly in cash and partly in shares, unless the Committee determines at the time of grant (in the case of incentive stock options) that payment may be made only in cash. 11. ASSIGNABILITY. Except as otherwise provided in Section 8(b), an option granted under this Plan shall not be transferable and may be exercised only by the employee to whom granted. Each employee to whom an option is granted, by accepting the option, agrees with the Company that, in the event the Company merges into, consolidates with, or sells or otherwise transfers all or a substantial part of its assets to another corporation, he will consent to the assumption of the option, or accept a new option in substitution, if the Committee or the Board of Directors requests him to do so and the option is not otherwise terminated in accordance with the provisions of Section 9(b). 12. ADJUSTMENTS UPON CHANGES IN SHARES. In the event of any change in the Common Shares subject to the Plan or to any option granted under the Plan by reason of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split-up, combination, or exchange of shares, or other change in the corporate structure of the Company, the aggregate number of shares as to which options may thereafter be granted under the Plan, the number of shares subject to each outstanding option, and the option price with respect to the shares shall be appropriately adjusted by the Board of Directors. 13. SUBSTITUTE OPTIONS. The Board of Directors may grant options in substitution for, or upon the assumption of, options granted by another corporation that is merged into, consolidated with, or all or a substantial part of the assets or stock of which is acquired by the Company or a subsidiary. Subject to the limit in Section 4 on the number of shares that may be delivered upon the exercise of options granted under the Plan, the terms and provisions of any options granted under this Section 13 may vary from the terms and provisions otherwise specified in the Plan and may, instead, correspond to the terms and provisions of the options granted by the other corporation. 14. PURCHASE FOR INVESTMENT. Each employee exercising an option may be required by the Company, in its sole discretion, to give a representation that he is acquiring the shares other than with a view to their distribution. The Company may release any investment representation obtained if it subsequently determines that the representation is no longer required to insure that a sale or other disposition of the shares would not involve a violation of the provisions of the Securities Act of 1933, as amended, or of applicable state blue sky laws. 15. COMPLIANCE WITH SECURITIES LAWS AND EXCHANGE REQUIREMENTS. No certificate for shares shall be delivered upon exercise of an option until the Company shall have taken such action, if any, as is then required to comply with the provisions of the Securities Act of 1933, as amended, of the Securities Exchange Act of 1934, as amended, of the Ohio Securities -5- 6 Act, as amended, and of any other applicable state blue sky laws, and with the requirements of any exchange on which the Common Shares may, at the time, be listed. 16. TAXES ASSOCIATED WITH THE EXERCISE OF OPTIONS. On the exercise of an option, the Company may withhold, or require the optionee to remit to the Company, an amount sufficient to pay any federal, state, and local withholding taxes associated with the exercise of the option. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit an optionee to pay any or all withholding taxes associated with the exercise of a non-qualified stock option in cash, by the transfer of Common Shares, by the surrender of all or part of the shares for which the option is being exercised, or by a combination of cash and shares. The Committee may permit an optionee to pay any or all withholding taxes associated with the exercise of an incentive stock option in cash, by the transfer of Common Shares, or by a combination of cash and shares. 17. EFFECTIVE DATE, DURATION, AND TERMINATION OF THE PLAN. The Board of Directors may suspend or terminate the Plan at any time. The Plan shall become effective on the date the stock option program described in the Plan is approved by the Company's shareholders and shall remain in effect until terminated by the Board of Directors. Except as provided in Section 19, termination of the Plan shall not affect options granted prior thereto. 18. AMENDMENT OF THE PLAN. The Board of Directors may alter or amend the Plan from time to time prior to its termination, except that, without shareholder approval, no amendment may increase the aggregate number of shares with respect to which options may be granted (except in accordance with the provisions of Section 12), reduce the option price at which options may be exercised (except in accordance with Section 12), extend the time within which options may be granted or exercised, or change the requirements relating to eligibility or to administration of the Plan. Except for adjustments made in accordance with the provisions of Section 12, the Board of Directors may not, without the consent of the holder of the option, alter or impair any option previously granted under the Plan. 19. SHAREHOLDER APPROVAL. Approval of the stock option program described in the Plan must be obtained no later than May 31, 1994, by the affirmative vote of the holders of shares of the Company entitling them to exercise at least a majority of the voting power on the approval. Options may be granted prior to approval of the Plan by shareholders, but no option may be exercised until after the Plan has been approved by shareholders. -6- EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 February 13, 1997 Richard E. Clemens 3288 Muirfield Drive Chambersburg, PA 17201 Dear Rick: The Board of Directors of The Monarch Machine Tool Company (the "Company") is pleased to offer you the position as President and Chief Executive Officer of the Company. This letter, when signed by you below, will constitute the agreement between the Company and you concerning your terms of employment with the Company. The terms of your employment with the Company are as follows: A. POSITION AND OFFICES. You will be employed as the President and Chief Executive Officer of the Company and be appointed to the Board of Directors of the Company for an initial term expiring at the Company's Annual Meeting of Shareholders in 1998. B. BASE ANNUAL SALARY. Your base annual salary through February 28, 1998 is $215,000, payable in accordance with the Company's normal payment schedule for executive officers. The Compensation Committee of the Board will review your base annual salary in February 1998 for the purpose of considering whether an increase, commencing March 1, 1998 is appropriate. C. ANNUAL INCENTIVE BONUS. The Company will pay you a guaranteed cash bonus of $100,000 in March 1998. In connection with your annual salary review in February 1998, the Compensation Committee will establish an annual incentive cash bonus arrangement for you. D. STOCK OPTIONS. The Compensation Committee will grant you nonqualified stock options to purchase a total of 75,000 Common Shares of the Company at an option exercise price equal to the average of the high and low prices of the Common Shares on 2 Richard E. Clemens February 13, 1997 Page 2 the New York Stock Exchange for the last business day immediately preceding the date you sign this letter agreement. Such options would become exercisable as follows: 1. Options to purchase 25,000 shares become exercisable on the day immediately following any consecutive 10-day trading period during which the closing price of the Common Shares on each trading day during the period was $15 per share or more; 2. Options to purchase an additional 25,000 shares become exercisable on the day immediately following any consecutive 10-day trading period during which the closing price of the Common Shares on each trading day during the period was $18 per share or more; and 3. Options to purchase an additional 25,000 shares become exercisable on the day immediately following any consecutive 10-day trading period during which the closing price of the Common Shares on each trading day during the period was $20 per share or more. In addition, on March 1, 2003 or the date there is a Change of Control of the Company (as defined below), any of such options that were not then exercisable would automatically become exercisable. The options, if not previously exercised, would expire the earlier of 30 days after your cessation of employment with the Company or 10 years after the date of grant. The option price, as well as any income taxes associated with the exercise of the option, would be payable in cash or by delivery of any unrestricted Common Shares of the Company owned by you at the time of exercise. In future years, you would be eligible for grants of options under the Company's 1994 Employees Stock Option Plan. "Change of Control" means the lease, sale, or other disposition of all or substantially all of the assets of the Company to other corporations, firms, or individuals or of a merger, consolidation, combination [as defined in Section 3 Richard E. Clemens February 13, 1997 Page 3 1701.01(Q) of the Ohio Revised Code], or majority share acquisition [as defined in Section 1701.01(R) of the Ohio Revised Code] involving the Company and as a result of which the holders of shares of the Company prior to the transaction would become, by reason of the transaction, the holders of such number of shares of the surviving or acquiring corporation as entitle them to exercise less than one-third of the voting power of the surviving or acquiring corporation in the election of directors. E. RESTRICTED SHARES. You would also be issued, on the same date you are granted options, 17,000 Common Shares of the Company as a "restricted share award." Such shares would vest as follows: 8,500 shares on March 1, 1998 if you were employed by the Company on such date and an additional 8,500 shares on March 1, 1999 if you are employed by the Company on such date. F. RETIREMENT PLAN. If you are employed by the Company on March 1, 1998, the Company will establish an arrangement under which you would receive an additional five years of credited service for the purpose of calculating any retirement benefit payable to you under the Company's Retirement Plan applicable to executive officers. G. RELOCATION ARRANGEMENTS. In connection with your relocation to Ohio, the Company would provide the following: 1. A normal and customary allowance to cover your moving expenses; and 2. The Company would make available to you a loan equal to the mortgage on your present residence. The loan would bear interest at a rate equal to the Company's cost of funds under its Credit Agreement with First Chicago NBD, which is currently approximately 6.5% per annum. The loan would be repayable in full, together with accrued interest, on the earlier of the sale of your present residence or March 1, 1998. 4 Richard E. Clemens February 13, 1997 Page 4 H. HEALTH AND LIFE INSURANCE. Officers of the Company are provided health insurance coverage at no cost and life insurance, which, in your case, would be approximately $300,000. The Company will review the possibility of purchasing additional insurance on your behalf, up to three times your base annual salary. If you have any questions concerning any of the foregoing, please feel free to review the matter with me. The Board of Directors is enthused about you joining the Company, and while there will be challenges, they are confident that there are significant opportunities to improve significantly the Company's performance and to enhance shareholder value. Very truly yours, The Monarch Machine Tool Company /s/ David E. Lundeen - ------------------------------ David E. Lundeen Acting President and CEO ACCEPTED AND AGREED TO: - ----------------------- /s/Richard E. Clemens Dated: February 14, 1997 - ----------------------- Richard E. Clemens cc: William A. Enouen Joseph M. Rigot EX-10.3 4 EXHIBIT 10.3 1 EXHIBIT 10.3 May 7, 1996 Mr. Robert J. Siewert 3233 Deerpath Way Sidney, OH 45365 Dear Bob: This letter confirms that you ceased to be President, Chief Executive Officer and a Director of The Monarch Machine Tool Company (the "Company") effective at the beginning of business on May 13, 1996. This letter also constitutes the entire agreement (the "Agreement") between you and the Company concerning your change in status with the Company. In consideration of your agreements stated herein and for so long as you adhere to your commitments in this Agreement, the Company will provide the following: A. SALARY THROUGH MAY 22, 1998 --------------------------- (1) SALARY. You will continue as a employee of the Company until the close of business on Friday, May 22, 1998 ("Termination Date"). Your salary will be continued at a rate of $16,670 per month, payable monthly, until April 30, 1997; for the period from May 1, 1997 until your last day of employment on May 22, 1998, your salary will be at a rate of $6,335 per month, payable monthly. B. BENEFITS -------- (1) GROUP HEALTH INSURANCE. Until your Termination Date, the Company will, at its expense, continue your and your spouse's participation in The Monarch Machine Tool Company Medical Benefits Plan (the "Health Plan"). After your Termination Date, the Company will continue coverage under the Health Plan in accordance with the provisions of the Health Plan relating to retired officers. (2) BASIC LIFE INSURANCE. The Company will continue to provide you a life insurance benefit under the Company's plan for officers until your Termination Date. After your Termination Date, you will be treated as a retired officer under the plan. (3) QUALIFIED PENSION PLAN FOR SALARIED EMPLOYEES. As an employee of the Company, you will continue to accrue service under the Qualified Pension Plan until your Termination Date. After your Termination Date and when you commence pay status under the Pension Plan, the Company will pay you for a ten-year period certain an additional monthly amount so that your monthly retirement benefit during such ten-year period is not actuarially reduced because you went into pay status under the Pension Plan prior to reaching age 65. 2 Mr. Robert J. Siewert May 7, 1996 Page -2- C. FURTHER AGREEMENTS ------------------ In consideration of the foregoing, you agree to the following: (1) Your employment with the Company shall cease at the close of business on May 22, 1998. This Agreement evidences your resignation, effective May 13, 1996, as an officer and director of the Company and as of an officer or director of any of its subsidiaries. You further agree that unless David E. Lundeen otherwise agrees, (a) you shall immediately cease using any Company property, including Company offices, computer equipment and software, credit cards and secretarial services and you will not seek access to any Company facilities and (b) you shall promptly return to the possession of the Company all property of the Company in your control or possession, including but not limited to, security passes, keys, computer equipment and software, accounting records, customer and supplier information, business plans, drawings, designs, and any other documents relating to the Company and its business which you obtained as a result of employment with the Company and any copies of any of the foregoing. (2) You agree that until your Termination Date, you will consult and advise the Company on any matters related to the Company's business, including product development and customer relations, that the President of the Company or the Board of Directors of the Company deems appropriate and beneficial to the Company. It is understood that these consulting and advisory services are "on call" services and will only be requested of you at reasonable times and will not interfere with you devoting yourself to other matters on a full time basis. The forgoing services shall constitute the sole services that are expected of you between now and your Termination Date. (3) For purposes of this Agreement, you agree that the following words shall have the following meanings: (a) "Confidential Information" means and includes, but is not limited to, matters of a technical nature such as scientific, trade and engineering secrets, know-how, designs, plans, formulae, processes, inventions, and research and development projects relating to the designing, engineering and manufacturing of the products and planned products of the Company, and matters of a business nature, such as cost and pricing data, purchasing, marketing and sales policies and procedures, market analysis, customer lists and strategies and plans for future growth and development, all of which are of a confidential and proprietary nature to the Company, except for any such information which is or becomes known in the public domain. 3 Mr. Robert J. Siewert May 7, 1996 Page -3- (b) "Competition with the Company" means and includes competition with the Company, any subsidiary or affiliate of the Company, or any of their successors or assigns, or the business of any of them and a business or enterprise shall be in "Competition with the Company" if it is engaged, in any state of the United States or in any foreign country in which the Company's products are then marketed in developing, designing, engineering, manufacturing, assembling, distributing, selling or servicing manual or computer numerically controlled (CNC) turning machines, vertical machining centers, custom metal processing equipment, paper converting machinery, or robotic workpiece handling equipment or replacement parts for any of the foregoing. (3) You agree that you shall not at any time disclose any Confidential Information unless you are required by law to do so. You agree that until May 22, 1998, you will not, without the prior written consent of the Company, directly or indirectly, individually or as an agent, officer, director, employee or consultant, shareholder or partner, engage in any business or enterprise which is in Competition with the Company. In the event you knowingly violate the provisions of this section or any other section of this Agreement, the Company may terminate all payments and benefits that are to be made or provided to you under this Agreement and seek such other and further relief as the Company may be entitled to under law. This paragraph shall not prevent you from (i) being employed by or serving as an officer of, or consultant to any subsidiary or division of a business or enterprise in Competition with the Company if that subsidiary or division is not itself in Competition with the Company; or (ii) purchasing and holding for investment less than 2% of the shares of any corporation whose shares are regularly traded either on a national securities exchange or in the over-the-counter market. (4) For and in consideration of the payments and benefits provided by this Agreement, you, on behalf of yourself, your heirs, administrators, assigns, and agents, fully settle, release and forever discharge the Company, its subsidiaries and its and their present and former officers, directors, agents, and employees of and from any and all claims, demands, liabilities, costs, damages, actions and causes of action arising out of or related to your employment, or your termination from employment with the Company, including, but not limited to, any claims which may be or may have been brought for age discrimination under the federal Age Discrimination in Employment Act, or any state or local law relating to age discrimination, or any other type of employment discrimination, breach of express or implied contract, promissory estoppel, intentional tort, or personal injury. (5) This Agreement does not constitute an admission by the Company that it has violated any contract, law or regulation or in any way infringed your rights or privileges. 4 Mr. Robert J. Siewert May 7, 1996 Page -4- (6) You also agree that the benefits and payments provided by this Agreement are in lieu of, and replace, any severance benefits for which you might have claimed eligibility, or entitlement, under Company policy or practice. D. GENERAL ------- (1) You agree that the Company's remedy at law for any breach of your obligations under Paragraph (C)(3) of this Agreement would be inadequate and you agree and consent that temporary and permanent injunctive relief may be granted in any proceeding brought to enforce Paragraph (C)(3) of this Agreement without the necessity of proof of actual damage. (2) This Agreement shall be binding upon, shall be assignable by, and shall inure to the benefit of the Company, its legal representatives, successors and assigns. This Agreement is personal to you and may not be assigned by you except to your estate. (3) The provisions of this Agreement are divisible. If any provision shall be deemed invalid or unenforceable, it shall not affect the applicability or validity of any other provision of this Agreement, but rather such provision shall be amended to the extent necessary to render it valid and enforceable. (4) This Agreement shall be construed according to, and the legal relations between the parties shall be governed by, the laws of the State of Ohio as applicable to agreements executed and fully performed in the State of Ohio. E. ACKNOWLEDGMENT -------------- In connection with your execution of this Agreement, you acknowledge the following: (1) that you are waiving all rights or claims that you have or may have under the Federal Age Discrimination in Employment Act, and any rights or claims that you have or may have under other federal, state or local laws with regard to age and employment discrimination; (2) that you have been advised by the Company to consult with an attorney prior to executing this Agreement; (3) that you have a period of 21 days after receiving a copy of this Agreement in which to consider this Agreement; and (4) that for a period of seven days following your execution of this Agreement, you may revoke this Agreement, and that this Agreement shall not 5 Mr. Robert J. Siewert May 7, 1996 Page -5- become effective and enforceable until that seven-day revocation period has expired. An additional signed copy of this Agreement is enclosed. If you understand, accept and agree to the terms and provisions set forth herein, please date and sign this Agreement below and return the signed Agreement to the Company. The additional copy is for your records. If the Company does not receive this Agreement signed by you before June 28, 1996, this letter is of no force and effect. Sincerely, The Monarch Machine Tool Company By:/s/William A. Enouen ---------------------------------- William A. Enouen Pursuant to Authority Granted by Resolution of the Board of Directors adopted May 7, 1996 Understood, Accepted and Agreed to: /s/Robert J. Siewert 5/96 - ----------------------- ---- Robert J. Siewert Date EX-11 5 EXHIBIT 11 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF INCOME (LOSS) PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------------------------- ------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of shares and net income (loss) applicable to common stock 3,744,967 $ (5,498) 3,744,967 $ 786 3,744,967 $ (1,463) Stock options granted, assumed issued since date of grant 43,300 43,800 40,900 Less shares assumed to have been purchased under the treasury stock method (43,300) (43,800) (40,900) ------------ ------------ ------------ ------------ ------------ ------------ 3,744,967 (5,498) 3,744,967 786 3,744,967 (1,463) Per share, primary $ (1.47) $ .21 $ (.39) ============ ============ ============ Conversion of $1.80 convertible preferred shares 59,028 27 59,028 27 59,028 27 ------------ ------------ ------------ ------------ ------------ ------------ 3,803,995 $ (5,471) 3,803,995 $ 813 3,803,995 $ (1,436) ============ ============ ============ ============ ============ ============ Per share, fully diluted $ (1.44)(1) $ .21 $ (.38)(1) ============ ============ ============
(1) For 1996 and 1994, loss per share, fully diluted is reported as $1.47 and $.39, respectively, in the consolidated financial statements because the effect of converting preferred shares is antidilutive. EX-13 6 EXHIBIT 13 1 The Monarch Machine Tool Company Annual Report 1996 [MONARCH logo] 2 CORPORATE PROFILE The Monarch Machine Tool Company has for more than eighty years designed and built a wide range of metalworking machinery, primarily for shaping metal by cutting. The Company's principal products are computer numerically controlled (CNC) turning machines and machining centers and custom-engineered metal coil processing equipment. Other products of the Company include robotic workpiece handling devices and manually operated lathes. Each of these products is essential to the production of industrial and transportation equipment and to many consumer products. The Company also produces paper converting machinery at a facility located in Germany. This equipment is essential to the packaging industry and many other producers of commercial and consumer products. From the main office and plant in Sidney, Ohio, the Company directs the work of its domestic and overseas manufacturing facilities: - - Monarch Sidney designs and produces manual and CNC turning machines. - - Monarch Cortland (Cortland, New York) designs and produces vertical machining centers. - - Monarch Stamco (New Bremen, Ohio) designs and manufactures custom metal coil processing equipment. Monarch Busch U.S., located at the same facilities, designs and manufactures paper converting equipment. - - Monarch subsidiaries in Europe include Stamco UK Ltd., England, and Stamco Depiereux, Germany, which design and market custom metal coil processing equipment, as well as Monarch Busch, Germany, which designs and markets paper converting machinery. FINANCIAL HIGHLIGHTS
1996 1995 (In thousands) Net Sales $ 115,528 $ 114,991 Operating Costs and Expenses $ 126,748 $ 113,771 Income (Loss) Before Taxes $ (7,891) $ 1,163 Income Tax Expense (Benefit) $ (2,393) $ 377 Net Income (Loss) $ (5,498) $ 786 Cash Dividends $ 775 $ 775 Shareholders' Equity $ 46,579 $ 52,650
1 3 TO MONARCH SHAREHOLDERS [HALFTONE] Net losses during 1996 were $5.5 million after tax or $1.47 per share. This includes an after tax loss of $0.8 million prior to write downs of $4.7 million, primarily associated with inventories. These results also included an after-tax gain of $2.2 million associated with the sale of overseas properties. Net sales during 1996 were $115.5 million, essentially unchanged from the $115.0 million of the prior year. New orders were $117.5 million, down 6% from the $125.5 million of 1995. Fourth quarter operations showed after tax earnings of $68,000 or 2 cents per share prior to inventory write downs of $4.7 million for a net loss of $4.7 million or $1.25 per share. Sales for the fourth quarter were $38.6 million, up 17% from the same period of the prior year and were enhanced by shipment of a single large order from our Stamco Division valued at $6.4 million. Operating losses during 1996 were the result of lower than anticipated margins throughout the Company. New orders at our Sidney Division, where our turning products are produced, rose substantially through the 3rd quarter of 1996, continuing a trend that began in 1995. Backlogs for the division increased 50% during the year despite a slow down in new orders during the fourth quarter. Shipments also increased, however, losses continued through the year as a result of inadequate margins for a number of product lines. Consequently several models were discontinued in order to improve overall efficiency. A write down of inventory was a necessary side effect of these changes and this constituted a large percentage of the losses described in the opening paragraph. Portions of discontinued product lines will be made available on a special order basis or as parts of multi-machine systems for customers who require their rugged design characteristics. A significant percentage of new orders at Sidney during 1996 were from the automotive sector and proved to have better margins since they involved our more recently introduced Predator and Ultra-Center lines. Increased automotive business is a fairly recent and favorable trend and is the result of increased attention to specific customer requirements within that sector. New products, that are an extension of our cost effective Predator line, are scheduled for release early in 1997. New order rates increased throughout 1996 at our Cortland, New York plant which is the source of our machining centers. Shipment rates were low early in the year and this served to depress average annual margins. Cortland did operate profitably in 1996 and order rates continue to be strong in a very competitive and active market. Cortland's new PMC product drew increasing attention from several manufacturing sectors, including automotive. This machine has features not easily duplicated and should enjoy increased volume as its introduction continues. New orders for coil processing equipment, produced at our Stamco Division, were strong throughout 1996, continuing the pattern of the prior year. Shipments for 1996 were up 7% as compared to the prior year but income declined from 1995 levels due to several low margin shipments in the first quarter. Further, a large order was delayed by an overseas customer. This disrupted production schedules leading to poor utilization of facilities and additional margin erosion. Stamco has well engineered products and can produce them at a profit. Continued attention to costs, an effective marketing program and an increased emphasis on better margins should permit this division to obtain improved performance despite continuous and intense price competition. Stamco enjoys an international customer base which recognizes the value and superior quality of its products. Stamco's experience in exporting, which now represents 40% of shipments from the U.S. plant, will be useful to our other divisions as they continue to develop off shore markets. Overseas, new order rates for coil processing equipment were off at both Stamco U.K. and Depiereux in Dueren, Germany. A generally depressed European economy continues to be a factor. However, these divisions compete favorably in Mid and Far East markets which provide compensating opportunities. Active selling efforts produced new orders late in the year. Losses at these divisions were sufficient to offset gains at Stamco U.S. resulting in a loss for the coil processing segment of our business. The Busch Division, during its second year as a part of the Company, recorded a loss due to low shipments. This division remains in a developmental phase and, with increased penetration of the U.S. market, has potential for good results. Busch designs and manufactures paper converting equipment which shares certain manufacturing methods with coil processing equipment. This should aid in rapid start up of U.S. production. 2 4 A developing U.S. staff began to receive their first orders late in the year. The product designs currently emanating from Busch GmbH, are innovative and of high quality and should do well in the U.S. market. During 1996 we relocated our German machine tool subsidiary to Dueren, Germany where it shares facilities with Depiereux. Our properties in Hemsbach, Germany, which formerly housed our European machine tool operations, were then sold. We continue to provide service and repair parts to our European customers from Dueren. In May of 1996, Robert Siewert resigned as President and Chief Executive Officer. The Board asked that I temporarily assume these duties during the search for a permanent replacement. Having recently retired from the Cortland Division as its Vice President and General Manager and having been a Director for many years this was considered an appropriate appointment during a transitional period. The search for a new President was carried out by a Special Committee of the Board which met with many capable candidates. During early 1997 our search narrowed and Richard E. Clemens was named President, C.E.O. and a Director of the Company effective March 10, 1997. Mr. Clemens, a 1972 graduate of General Motors Institute, has substantial experience in the agricultural, defense, and automotive industries. Most recently he has been Vice President and General Manager of The Frick Company, a Division of York International. Prior to that, he was President and C.E.O., Clark Material Handling Company, a Division of Terex, where he led a turnaround of that old line American Company. The Board has directed Mr. Clemens to quickly and carefully evaluate the investments represented by our several factories and devise a course of action which will maximize return on those investments. The firm of Lehman Brothers, investment bankers, continues to be retained by the Company and is available to aid in these evaluations. The Board of Directors will continue to consider any and all alternatives and take those actions that it believes to be in the best interest of our shareholders. It has been my pleasure to serve briefly and to again be associated with the many fine people of our Company and its shareholders. I thank you for the many courtesies extended to me. /s/ David E. Lundeen David E. Lundeen Acting President and C.E.O. March 14, 1997 I am very pleased and proud to have been named President and C.E.O. of your Company. I believe my previous assignments have prepared me to properly discharge the duties and responsibilities implicit in my appointment. I am enthusiastic and anxious to begin. My experience in manufacturing has provided numerous opportunities to understand what good machinery, properly applied in an environment of continuous improvement, can achieve. Monarch, with its century long tradition of technical leadership, has an opportunity to play a significant role in the continuing revival of American manufacturing. To succeed we must focus our experience where we can add recognized value . . . and that is on the factory floor of our customers, who themselves face a never-ending quest for improvement. The pace of our business must be quicker. Every business segment and manufacturing location requires improvement initiatives. We must now perform at a higher level. Rest assured that we will not dismiss any opportunity to do so. We must exercise strong and decisive action once our strategy is set. I look forward to the future and the anticipated changes that will serve our customers, shareholders and employees. /s/ Richard E. Clemens Richard E. Clemens President and C.E.O. March 14, 1997 [HALFTONE] 3 5 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Strengthening demand for the Company's traditional products as well as increasing order levels for several new product offerings in 1996 as well as in 1995, elevated our backlogs and allowed our facilities to operate at somewhat greater levels relative to prior periods. Demand for the Company's products as well as for general purpose metal cutting capital equipment was exceedingly weak for several years prior to late 1994. New orders booked this year were $117.5 million as compared to approximately $125.5 million and $100.2 million during 1995 and 1994, respectively. Demand for all of the Company's products is highly cyclical. A flat market in the metalworking machinery industry, except in the automotive sector in which the Company has, until recently, played a minor role, adversely impacted order booking rates until the new order rate began increasing in the fourth quarter of 1994. The stronger order rate continued during the past two years. This resulted in a backlog of $60.8 million at December 31, 1996. Backlogs increased 2% when compared to last year and increased 22.7% relative to 1994. While the metal working machinery industry tends to lag the general economy, there can be no assurance that the industry will continue to recover at the same rate or at the same point in the cycle as in past economic recoveries. Furthermore, the severe price competition among domestic as well as foreign machine tool builders has and will continue to exert a depressing effect upon the gross margins that the Company can expect to achieve on sales of its products. The Company reported an after tax loss for 1996 of $.8 million or $.20 per share before giving effect to an after tax inventory write down of $4.7 million or $1.27 per share booked during the fourth quarter. The inventory write downs were principally associated with the Sidney division where the Company's turning products are produced, and were the result of a narrowing of product lines in order to simplify manufacturing and improve efficiencies. In the second quarter of this year the Company also recorded a special charge to income of approximately $1.1 million or 30 cents per share to recognize the consolidation of several machine tool product lines, potentially uncollectible accounts and a state personal property tax liability. During the course of this year the Company also sold certain excess foreign properties for an after tax gain of approximately $2.2 million or 58 cents per share. The operating loss was largely created by poor margins at many of our operations with the exception of those in the paper converting segment of our business, as well as lower than optimum operating levels at our machine tool divisions. Certain promotional and operating expenses were incurred during the start-up of our new Busch U.S. division in New Bremen, which began taking orders in 1997. The Company incurred a net gain of $.8 million for the year of 1995 as compared to a net loss of $1.5 million in 1994. Pre-tax earnings were positively impacted by $1.1 million, due to the acquisition of certain assets of the Busch Company located in Dueren, Germany. This newly created subsidiary, namely Monarch Busch GmbH, markets and engineers paper converting equipment worldwide. This subsidiary represents the Company's first diversification into non-metal working machinery, thereby partially mitigating our total reliance upon the metal working industries. Although this subsidiary's products are capital in nature and therefore highly cyclical, its products serve a completely different industry relative to our other operations. Pre-tax earnings in 1995 were favorably impacted by $.2 million as the Company was able to satisfy certain liabilities below the amounts recorded in the financial statements as well as sell a portion of the inventory above the book value recorded with respect to the closing of the Dean Smith & Grace subsidiary in 1992. Pre-tax earnings in 1995 were also positively affected by the receipt of a $.4 million settlement from an action against several insurance carriers for reimbursement of defense costs associated with the clean up of the Rosen site. Pre-tax earnings in 1994 were negatively impacted by approximately $1 million in start-up costs associated with the acquisition of certain assets of the Depiereux Companies in Dueren, Germany. The newly created subsidiary, namely, Stamco Depiereux, markets and engineers coil processing equipment for customers worldwide. The creation of this operation has enabled Monarch to expand its product offerings in the strip processing equipment industry. This acquisition has also enabled the Company to relocate the Monarch Werkzeugmachinen subsidiary to the Stamco Depiereux operation to achieve certain operating efficiencies and allowed the Company to market the land and buildings at the previous location in Hemsbach, Germany, which was sold in 1996 as previously discussed. Pre-tax earnings in 1994 were favorably impacted by $.6 million as the Company was able to satisfy certain liabilities below the amounts recorded in the financial statements as well as sell a portion of the inventory above the book value recorded with respect to the closing of the Dean Smith & Grace subsidiary in 1992. Net sales were $115.5 million in 1996, $115.0 million in 1995 and $76.3 million in 1994. The increase in shipments for the past two years, when compared to 1994, was the result of better orders and backlogs at most of our operations, as well as the start-up of two new operations. Cost of sales, expressed as a percentage of sales, was 95.3% this year compared to 85.7% in 1995 and 89.3% in 1994. The abnormally high ratio in 1996 was due to several factors including the aforementioned inventory write down and the Company's inability to offset cost increases with adequate increases in prices charged to customers because of continued unrelenting price competition from machine tool builders, both domestic and foreign. Such competition is expected to continue into the immediate future. Margins at our U.S. strip processing operation were much lower than those experienced in past years. The low margins were mostly the result of the shipment of several new products that had not been produced in the past. Procedures have been adopted in an effort to control the quoting and cost over-runs that were associated with this type of order, in 1996, from happening in the future. The decrease in this ratio in 1995 relative to 1994 was primarily due to increasing plant utilization. Selling, general and administrative expenses were $16.7 million in 1996, $15.3 million in 1995 and $11.6 million in 1994. SG&A as a percentage of sales increased to 14.4% in 1996 from 13.3% in 1995. In 1994 this percentage was 15.1%. The dollar increase in these expenses in 1996 as compared to 1995 was due to the start-up of the new Busch U.S. division as well as increased selling efforts particularly at our foreign operations. The dollar increase in these expenses in 1995 relative to 1994 was principally due to the first full year of operation of Stamco Depiereux, the creation of Monarch Busch GmbH and additional sales efforts at our U.S. divisions. The relative stability of these expenses expressed as a percentage of sales over the past three years is reflective of the 4 6 stringent cost control efforts in all areas of the Company. However, this has been difficult to accomplish due to the burdensome increases in the cost of regulatory compliance, health care and certain other areas largely outside the direct control of the Company. Research and development costs, which are expensed currently, were $1.4 million in 1996, $1.7 million in 1995 and $1.2 million in 1994. Total research and development expenditures during the past year were approximately equal to the average level of expense incurred during the last five years. As a result of the research and development efforts, the Company will introduce several new products during 1997. The Company currently has an accrual of $1.5 million to cover its estimated share of the remaining estimated costs associated with the remediation of a "Superfund" site in Cortland, New York. The extent and nature of the contamination, insurance coverage available to the Company and participation by additional potentially responsible parties in the clean up of this site are not fully known at this time. The Remedial Investigation/Feasibility Study performed at this site resulted in the conclusion that there is little if any risk to human life at this site. During 1995 the aforementioned Feasibility Study concluded that a cap over a portion of the site, an asphalt cover over the remainder of the site, together with continual ground water monitoring would constitute an adequate remedy. However, the EPA has given no indication that the remedy proposed in the Feasibility Study would be acceptable, therefore, the final cost of the approved remedy should be considered highly speculative at this time. To-date the estimated minimum costs of the remedial efforts have not changed. If the EPA accepts the recommendations described in the Feasibility Study, capital costs will be incurred in the early part of the remedial efforts and annual costs associated primarily with ground-water monitoring would be incurred over a 30 year period. The attorneys for five of the existing PRPs brought on Motions for Summary Judgement against several defendants in order to establish liability for clean-up costs on the part of these defendants. The motions have been granted in two cases and are pending in three others. The Company is a defendant in various legal actions, primarily product liability claims, arising in the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from these matters will not have a material effect on the Company's consolidated financial position. The significance of these lawsuits and the remediation of the "Superfund" site on the Company's future operating results will depend on the Company's level of future earnings as well as the timing and the amount of the ultimate disposition of these matters above the amounts covered by insurance. The Company's retirement plans are substantially overfunded. Due to plan assets exceeding the benefit obligations, ($17.0 million at December 31, 1996 and $14.5 million at December 31, 1995), minimal contributions were required in 1996, 1995 and 1994. To the extent that the actual rate of return on plan assets continues to exceed both the assumed rate of return and the actuarily determined increase in benefit obligations, the employee benefit plans will continue to be overfunded and will require minimal contributions in the foreseeable future. This overfunding, therefore, has a positive impact on potential future cash flows of the Company. There are no time limits relative to the realization of the large pension asset; however, because of the magnitude of the overfunding and because of the applicable tax laws, the Company's ability to realize this prepayment is limited. The effect of this overfunding on deferred taxes is such that the pension income recognized for book purposes is not being recognized as income for tax purposes. This temporary difference, resulting in a deferred tax liability, will not reverse until such time as the pension plan costs exceed the returns on plan assets. The assumption rates for calculating the pension benefit obligation were not changed during 1996 and therefore had no impact upon the pension benefit obligation calculations. However, in 1995, the Company changed the discount rate to 7.25% from 8% to reflect the current rates at which the benefit obligation could be effectively settled. This change had the effect of increasing the projected benefit obligation by approximately $1.8 million. In 1994 the discount rate was increased to 8% from 7%, thereby decreasing the projected benefit obligation by approximately $1.8 million. Exchange adjustments resulting from foreign currency transactions are recognized in net earnings, whereas adjustments resulting from the translation of financial statements are reflected as translation adjustments in the shareholders' equity section of the balance sheet. Currency exchange gains and losses during 1996, 1995 and 1994 were not significant. Translation adjustment balances at December 31, 1996, 1995 and 1994 were $.2 million, $.1 million and $.1 million respectively. The effective tax benefit rate of 30% in 1996, compares to an effective tax rate of 32% in 1995 and an effective tax benefit rate of 55% in 1994. The effective tax benefit rate and tax rate this year and last, respectively, approximates the statutory rates in effect in the jurisdictions in which our operations are located. The high effective tax benefit rate in 1994 was caused by foreign operations which are taxed at a high rate. The Company has a total net deferred tax asset of $3.5 million at 12/31/96. The Company has determined that based upon the available weight of evidence it is not necessary to place a valuation allowance against this asset. However, utilization of this asset depends upon the generation of future taxable income and certain tax planning opportunities potentially available to the Company. The Company has taken several steps throughout the past several years designed to reverse the earnings decline of the past few years. The decision to dispose of the Dean Smith & Grace facility as well as the purchase of the Lodge & Shipley assets were designed to lower the Company's breakeven point and boost capacity utilization. The narrowing of product lines at the Sidney turning operation will allow greater manufacturing efficiencies and thereby help lower the breakeven point at this operation. The Company has also committed a considerable amount of effort and money into research and development in recent years to develop new product lines. Furthermore, stringent cost containment efforts have been effectuated for the past several years. However, even with these efforts the earnings of the Company will be dependent upon the continued improvement of the market for capital equipment and the Company's ability to be effective in a highly competitive environment. In addition to the above mentioned strategies, the Company, in 5 7 February 1996, engaged the investment banking firm of Lehman Brothers Inc. to evaluate various methods of maximizing shareholder value. Lehman Brothers will render advice as to the strategic development of the Company's business and give consideration to various alternatives, such as the purchase of additional product lines, joint ventures, divestiture of particular business units, the sale of the entire Company or other transactions or programs for maximizing shareholder value. The Company has been working diligently to adapt its computer applications to accept the year 2000 in its date processing logic. Considerable progress has been made to-date by Company personnel and it is anticipated that this project will be largely completed by internal staff. We do not expect to spend any significant amounts with outside contractors relative to the completion of this task. LIQUIDITY AND CAPITAL RESOURCES The Company maintained a strong financial position throughout the year and has current assets of $2.03 for each dollar of current liabilities, as compared to $2.21 at December 31, 1995 and $2.11 at December 31, 1994. Cash used in operating activities totaled $4.1 million in 1996 and $6.2 million in 1995. Operations during 1994 provided cash of $2.2 million. The use of cash in 1996 was principally due to the need to finance an increase in the level of accounts receivable, as a result of two large foreign orders at our Stamco U.S. operation. The use of cash in 1996 was mitigated by cash generated by the sales of excess foreign properties. The use of cash in 1995 was principally due to the need to finance increases in the level of accounts receivable and inventories needed to support the increased level of business at most of our operations, offset by an increase in accounts payable and accrued expenses. The favorable impact on cash flow from operations in 1994 was primarily due to advantageous progress billing arrangements on several large orders taken late in the year. Capital expenditures for plant and equipment totaled $1.1 million in 1996, $2.1 million in 1995 and $2.3 million in 1994. These capital expenditures were incurred to purchase machinery and equipment to enhance the productivity of the manufacturing plant and support the ability to control costs, as well as the purchase of the Monarch Busch GmbH operation in 1995 and the Stamco Depiereux operation in 1994. The Company has not increased its dividend payments during the past three years. Under a revolving credit agreement, the maximum amount that the Company can pay in dividends is $3.8 million plus the sum of the annual net income greater than zero since December 31, 1994, less the sum of all excess dividend distributions since December 31, 1994. At December 31, 1996, the maximum amount of retained earnings available for dividend distribution under this formula is approximately $3.0 million. The Company had $18.2 million of long-term debt at the end of this year as compared to $14.3 million in 1995 and none at the end of 1994. The long-term debt carried during the past two years was incurred largely to finance an increase in business as stated above. The Company has unsecured lines of credit with several banks, aggregating approximately $37.0 million. One of these lines is a three-year revolver which contains a three year term-out option at April 30, 1998. Long-term borrowings against this $20 million line of credit at December 31, 1996 were $18 million. Management has the option to renew this revolving arrangement, rather than term out the loan. However, if this loan is termed out, principal repayments on the loan will be required as detailed in Note 9 to the consolidated financial statements. On March 19, 1997 this Credit Facility was amended to revise certain financial ratios and to increase the interest rate in various increments up to (LIBOR plus 1.5%) dependent upon a certain financial ratio. The remaining lines of credit expire on various dates during 1997. It is management's intention to renew these arrangements. At the beginning of 1996 the Company had several properties which were held for sale as the result of the consolidation of operations at our German subsidiaries and the discontinuance of an English operation. These properties, which were all sold during the year, generated approximately $4 million of cash which was used to retire debt. The increase in the net borrowing position to $17.8 million in 1996 from $16.2 million in 1995 and $7 million in 1994 will subject the Company to greater financial risk relative to the direction of interest rate movements and general economic conditions. This situation is not expected to create undue hardship given the strong liquidity of the Company, and the fact that most of the borrowing was incurred to finance current operations. It is anticipated that the environmental liability will be paid during the next several years. However, as more fully described in Note 10 to the consolidated financial statements, there are several factors that could have a positive and/or negative impact on this liability and the corresponding cash flow to the Company. The Company will continue to monitor this situation and as more information becomes available, the Company will reflect new data in its financial statements as it becomes known. ACCOUNTING STANDARDS In October 1995 the Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (FASB No. 123), Accounting for Stock-Based Compensation. This statement defines a fair value based method of accounting for an employee stock option. As allowed by FASB No. 123 the Company has decided to remain with the method of accounting prescribed by APB Opinion No. 25 and, accordingly, FASB No. 123 will not have an impact on the Company's consolidated financial statements. No stock options were granted during 1996. In March 1997, the Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, Earnings Per Share. This statement will replace the primary earnings per share calculation with a new defined basic earnings per share calculation, revise the disclosure requirements and increase the comparability of earnings per share data on an international basis. This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined the impact of this statement. Except for historical information, statements in this document which are forward-looking, involve risks and uncertainties including, but not limited to, continuation of intense price competition in the industries in which the Company participates, changes in economic conditions, customer preference and spending patterns, inflation, labor benefit costs, product liability and other legal claims and government regulatory initiatives. 6 8 SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)
1996 1995 1994 1993 1992 Net Sales $ 115,528 $ 114,991 $ 76,332 $ 77,517 (4)$ 77,894 Net Income (Loss) (1)$ (5,498) $ 786 $ (1,463) (2)$ (475) (3)(5)$ (7,250) Per common share (1)$ (1.47) $ .21 $ (.39) (2)$ (.13) (3)(5)$ (1.94) Dividends per common share $ .20 $ .20 $ .20 $ .20 $ .20 Total Assets $ 102,912 $ 101,348 $ 78,342 $ 78,968 $ 73,982 Long-Term Debt $ 18,175 $ 14,318 0 0 0 (1) The 1996 results reflect an after-tax loss of $4,926 or $1.32 per share resulting from an inventory write-down primarily at our turning operation in Sidney, Ohio, as well as an after-tax loss of $1,100 or $.30 per share to recognize the consolidation of several product lines, potentially uncollectible accounts and a state personal property tax liability. Earnings were favorably impacted by an after-tax gain of $2,181 or $.58 per share by the sale of excess foreign properties and $1,662 or $.44 per share for LIFO liquidations. (2) The 1993 results reflect an after-tax gain of $1,261 or $.34 per share representing both the cumulative effect and the current year's impact of adopting two new accounting standards, as well as a $1,900 pre-tax gain related to the prior year discontinuance of operations of a foreign subsidiary, which increased Net Income by $1,254 or $.33 per share and a $1,600 pre-tax charge related to a "Superfund" site in Cortland, New York, which reduced Net Income by $1,056, or $.28 per share. (3) The 1992 results include an $8,478 pre-tax charge related to the discontinuance of the Dean Smith & Grace Subsidiary, which reduced Net Income by $5,595 or $1.50 per share. (4) Net Sales for 1992 include the sales of the discontinued subsidiary, which were $4,532. (5) Net Income (loss) for 1992 includes the Net Loss of the discontinued subsidiary, which was $(2,212). (Loss) per share for 1992 attributable to this discontinued subsidiary was $(.59).
SHAREHOLDERS' INFORMATION
STOCK PRICES HIGH LOW 1996 FIRST QUARTER 13 9 7/8 SECOND QUARTER 12 10 3/8 THIRD QUARTER 11 3/4 9 1/2 FOURTH QUARTER 10 1/2 7 3/4 1995 First Quarter 10 9 1/8 Second Quarter 10 1/8 9 1/2 Third Quarter 15 1/4 9 5/8 Fourth Quarter 14 1/4 9 7/8
The number of shareholders of record as of December 31, 1996 was 2,539. Common shares outstanding as of December 31, 1996 were 3,744,967. 7 9 CONSOLIDATED BALANCE SHEETS The Monarch Machine Tool Company and Subsidiaries December 31, 1996 and 1995 (Dollars in thousands, except per share data)
1996 1995 ASSETS Cash $ 4,848 $ 2,616 Accounts receivable, net of allowance for doubtful accounts of approximately $469 and $150 in 1996 and 1995, respectively (Note 2) 40,773 31,592 Inventories (Note 3) 15,528 26,149 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 4) 3,307 7,912 Other current assets 1,962 1,021 Deferred income taxes (Note 5) 5,341 1,946 -------- -------- Current assets 71,759 71,236 Property, plant and equipment, net (Note 6) 15,938 16,841 Prepaid pension cost (Note 7) 13,277 11,276 Other assets (Notes 2 and 8) 1,938 1,995 -------- -------- Total assets $102,912 $101,348 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings (Note 9) $ 4,500 $ 4,417 Current portion of long-term debt (Note 9) 122 99 Accounts payable 12,124 12,400 Accrued liabilities (Note 10) 13,976 10,699 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 4) 4,669 4,679 -------- -------- Current liabilities 35,391 32,294 Deferred income taxes (Note 5) 1,847 1,134 Postretirement and other accrued benefits (Note 7) 920 952 Long-term debt, less current portion (Note 9) 18,175 14,318 -------- -------- 56,333 48,698 -------- -------- Contingencies (Note 11) Preferred stock, no par value, $1 stated value; 500,000 shares authorized; 14,757 shares issued and outstanding; (liquidation preference of $590)(Note 12) 14 14 Common stock, no par value, 12,000,000 shares authorized; 3,744,967 shares issued and outstanding (Note 13) 5,618 5,618 Retained earnings (Note 9) 40,720 46,993 Translation adjustments (Note 14) 227 25 -------- -------- 46,579 52,650 -------- -------- Total liabilities and shareholders' equity $102,912 $101,348 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 8 10 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands, except per share data)
1996 1995 1994 Net sales $ 115,528 $ 114,991 $ 76,332 Cost of sales (Note 3) 110,076 98,502 68,175 --------- --------- --------- 5,452 16,489 8,157 Selling, general and administrative expenses 16,672 15,269 11,564 --------- --------- --------- Operating income (loss) (11,220) 1,220 (3,407) Other income (expense): Interest expense, net (1,065) (576) (310) Environmental income (expenses) (Note 10) (50) 350 (300) Other income, net (Notes 8 and 15) 4,444 169 728 --------- --------- --------- Income (loss) before income taxes (7,891) 1,163 (3,289) Income tax provision (benefit)(Note 5) (2,393) 377 (1,826) --------- --------- --------- Net income (loss) (5,498) 786 (1,463) Retained earnings, beginning of year 46,993 46,982 49,220 --------- --------- --------- 41,495 47,768 47,757 Deduct dividends (preferred at $1.80 per share and common at $.20 per share) 775 775 775 --------- --------- --------- Retained earnings, end of year $ 40,720 $ 46,993 $ 46,982 ========= ========= ========= Income (loss) per common share $ (1.47) $ .21 $ (.39) ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 9 11 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands, except per share data)
1996 1995 1994 Cash flows from operating activities: Net income (loss) $ (5,498) $ 786 $ (1,463) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,955 1,778 1,538 Pension income (2,001) (115) (513) Deferred tax provision (benefit) (2,400) 181 (1,728) (Gain) loss on sale of fixed assets (3,400) 72 26 Provision for inventory write-down 9,690 757 748 Cash provided by (required for) changes in assets and liabilities: Accounts receivable (9,479) (6,766) (1,260) Inventories 397 (6,688) 745 Costs and estimated earnings in excess of billings on uncompleted contracts 4,546 (6,528) 2,064 Billings in excess of costs and estimated earnings on uncompleted contracts (21) 955 2,329 Other assets (117) (880) (1,163) Accounts payable (448) 7,546 1,559 Accrued liabilities 2,707 2,747 (651) -------- -------- -------- Net cash provided by (used in) operating activities (4,069) (6,155) 2,231 -------- -------- -------- Cash flows used in investing activities: Capital expenditures (1,101) (2,072) (2,260) Proceeds from sale of fixed assets 3,969 -- -- -------- -------- -------- Net cash provided by (used in) investing activities 2,868 (2,072) (2,260) -------- -------- -------- Cash flows provided by (used in) financing activities: Dividends paid (775) (775) (775) Proceeds from (repayment of) short-term borrowings, net 129 2,359 (1,000) Proceeds from long-term borrowings 4,000 9,405 -- Repayment of long-term borrowings (120) -- -- -------- -------- -------- Net cash provided by (used in) financing activities 3,234 10,989 (1,775) -------- -------- -------- Effect of exchange rates on cash 199 (176) 278 -------- -------- -------- Net increase (decrease) in cash 2,232 2,586 (1,526) Cash, beginning of year 2,616 30 1,556 -------- -------- -------- Cash, end of year $ 4,848 $ 2,616 $ 30 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 10 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The following is a summary of the significant accounting policies: a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Monarch Machine Tool Company and its subsidiaries (the Company). All intercompany accounts and transactions have been eliminated. b. CASH AND CASH EQUIVALENTS: The Company handles its cash transactions primarily through three institutions in the United States, one in the United Kingdom and one in Germany. Cash equivalents include those obligations which are readily convertible to cash and have a stated maturity of ninety days or less when purchased. c. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost and depreciated principally under the straight-line method, over their estimated useful lives. Repairs which do not extend the useful life of the asset are expensed as incurred. Major renewals or renovations are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and the related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is recognized. d. REVENUE RECOGNITION: Revenues are recorded at the time products are shipped except for significant long-term contracts which are recorded on the percentage-of-completion method. The percentage-of-completion method is used in the production of custom metal coil processing equipment and paper conversion machinery. Revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Revenue and gross profit are adjusted prospectively for revisions in estimated total contract costs. Estimated losses on contracts, if any, are recorded when identified. e. RESEARCH AND DEVELOPMENT COSTS: Research and development costs, which are expensed as incurred, were approximately $1,415, $1,679 and $1,225 in 1996, 1995 and 1994, respectively. f. INCOME (LOSS) PER SHARE: Income (loss) per common share is based upon net income (loss) after giving effect to the preferred stock dividend requirements and the weighted average number of common shares outstanding. Fully diluted income (loss) per share is not presented because the effect of dilution related to preferred shares does not have an impact in 1995 and is antidilutive in 1996 and 1994. g. SUPPLEMENTAL CASH FLOW INFORMATION: Total interest paid was approximately $1,380, $604 and $386 in 1996, 1995 and 1994, respectively. Total income taxes paid were approximately $469, $188 and $213 in 1996, 1995 and 1994, respectively. h. ENVIRONMENTAL REMEDIATION COSTS: Costs incurred to investigate and remediate contaminated sites are expensed. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. i. STOCK OPTIONS: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (FASB No. 123), Accounting for Stock-Based Compensation. This Statement defines a fair value based method of accounting for an employee stock option. Although FASB No. 123 encourages all entities to adopt this method of accounting, it allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stocks Issued to Employees. The management of the Company has decided to remain with the method of accounting prescribed by APB Opinion No. 25. No stock options were granted during 1996. j. POSTRETIREMENT BENEFITS: The Company accrues the cost of providing postretirement benefits for medical and life insurance coverage over the active service period of the employee. These benefits are funded by the Company when paid. 11 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) k. RECLASSIFICATIONS: Certain 1994 and 1995 amounts have been reclassified to conform to the 1996 presentation. 2. ACCOUNTS RECEIVABLE: Included in accounts receivable are $10,068 and $995 of unbilled accounts receivable as of December 31, 1996 and 1995, respectively. The 1995 unbilled accounts receivable were billed during 1996. Of the 1996 unbilled accounts receivable, approximately $1,224, representing several accounts, will be billed during 1997. In addition, it is anticipated that one account will be partially billed ($5,843) in April 1997 and partially billed ($3,001) in December 1997 at the time the equipment is shipped. The remaining balance included in other assets, ($1,002) representing retainage, will be billed during 1998. 3. INVENTORIES: Inventories, aggregating approximately $10,309 and $20,474 at December 31, 1996 and 1995, respectively, were valued at the lower of last-in, first-out (LIFO) cost or market. The remaining inventories of approximately $5,219 and $5,675 at December 31, 1996 and 1995, respectively, were valued at the lower of first-in, first-out (FIFO) cost or market. At December 31, 1996 and 1995, inventories are summarized as follows:
1996 1995 - -------------------------------------------------------------------------------- Finished goods $ 4,978 $ 6,696 Work-in-process and parts inventory 23,940 33,232 Raw materials 599 1,398 - -------------------------------------------------------------------------------- Total first-in, first-out (FIFO) cost 29,517 41,326 Less allowance to adjust the carrying value of inventories to LIFO basis 13,989 15,177 - -------------------------------------------------------------------------------- $15,528 $26,149 ================================================================================
The Company provides for potential losses from obsolete and slow-moving inventory in the period in which they are identified. The Company has decided to discontinue the manufacture of certain product lines except for certain special orders and, accordingly, has re-evaluated its parts inventory relating to those product lines. As a result of this re-evaluation, $7,463, ($1.32 per share after applicable income taxes of $2,537), before giving effect to LIFO liquidations, of the addition to the 1996 reserve for obsolete and slow-moving inventory is attributed to this change. The charge to earnings, before giving effect to LIFO liquidations, in 1996, 1995 and 1994 relating to obsolete and slow-moving inventory was $9,690, $757 and $748, respectively. Because of the above and because of reductions in inventory in the normal course of business, prior year LIFO inventory quantities were reduced. In 1996, this resulted in an increase in income before taxes of $2,518 ($.44 per share after applicable income taxes of $856). 4. CONTRACTS IN PROCESS: Contract costs on uncompleted contracts are as follows:
COSTS AND ESTIMATED BILLING IN EXCESS EARNINGS IN EXCESS OF COSTS AND OF BILLINGS ESTIMATED EARNINGS TOTAL - -------------------------------------------------------------------------------------- DECEMBER 31, 1996: COSTS $ 11,472 $ 1,371 $ 12,843 ESTIMATED EARNINGS 2,472 293 2,765 - -------------------------------------------------------------------------------------- 13,944 1,664 15,608 BILLINGS 10,637 6,333 16,970 - -------------------------------------------------------------------------------------- $ 3,307 $ (4,669) $ (1,362) ====================================================================================== December 31, 1995: Costs $ 13,924 $ 8,934 $ 22,858 Estimated earnings 2,677 1,665 4,342 - -------------------------------------------------------------------------------------- 16,601 10,599 27,200 Billings 8,689 15,278 23,967 - -------------------------------------------------------------------------------------- $7,912 $ (4,679) $ 3,233 ======================================================================================
5. INCOME TAXES: The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The income tax provision (benefit) reflected in the consolidated statements of operations and retained earnings is comprised of the following:
1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $ (110) $ 71 $ (68) Foreign 100 125 (30) - -------------------------------------------------------------------------------- (10) 196 (98) - -------------------------------------------------------------------------------- Deferred: Federal (2,501) 259 421 Foreign -- 326 -- - -------------------------------------------------------------------------------- (2,501) 585 421 - -------------------------------------------------------------------------------- Net operating loss carryforward: Federal (778) (301) (1,101) Foreign 896 (103) (1,048) - -------------------------------------------------------------------------------- 118 (404) (2,149) - -------------------------------------------------------------------------------- $(2,393) $ 377 $(1,826) ================================================================================
12 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) The differences between the statutory U.S. income tax rate and the effective income tax rate are as follows:
1996 1995 1994 - ---------------------------------------------------------- U.S. income tax rate (34)% 34% (34)% Effect of foreign operations 4 (1) (16) Other - (1) (5) - --------------------------------------------------------- (30)% 32% (55)% =========================================================
The components of deferred taxes included in the balance sheets are as follows:
1996 1995 - ------------------------------------------------------------------------------- Current deferred tax assets/(liabilities): Accounts receivable $ 46 $ 51 Inventory 3,743 1,156 Product liability reserve 173 136 Accrued vacation 254 242 Environmental reserve 510 500 Other liabilities and reserves 615 (139) - ------------------------------------------------------------------------------- Net current deferred tax asset $ 5,341 $ 1,946 ================================================================================ Noncurrent deferred tax assets/(liabilities): Postretirement and other accrued benefits $272 $301 Net operating loss and tax credit carryforwards 4,059 4,177 Property, plant and equipment (1,713) (1,826) Prepaid pension cost (4,465) (3,786) - ------------------------------------------------------------------------------- Net noncurrent deferred tax liabilities $(1,847) $(1,134) ================================================================================
Generally accepted accounting principles requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that a valuation allowance is not necessary because the benefits of the deferred tax assets will be realized as a result of the utilization of the deferred tax liabilities, the generation of future taxable income, and the existence of appreciated values over the tax basis of the Company's net assets. However, the amount of the deferred tax assets considered realizable could be reduced if estimates of future taxable income are reduced. At December 31, 1996, the Company has domestic net operating loss carryforwards of approximately $9,868 which expire in the years 2007 through 2011. The Company also has foreign net operating loss carryforwards for its subsidiary in England of approximately $1,554 which can be carried forward indefinitely. The Company also has an alternative minimum tax credit carryforward of approximately $175, which can be carried forward indefinitely and a general business credit carryforward of approximately $75 which expires in the year 2005. 6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment includes the following:
1996 1995 - -------------------------------------------------------------------------------- Land $ 1,328 $ 1,318 Buildings 22,366 22,281 Machinery and equipment 30,297 29,479 - -------------------------------------------------------------------------------- 53,991 53,078 Accumulated depreciation (38,053) (36,237) - -------------------------------------------------------------------------------- $ 15,938 $ 16,841 ================================================================================
7. BENEFIT PLANS: The Company accounts for pension plans covering domestic employees in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"(SFAS 87). Those plans which cover salaried employees provide pension benefits that are based on years of service and compensation before retirement. Plans covering union members generally provide benefits of stated amounts for each year of service. The Company contributes such amounts as are necessary on an actuarial basis to provide the Plan with assets sufficient to meet the benefits to be paid to Plan members. Due to plan assets exceeding benefit obligations, minimal contributions were required in 1996, 1995 and 1994. Although there are no time limits to the realization of the pension asset, because of the magnitude of the overfunding and because of the applicable tax laws, the opportunities to realize this prepayment are limited. Net periodic pension expense (income) includes the following components:
1996 1995 1994 - -------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 455 $ 525 $ 505 Interest cost on projected benefit obligation 1,380 1,396 1,305 Actual return on assets (5,310) (7,829) (204) Net amortization and deferral 1,587 5,940 (2,119) - ------------------------------------------------------------------------------- $(1,888) $ 32 $ (513) ================================================================================ The pension plans' funded status and accounting assumptions at December 31, 1996 and 1995 are as follows: 1996 1995 - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $18,022 and $16,835 at December 31, 1996 and 1995, respectively $(18,562) $(17,315) ================================================================================
13 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data)
1996 1995 - -------------------------------------------------------------------------------- Projected benefit obligation for services rendered to date $(20,703) $(19,029) Plan assets at fair value, primarily common stocks, pooled investment funds and U.S. Government securities 37,742 33,548 Plan assets in excess of projected benefit obligation 17,039 14,519 Unrecognized net (gain) loss (3,071) (2,224) Unrecognized transition asset (691) (1,019) Prepaid pension cost included on the consolidated balance sheet $ 13,277 $ 11,276 ================================================================================ Assumptions: Discount rate 7.25% 7.25% Compensation increases 4.50% 4.50% Rate of return on assets 8.50% 8.50%
Unrecognized gains and losses, as of the beginning of the year, are amortized to income ratably over a period of five years. Assets in the plans include common stock of the Company with a fair value of $823 and $1,248 at December 31, 1996 and 1995, respectively. In 1995, the Company decreased the discount rate from 8% to 7.25% to better reflect the current rates at which the obligation could be effectively settled. This decrease had the effect of increasing the projected benefit obligation by approximately $1,812. The Monarch Machine Tool Company Retirement Savings Plan (the Plan) enables substantially all full-time domestic employees to participate and contribute up to 15% of their salary to the Plan upon completion of six months of service. Company matching and profit-sharing contributions are determined annually at the discretion of the Board of Directors. During 1996, 1995 and 1994, the Company made matching contributions of ten percent and no profit-sharing contributions. Total expense charged to operations was approximately $142, $126 and $116 in 1996, 1995 and 1994, respectively. The Company also provides certain life insurance benefits and certain health benefits for eligible retired employees through a participating contract with an insurance company. The liability and expense recorded is not material to the Company's financial position as of December 31, 1996 and 1995 or results of operations for each of the three years in the period ended December 31, 1996. 8. OTHER ASSETS: Included in other assets in 1995, is $1,177 of certain real estate, identified by the Company in prior years as being available for sale because of the discontinuance of Dean, Smith and Grace as described in Note 15 and because of the consolidation of the Company's German operations partly resulting from the acquisition described in Note 16. During 1996, the Company sold these properties and recognized a gain of $3,893, ($.58 per share after applicable income taxes of $1,712), which is included in other income net. 9. DEBT: a. SHORT-TERM BORROWINGS At December 31, 1996 and 1995, the Company had $1,500 and $2,500 outstanding, respectively, under a demand revolving loan agreement which allows for borrowings up to $2,500 and which expires April 30, 1997. Interest is payable on outstanding borrowings at the bank's prime rate minus .50% (effectively 7.75% at December 31, 1996). The Company also maintains lines of credit with a bank, which expire August 31, 1997, in the aggregate amount of $4,000 for its German subsidiaries. Outstanding borrowings bear interest at the bank's overdraft rate plus .75% (effectively 7% at December 31, 1996). The Company had no borrowings outstanding at December 31, 1996 and $1,917 outstanding at December 31, 1995 under these lines of credit. As part of these agreements, letters of credit will be reserved under the available line of credit. At December 31, 1996 and 1995, approximately $2,257 and $2,285, respectively, of letters of credit were outstanding. At December 31, 1996, the Company had outstanding $3,000 under an unsecured $7,500 revolving loan agreement with a bank. There were no outstanding borrowings as of December 31, 1995. Interest on any amounts outstanding is based on the reserve adjusted LIBOR rate plus 1.00% (effectively 6.30% at December 31, 1996). This Agreement expires June 1, 1997. As part of this agreement, standby and commercial letters of credit will be reserved under the line-of-credit. At December 31, 1996 and 1995, approximately $2,837 and $3,805, respectively, of such letters of credit are outstanding. Additionally, the Company has a line of credit with a bank, which expires on August 31, 1997, for its subsidiary located in England which allows for borrowings up to $3,400. Outstanding borrowings bear interest at the LIBOR rate plus 3% (effectively 8.8% at December 31, 1996). The Company had no outstanding borrowings at December 31, 1996 and 1995. As part of this agreement, letters of credit will be reserved under the available line of credit. At December 31, 1996, approximately $1,464 of letters of credit were outstanding. The weighted average interest rate on all outstanding short-term borrowings at December 31, 1996 and 1995 was 6.6% and 6.9%, respectively. 14 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) b. LONG-TERM BORROWINGS In June 1995, the Company entered into the Credit Facility with two banks. The agreement provides the Company with a revolving credit facility of $20,000 until April 30, 1998, at which time the Company has the option to convert any outstanding amounts into a single term loan which would mature on April 30, 2001. Interest on any outstanding loans is based on LIBOR plus 1% (effectively 6.8% at December 31, 1996). A commitment fee of 3/8 of 1% per annum must be paid quarterly on the daily average unused amount of the Credit Facility. At December 31, 1996 and 1995, the Company has $18,000 and $14,000, respectively, outstanding under the Credit Facility. The Credit Facility requires the Company to comply with various covenants which include, among others, maintaining certain financial ratios and limiting the payment of dividends. In addition, the Credit Facility contains a cross-default clause whereby any default or event of default under any other credit agreement shall be deemed an event of default under the Credit Facility. The demand revolving loan agreement described in (a) above contains a subjective acceleration clause whereby the Bank can deem an event of default if it for any good faith reason deems itself insecure or there has been a material adverse change in the financial affairs or operating condition of the Company. As of December 31, 1996, the maximum amount of retained earnings available for dividends is approximately $2,975. In 1995, a Germany subsidiary entered into two term loans. The aggregate amount outstanding at December 31, 1996 and 1995 was $297 and $417, respectively. The loans bear interest at 5.5% and 6.75% per annum and mature on March 30, 1999 and September 30, 2000, respectively. Principal payments are due semi-annually with interest payable quarterly. Future payments due under all long-term borrowing arrangements are as follows: 1997 $ 122 1998 3,878 1999 5,864 2000 6,256 2001 2,177 - -------------------------------------------------------------------------------- 18,297 Less current portion 122 - -------------------------------------------------------------------------------- $18,175 ================================================================================
On March 19, 1997 the Credit Facility was amended to revise certain financial ratios and to increase the interest rate in various increments up to LIBOR plus 1.5% dependent upon a certain financial ratio. 10. ENVIRONMENTAL LIABILITY: In September 1988, the Company and several other potentially responsible parties ("PRPs") were ordered by the Environmental Protection Agency, under the Federal "Superfund" legislation to perform a removal action to dispose of waste materials at the Rosen site, a former scrap yard in Cortland, New York. Thereafter, the Company and certain other PRPs agreed to perform a Remedial Investigation, Risk Assessment, and Feasibility Study at the site. The Remedial Investigation, Risk Assessment, and Feasibility Study have been completed by an engineering firm and submitted to EPA Region II in 1995. Six PRPs shared in the cost of the Remedial Investigation, Risk Assessment, and Feasibility Study. In 1992, five of these PRPs, including the Company, sued 15 additional companies and individuals that were considered to be potentially liable to share in the costs of the Remedial Investigation, Risk Assessment, and Feasibility Study and ultimate clean-up of the site. During 1993, it was preliminarily estimated that the minimum remedial efforts could cost from $6,000 to $8,500. Accordingly, during 1993, the Company accrued an additional $1,600 to cover its share of the estimated costs associated with the ultimate resolution of this matter. Because of financial difficulties experienced by one of the PRPs and because the suit against the potential additional PRPs is not settled, the Company computed its share of the estimated costs on the basis of five PRPs. During 1994, the estimated minimum costs of the remedial efforts did not materially change. However, because of the many uncertainties surrounding this issue the Company expensed approximately $300 of such costs instead of offsetting it against the accrued liabilities. Accordingly, at December 31, 1994, the Company maintained its accrual at $1,715 to absorb future costs associated with this matter. During 1995, the aforementioned Risk Assessment concluded there was little, if any, risk to human health at the site. The Feasibility Study concluded that a cap over a portion of the site, an asphalt cover over the remainder of the site, together with continual ground water monitoring would constitute an adequate remedy. The attorneys for five PRPs have brought on Motions for Summary Judgment against several defendants in order to establish liability for clean-up costs on the part of these defendants. In the case of two of these defendants, the motions have been granted and liability thus established. Additional motions against three defendants have been made and are now pending. It is the opinion of the PRP's attorneys that these motions are also likely to be successful. In the opinion of counsel, this is significant since all defendants against which liability has been established will in all probability be included in the EPA order directing cleanup 15 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) of the Rosen Site and will thereby be compelled to share in the costs of cleanup. During 1995 and 1996, the estimated minimum costs of the remedial efforts did not materially change. If the EPA accepts the recommendations described in the Feasibility Study, capital costs would be incurred in the early part of the remedial efforts and annual operating and maintenance costs primarily associated with ground-water monitoring and sampling would be incurred over a 30 year period. However, the EPA has given no indication that the remedy proposed in the Feasibility Study would be an acceptable one so that the final cost of the approved remedy should be considered highly speculative at this time. The ultimate liability of the Company will vary depending on the actual costs which will be incurred, the resolution of the lawsuit against the potential additional PRPs, the allocation of the costs of remediation among the various PRPs, and the financial viability of the existing PRPs. In prior years, the Company commenced an action against six insurance carriers to secure defense and indemnification coverage for matters associated with defense costs and other costs associated with the clean up of the Rosen Site. In October 1995, the parties agreed to a settlement in which six of the insurance carriers, later amended to five, agreed to make a combined payment of $350 to the Company in exchange for a full site release. 11. CONTINGENCIES: The Company is a defendant in various legal actions, primarily product liability claims, arising in the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from these matters will not have a material effect on the Company's consolidated financial position. The significance of these matters on the Company's future operating results will depend on the Company's level of future earnings as well as the timing and the amount of the ultimate disposition of these matters above the amounts covered by insurance. The Company maintains a self-insurance program for that portion of health care costs not covered by insurance. The Company is liable for aggregate claims up to $3,300 annually. The Company is also self-insured for workers' compensation for those U.S. divisions located in Ohio. The Company is liable for individual claims up to $350 per occurrence. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. 12. CAPITAL STOCK: The Company's preferred shares are $1.80 cumulative. Each preferred share is entitled to one vote and is convertible into four common shares. 13. STOCK PLANS: In 1994, the Board of Directors adopted, and the shareholders approved the 1994 Employees Stock Option Plan ("the 1994 Plan"). The 1994 Plan provides for the issuance of up to 100,000 shares of common stock in connection with nonqualified and incentive stock options granted under such plan. The exercise price for the options may not be less than the market value of the underlying shares on the date of grant. Outstanding options become exercisable one year from the date of grant, at 25% per year on a cumulative basis, and expire 10 years from the date of grant, or upon an employee's separation or retirement. As of December 31, 1996 and 1995, 73,000 shares remain available for issuance under the 1994 Plan. The Company's Employees Stock Option Plan ("the 1984 Plan") which authorized the granting of incentive and nonqualified stock options to purchase common stock expired on December 31, 1993. The 1984 Plan provided for the issuance of up to 50,000 shares of common stock in connection with the exercise of stock options under such plan. No further grants will be made under the 1984 Plan. The following summarizes changes in common stock options under the 1984 Plan and 1994 Plan during 1996, 1995 and 1994:
NUMBER OF SHARES PRICE PER SHARE - -------------------------------------------------------------------------------- Outstanding December 31, 1993 20,900 $11.38 - 13.94 Granted 22,100 9.69 Cancelled (2,100) 12.50 - 13.94 - -------------------------------------------------------------------------------- Outstanding December 31, 1994 40,900 $ 9.69 - 13.94 Granted 4,900 10.19 Cancelled (2,000) 9.69 - -------------------------------------------------------------------------------- Outstanding December 31, 1995 43,800 $ 9.69 - 13.94 Granted - - Cancelled (500) 10.19 - -------------------------------------------------------------------------------- Outstanding December 31, 1996 43,300 $ 9.69 - 13.94 ================================================================================ Options Exercisable at: December 31, 1996 29,700 $ 9.69 - 13.94 December 31, 1995 23,325 $ 9.69 - 13.94
The weighted average exercise price and the weighted average contractual life on all outstanding options is $11.50 and 5 1/2 years, respectively. The Company also has a Restricted Stock Bonus Plan, which authorizes the awarding of up to an aggregate of 50,000 common shares to employees less than sixty years old. No common shares have been awarded under this Plan. 14. FOREIGN CURRENCY: All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at rates of exchange in effect at the close of the year, in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency 16 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) Translation"(SFAS 52). SFAS 52 requires that the effects of changes in the value of the U.S. dollar, as compared to the local currency of the foreign subsidiaries, be shown as translation adjustments in Shareholders' Equity. Translation adjustments are as follows:
1996 1995 1994 - -------------------------------------------------------------------------------- Balance, beginning of year $ 25 $ 62 $(394) - -------------------------------------------------------------------------------- Translation adjustment increase (decrease): Net long-term assets 67 82 82 Working capital 135 (119) 374 - -------------------------------------------------------------------------------- Total adjustment 202 (37) 456 - -------------------------------------------------------------------------------- Balance, end of year $ 227 $ 25 $ 62 ================================================================================
Currency exchange gains and losses during 1996, 1995 and 1994 were not significant. The Company enters into forward foreign exchange contracts during the normal course of business to hedge its foreign currency exposure associated with sales contracts and purchase orders denominated in foreign currencies. Any gains and losses in connection with the contracts are included in the consolidated statements of operations and retained earnings. At December 31, 1996 and 1995, the value of the outstanding contracts were not significant to the Company's financial position. 15. DISCONTINUED OPERATIONS: In 1992, the Company discontinued the operations of Dean Smith and Grace and provided for the estimated loss of $8,478 ($1.50 per share after applicable income taxes of $2,883). Subsequent to 1992, the Company recovered some of these charges primarily due to the realization of assets at more favorable terms than originally estimated. As a result, the Company recognized a gain of $365 ($.06 per share after applicable income taxes of $124), $230 ($.04 per share after applicable income taxes of $78), and $557 ($.10 per share after applicable income taxes of $189), all of which are included in other income net, for 1996, 1995 and 1994, respectively. Primarily all of the 1996 gain is attributed to the sale of property as described in Note 8. 16. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION: The Company operates in three primary industries in which it designs and builds machinery in the machine tool, coil processing and paper conversion industries. The Company's principal products are computer numerically controlled turning machines and machining centers, custom engineered metal coil processing equipment and paper conversion equipment. Demand for all of the Company's products is highly cyclical. While the metal working machinery industry tends to lag the general economy, there can be no assurance that the industry will emulate the economy. All Company products are sold by direct Company sales people and independent agents throughout the United States and the world. Approximately 17%, 16% and 10% of the Company' consolidated revenues for 1996, 1995 and 1994, respectively, were export sales from the United States primarily to Mexico, Canada, China and the Far East. Intercompany and intersegment sales are priced at market but are not material. The foreign subsidiaries are located in England and Germany. In June 1995, the Company purchased, for approximately $500, certain assets of the paper conversion machinery segment (Busch Gmbh) of the Depiereux group of companies. In June 1994, the Company purchased certain assets of the coil processing machinery segment (Depiereux) of the Depiereux group of companies for approximately $1,260. During 1994, the Company incurred primarily start-up costs associated with this acquisition. In 1996, the Company consolidated its German operations and recognized a gain on sale of property as described in Note 8. Business segment information is presented below:
1996 1995 1994 - ------------------------------------------------------------------------------- Revenues: Machine tools $ 55,328 $ 49,534 $ 43,195 Coil processing 57,383 57,651 33,354 Paper conversion 3,623 8,313 -- Adjustments and eliminations (806) (507) (217) - -------------------------------------------------------------------------------- $ 115,528 $ 114,991 $ 76,332 ================================================================================ Operating income (loss): Machine tools $ (9,258) $ (1,980) $ (2,973) Coil processing (789) 2,122 13 Paper conversion (902) 1,182 -- Corporate (271) (104) (447) - -------------------------------------------------------------------------------- $ (11,220) $ 1,220 $(3,407) ================================================================================ Total assets: Machine tools $ 56,122 $ 57,930 $ 51,055 Coil processing 40,288 41,403 28,301 Paper conversion 1,787 8,560 -- Corporate 8,871 3,233 2,763 Adjustments and eliminations (4,156) (9,778) (3,777) - -------------------------------------------------------------------------------- $ 102,912 $ 101,348 $ 78,342 ================================================================================ Depreciation and amortization: Machine tools $ 955 $ 1,013 $ 1,060 Coil processing 803 647 478 Paper conversion 197 118 -- - -------------------------------------------------------------------------------- $ 1,955 $ 1,778 $ 1,538 ================================================================================ Capital expenditures: Machine tools $ 585 $ 564 $ 1,099 Coil processing 434 869 1,232 Paper conversion 78 725 -- - -------------------------------------------------------------------------------- $ 1,097 $ 2,158 $ 2,331 ================================================================================
17 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Dollars in thousands, except per share data) Geographic information is presented below:
1996 1995 1994 - -------------------------------------------------------------------------------- Revenues: United States $ 97,088 $ 88,439 $ 71,001 Europe 19,246 27,059 5,548 Adjustments and eliminations (806) (507) (217) - -------------------------------------------------------------------------------- $ 115,528 $ 114,991 $ 76,332 ================================================================================ Operating income (loss): United States $ (8,691) $ 540 $ (1,005) Europe (2,258) 784 (1,955) Corporate (271) (104) (447) - -------------------------------------------------------------------------------- $ (11,220) $ 1,220 $ (3,407) ================================================================================ Total assets: United States $ 83,318 $ 84,207 $ 71,443 Europe 14,879 23,686 7,913 Corporate 8,871 3,233 2,763 Adjustments and eliminations (4,156) (9,778) (3,777) - -------------------------------------------------------------------------------- $ 102,912 $ 101,348 $78,342 ================================================================================
17. FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial instruments of the Company and its subsidiaries consist mainly of cash, long term investments, current and non-current accounts receivables, short-term bank credit, accounts payable, accrued liabilities and long-term liabilities. In view of their nature, the fair value of the financial instruments included in working capital of the Company is usually identical or close to their carrying amount. The fair value of non-current receivables and long-term liabilities also approximates their carrying value, because they bear interest at rates close to the prevailing market rates. 18 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors The Monarch Machine Tool Company We have audited the accompanying consolidated balance sheets of THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated statements of operations and retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Monarch Machine Tool Company and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Dayton, Ohio February 11, 1997, except for the last paragraph of Note 9 as to which the date is March 19, 1997 19 21 BOARD OF DIRECTORS JOHN A. BERTRAND, President, A.O. Smith Electrical Products Company, Tipp City, Ohio RICHARD E. CLEMENS, President and Chief Executive Officer, The Monarch Machine Tool Company, effective 3-10-97. WILLIAM A. ENOUEN, Senior Vice President and Chief Financial Officer-Retired, Mead Corporation, Dayton, Ohio DR. WALDEMAR M. GOULET, Ph.D., Professor of Finance, Wright State University, Dayton, Ohio KENNETH H. HOPKINS, Chairman and Director, Field Abrasives Incorporated, Dayton, Ohio DAVID E. LUNDEEN, Acting President and Chief Executive Officer, The Monarch Machine Tool Company JOHN M. RICHARDSON, Senior Vice President-Retired, A. O. Smith Corporation, Tipp City, Ohio JOSEPH M. RIGOT, Partner-in-Charge, Thompson, Hine and Flory, Dayton, Ohio JOHN F. TORLEY, Chief Executive Officer-Retired, Amcast Industrial Corp., Dayton, Ohio OFFICERS DAVID E. LUNDEEN, Acting President and Chief Executive Officer, The Monarch Machine Tool Company RICHARD E. CLEMENS, President and Chief Executive Officer, The Monarch Machine Tool Company, effective 3-10-97. ROBERT J. KINDT, President-Monarch Stamco/Busch Divisions and Subsidiaries ROBERT A. SKODZINSKY, Vice President-Vertical Machining Centers and General Manager, Monarch Cortland PAUL J. MALONEY, Vice President and General Manager, Monarch Stamco U.S. ROBERT B. RIETHMAN, Treasurer EARL J. HULL, Secretary DIVISIONS AND SUBSIDIARIES CORPORATE OFFICE The Monarch Machine Tool Company 615 North Oak Avenue Sidney, Ohio 45365 Telephone: 937/492-4111 DIVISIONS Monarch Sidney, Sidney, Ohio MANUFACTURING DIVISION Monarch Cortland, Cortland, New York MANUFACTURING DIVISION Monarch Stamco, New Bremen, Ohio MANUFACTURING DIVISION Monarch Busch U.S., New Bremen, Ohio MANUFACTURING DIVISION SUBSIDIARIES Monarch Werkzeugmaschinen GmbH Dueren, Germany SALES AND SERVICE SUBSIDIARY Stamco UK Ltd. Walsall, West Midlands, England SALES AND ENGINEERING SUBSIDIARY Stamco Depiereux GmbH Dueren, Germany SALES AND ENGINEERING SUBSIDIARY Monarch Busch GmbH Dueren, Germany SALES AND ENGINEERING SUBSIDIARY Monarch Machine Tool International Ltd. Bridgetown, Barbados, W.I. FOREIGN SALES CORPORATION COMMON STOCK TRANSFER AGENT AND REGISTRAR Fifth Third Bank 38 Fountain Square Plaza MD-1090F5 Cincinnati, Ohio 45263 1-800-837-2755 Shares traded New York Stock Exchange. Symbol MMO. 20 EX-21 7 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Monarch has five consolidated subsidiaries, each of which is wholly-owned, as follows: NAME JURISDICTION - ---- ------------ Monarch Werkzeugmaschinen GmbH Germany Stamco Depiereux GmbH Germany Monarch Busch GmbH Germany Stamco (U.K.), Ltd. United Kingdom Monarch Machine Tool International, Inc. (FSC) Barbados, West Indies EX-23 8 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of The Monarch Machine Tool Company and Subsidiaries on Form S-8 (File No. 2-92311) of our report dated February 11, 1997, except for the last paragraph of Note 9 as to which the date is March 19, 1997, on our audits of the consolidated financial statements and financial statement schedule of The Monarch Machine Tool Company and Subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Dayton, Ohio March 27, 1997 EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET, CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERNECE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,848 0 40,773 0 15,528 71,759 53,991 38,053 102,912 35,391 0 5,618 0 14 40,947 102,912 115,528 115,528 110,076 126,748 (3,329) 469 1,065 (7,891) (2,393) (7,891) 0 0 0 (5,498) (1.47) (1.47)
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