-----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, WID8BG9/3Xm4kEflnozT8cG5Z8Bbhh3uqAAWdvnUe6uI4uXvnIyHY1ayWsbtGJAp K+wEjOPNSjLsHDUWpWcj5Q== 0000950152-98-002822.txt : 19980401 0000950152-98-002822.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950152-98-002822 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-01997 FILM NUMBER: 98581320 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 MACINE 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, 1997 Commission File No. 1-1997 THE MONARCH MACHINE TOOL COMPANY An Ohio Corporation Employer Identification No. 34-4307810 2600 Kettering Tower, Dayton, Ohio 45423 Telephone 937/910-9300 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 9, 1998 was $28,504,000. The number of common shares outstanding as of March 9, 1998, was 3,768,967. Documents Incorporated By Reference (1) Portions of the registrant's annual report to security holders for the year ended December 31, 1997 (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 5, 1998. (Parts I & III) 2 Part I ------ Item 1 - Business - ----------------- The Monarch Machine Tool Company ("Monarch" or the "Company") was incorporated in 1909. During 1997, the Company sold the business of the Sidney lathe (turning machines) operation and decided to close the operations of its three German businesses. Subsequently, in March 1998, the Company entered into an agreement to sell a majority of the assets of one of the German businesses, with the buyer agreeing to assume certain liabilities of the business. The Company entered into a strategic alliance in 1997 with Spinner Machine Tool Company, a German company, to market, in North America, ultra-precision horizontal turning machines produced by Spinner and to have Spinner market the Company's machining centers in Europe. Products - -------- The Company operates in three primary industries in which it designs and builds equipment, namely the machine tool, coil processing and coating and laminating 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 built by the Company. Monarch Machine Tools --------------------- 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. Stamco Coil Processing Equipment -------------------------------- Stamco engineers and manufactures a broad line of coil processing equipment. 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. Stamco 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 - ----------------- Busch Coating and Laminating Equipment -------------------------------------- In 1995, the Company entered a new industry segment with its purchase of certain assets of the coating and laminating equipment business of a German company. In 1997, the Company decided to close the German business and to manufacture this equipment solely in the United States. The equipment, typically sold in complete lines, is used to further process paper, plastics, and foil for use in flexible or medical packaging, pressure sensitives, adhesives products and wall coverings. The products 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 equipment manufacturers, both domestic and foreign. The market for the Company's products is subject to normal price, service, and quality competition. Increasingly, foreign machine tool manufacturers aggressively compete in the North American market. Although the prior primary competition was predominantly Japanese, it is now Asian. Customers - --------- Monarch has a broad market base. Virtually all manufacturing plants that perform metal cutting operations are potential customers for Monarch machining centers. Producers, suppliers, and users of strip metal generally have application for coil processing equipment. The Company's coating and laminating equipment is used by individual customers in the packaging industry and by producers of commercial or consumer products. The loss of any individual 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, 1997 1996 ------------ ------------ Machine Tools $10,275 $18,914 Coil Processing Equipment 30,352 41,901 Coating and Laminating Equipment 1,584 - ------- ------- $42,211 $60,815 ======= =======
The entire backlog can reasonably be expected to be shipped within twelve months. Seasonal factors are not significant to Monarch. 4 Part I ------ Purchases of Raw Materials and Supplies - --------------------------------------- Monarch manufactures substantially all of the components of its machines other than computer 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 commercially available. Monarch's numerically controlled machines are designed to be used with controls made by any one of the major industrial control manufacturers. Patents, Licenses and Franchises - -------------------------------- Patents, licenses, and franchises are not considered significant to the business. During 1997, Monarch entered into a strategic alliance with Spinner Machine Tool Company GmbH to jointly sell each other's products. In North America, Monarch will sell Spinner's ultra-precision horizontal turning machines. Engineering and Development - --------------------------- Monarch's divisional engineering departments, which currently employ 97 persons, are responsible for engineering customer orders, the improvement of existing product lines, and the development of new products. Monarch's current product lines have been engineered and developed by Monarch personnel, with the exception of the new Spinner products. Refer to the Notes to Consolidated Financial Statements, incorporated into this Form 10-K by reference, for the amount of research and development expense in 1997, 1996 and 1995. Employees - --------- Monarch had 537 employees at December 31, 1997. Working Capital - --------------- Because of the long cycle time required to manufacture certain of 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 1997, 1996, and 1995 are included in Notes to Consolidated Financial Statements incorporated by reference into this Form 10-K. 5 Part I Item 2 - Properties - ------------------- Domestic - -------- The coating and laminating equipment business is based in Sidney, Ohio, in a plant of over 400,000 square feet, a significant portion of which is being leased to the buyer of the Sidney lathe division. The Company has listed this property for sale in 1998, although it expects to be able to continue using the property for the operations of its laminating and coating businesses for the foreseeable future. Manufacturing operations for the machine tool business are conducted in Cortland, New York in a plant of 135,000 square feet and for the coil processing equipment in New Bremen, Ohio, in a plant of 180,000 square feet. All facilities are owned by Monarch and are in good condition. During 1998, the Company relocated its corporate headquarters from Sidney, Ohio to leased facilities in Dayton, Ohio. Foreign Subsidiaries - -------------------- Stamco (U.K.), Ltd., engineers and sells coil processing equipment that is produced at leased, general purpose facilities located in England. During 1997, the Company decided to close or sell the operations of the following three businesses located in Germany. The closings are expected to be completed in 1998. Monarch Werkzeugmaschinen GmbH, served as a sales and service headquarters for U.S. machine tools in Europe but performed minimal operations in 1997, primarily aftermarket parts sales. Stamco Depiereux GmbH, engineered and sold coil processing equipment and operates from leased general purpose facilities. Monarch Busch GmbH, engineered and sold coating and laminating equipment and operates from leased general purpose facilities. 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. Since 1995, the estimated minimum costs of the remedial efforts have not materially changed. 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 $350,000 to the Company in exchange for a full site release. During 1997, the EPA published a proposed Record of Decision ("ROD"), which is awaiting final approval. The ROD basically incorporates the proposed remediation program proposed by the PRP's. Following the expected approval of the ROD, the PRPs expect to either negotiate an agreement with non-participating PRPs concerning past and prospective expenses or to commence an action against the non-participants. 7 Part I ------ Item 3 - Legal Proceedings, Continued - -------------------------- Based upon information presently available, the Company believes that the $1,450,000 it presently has reserved at December 31, 1997 is adequate to provide for its share of the estimated costs for resolution of this issue. 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 headings "Shareholders' Information and Market Price, Dividend and Shareholder Data" in 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 9 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 10 through 11 of the Annual Report and is incorporated herein by this reference. Item 8 - Financial Statements and Supplementary Data - ---------------------------------------------------- The information required by this Item 8 is set forth on pages 12 through 22 of the Annual Report and is incorporated herein by this reference. 8 PART II 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 and Chief Executive Officer Richard E. Clemens 48 President, Machine Tool Division Robert A. Skodzinsky 53 President, Stamco Division Frederick G. Sharp 44 Vice President and Chief Financial Officer Karl A. Frydryk 43 Vice President, Operations Improvement Patrick M. Flaherty 48 Vice President, Human Resources Timothy P. Gibson 40 Vice President and General Manager - Stamco US Paul J. Maloney 60 Treasurer Robert B. Riethman 50 Secretary Earl J. Hull 64
Mr. Clemens became President and Chief Executive Officer of Monarch in March 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 1995 to 1997. Prior to working for the Frick Company, he was the President and Chief Executive Officer of Clark Material Handling Company, a manufacturer of fork lift trucks, from 1994 to 1995. Before working for Clark Material Handling Company, he was President of BMY Combat Systems, a division of Harsco Corporation, from 1992 to 1994 and held various other management positions with the division from 1985 to 1992. 9 PART III -------- Item 10 - Directors and Executive Officers of the Registrant, Continued - ------------------------------------------------------------ Executive Officers of the Registrant, Continued - ------------------------------------ Mr. Skodzinsky became President of the Machine Tool Division in March 1998. He had been a Vice President of the Company since 1995, General Manager of the Monarch Cortland division since 1994 and prior to that date was the Director of Marketing at that division. He was previously employed at Hunt Valve Company as President and Chief Operating Officer from 1991 to 1993. Mr. Sharp was named President, Stamco Division in March 1998. Prior to joining the Company he was Vice President, Marketing and Sales for Fairfield Manufacturing Co., Inc., a manufacturer of power transmission components and assemblies, and from 1991 to 1996 he was Director, Combat Artillery Programs for United Defense, LP (formerly BMY Combat Systems) a manufacturer of tracked military vehicles. Mr. Frydryk, a CPA, became Vice President and Chief Financial Officer on January 5, 1998. He had previously been employed for over 13 years by Nord Resources Corporation, a New York Stock Exchange listed company engaged in mining and mineral and chemical processing. He held various positions with that company, including serving for over 10 years as its Vice President Controller and Secretary. Mr. Flaherty become Vice President, Operations Improvement on February 16, 1998. Prior to joining the Company, he was a consultant, providing consulting services to the Company for 6 months. From 1995 to 1997 he was Vice President, Operations for Frick Company, a subsidiary of York International, which manufactures compressors, heat exchangers and process refrigeration equipment. From 1994 to 1995 he served as Vice President, Operations and then Vice President, Business Development for Clark Equipment Handling Company, a manufacturer of fork lift trucks, and from 1977 to 1994 served in various capacities with Allied Signal, including Vice President, Airline Services from 1992 to 1994. Mr. Gibson became Vice President, Human Resources on March 2, 1998. From January 1995 until his employment by the Company he was Vice President, Human Resources for CTG, Inc., a distributor of computer-related equipment. Prior to then he was, for over 5 years, the Senior Director, Human Resources for US Airways Express. Mr. Maloney has been Vice President and General Manager - Stamco U.S. since 1995 and was the Sales and Marketing manager for Stamco U.S. since 1991. 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. 10 PART III -------- 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. 11 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, 1997 and 1996 * Consolidated Statements of Operations and Retained Earnings for the years ended December 31, 1997, 1996 and 1995 * Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 * 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, 1997 (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 fourth quarter of 1997. (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. 12 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 27, 1998 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 27, 1998 RICHARD E. CLEMENS Director, President and Chief Executive Officer By /s/ John A. Bertrand ------------------------------------------------ March 27, 1998 JOHN A. BERTRAND Director By /s/ Gerald L. Connelly ------------------------------------------------ March 27, 1998 GERALD L. CONNELLY Director By /s/ William A. Enouen ------------------------------------------------ March 27, 1998 WILLIAM A. ENOUEN Director By /s/ Waldemar M. Goulet ------------------------------------------------ March 27, 1998 WALDEMAR M. GOULET Director By /s/ Kenneth H. Hopkins ------------------------------------------------ March 27, 1998 KENNETH H. HOPKINS Director 13 By /s/ David E. Lundeen ------------------------------------------------ March 27, 1998 DAVID E. LUNDEEN Director By /s/ Joseph M. Rigot ------------------------------------------------ March 27, 1998 JOSEPH M. RIGOT Director By /s/ Karl A. Frydryk ------------------------------------------------ March 27, 1998 KARL A. FRYDRYK Vice President (Principal Financial Officer) By /s/ Robert B. Riethman ------------------------------------------------ March 27, 1998 ROBERT B. RIETHMAN Treasurer (Principal Accounting Officer) 14 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 23 of the 1997 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 19, 1998, except for Note 2 as to which the date is March 12, 1998 15 THE MONARCH MACHINE TOOL COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (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, 1997: Allowance for doubtful trade accounts receivable $ 469 $ 1,097 $ (59)(a) $ 1,507 Inventory reserves 13,516 751 (13,236)(b) 1,031 Valuation allowance against deferred tax assets - 1,243 - 1,243 -------------- -------------- ------------- ------------- Total $ 13,985 $ 3,091 $ (13,295) $ 3,781 ============== ============== ============= ============= 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 ============== ============== ============= =============
(a) Write-offs/Collections (b) Disposals/Sales 16 INDEX OF EXHIBITS (Filed with the Commission and the New York Stock Exchange) ---------
"Assigned" Exhibit Number * Description -------- ----------- 3 Articles of Incorporation and Regulations (2) 10 Material Contracts 10.1 1994 Employees Stock Option Plan (3) 10.2 Letter Agreement, dated February 13, 1997, between The Monarch Machine Tool Company and Richard E. Clemens (3) 10.3 Letter Agreement, dated May 7, 1996 between The Monarch Machine Tool Company and Robert J. Siewert (3) 10.4 Amended and Restated Credit Agreement dated as of June 9, 1995 by and among the Company, NBD Bank, Star Bank, N.A and NBD Bank, as agent (4) 10.5 Asset Purchase Agreement by and between Monarch Lathes, L.P. and the Company, dated July 16, 1997 (5) 10.6 First Amendment to Amended and Restated Credit Agreement dated as of July 11, 1995 (1) 10.7 Second Amendment to Amended and Restated Credit Agreement dated as of July 31, 1996 (1) 10.8 Third Amendment to Amended and Restated Credit Agreement dated as of March 19, 1997 (1) 10.9 Fourth Amended to Amended and Restated Credit Agreement dated as of November 10, 1997 (1) 11 Statement Re: Computation of Income (Loss) Per Share (1) 13 Annual Report to Security Holders for the fiscal year ended (6) December 31, 1997 21 Subsidiaries of the Registrant (1) 23 Consent of Independent Accountants (1) 27 Financial Data Schedule (1) * Exhibits 2, 4, 9, 12, 16, 18, 22, 24, 28, and 29 are either inapplicable to the Company or require no answer.
17 INDEX OF EXHIBITS (Filed with the Commission and the New York Stock Exchange) --------- "Assigned" Exhibit Number * Description -------------- (1) Indicates Exhibit is being filed with this report (2) 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. (3) Incorporated by reference to the Exhibit with the same number filed with the Company Form 10-K for the year ended December 31, 1996 (4) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 10-Q for the quarter ended March 31, 1997 (5) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K dated August 13, 1997 (6) 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-10.6 2 EXHIBIT 10.6 1 Exhibit 10.6 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ----------------------------- THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of July 11, 1995 (this "Amendment"), is by and among MONARCH MACHINE TOOL COMPANY, an Ohio corporation (the "Company"), the BANKS identified on the signature pages hereof (collectively the "Banks" and individually a "Bank") and NBD BANK, a Michigan banking corporation, as agent (in such capacity, the "Agent") for the Banks. INTRODUCTION ------------ The Company, the Banks and the Agent have entered into the Amended and Restated Credit Agreement, dated as of June 9, 1995 (the "Credit Agreement"). The parties now desire to amend the Credit Agreement on the terms and conditions herein set forth. NOW THEREFORE, in consideration of the premises and of the mutual agreements herein and in the Credit Agreement contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENTS TO CREDIT AGREEMENT ----------------------------------------- 1.1 The definition of the term "Borrowing Base" in Section 1.1 of the Credit Agreement is amended to read in full as follows: "BORROWING BASE" shall mean, as of any date, the sum of (a an amount equal to 80% of the Eligible Accounts Receivable plus (b) an amount equal to 50% of the Eligible Inventory minus (c) the Fifth Third Borrowings. 1.2 The following definition of the term "Fifth Third Borrowings" is added to Section 1.1 of the Credit Agreement in its alphabetical location: "Fifth Third Borrowings" shall mean, as of any date, the aggregate outstanding principal amount Indebtedness of the Company to The Fifth Third Bank. 1.3 Subpart (vi) of Section 5.1(d) of the Credit Agreement is relabeled as subpart (vii) and a new subpart (vi) of Section 5.1 is inserted reading as follows: 2 (vi) On the same day, telephonic notice, followed immediately by written confirmation, of all borrowings from time to time by the Company from The Fifth Third Bank and all repayments thereof from time to time. 1.4 Section 5.2(m) of the Credit Agreement is amended to read in full as follows: (m) NEGATIVE PLEDGE LIMITATION. Enter into any agreement, with any person other than the Banks pursuant hereto, which prohibits or limits the ability of the Company or any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired; PROVIDED that this Section 5.2(m) shall not prohibit the Company from entering into such an agreement with The Fifth Third Bank, so long as the aggregate principal amount of Indebtedness of the Company to The Fifth Third Bank does not at any time exceed $7,500,000. 1.5 AMENDMENT OF EXHIBIT E. Exhibit E annexed to the Credit Agreement is deleted in its entirety and Exhibit E annexed to this Amendment shall be deemed substituted in place thereof. ARTICLE 2. REPRESENTATIONS AND WARRANTIES ----------------------------------------- In order to induce the Banks and the Agent to enter into this Amendment, the Company represents and warrants that: 2.1 The execution, delivery and performance by the Company of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property is or may be bound or affected. 2.2 This Amendment is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 2.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or stockholder of the Company, is required on the part of the Company in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment. -2- [First Amendment to Amended and Restated Credit Agreement] 3 2.4 After giving effect to the amendments contained in Article 1 of this Amendment, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. ARTICLE 3. MISCELLANEOUS ------------------------ 3.1 If the Company shall fail to perform or observe any term, covenant or agreement in this Amendment, or any representation or warranty made by the Company in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute an Event of Default. 3.2 All references to the Credit Agreement in any other document, instrument or certificate referred to in the Credit Agreement or delivered in connection with or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby. 3.3 Subject to the amendments herein provided, the Credit Agreement shall in all respects continue in full force and effect. 3.4 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 3.5 This Amendment shall be governed by and construed in accordance with the laws of the State of Michigan. 3.6 The Company agrees to pay the reasonable fees and expenses of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for the Agent, in connection with the negotiation and preparation of this Amendment and the consummation of the transactions contemplated hereby, and in connection with advising the Agent as to its rights and responsibilities with respect thereto. 3.7 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. [THIS SPACE INTENTIONALLY LEFT BLANK.] -3- [First Amendment to Amended and Restated Credit Agreement] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered on the 11th day of July, 1995, notwithstanding the day and year first-above written. THE MONARCH MACHINE TOOL COMPANY By: /s/ Robert B. Riethman ------------------------ Its: Treasurer -------------------- NBD BANK, as a Bank and as the Agent By: /s/ Victoria L. Decker ------------------------ Its: Vice President -------------------- STAR BANK, N.A. By: Thomas D. Gill ------------------------ Its: Vice President -------------------- -4- [First Amendment to Amended and Restated Credit Agreement] 5 [EXHIBITS A THROUGH D TO THE FIRST AMENDMENT INTENTIONALLY OMITTED.] 6 EXHIBIT E BORROWING BASE CERTIFICATE [Date] NBD Bank, as Agent 611 Woodward Avenue Detroit MI 48226 Attention: Midwest Banking Division Reference is made to the Amended and Restated Credit Agreement dated as of June 9, 1995, as amended by the First Amendment to Amended and Restated Credit Agreement dated as of July 11, 1995, and as further amended, supplemented, extended or otherwise modified from time to time (the "Credit Agreement"), among The Monarch Machine Tool Company, an Ohio corporation (the "Company"), the banks parties thereto (the "Banks") and you as agent for the Banks (the "Agent"). Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Credit Agreement. The Company hereby represents and warrants to the Agent and the Banks that the following computations of the Borrowing Base, and the related supporting schedules attached hereto, and of the mandatory prepayment required pursuant to Section 3.1(d) of the Credit Agreement are true and correct as of the close of business on __________ , 19___ and are in conformity with the terms and conditions of the Credit Agreement: Borrowing Base -------------- 1. Accounts Receivable: (a) Aggregate Accounts Receivable $________ (b) Less: Ineligible Accounts Receivable $________ (c) Eligible Accounts Receivable $________ (d) 80% of Eligible Accounts Receivable $________ 7
2. Inventory: (a) Aggregate Inventory $________ (b) Less: Ineligible Inventory $________ (c) Eligible Inventory $________ (d) 50% of Eligible Inventory $________ 3. Aggregate principal amount of Indebtedness of the Company to The Fifth Third Bank $________ 4. Borrowing Base (item 1(d) plus item 2(d) minus item 3) $ ======== Determination of Mandatory Prepayment ------------------------------------- 1. Aggregate Borrowing Base (item 4 above) $________ 2. Less: Dollar Equivalent of aggregate principal amount of Loans outstanding $________ 3. Excess (or deficiency) in Borrowing Base (if deficiency, prepayment required in amount of deficiency) $ ========
The Company hereby further represents and warrants to the Banks that as of the close of business on ___________ 19___: A. The representations and warranties contained in Article IV of the Credit Agreement are true and correct on and as of such date, as if such representations and warranties were made on and as of such date. For purposes of this certificate the representations and warranties contained in Section 4.6 of the Credit Agreement shall be deemed made with respect to both the financial statements referred to therein and the most recent financial statements delivered pursuant to Sections 5.1(d)(ii) and (iii) of the Credit Agreement. B. No Event of Default and no Default has occurred and is continuing. THE MONARCH MACHINE TOOL COMPANY By: ______________________________ Its: ___________________________ BORROWING BASE CERTIFICATE -2- 8 Amended and Restated Credit Agreement dated as of June 9, 1995 by and among The Monarch Machine Tool Company, NBD Bank, Star Bank, N.A., and NBD Bank, as Agent Closing Item List ----------------- 1. Amended and Restated Credit Agreement, with Exhibits A through E and Schedules 4.4, 4.5, 5.2(d) and 5.2(k) attached 2. Revolving Credit Notes 3. Closing Certificate of the Company with respect to charter documents and resolutions 4. Environmental Certificate (1992; referenced in Section 4.13 of the Amended and Restated Credit Agreement) 5. Legal Opinion EX-10.7 3 EXHIBIT 10.7 1 Exhibit 10.7 SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ----------------------------- THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of July 31, 1996 (this "Amendment"), is by and among MONARCH MACHINE TOOL COMPANY, an Ohio corporation (the "Company"), the BANKS identified on the signature pages hereof (collectively the "Banks" and individually a "Bank"), and NBD BANK, a Michigan banking corporation, as agent (in such capacity, the "Agent") for the Banks. INTRODUCTION ------------ The Company, the Banks and the Agent are parties to the Amended and Restated Credit Agreement, dated as of June 9, 1995, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of July 11, 1995 (the "Credit Agreement"). The parties now desire to amend the Credit Agreement on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein and in the Credit Agreement contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENTS TO CREDIT AGREEMENT ----------------------------------------- Effective upon the date that the conditions precedent set forth in Article 2 of this Amendment are satisfied, which date (the "Amendment Date") shall be determined by the Agent in its sole discretion, the Credit Agreement hereby is amended retroactively as of June 30, 1996, as follows: 1.1 Clause (a) of the definition of the term "Eurodollar Rate" in Section 1.1 is amended to read in full as follows: (a) the Applicable Eurodollar Rate Margin, plus 1.2 The following definition of the term "Applicable Eurodollar Rate Margin" is added to Section 1.1 in alphabetical order: "APPLICABLE EURODOLLAR RATE MARGIN" shall be, for purposes of determining the Eurodollar Rate applicable to any Eurodollar Rate Loan, whether a Revolving Credit Loan or the Term Loan, outstanding at any time during any calendar month (the "Application Month"), the percent set forth under the heading "Applicable Eurodollar Rate Margin for Revolving Credit Loans" and "Applicable Eurodollar Rate Margin for the Term Loan", respectively, below in the row corresponding to the range into 2 which falls the ratio (the "Ratio") of the Consolidated Total Liabilities of the Company and its Subsidiaries to the Consolidated Tangible Net Worth of the Company and its Subsidiaries as of the end of the last fiscal quarter (the "Determination Quarter") preceding such Application Month for which financial statements have been delivered to the Banks under Section 5.l(d)(ii):
Applicable Eurodollar Applicable Eurodollar Rate Margin for Rate Margin for Ratio Revolving Credit Loans the Term Loan ----- ---------------------- ------------- Less than or equal to 0.75 to 1.00 0.75% 1.00% Greater than 0.75 to 1.00 1.00% 1.25%
Each change in the Applicable Eurodollar Rate Margin in accordance with this definition, as finally determined upon the Bank's receipt of the Company's financial statements for any Determination Quarter pursuant to Section 5.l(d)(ii), shall be effective as of the first day of the corresponding Application Month following such Determination Quarter. 1.3 The definition of the term "Tangible Net Worth" in Section 1.1 is amended to read in full as follows: "TANGIBLE NET WORTH" of any person shall mean, as of any date, (a) the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings of such person and the amount of any foreign currency translation adjustment account shown as a capital account of such person, less (b) the net book value of all items of the following character which are included in the assets of such person: (i) goodwill, including without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock (to the extent not -2- [Second Amendment to Amended and Restated Credit Agreement] 3 already deducted in such equity accounts), (vi) franchises, licenses and permits, and (vii) other assets which are deemed intangible assets under generally accepted accounting principles. 1.4 Section 5.2(c) is amended to read in full as follows: (c) TOTAL LIABILITIES TO TANGIBLE NET WORTH. Permit or suffer the ratio of Consolidated Total Liabilities of the Company and its Subsidiaries to Consolidated Tangible Net Worth of the Company and its Subsidiaries to be greater than 1.15 to 1.00 at any time. ARTICLE 2. CONDITIONS PRECEDENT TO AMENDMENTS --------------------------------------------- As conditions precedent to the effectiveness of the amendments to the Credit Agreement set forth in Article 1 of this Amendment, the Agent and the Banks shall receive the following documents and the following matters shall be completed, all in form and substance satisfactory to the Agent and the Banks: 2.1 An incumbency certificate of the Company and a certified copy of the resolutions of the board of directors of the Company authorizing the Company's execution, delivery and performance of this Amendment and the transactions contemplated hereby. 2.2 Payment by the Company to the Agent of an amendment fee in the amount of $10,000 for the pro rata account of the Banks. ARTICLE 3. REPRESENTATIONS AND WARRANTIES ----------------------------------------- In order to induce the Agent and the Banks to enter into this Amendment, the Company represents and warrants that: 3.1 The execution, delivery and performance by the Company of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property is or may be bound or affected. 3.2 This Amendment is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. -3- [Second Amendment to Amended and Restated Credit Agreement] 4 3.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or stockholder of the Company, is required on the part of the Company in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment. 3.4 After giving effect to the amendments contained in Article 1 of this Amendment, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. ARTICLE 4. WAIVER OF CERTAIN DEFAULTS ------------------------------------- 4.1 The Company has advised the Agent and the Banks that prior to, and as of, March 31, 1996, the Company failed to comply with certain covenants set forth in Sections 5.1 and 5.2 of the Credit Agreement, and the Company has asked the Banks to waive any Event of Default caused by such failure. Based upon such request, the Banks hereby waive any such Event of Default; PROVIDED that (a) such waiver shall be limited to those Events of Default caused by such covenant compliance failures occurring on or before March 31, 1996 that are known to the Banks as of the date of this Amendment, and (b) such waiver shall not be deemed to (i) be a waiver of or consent or agreement to any other action or omission in violation of the Credit Agreement or any other instrument, agreement or document referred to therein or executed in connection therewith, (ii) be a waiver or modification of any provision of the Credit Agreement or of any instrument, agreement or document referred to therein or executed in connection therewith, or (iii) prejudice any other right or rights which the Banks may now have or have in the future under or in connection with the Credit Agreement or any instrument, agreement or document referred to therein or executed in connection therewith. ARTICLE 5. MISCELLANEOUS ------------------------ 5.1 If the Company shall fail to perform or observe any term, covenant or agreement in this Amendment, or any representation or warranty made by the Company in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute an Event of Default. 5.2 All references to the Credit Agreement in any other document, instrument or certificate referred to in the Credit Agreement or delivered in connection with or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby. 5.3 Subject to the amendments herein provided, the Credit Agreement shall in all respects continue in full force and effect. -4- [Second Amendment to Amended and Restated Credit Agreement] 5 5.4 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 5.5 This Amendment shall be governed by and construed in accordance with the laws of the State of Michigan. 5.6 The Company agrees to pay the reasonable fees and expenses of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for the Agent, in connection with the negotiation and preparation of this Amendment and the consummation of the transactions contemplated hereby, and in connection with advising the Agent as to its rights and responsibilities with respect thereto. 5.7 The Company and the Banks hereby consent (which consent shall be deemed to satisfy the consent requirements of Section 8.6 of the Credit Agreement) to the assignment by NBD Bank, a Michigan banking corporation ("NBD-Detroit"), at any time, of all of its rights and obligations, individually and as Agent, under the Credit Agreement and the Notes to NBD Bank, N.A., a national banking association of Indianapolis, Indiana ("NBD-Indiana"), the assumption by NBD-Indiana of all such rights and obligations, and the release of NBD-Detroit from all such obligations. Each of the Company and the Banks further hereby agrees to execute and deliver such documents as NBD-Detroit or NBD-Indiana may consider to be necessary or desirable in order to reflect or take into account such assignment and assumption. 5.8 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] -5- [Second Amendment to Amended and Restated Credit Agreement] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first-above written. THE MONARCH MACHINE TOOL COMPANY By /s/ Robert B. Riethman ----------------------------------------- Its: Treasurer ------------------------------------- NBD BANK, as a Bank and as the Agent By: /s/ Edward C. Hathaway ----------------------------------------- Its: First Vice President ------------------------------------- STAR BANK, N.A. By: /s/ Thomas D. Gill ----------------------------------------- Its: Vice President ------------------------------------- -6- [Second Amendment to Amended and Restated Credit Agreement] 7 CLOSING CERTIFICATE OF THE MONARCH MACHINE TOOL COMPANY NBD Bank, as Agent 611 Woodward Avenue Detroit, Michigan 48226 Ladies and Gentlemen: I hereby certify that I am the Secretary of The Monarch Machine Tool Company, an Ohio corporation (the "Company"), and as such have access to the Company's corporate records and am familiar with the matters therein contained and herein certified, and that: 1. The Company is a corporation with a perpetual charter duly organized and validly existing and in good standing under the laws of the State of Ohio. 2. Attached hereto as Annex 1 is a true and correct copy of resolutions, and the preamble thereto, adopted at a meeting of the Board of Directors of the Company duly called and held in Sidney, Ohio, on August 6, 1996, at which meeting a quorum was present and acting throughout, and such resolutions and preamble were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been in any way amended, altered or repealed. 3. No proceedings looking toward the dissolution or liquidation of the Company have been commenced and no such proceedings are contemplated. 4. The following persons are now, and at all times subsequent to May 13, 1996, have been, duly qualified and acting officers of the Company, duly elected to the offices set forth opposite their respective names, and the signature appearing opposite the name of each such officer is his authentic signature: Name Office Signature ---- ------ --------- Acting David E. Lundeen President /s/ David E. Lundeen --------------------- Earl J. Hull Secretary /s/ Earl J. Hull --------------------- Robert B. Riethman Treasurer /s/ Robert B. Riethman --------------------- 8 IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 9th day of August, 1996. /s/ Earl J. Hull --------------------- Earl J Hull, Secretary -2- 9 ANNEX 1 ADOPTED ON AUGUST 6, 1996 BY THE BOARD OF DIRECTORS OF THE MONARCH MACHINE TOOL COMPANY RESOLUTION, COMMITTED CREDIT LINE AMENDMENT It was moved and seconded that the President and Treasurer be authorized in the name of the Company to execute an amendment to the Company's committed credit line with First Chicago/NBD Bank. Motion passed. EX-10.8 4 EXHIBIT 10.8 1 Exhibit 10.8 THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ----------------------------- THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of March 19, 1997 (this "Amendment"), is by and among MONARCH MACHINE TOOL COMPANY, an Ohio corporation (the "Company"), the BANKS identified on the signature pages hereof (collectively the "Banks" and individually a "Bank"), and NBD BANK, N.A., a national banking association, as successor by assignment to NBD Bank, a Michigan banking corporation, as agent (in such capacity, the "Agent") for the Banks. INTRODUCTION ------------ The Company, the Banks and the Agent are parties to the Amended and Restated Credit Agreement, dated as of June 9, 1995, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of July 11, 1995, and the Second Amendment to Amended and Restated Credit Agreement, dated as of July 31, 1996 (the "Credit Agreement"). NBD Bank, N.A. purchased and assumed all of NBD Bank's rights and obligations under the Credit Agreement, including NBD Bank's rights and obligations as a Bank and as the Agent, pursuant to the Assignment and Assumption Agreement dated February 20, 1997 between them (the "Assignment"). The Company and the Banks previously consented to the Assignment under Section 5.7 of the above-referenced Second Amendment. The parties now desire to amend the Credit Agreement on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein and in the Credit Agreement contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENTS TO CREDIT AGREEMENT ----------------------------------------- Effective upon the date that the conditions precedent set forth in Article 2 of this Amendment are satisfied, which date (the "Amendment Date") shall be determined by the Agent in its sole discretion, the Credit Agreement hereby is amended as follows: 1.1 The definition of the term "Applicable Eurodollar Rate Margin" set forth in Section 1.1 is amended to read in full as follows: "APPLICABLE EURODOLLAR RATE MARGIN" shall be, for purposes of determining the Eurodollar Rate applicable to any Eurodollar Rate Loan, whether a Revolving Credit Loan or the Term Loan, outstanding at any time during any calendar month (the "Application Month"), the percent set forth under the heading "Applicable Eurodollar Rate Margin for Revolving Credit Loans" and "Applicable Eurodollar Rate Margin for the Term Loan", respectively, below in the row corresponding to the range into which falls the ratio (the "Ratio") of the Consolidated Total Liabilities of the Company and its Subsidiaries to the Consolidated Tangible Net Worth of the Company and its Subsidiaries as of the end of the last fiscal quarter (the "Determination Quarter") preceding such 2 Application Month for which financial statements have been delivered to the Banks under Section 5.1(d)(ii):
Applicable Eurodollar Applicable Eurodollar Rate Margin for Rate Margin for Ratio Revolving Credit Loans the Term Loan - ----- ---------------------- ------------- Less than or equal to 0.75 to 1.00 0.75% 1.00% Greater than 0.75 to 1.0 but less than or equal to 1.15 to 1.00 1.00% 1.25% Greater than 1.15 to 1.00 1.50% 1.75%
Each change in the Applicable Eurodollar Rate Margin in accordance with this definition, as finally determined upon the Bank's receipt of the Company's financial statements for any Determination Quarter pursuant to Section 5.1 (d)(ii), shall be effective as of the first day of the corresponding Application Month following such Determination Quarter. 1.2 Subpart (vi) of Section 5.1(d) is relabeled as subpart (vii), and a new subpart (vi) is added to Section 5.1(d) as follows: (vi) As soon as available and in any event within 30 days after the end of each month (other than those months which correspond to fiscal quarter ends of the Company, which are covered by subpart (ii) above), the consolidated balance sheet of the Company and its Subsidiaries as of the end of such month, and the related consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail; and 1.3 Subpart (iv) of Section 5.1(d) is amended to read in full as follows: -2- [Third Amendment to Amended and Restated Credit Agreement] 3 (iv) No later than the 30th calendar day following the end of each month, a Borrowing Base Certificate prepared as of the close of business on the last day of each such month, together with supporting schedules, in form and detail satisfactory to the Agent, setting forth such information as the Agent may request with respect to the aging, value, location and other information relating to the computation of the Borrowing Base and the eligibility of any property or assets included in such computation, certified as true and correct by the chief financial officer of the Company; 1.4 Section 5.2(b) is amended to read in full as follows: (b) TANGIBLE NET WORTH. Permit or suffer (i) the sum of (A) Consolidated Tangible Net Worth of the Company and its Subsidiaries plus (B) unrealized foreign currency losses of the Company and its Subsidiaries that do not exceed $5,000,000 in the aggregate plus (C) the Aggregate Change LIFO Reserve Adjustment to be less than (ii) the sum of (A) $44,000,000 plus (B) 50% of Consolidated Cumulative Net Income of the Company and its Subsidiaries after December 31, 1996 plus (C) for each fiscal year end of the Company, the amount if any by which $500,000 exceeds the aggregate amount added pursuant to the foregoing clause (B) attributable to each such fiscal year; such covenant to be tested as of the end of each fiscal quarter of the Company. 1.5 Section 5.2(c) is amended to read in full as follows: (c) TOTAL LIABILITIES TO TANGIBLE NET WORTH. Permit or suffer the ratio of Consolidated Total Liabilities of the Company and its Subsidiaries to Consolidated Tangible Net Worth of the Company and its Subsidiaries to be greater than 1.25 to 1.00 at any time. 1.6 In recognition of the Assignment, (a) all references to the "Agent", or to NBD Bank in its capacity as the Agent, in the Credit Agreement and all other related instruments, agreements and documents (collectively, the "Loan Documents") shall be deemed to refer to NBD Bank, N.A. in its capacity as the Agent, and (b) all references in the Loan Documents to NBD Bank in its capacity as a Bank shall be deemed to refer to NBD Bank, N.A. in its capacity as a Bank. 1.7 All references in the Loan Documents to any address for notices to NBD Bank or the Agent shall be amended to read: One Indiana Square, Suite 308, Indianapolis, Indiana 46266, Attn: Edward C. Hathaway, Facsimile: (317) 266-6042." -3- [Third Amendment to Amended and Restated Credit Agreement] 4 ARTICLE 2. CONDITIONS PRECEDENT TO AMENDMENTS --------------------------------------------- As conditions precedent to the effectiveness of the amendments to the Credit Agreement set forth in Article 1 of this Amendment, the Agent and the Banks shall receive the following documents and the following matters shall be completed, all in form and substance satisfactory to the Agent and the Banks: 2.1 An incumbency certificate of the Company. 2.2 Payment by the Company to the Agent of an amendment fee in the amount of $25,000 for the pro rata account of the Banks. ARTICLE 3. REPRESENTATIONS AND WARRANTIES ----------------------------------------- In order to induce the Agent and the Banks to enter into this Amendment, the Company represents and warrants that: 3.1 The execution, delivery and performance by the Company of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property is or may be bound or affected. 3.2 This Amendment is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or stockholder of the Company, is required on the part of the Company in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment. 3.4 After giving effect to the amendments contained in Article 1 of this Amendment, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. ARTICLE 4. WAIVER OF CERTAIN DEFAULTS ------------------------------------- 4.1 The Company has advised the Agent and the Banks that for the period from and including December 31, 1996 through the date of this Amendment the Company failed to comply with the covenants set forth in Sections 5.2(b) and (c) of the Credit Agreement, and the Company has asked the Banks to waive the Events of Default caused by such failure. Based upon such request, the Banks hereby waive each such Event of Default, including, without limitation, any such Event of Default pursuant to Section 6.1(e) of the Credit Agreement caused by the occurrence of an event of default under the Company's credit facilities with The Fifth Third Bank due to the -4- [Third Amendment to Amended and Restated Credit Agreement] 5 Company's failure to so comply with Sections 5.2(b) and (c) of the Credit Agreement (the "Fifth Third Cross Default"); PROVIDED that (a) such waiver shall be limited to those Events of Default, including, without limitation, the Fifth Third Cross Default, caused by such covenant compliance failures occurring during the period from and including December 31, 1996 through the date of this Amendment that are known to the Banks as of the date of this Amendment, and (b) such waiver shall not be deemed to (i) be a waiver of or consent or agreement to any other action or omission in violation of the Credit Agreement or any other instrument, agreement or document referred to therein or executed in connection therewith, (ii) be a waiver or modification of any provision of the Credit Agreement or of any instrument, agreement or document referred to therein or executed in connection therewith, or (iii) prejudice any other right or rights which the Banks may now have or have in the future under or in connection with the Credit Agreement or any instrument, agreement or document referred to therein or executed in connection therewith. ARTICLE 5. MISCELLANEOUS 5.1 If the Company shall fail to perform or observe any term, covenant or agreement in this Amendment, or any representation or warranty made by the Company in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute an Event of Default. 5.2 All references to the Credit Agreement in any other document, instrument or certificate referred to in the Credit Agreement or delivered in connection with or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby. 5.3 Subject to the amendments herein provided, the Credit Agreement shall in all respects continue in full force and effect. 5.4 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 5.5 This Amendment shall be governed by and construed in accordance with the laws of the State of Michigan. 5.6 The Company agrees to pay the reasonable fees and expenses of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for the Agent, in connection with the negotiation and preparation of this Amendment and the consummation of the transactions contemplated hereby, and in connection with advising the Agent as to its rights and responsibilities with respect thereto. 5.6 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK.] -5- [Third Amendment to Amended and Restated Credit Agreement] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first-above written. THE MONARCH MACHINE TOOL COMPANY By /s/ Richard E. Clemens ---------------------------------------- Its: President -------------------------------- NBD BANK, N.A., as a Bank and as the Agent By: /s/ Edward C Hathaway ---------------------------------------- Its: First Vice President --------------------------------- STAR BANK, N.A., as a Bank By: /s/ Thomas D. Gill ---------------------------------------- Its: Vice President -------------------------------- -6- [Third Amendment to Amended and Restated Credit Agreement] 7 CLOSING CERTIFICATE OF MONARCH MACHINE TOOL COMPANY ------------------------------- NBD Bank, as Agent 611 Woodward Avenue Detroit, Michigan 48226 Ladies and Gentlemen: I hereby certify that I am the Secretary of Monarch Machine Tool Company, an Ohio corporation (the "Company"), and as such have access to the Company's corporate records and am familiar with the matters therein contained and herein certified, and that: 1. The Company is a corporation with a perpetual charter duly organized and validly existing and in good standing under the laws of the State of Ohio. 2. No proceedings looking toward the dissolution or liquidation of the Company have been commenced and no such proceedings are contemplated. 3. Each person who, as an officer of the Company, signed, by facsimile or otherwise, and delivered the Third Amendment to Amended and Restated Credit Agreement dated as of March 19, 1997 was duly appointed, qualified and acting as an officer of the Company at the respective times of such signing and delivery. Such execution and delivery was duly authorized by all necessary corporate action of the Company. 4. The following persons are now, and at all times subsequent to March 10, 1997 have been, duly qualified and acting officers of the Company, duly elected to the offices set forth opposite their respective names, and the signature appearing opposite the name of each such officer is his authentic signature: Name Office Signature - ---- ------ --------- Richard E. Clemens President and /s/ Richard E. Clemens Chief Executive ----------------------------- Officer Earl J. Hull Secretary /s/ Earl J. Hull ----------------------------- Robert B. Riethman Treasurer /s/ Robert B. Riethman and Chief ----------------------------- Financial Officer 8 IN WITNESS WHEREOF, I have hereunto set my hand as of the 19th day of March, 1997. /s/ Earl J. Hull ----------------------------- Earl J. Hull, Secretary EX-10.9 5 EXHIBIT 10.9 1 Exhibit 10.9 FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT ----------------------------- THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 10, 1997 (this "Amendment"), is by and among MONARCH MACHINE TOOL COMPANY, an Ohio corporation (the "Company"), the BANKS identified on the signature pages hereof (collectively the "Banks" and individually a "Bank"), and NBD BANK, N.A., a national banking association, as successor by assignment to NBD Bank, a Michigan banking corporation, as agent (in such capacity, the "Agent") for the Banks. INTRODUCTION ------------ The Company, the Banks and the Agent are parties to the Amended and Restated Credit Agreement, dated as of June 9, 1995, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of July 11, 1995, the Second Amendment to Amended and Restated Credit Agreement, dated as of July 31, 1996, and the Third Amendment to Amended and Restated Credit Agreement, dated as of March 19, 1997 (the "Credit Agreement"). The parties now desire to further amend the Credit Agreement on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein and in the Credit Agreement contained, the parties hereto agree as follows: ARTICLE 1. AMENDMENT TO CREDIT AGREEMENT ---------------------------------------- The Credit Agreement hereby is amended, retroactively effective as of September 30, 1997. as follows: 1.1 Section 5.2(b) is amended to read in full as follows: (b) TANGIBLE NET WORTH. Permit or suffer (i) Consolidated Tangible Net Worth of the Company and its Subsidiaries to be less than (ii) the sum of (A) $44,000,000 plus (B) 50% of Consolidated Cumulative Net Income of the Company and its Subsidiaries after December 31, 1996 plus (C) for each fiscal year end of the Company, the amount if any by which $500,000 exceeds the aggregate amount added pursuant to the foregoing clause (B) attributable to each such fiscal year; such covenant to be tested as of the end of each fiscal quarter of the Company. ARTICLE 2. REPRESENTATIONS AND WARRANTIES ----------------------------------------- In order to induce the Agent and the Banks to enter into this Amendment, the Company represents and warrants that: 2.1 The execution, delivery and performance by the Company of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order 2 or award of any arbitrator, court or governmental authority, or of the terms of the Company's charter or by-laws, or of any contract or undertaking to which the Company is a party or by which the Company or its property is or may be bound or affected. 2.2 This Amendment is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 2.3 No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor or stockholder of the Company, is required on the part of the Company in connection with the execution, delivery and performance of this Amendment or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Amendment. 2.4 After giving effect to the amendments contained in Article 1 of this Amendment, the representations and warranties contained in Article IV of the Credit Agreement are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof. ARTICLE 3. WAIVER OF CERTAIN DEFAULTS ------------------------------------- 3.1 The Company has advised the Agent and the Banks that for the period from and including July 31, 1997 through the date of this Amendment the Company failed to comply with the covenant set forth in Section 5.2(b) of the Credit Agreement, and the Company has asked the Banks to waive the Events of Default caused by such failure. Based upon such request, the Banks hereby waive each such Event of Default, including, without limitation, any such Event of Default pursuant to Section 6.1(e) of the Credit Agreement caused by the occurrence of an event of default under the Company's credit facilities with The Fifth Third Bank due to the Company's failure to so comply with Section 5.2(b) of the Credit Agreement (the "Fifth Third Cross Default"); PROVIDED that (a) such waiver shall be limited to those Events of Default, including, without limitation, the Fifth Third Cross Default, caused by such covenant compliance failure occurring during the period from and including July 31, 1997 through the date of this Amendment that are known to the Banks as of the date of this Amendment, and (b) such waiver shall not be deemed to (i) be a waiver of or consent or agreement to any other action or omission in violation of the Credit Agreement or any other instrument, agreement or document referred to therein or executed in connection therewith, (ii) be a waiver or modification of any provision of the Credit Agreement or of any instrument, agreement or document referred to therein or executed in connection therewith, or (iii) prejudice any other right or rights which the Banks may now have or have in the future under or in connection with the Credit Agreement or any instrument, agreement or document referred to therein or executed in connection therewith. ARTICLE 4. MISCELLANEOUS ------------------------ 4.1 If the Company shall fail to perform or observe any term, covenant or agreement in this Amendment, or any representation or warranty made by the Company in this Amendment shall prove to have been incorrect in any material respect when made, such occurrence shall be deemed to constitute an Event of Default. 4.2 All references to the Credit Agreement in any other document, instrument or -2- [Fourth Amendment to Amended and Restated Credit Agreement] 3 certificate referred to in the Credit Agreement or delivered in connection with or pursuant thereto, hereafter shall be deemed references to the Credit Agreement, as amended hereby. 4.3 Subject to the amendments herein provided, the Credit Agreement shall in all respects continue in full force and effect. 4.4 Capitalized terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 4.5 This Amendment shall be governed by and construed in accordance with the laws of the State of Michigan. 4.6 The Company agrees to pay the reasonable fees and expenses of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for the Agent, in connection with the negotiation and preparation of this Amendment and the consummation of the transactions contemplated hereby, and in connection with advising the Agent as to its rights and responsibilities with respect thereto. 4.7 This Amendment may be executed upon any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK.] -3- [Fourth Amendment to Amended and Restated Credit Agreement] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first-above written. THE MONARCH MACHINE TOOL COMPANY By: /s/ Robert B. Riethman ------------------------------------ Its: Chief Financial Officer ---------------------------- NBD BANK, N.A., as a Bank and as the Agent By: /s/ Edward C. Hathaway ------------------------------------ Its: First Vice President ---------------------------- STAR BANK, N.A., as a Bank By: /s/ Mark Whitson ------------------------------------ Its: Vice President ---------------------------- -4- [Fourth Amendment to Amended and Restated Credit Agreement] EX-11 6 EXHIBIT 11 1 EXHIBIT 11 STATEMENT RE COMPUTATION OF EARNINGS PER COMMON SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 ---------------------------------------------------------------- Income (loss) Shares (Numerator) (Denominator) Per-Share Amount ----------------- ----------------- --------------------- Basic Earnings per share $ (4,202) 3,757,717 $ (1.12) Effect of Dilutive Securities (b): Stock option awards (a) - - ----------------- ----------------- --------------------- Diluted Earnings per share $ (4,202) 3,757,717 $ (1.12) ================= ================= ===================== 1996 ---------------------------------------------------------------- Income (loss) Shares (Numerator) (Denominator) Per-Share Amount ----------------- ----------------- --------------------- Basic Earnings Per Share $ (5,498) 3,744,967 $ (1.47) Effect of Dilutive Securities (b): Stock option awards (a) - ----------------- ----------------- --------------------- Diluted Earnings per share $ (5,498) 3,744,967 $ (1.47) ================= ================= ===================== 1995 ---------------------------------------------------------------- Income (loss) Shares (Numerator) (Denominator) Per-Share Amount ----------------- ----------------- --------------------- Basic Earnings Per Share $ 786 3,744,967 $ .21 Effect of Dilutive Securities (b): Stock option awards (a) 27,000 ----------------- ----------------- --------------------- Diluted Earnings per share $ 786 3,771,967 $ .21 ================= ================= =====================
(a) Stock option awards are not considered exercise in 1997 or 1996, since the impact would have an antidilutive effect on earnings per share (b) The effect of the convertible preferred stock is not included since they would have antidilutive effect on earnings per share EX-13 7 EXHIBIT 13 1 [MONARCH LOGO] The Monarch Machine Tool Company 2600 Kettering Tower Dayton, Ohio 45423 2 THE MONARCH MACHINE TOOL COMPANY "PROVIDING [MONARCH LOGO] MANUFACTURING SOLUTIONS TO INDUSTRIES WORLDWIDE" 1997 ANNUAL REPORT 3 TABLE OF CONTENTS Company Profile and Current Year's Events.....................................1 Letter to Monarch Shareholders................................................2 Monarch Machine Tools.........................................................4 Stamco Coil Processing Equipment .............................................6 Busch Coating and Laminating Equipment........................................8 Financial Results: Selected Financial Data..............................................9 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................10 Consolidated Balance Sheets.........................................12 Consolidated Statements of Operations and Retained Earnings.........13 Consolidated Statements of Cash Flows...............................14 Notes to Consolidated Financial Statements..........................15 Report of Independent Accountants...................................23 Board of Directors and Executive Officers....................................24 4 SHAREHOLDER INFORMATION ANNUAL MEETING EXECUTIVE OFFICES May 5, 1998 The Monarch Machine Tool Company 1:00 p.m. 2600 Kettering Tower Kettering Tower, 12th Floor Dayton, Ohio 45423 40 N. Main Street (937) 910-9300 Dayton, Ohio LEGAL COUNSEL INDEPENDENT ACCOUNTANTS Thompson Hine & Flory LLP Coopers & Lybrand L.L.P. 2000 Courthouse Plaza NE 2080 Kettering Tower Dayton, Ohio 45402 Dayton, Ohio 45423-2080 INVESTOR RELATIONS REGISTRAR AND TRANSFER AGENT Request for a copy of Monarch's Annual Report on The Fifth Third Bank Form 10-K, news releases and any other information 38 Fountain Square Plaza MD-1090F5 should be directed to: Cincinnati, Ohio 45263 (800) 837-2755 Investor Relations c/o Executive Offices
MARKET PRICE, DIVIDEND AND SHAREHOLDER DATA The following table sets forth the high and low price of the Company's Common Stock on the New York Stock Exchange Composite Tape and the dividend per share paid on the Common Stock (ticker symbol is MMO):
1997 1996 --------------------------------------- --------------------------------------- DIVIDEND DIVIDEND QUARTER ENDED HIGH LOW PAID HIGH LOW PAID - ----------------------------------------------------------------------- --------------------------------------- March 31 $9 1/8 $7 3/8 5(cent) $13 $9 7/8 5(cent) June 30 9 7 5(cent) 12 10 3/8 5(cent) September 30 9 3/4 7 3/16 5(cent) 11 3/4 9 1/2 5(cent) December 31 9 15/16 7 11/16 5(cent) 10 1/2 7 3/4 5(cent)
At December 31, 1997, the number of holders of record for the Company's Common Stock was 2,325 and the number of shares outstanding was 3,761,967. 5 COMPANY PROFILE For almost 90 years, the Monarch Machine Tool Company has produced a wide-range of quality metalworking machinery for customers in a variety of industries, both domestically and internationally. Throughout its history, Monarch has been at the forefront in designing and engineering unique equipment to satisfy the varying needs of its broad customer base. The Company's principal products are custom coil processing equipment (Stamco located in New Bremen, Ohio and in West Midland, England), computer numerically controlled vertical machining centers (Monarch Machine Tools located in Cortland, New York) and its newer coating and laminating equipment business (Busch located in Sidney, Ohio). Custom coil processing equipment is used by metal processors and product manufacturers to flatten, cut, slit, clean and polish coils of any type of metal, including steel, aluminum or brass. High performance computer numerically controlled vertical machining centers are sold to manufacturers of components made of high density (for instance titanium) metals, in industries such as aerospace, automotive and oil drilling and are used in rugged applications requiring high horsepower, special tooling, high tolerances or other special production requirements. To complement its machining center business, the Company entered into a strategic alliance in 1997 with Spinner Machine Tool Company (located near Munich, Germany) to provide a quality source of ultra-precision computer numerically controlled turning machines to North American customers. Custom coating and laminating equipment is used to further process paper, plastic or foil for use in flexible or medical packaging, adhesive products and wall coverings. While much of Monarch's history was in its lathe business located in Sidney, Ohio, this business was sold in 1997. The Company is now focused on increasing the market share of its two remaining core businesses and in the growth opportunities available in the coating and laminating equipment business. CURRENT YEAR'S EVENTS CLOSING NON-PROFITABLE OPERATIONS During 1997, the Company disposed of a majority of the assets and the business of its Sidney lathe operation and decided to sell or close its German facilities, which manufacture coil processing and coating and laminating equipment, primarily sold in Europe. The Company's financial results in 1997 include $6.2 million of losses from operations, asset impairment and closure reserves related to the Sidney lathe and German businesses. These decisions had a negative impact on the Company's financial results in 1997, but will enable the Company to focus on increasing the profitability of its core businesses in 1998. IMPROVEMENT IN CORE BUSINESSES The Company's ongoing core businesses contributed earnings before income tax of $843,000 in 1997 compared to a loss before income tax of $478,000 in 1996. Sales at these core businesses increased to $91.4 million in 1997 from $78.4 million in 1996. STRENGTHENING FINANCIAL POSITION Proceeds from the sale of the Sidney lathe operation contributed to the Company being able to repay a majority of its bank indebtedness in 1997. The Company's beginning 1998 financial position shows a very low debt to equity ratio, which allows the Company necessary leverage when evaluating opportunities to expand its businesses through acquisition or strategic alliance. 1 6 LETTER TO MONARCH SHAREHOLDERS Your Company completed a year of significant change in 1997. During the second half of the year, decisions were made to divest or discontinue operations in four businesses. After an intense evaluation process which included operational and market analysis, product line assessment and customer surveys, we could not project an acceptable level of success in those businesses. This process resulted in the sale of two and the closure of two other business units. We believe the repositioning and realignment of our business units is now complete. The 1997 scorecard reads: two businesses sold, two businesses closed, one business moved, one business gained significant cost reductions through negotiations with the state government and a local utility and relocation of the corporate headquarters to better serve the business units. In 1998, management's energies are directed to improving the profitability of the remaining core businesses, coil processing equipment and vertical machining centers, and to capitalize on the growth opportunities related to these businesses. The Company incurred a loss of $4.2 million ($1.12 per share) in 1997 compared to a 1996 loss of $5.5 million ($1.47 per share). The Company's loss before income tax in 1997 includes $6.2 million ($1.64 per share) of losses from operations, asset impairment and closure reserves related to the Sidney lathe and German businesses, which were sold or closed in 1997. The Company's ongoing operations contributed earnings before income tax of $843,000 ($.22 per share) in 1997 compared to a loss before income tax of $478,000 ($.13 per share) in 1996. Sales for the year were $107.1 million compared to sales of $115.5 million for 1996. Sales in 1997 were affected by the July 1997 sale of the Company's Sidney lathe business, which contributed $10.6 million to sales in 1997 compared to $23.8 million in 1996. In addition, lower sales were realized from the Company's German businesses in 1997 ($5.1 million) compared to 1996 ($13.3 million). This decline in sales was due in part to the Company's decision in 1997 to sell or close these businesses. Sales from the Company's ongoing operations in the United States and in the United Kingdom increased to $91.4 million in 1997 from $78.4 million in 1996. The Company's backlog at the beginning of 1998 was $40 million compared to a beginning of 1997 backlog of $49 million (excluding the Sidney lathe and German businesses). The Company recorded $82 million of orders for its ongoing businesses during 1997. The recent financial instability in Southeast Asia had a negative impact on orders during the last quarter of 1997 and into early 1998, primarily at the Company's coil processing equipment division. [PHOTO] So where do we go from here? Our actions taken in 1997 have eliminated those businesses where we could no longer reasonably compete or be financially viable. Our remaining coil processing equipment and vertical machining center businesses have historically been profitable and we now expect the paper coating and laminating equipment business to turn the corner during 1998. We believe our actions have provided a solid foundation upon which to begin rebuilding the Company. This is easier said than done. What will we actually do in 1998? During 1998 we will focus our energy on the business basics of increasing market share, improving margins and addressing the cost structure of our remaining core businesses. This will insure our long-term competitiveness. Some may view our 1997 actions as tactical in nature. Certain actions were, but others were strategic. The Company is now positioned for success in many ways; a profitable historical performance of our core business, reduced levels of debt and focused management armed with a new aggressive strategy. Rest assured that we will attack our 1998 objectives with the same energy and commitment that was evident in our restructuring efforts of 1997. We are in the initial stages of implementing a corporate-wide business planning, or Enterprise Resource Planning (ERP), system. The new system will enable us to more effectively utilize Company resources, reduce material and labor variances by better planning and allocating resources and will, of course, be Year 2000 compliant. The implementation of this system will cause us to complete a comprehensive internal operational analysis, thereby enabling us to streamline processes, reduce waste and 2 7 ultimately to improve performance at our business units. A new ERP system is an "enabler." It will enable us to modernize and optimize our existing businesses while preparing for future additions. Not all of our efforts in 1998 were devoted to restructuring. Comprehensive market studies were completed for our core businesses, which will enable us to formulate and execute the appropriate business strategies. These studies also identified challenges for improvement and opportunities for growth. During 1998, management will develop a road map for that growth. Based on this new foundation, we will be positioned to focus on growth at our profitable business units. Revenue growth will come from both the continued internal development of new products, joint ventures or marketing agreements and the external pursuit of appropriate acquisition opportunities. We are in a position to capitalize on those opportunities because during 1997, the Company repaid a majority of its indebtedness in part from the proceeds of the sale of the Sidney lathe business. As a result, we enter 1998 in a strong financial position. During various times in 1997, I have advised our shareholders that "Actions speak louder than words." The wisdom of that adage has certainly been proven during 1997. The return of Monarch to profitability, along with the expected benefits to be derived by our shareholders, remains management's top priority . . . we believe there can be no more important objective. In order to meet the objectives of our shareholders, certain changes are obligatory and decisions must be promptly finalized. As a result, changes in management have been made. We are in the process of building a new management team. Several key positions have been filled in early 1998. Additional changes will undoubtedly occur as we increase performance expectations. In January, 1998 Karl A. Frydryk joined the company as Vice President and Chief Financial Officer. Karl's primary focus will be making us a more numbers-based management team and improving our financial communications. In February and March, 1998 Patrick M. Flaherty, Vice President-Operations Improvement and Timothy P. Gibson, Vice President-Human Resources joined Monarch. Pat will lead our cost reduction efforts and will establish efforts in manufacturing and engineering excellence, along with assuming the role of Corporate Project Leader for the new ERP system. Tim is responsible for developing programs and initiatives to better engage our employees in the future direction and performance of the business. Robert A. Skodzinsky assumed the new position of President--Machine Tool Division in March, 1998. Bob will be responsible for all of Monarch's machine tool business as we drop the Cortland and Sidney designations. Also in March, Frederick G. Sharp joined the company as President--Stamco Division. Fred will lead a more strategic Stamco business now focused on its U.S. and U.K. operations. Both divisions' management is charged with improved bottom-line performance. Obviously, my expectations for the new management team are high. It is important that Monarch's management and employees are challenged to perform at a much higher level in 1998. For 1998, the salaries of our top corporate officers and general managers were frozen. A new interim management incentive plan has been implemented, focused on measurable, absolute objectives, not intangibles. The 1998 objectives include pre-tax earnings, earnings per share and share price appreciation. In future years the objectives will have a longer-term focus. A significant percentage of the payout for achieving these objectives will be in the form of the Company's stock which, if earned, will vest over a three-year period. Implementation of this plan will build an even stronger link between management and shareholder interests. Success, when attained, will therefore be mutual. In summary, 1997 was a transitional year with multiple divestitures and the closure of non-strategic, unprofitable businesses. We have positioned the Company for future success and are laying the foundation during 1998 from which we expect to rebuild the Company. We have a strong balance sheet accompanied by a growing group of dedicated and focused employees. Most important is the emerging confidence I see in our new strategic direction. Employees now believe we will be a different business. Your management team is focused, committed and confident of our imminent success in 1998 and beyond. I regret to report that in early 1998, John F. Torley, a retired Director of Monarch with over 25 years of experience, passed away. During his many years of service Mr. Torley was a key contributor to the success of the Company. He chaired many committees during the good times at Monarch. His dedication to the Company will be remembered and appreciated for years to come. /S/ Richard E. Clemens Richard E. Clemens President & Chief Executive Officer March 20, 1998 3 8 MONARCH MACHINE TOOLS--EXPANDING OPPORTUNITIES Monarch's machine tool business experienced a year of strategic repositioning in 1997. The sale of the Sidney-based lathe business in July allowed for the pursuit of development and expansion opportunities with a focused and experienced management team. A modern facility in Cortland, New York remains the division headquarters. The decision to sell Sidney eliminated over-capacity, under-utilization and redundancy caused by two very similar operating units. At the same time, any dual market image issues with regard to customers, distributors, technology and the products were eliminated. The sale also created the opportunity to develop a set of strategic development initiatives under which the machine tool business has become unified. Monarch's high performance machining centers provide excellent value in helping customers increase productivity or to meet stringent manufacturing requirements. Our historic market niche has been in heavy-duty, high-accuracy, large-envelope vertical machining centers. During 1996, with a new product, the production machining center (PMC), we entered into the high-volume production segment of the market. With the announcement in late 1997 of the Company's first strategic alliance with a German machine tool builder, Spinner Machine Tool Company GmbH, we entered into another market segment, ultra-precision horizontal turning machines. While attacking new market segments, we have continued to add key accounts with many well-known machine tool users who have discovered a reinvigorated Monarch Machine Tool Division. We have expanded our customer application sales capability to provide customers with both packaged machining solutions and unique custom-engineered special applications. Our strategic initiative remains to develop a steady stream of innovative new products that provide superior features and benefits. This is being pursued both internally by product development teams and externally via strategic alliances or acquisition candidates. [PHOTO] Monarch's new PMC-V750 offers unsurpassed production performance with "three-machines-in-one" flexibility. 4 9 Internally, our design teams finalized the next model in our new line of machining centers. The PMC V-1200, which will begin shipment in March 1998, incorporates many first-time features never before seen in a high-performance machining center. Two new versions of our successful VMC-RT (rotary table) machines--an X-axis version and a tilting table version--were also introduced in 1997. These new products have been well received by jet engine manufacturers, specialty bearing producers and construction equipment companies. Our control and software engineers have launched two new control platforms, while standardizing and miniaturizing many components of electronic hardware. Spinner, with its five product families, will provide a continuous source of ultra-precision computer numerically controlled (CNC) turning and milling products. Early in 1998, the truly unique TM series (turning-mill center)was introduced to North American customers. Later in 1998 certain models of the TC Series (compact slant-bed machines) will be introduced. The complete line of Monarch-Spinner products will be exhibited in September 1998 at the International Manufacturing Technology Show (IMTS) in Chicago, Illinois. Monarch expects to present a re-energized image at this biennial conference. New distributors in six major territories during the past year further strengthened Monarch's North American distribution. By expanding the market segments served and products offered, we have significantly increased our distributors' sales opportunities and resultant earnings potential. Continuous dialog with the distributors has strengthened our understanding of market and customer needs. The Spinner strategic alliance brings us a European Community-based, state-of-the-art factory and product showroom in Sauerlach, Germany along with a group of Spinner-Monarch distributors with sales offices throughout Europe. Development of the Far East market also took shape in 1997. This included the first time participation in the Beijing Machine Tool Show and the capture of a major order for equipment to be used for aircraft component manufacturing in Shenyang, China. A reputation for outstanding customer service doesn't come quickly or easily; it has to be built one service call, one satisfied customer at a time. With increased customer demands for 100% machine availability, when our products require spare parts, factory service or even on-line information and assistance, Monarch is there. Beyond machine tool product service, we provide hotline assistance, customer training and engineering and applications services. Focusing on these services will undoubtedly lead to enhanced business opportunities as customers continue their search for improved levels of technical support. By aggressively pursuing market opportunities along with a strong commitment to further educate its workforce in material resource planning, financial performance measurement and continuous improvement initiatives, the success of the Monarch Machine Tool Division is secure. 5 10 STAMCO COIL PROCESSING EQUIPMENT--OPERATIONAL EXCELLENCE The Stamco coil processing division enjoys a 113-year history and a well-deserved reputation for quality and innovation in the metal working industry. Its principal manufacturing facility, located in New Bremen, Ohio, is complemented by the operations of its subsidiary located in West Midland, England (Stamco UK). Stamco provides high performance applications to many industrial segments, including primary steel, brass and aluminum mills, metal service and distribution centers and metal product manufacturers, such as the automotive, metal furniture, building products and appliance sectors. Stamco designs, builds and installs custom slitting lines that can operate at speeds in excess of 2,000 feet per minute or cut-to-length lines that can process a steel coil over 8 feet wide and 3/4 of an inch thick. A Stamco tension leveling line can pull the shape defects out of a 1/4 inch thick, 6-foot wide coil of aluminum running at a speed of 1,500 feet per minute. During 1997 Stamco achieved record sales and increased profitability, which was due, in part, to a successful target marketing strategy. Specifically, the aluminum industry is an important target market [PHOTO] Stamco's quick-change removable roll module in this multi-roll leveler enhances user productivity. 6 11 segment for Stamco. In the past, we have supplied two lines for processing aluminum can stock measuring .012 inch thick and 7 feet wide and running at 5,000 feet per minute, a feat which remains unchallenged in the industry. In 1997, we again "raised the bar" in aluminum processing by manufacturing a dual carousel rewind reel for aluminum can stock that not only runs at 2,500 feet per minute, but shears and re-threads at that speed, without stopping. This significant achievement will now become standard equipment in a major aluminum producer's new micro mill expansion program. Increasing productivity is a constant challenge in the coil processing business. Steel mills are processing ever-larger coils to increase their efficiency. During 1997, we designed and built unwinders and rewinders to handle coils of steel weighing up to 60 tons each, which is almost twice the weight of the previous standard. Also in 1997, Stamco designed and constructed turret unwinders and rewinders for heavy gauge (1/2 inch thick) slitting lines to improve their productivity by allowing virtually continuous operation from one coil to the next. In Europe, Stamco UK shared its innovation of the rapid change tooling capstan, which has enjoyed great success in the United States since its introduction. Our customers immediately recognized the benefits of incorporating this timesaving feature, resulting in 8 installations and a backlog of 2 units in progress. With just these innovations alone, customers can increase productivity 45%. Stamco shipped a newly designed trapezoidal shearing line to a major international automobile builder in 1997 and partnered with Andritz/Sundwig to build two push-pull pickle lines, which will be the most productive lines in the world. As the only ISO-9001 certified company in the industry, Stamco enjoys an international reputation for performance and quality. Stamco expects to continue on its path of continuous improvement in 1998 by focusing on operational excellence. In order to improve profitability, competitive position and customer service, Stamco will implement a strategic program of standardization, simplification and value engineering of products. Combined with its past successes, the above focus will further enhance Stamco's leadership role in the design and manufacturing of coil processing equipment. 7 12 BUSCH COATING AND LAMINATING EQUIPMENT--MANY FIRSTS Busch achieved many "firsts" during its third year of operation in 1997, notably receiving its first U.S. and South American orders and sale of its first U.S. designed and manufactured equipment. Achieving firsts for a company which has been in existence since 1913 is no easy task. The German company Busch was purchased by Monarch in May 1995. Although it was very active in Europe and Asia, its success in North and South America was limited. The Monarch strategy has been to establish a new Busch entity by introducing it as an U.S. company with historic German roots in the equipment manufacturing industry. The Busch mission is to provide value, innovation and quality products to the paper and plastics coating and laminating industries. Working under the philosophy to "Think Globally, Act Locally," Busch was successful in capturing orders in 1997 from Ohio-based customers who recognized the value of a local equipment supplier. These orders covered a broad spectrum, from system components to complete converting lines in the pressure sensitive market, and included a custom-engineered laminating machine for the industry's largest converter. Busch equipment was also successfully introduced into the South American market, with a silicone coating line sold to Columbia's largest pressure sensitive adhesive (PSA) converter. This line incorporates the latest in coating technology, using a 5-roll, multi-purpose coating head, capable of applying water, solvent and 100% solids silicones to various mediums. During 1997 Busch established an U.S. based capable and experienced engineering and manufacturing workforce with the addition of personnel with pertinent industry experience. We also benefited from the availability of experienced manufacturing and customer service personnel previously employed by Monarch's Sidney lathe business. A team of sales engineers and agents strategically located to serve the global market will implement Busch's 1998 sales and marketing strategy. With manufacturing and engineering now centralized in its Ohio facilities, Busch will ensure a worldwide commonality to its product line of custom-engineered coating and laminating equipment. Our focus on achieving quality product performance and growth in market share during 1998 will be well served by our new location and staff. [PHOTO] Busch's PVDC coating line with two coating stations is used for production of packaging material. 8 13 SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts) The selected financial data set forth below for the Company for the five years ended December 31, 1997 has been derived from the audited financial statements of the Company. Such information should be read in conjunction with the financial statements.
1997 1996 1995 1994 1993 SUMMARY OF OPERATIONS: Net Sales $ 107,116 $ 115,528 $ 114,991 $ 76,332 $ 77,517 Operating Income (Loss) $ (4,850) (1) $ (11,220) (2) $ 1,220 $ (3,407) $ (1,948) Net Income (Loss) $ (4,202) $ (5,498) $ 786 $ (1,463) $ (475) Earnings per Common Share $ (1.12) $ (1.47) $ .21 $ (.39) $ (.13) BALANCE SHEET DATA: Working Capital $ 15,078 $ 36,368 $ 38,942 $ 25,943 $ 31,265 Total Assets $ 75,869 $ 102,912 $ 101,348 $ 78,342 $ 79,628 Long-term Debt $ 1,598 $ 18,175 $ 14,318 Shareholders' Equity $ 41,269 $ 46,579 $ 52,650 $ 52,676 $ 54,459 OTHER DATA: Cash From (Used in) Operating Activities $ 14,797 $ (4,069) $ (6,155) $ 2,231 $ (4,264) Payments of Indebtedness $ 20,586 $ 120 $ 1,000 Additional Indebtedness $ 4,129 $ 11,764 $ 4,870 Ending Backlog $ 42,200 $ 60,800 $ 59,600 $ 49,600 $ 25,900 Cash Dividend per Common Share $ .20 $ .20 $ .20 $ .20 $ .20
(1) Includes reserves for asset impairment, closure costs and inventory write-down of $3,030 ($.81 per share, before tax) related to sale of the Sidney lathe business and $1,383 ($.37 per share, before tax) related to the sale and closure of the German businesses. (2) Includes a reserve of $7,463 ($1.99 per share, before tax) resulting from an inventory write-down at the Sidney lathe business and a gain of $2,518 ($.67 per share, before tax) related to LIFO liquidations. PROFORMA HISTORICAL OPERATING DATA (Dollars in thousands) The following proforma historical operating data are for the businesses which will comprise the ongoing operations of the Company in 1998. The data are based upon the amounts included in the above "Summary of Operations" and "Other Data" less the applicable amounts related to the businesses which were closed in 1997 or are expected to be closed or sold in 1998.
1997 1996 1995 1994 1993 Net Sales $ 91,370 $ 78,427 $ 81,475 $ 56,809 $ 60,514 Operating Income (Loss) $ 2,002 $ (92) $ 3,564 $ 356 $ 1,336 Earnings (Loss) Before Income Tax $ 843 $ (478) $ 3,568 $ 276 $ 1,790 Ending Backlog $ 39,600 $ 49,000 $ 46,400 $ 44,600 $ 15,600
9 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company reported a net loss of $4.2 million in 1997 compared to a net loss of $5.5 million in 1996 and net income of $786,000 in 1995. During 1997, the Company sold the operating assets of the Sidney lathe business and decided to close or dispose of the operations of its three German businesses. These businesses had sustained operating losses during the past few years and the Company could not project an acceptable level of success in these businesses. Results in 1997 include a reserve of $3.0 million for asset impairment and other disposal costs related to these businesses, while cost of sales includes $1.4 million for the write-down of inventory at these businesses. Included in the 1996 loss is a $7.5 million write-down of inventory, a gain of $3.9 million from the sale of properties in Germany and income of $2.5 million from LIFO liquidations, each related primarily to the businesses being sold or closed. The Company's ongoing businesses realized income before tax of $843,000 in 1997, a loss before tax of $478,000 in 1996 and income before tax of $3.6 million in 1995. Net sales were $107.1 million, $115.5 million and $115.0 million in 1997, 1996, and 1995, respectively. The decline in 1997 sales was due to the July 1997 sale of the Sidney lathe business and lower sales from the Company's German businesses, due to the decision in 1997 to sell or close these businesses. Sales from the Company's ongoing businesses were $91.4 million in 1997, $78.4 million in 1996 and $81.5 million in 1995. The increase in 1997 was primarily realized in the coil processing segment. Cost of sales as a percentage of sales was 86.0% in 1997 compared to 95.3% in 1996 and 85.7% in 1995. The percentage was higher in 1996 due to the above noted $7.5 million inventory write-down and lower margins achieved on certain coil processing lines of equipment shipped in 1996. The cost of sales percentage at the Company's ongoing businesses was 83.5%, 87.0% and 84.1% in 1997, 1996 and 1995, respectively, with the higher percentage in 1996 resulting from the aforementioned shipment of lower margin coil processing lines. The Company's ongoing machine tool business realized improved margins in 1997 due to a more profitable sales mix. Selling, general and administrative expense remained relatively constant in 1997 compared to 1996. Expenses decreased in 1997 as a result of lower sales at the German businesses and the July sale of the Sidney lathe business, but this decrease was partially offset by additional selling expenses related to efforts to increase market penetration by the Company's ongoing operations. The increase from 1995 to 1996 was due, in part, to costs related to the start-up of the coating and laminating business in the U.S. and increased selling efforts. Interest expense declined in 1997, as a significant portion of the Company's indebtedness was repaid in the second half of 1997, using proceeds from the sale of the Sidney lathe business and from collection of accounts receivable. Interest expense increased in 1996 due to higher levels of borrowings in late 1995 and in 1996 to fund operating losses. Included in other income in 1996 was the aforementioned gain of $3.9 million from the sale of properties in Germany. The Company's income tax provision (benefit) generally reflects the statutory rates in the jurisdictions in which the Company operates, except during 1997. A lower income tax benefit rate was recorded in 1997 as the Company is limited in the tax benefit it expects to realize from losses incurred by its German businesses. LIQUIDITY AND CAPITAL RESOURCES The Company anticipates that operating cash flow and amounts available under existing credit arrangements will be adequate to fund its operations in 1998. The Company does not anticipate making any significant capital expenditures during 1998, other than a projected $1.5 million for the acquisition of new computer software and associated hardware in conjunction with implementation of a corporate-wide business planning (Enterprise Resource Planning) system and associated consulting services. Additional costs for this project will be incurred during 1999 for completion of the system implementation. During 1998 the Company also expects to expend $350,000 to acquire new equipment and upgrade the CAD/CAM systems at its machine tool operation. The Company has up to $39.0 million of various credit facilities in place, although the amount available to the Company at any time is limited based on levels of the Company's inventory and accounts receivable and by letters of credit issued under the lines of credit. During 1997, the Company was able to reduce its 10 15 indebtedness by $20.6 million, by using the $7.2 million of proceeds received from the sale of the Sidney lathe business and from operating cash flow of $14.8 million, generated primarily from collection of accounts receivable. At December 31, 1997 the Company had $2 million outstanding and $17.1 million available under its credit facilities. One credit facility requires the Company to comply with various covenants which include, among others, maintaining certain financial ratios and limiting the amount available for payment of dividends. As of December 31, 1997, the maximum amount of retained earnings available for dividends was $2.2 million. The amount outstanding under a revolving credit facility of $20 million from two domestic banks can be converted to a term loan at April 30, 1998. The Company intends to request the banks for an extension of the revolving credit facility prior to its conversion to a term loan. The Company is a defendant in various legal actions arising in the normal course of its business, primarily product liability claims. It is self-insured for payment of limited amounts of product liability, group health and workers' compensation claims. In addition, the Company is one of currently five potentially responsible parties (PRP's) ordered by the Environmental Protection Agency to remove certain waste materials at a site in New York. The Company believes that the ultimate settlement and payment of amounts resulting from the above situations will not have a materially adverse impact on the financial condition of the Company. The fair value of the assets contained in the Company's various pension plans exceeds the projected benefit obligations by $24 million at December 31, 1997, of which $15.7 million is recorded in the Company's accounts at that date. The Company projects that the prepaid pension asset will increase by $3 million in 1998, based on current assumptions. The ability of the Company to realize the full value of this asset in the ordinary course of business is limited under present tax laws, although there is no time limitation for that realization. The Company has a net deferred tax asset of $4.3 million at December 31, 1997. The Company has determined that it is not necessary to provide a valuation allowance against this asset, as it expects to realize the asset through the implementation of certain tax-planning strategies and the generation of future taxable income. BACKLOG The Company's backlog for its ongoing businesses at December 31, 1997 was $40 million compared to a beginning of year backlog of $49 million. The Company recorded $82 million of orders for its ongoing businesses during 1997. The recent financial instability in Southeast Asia had a negative impact on orders during the fourth quarter of 1997 and into early 1998, primarily at the Company's coil processing equipment division. YEAR 2000 COMPLIANCE The Company anticipates that the implementation of the new Enterprise Resource Planning system software and hardware, which began in 1998, will adequately address any significant Year 2000 compliance issues. INFLATION AND INTEREST RATES The Company has not been significantly affected by inflation in recent years and anticipates that it will not be significantly affected by inflation in 1998. A change in interest rates would likely not have a significant impact on the Company's financial results due to the low level of indebtedness presently outstanding. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income, and Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. These standards are required to be adopted by the Company in 1998, but are not expected to have a material impact on the overall financial statements of the Company. FORWARD-LOOKING STATEMENTS In addition to historical information, this Annual Report contains various forward-looking statements, involving risks and uncertainties, which could cause actual results to differ materially from these statements. These risks include, but are not limited to, changes in economic conditions, product price competition, customer purchasing patterns, labor costs, product liability issues and other legal claims and governmental regulatory issues. 11 16 THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of December 31, 1997 and 1996 (Dollars in thousands)
1997 1996 ASSETS Cash $ 5,022 $ 4,848 Accounts receivable, net of allowance for doubtful accounts of $1,507 and $469 in 1997 and 1996, respectively 26,762 42,046 Inventories 11,142 15,528 Costs and estimated earnings in excess of billings on uncompleted contracts 337 3,307 Prepaid expenses 540 754 Deferred income taxes 3,102 5,276 ---------- --------- Current assets 46,905 71,759 Property, plant and equipment, net 8,649 15,938 Prepaid pension cost 15,723 13,277 Deferred income taxes 1,153 - Other assets 3,439 1,938 ---------- --------- Total assets $ 75,869 $ 102,912 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings $ - $ 4,500 Current portion of long-term debt 577 122 Accounts payable 10,138 12,124 Accrued liabilities 16,016 13,976 Billings in excess of costs and estimated earnings on uncompleted contracts 5,096 4,669 ---------- --------- Current liabilities 31,827 35,391 Deferred income taxes - 1,847 Postretirement and other accrued benefits 1,175 920 Long-term debt, less current portion 1,598 18,175 ---------- --------- Total liabilities 34,600 56,333 ---------- --------- Contingencies Preferred stock, no par value, $1.80 cumulative convertible, $1 stated value; 500,000 shares authorized; 14,757 shares issued and outstanding; (liquidation preference of $590) 14 14 Common stock, no par value, 12,000,000 shares authorized; 3,761,967 and 3,744,967 shares issued and outstanding in 1997 and 1996, respectively 5,741 5,618 Unearned compensation, restricted stock (77) - Retained earnings 35,739 40,720 Translation adjustments (148) 227 ---------- --------- Total shareholders' equity 41,269 46,579 ---------- --------- Total liabilities and shareholders' equity $ 75,869 $ 102,912 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. 12 17 THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands, except per share data)
1997 1996 1995 Net sales $ 107,116 $ 115,528 $ 114,991 ----------- ----------- ----------- Cost of sales 92,152 110,076 98,502 Selling, general and administrative 16,824 16,672 15,269 Impairment and other disposal costs 2,990 - - Total costs and operating expenses 111,966 126,748 113,771 ----------- ----------- ----------- Operating income (loss) (4,850) (11,220) 1,220 Other income (expense): Interest expense, net (424) (1,065) (576) Other income (expense), net (31) 4,394 519 ----------- ----------- ----------- Income (loss) before income taxes (5,305) (7,891) 1,163 Income tax provision (benefit) (1,103) (2,393) 377 ----------- ----------- ----------- Net income (loss) (4,202) (5,498) 786 Retained earnings, beginning of year 40,720 46,993 46,982 Less dividends (preferred at $1.80 per share and common at $.20 per share) (779) (775) (775) ----------- ----------- ----------- Retained earnings, end of year $ 35,739 $ 40,720 $ 46,993 =========== =========== =========== Earnings per common share, basic and diluted $ (1.12) $ (1.47) $ .21 =========== =========== =========== Average shares outstanding: Basic 3,757,717 3,744,967 3,744,967 Diluted 3,757,717 3,744,967 3,771,967
The accompanying notes are an integral part of the consolidated financial statements. 13 18 THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995 (Dollars in thousands)
1997 1996 1995 Cash flows from operating activities: Net income (loss) $ (4,202) $ (5,498) $ 786 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 1,565 1,955 1,778 Pension income (2,014) (2,001) (115) Deferred tax provision (benefit) (719) (2,400) 181 (Gain) loss on sale of fixed assets (79) (3,400) 72 Provision for inventory write-down 751 9,690 757 Loss on sale of Sidney division 1,507 0 0 Impairment of assets 1,914 0 0 Changes in operating assets and liabilities, net of the sale of the Sidney Division in 1997: Accounts receivable 14,679 (9,479) (6,766) Inventories (3,162) 397 (6,688) Costs and estimated earnings in excess of billings on uncompleted contracts 2,852 4,546 (6,528) Billings in excess of costs and estimated earnings on uncompleted contracts 427 (21) 955 Other assets (149) (117) (880) Accounts payable 3,281 (448) 7,546 Accrued liabilities (1,854) 2,707 2,747 -------- -------- -------- Net cash provided by (used in) operating activities 14,797 (4,069) (6,155) -------- -------- -------- Cash flows from investing activities: Capital expenditures (665) (1,101) (2,072) Proceeds from sale of fixed assets 416 3,969 - Proceeds from sale of Sidney division 7,167 - - -------- -------- -------- Net cash provided by (used in) investing activities 6,918 2,868 (2,072) -------- -------- -------- Cash flows from financing activities: Dividends paid (779) (775) (775) Proceeds from (repayment of) short-term borrowings, net (4,586) 129 2,359 Proceeds from long-term borrowings - 4,000 9,405 Repayment of long-term borrowings (16,000) (120) - -------- -------- -------- Net cash provided by (used in) financing activities (21,365) 3,234 10,989 -------- -------- -------- Effect of exchange rates on cash (176) 199 (176) -------- -------- -------- Net increase in cash 174 2,232 2,586 Cash, beginning of year 4,848 2,616 30 -------- -------- -------- Cash, end of year $ 5,022 $ 4,848 $ 2,616 ======== ======== ======== Cash paid during the year for: Interest $ 1,102 $ 1,380 $ 604 Income Taxes $ - $ 469 $ 188
The accompanying notes are an integral part of the consolidated financial statements. 14 19 THE MONARCH MACHINE TOOL COMPANY AND SUBSIDIARIES 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. Certain 1995 and 1996 amounts have been reclassified to conform to the 1997 presentation. The following is a summary of the significant accounting policies: 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. 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 three months or less when purchased. 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. 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 coating and laminating equipment. 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. RESEARCH AND DEVELOPMENT COSTS Research and development costs, which are expensed as incurred, were approximately $1,474, $1,415, and $1,679 in 1997, 1996 and 1995, respectively. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net income (loss), after adjustment for the preferred stock dividend requirement, by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by adding the dilutive effect of common stock equivalents, such as the convertible preferred shares and any stock options outstanding, to the weighted average number of common shares outstanding. The convertible preferred shares and stock options were antidilutive for all periods presented except for stock options during 1995 which resulted in 27,000 common stock equivalents. Earnings per share amounts for 1996 and 1995 did not change as a result of implementation of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." ENVIRONMENTAL REMEDIATION COSTS Costs incurred to investigate and remediate contaminated sites are expensed. Liabilities for these expenditures are recorded, on an undiscounted basis, when it is probable that obligations have been incurred and the amounts can be reasonably estimated. STOCK OPTIONS The Company measures compensation cost for their stock option plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stocks Issued to Employees. 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 2. SALE AND DISPOSAL OF BUSINESSES SALE OF SIDNEY DIVISION In July 1997, the Company sold the business of the Sidney division and essentially all of its operating assets, including inventory and machinery and equipment carried at $7,641 and $1,540, respectively. The buyer paid $7,167 in cash, assumed specified liabilities of $564 and agreed to pay the remaining amount over a five year period. In March 1998, the Company agreed to certain adjustments related to various inventory valuation claims made by the buyer. As a result, the Company and buyer agreed to reduce 15 20 the remaining payment due under the agreement to $250 which will be received over a two year period beginning August 2000. The Company recorded disposal costs of $391 ($.07 per share after applicable income taxes of $133) in 1997 related to this transaction, net of a $318 benefit from a pension plan curtailment. In addition, cost of sales includes charges of $1,139 ($.20 per share after applicable income taxes of $387) related to the write-down of inventory and to costs related to the settlement of claims made by the buyer. The following is unaudited historical information relating to the Sidney division (including in 1997 the disposal costs and charges noted above and $1,500 ($.26 per share after applicable income taxes of $510) related to an impairment of a property held for sale described in Note 9):
1997 1996 1995 Net sales $ 10,613 $ 23,848 $ 16,793 Operating loss (3,302) (9,569) (2,723)
DISPOSITION OF GERMAN BUSINESSES During 1997, the Company decided to close the operations of its three businesses located in Germany and recorded a reserve of $1,100 ($.19 per share after applicable income taxes of $374) for estimated costs related to the closure. In addition, included in cost of sales is $283 ($.05 per share after applicable income taxes of $96) related to the write-off of inventory related to these businesses. On March 12, 1998, the Company entered into an agreement to sell a majority of the assets of one of the businesses, with the buyer also agreeing to assume certain liabilities of the business. The expected loss on the sale of these assets is included in the reserve amount recorded in 1997 noted above. The Company has provided a full valuation allowance against the deferred tax assets of these subsidiaries in the amount of $1,243, in the fourth quarter of 1997. The following is unaudited historical information, including the reserves and charges noted above, relating to all three German businesses:
1997 1996 1995 Net sales $ 5,133 $ 13,253 $ 17,419 Operating income (loss) (3,550) (1,559) 379
3. ACCOUNTS RECEIVABLE Included in accounts receivable are $5,740 and $10,068 of amounts unbilled as of December 31, 1997 and 1996, respectively. All unbilled amounts at December 31, 1997 are expected to be billed in 1998 including $3,507 to one customer, which amount was also unbilled at December 31, 1996. The Company anticipates billing $2,405 of that amount in April 1998, upon shipment of a machine presently being stored in a warehouse, and the balance, representing retainage, in late 1998. 4. INVENTORIES At December 31, 1997 and 1996, inventories aggregating $9,558 and $10,309, respectively, were valued at the lower of last-in, first-out (LIFO) cost or market, with the remaining inventories of $1,584 and $5,219, respectively, valued at the lower of first-in, first-out (FIFO) cost or market. As discussed in Note 2, the sale of the Sidney division in 1997 resulted in a reduction in inventory. At December 31, 1997 and 1996, inventories are as follows:
1997 1996 - ----------------------------------------------------------- Finished goods $ 2,729 $ 4,978 Work-in-process and parts inventory 12,381 23,940 Raw materials 320 599 ------------------------ Total first-in, first-out (FIFO) cost 15,430 29,517 Less allowance to adjust the carrying value of inventories to LIFO basis 4,288 13,989 ------------------------ $ 11,142 $ 15,528 ========================
The Company provides for potential losses from obsolete and slow-moving inventory in the period in which they are identified. The charge to earnings, before giving effect to LIFO liquidations, in 1997, 1996 and 1995 relating to obsolete and slow-moving inventory was $751, $9,690 and $757, respectively. During 1996, the Company decided to discontinue the manufacture of certain product lines of the Sidney division, except for certain special orders and, accordingly, revalued its parts inventory relating to those product lines. As a result of this revaluation, before giving effect to LIFO liquidations, $7,463 ($1.32 per share after applicable income taxes of $2,537) is included in the 1996 provision for obsolete and slow-moving inventory. 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). 16 21 5. CONTRACTS IN PROCESS Amounts included in the consolidated financial statements related to uncompleted contracts are as follows:
Costs and Billing in Estimated Excess of Earnings Costs and in Excess Estimated of Billings Earnings Total - ----------------------------------------------------------- DECEMBER 31, 1997: Costs $ 396 $ 7,263 $ 7,659 Estimated earnings 69 1,354 1,423 ---------------------------------- 465 8,617 9,082 Less amounts billed (128) (13,713) (13,841) ---------------------------------- $ 337 $ (5,096) $ (4,759) ================================== December 31, 1996: Costs $ 11,472 $ 1,371 $ 12,843 Estimated earnings 2,472 293 2,765 ---------------------------------- 13,944 1,664 15,608 Less amounts billed (10,637) (6,333) (16,970) ---------------------------------- $ 3,307 $ (4,669) $ (1,362) ==================================
6. 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 statement 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 (loss) before income taxes reflected in the consolidated statements of operations and retained earnings is comprised of the following:
1997 1996 1995 - ---------------------------------------------------------- United States $ (2,395) $ (9,695) $ 376 Europe (2,910) 1,804) 787 ------------------------------------- $ (5,305) $ (7,891) $ 1,163 =====================================
The income tax provision (benefit) reflected in the consolidated statements of operations and retained earnings is comprised of the following:
1997 1996 1995 - ---------------------------------------------------------- Current: Federal $ - $ (110) $ 71 Foreign (277) 100 125 ------------------------------------ (277) (10) 196 ------------------------------------ Deferred: Federal 1,856 (2,501) 259 Foreign - - 326 ------------------------------------ 1,856 (2,501) 585 ------------------------------------ Net operating loss carryforward: Federal (2,905) (778) (301) Foreign 223 896 (103) ------------------------------------ (2,682) 118 (404) ------------------------------------ $ (1,103) $ (2,393) $ 377 ====================================
The differences between the statutory U.S. income tax rate and effective income tax rate are as follows:
1997 1996 1995 - ---------------------------------------------------------- U.S. income tax rate (34)% (34)% 34% Effect of foreign operations 13 4 (1) Other - - (1) ---------------------------- (21)% (30)% 32% ============================
The effect of the foreign operations in 1997 is primarily due to a valuation allowance provided against the deferred tax assets of the German subsidiaries. The components of deferred taxes included in the consolidated balance sheets are as follows:
1997 1996 - -------------------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 483 $ 46 Inventory 236 3,743 Intangibles 141 - Product liability reserve 204 173 Accrued vacation 202 254 Environmental reserve 493 510 Other liabilities and reserves 1,212 550 Postretirement and other accrued benefits 272 272 Net operating loss and tax credit carryforwards 7,913 4,059 ---------------------------- Total deferred tax assets 11,156 9,607 Less valuation allowance (1,243) - ---------------------------- Net deferred tax assets 9,913 9,607 ---------------------------- Deferred tax liabilities: Property, plant and equipment (457) (1,713) Prepaid pension cost (5,201) (4,465) ---------------------------- Total deferred tax liabilities: (5,658) (6,178) ---------------------------- Net deferred tax asset $ 4,255 $ 3,429 ============================ Net current deferred asset $ 3,102 $ 5,276 ============================ Net non-current deferred asset (liability) $ 1,153 $ (1,847) ============================
17 22 Generally accepted accounting principles require 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. The Company believes that a valuation allowance is not necessary, other than a valuation allowance of $1,243 recorded in the fourth quarter of 1997 relating to the net operating loss carryforwards of the German subsidiaries. The Company anticipates that the deferred tax assets will be realized as a result of the utilization of 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, a valuation allowance against the deferred tax assets could be required if estimates of future taxable income are reduced. At December 31, 1997, the Company has domestic net operating loss carryforwards of $18,063 available to offset future taxable income. These carryforwards expire as follows: 2007 $ 1,546 2008 2,068 2009 3,012 2010 624 2011 2,268 2012 8,545 -------- $ 18,063 ========
The Company also has foreign net operating loss carryforwards for its subsidiary in England and its subsidiaries in Germany of $954 and $2,763 respectively, which can be carried forward indefinitely. The Company also has an alternative minimum tax credit carryforward of $172, which can be carried forward indefinitely, and a general business credit carryforward of $75 which expires in the year 2005, for its domestic operations. 7. PROPERTY, PLANT AND EQUIPMENT The reduction in the cost and accumulated depreciation in 1997 resulted from the sale of certain machinery and equipment in the Sidney division and reclassification of $4,445 (prior to the write-down described in Note 9) at December 31, 1997 of land and building which are being held for sale. Property, plant and equipment includes the following:
1997 1996 - ---------------------------------------------------------- Land $ 307 $ 1,328 Buildings 10,975 22,366 Machinery and equipment 15,418 30,297 ------------------------- 26,700 53,991 Accumulated depreciation (18,051) (38,053) ------------------------- $ 8,649 $ 15,938 =========================
8. BENEFIT PLANS Under the Company's pension plans (Plans), all domestic salaried employees are provided monthly retirement benefits based on an employee's compensation and years of service at date of retirement. In addition, bargaining hourly employees are paid monthly retirement benefits of specified amounts for each year of service. The Company annually contributes amounts to provide the Plans with sufficient assets to fund payment of the benefits based on actuarial assumptions as noted in the following tables. Minimal contributions were required in 1997, 1996 and 1995 as Plan assets exceeded projected benefit obligations. At December 31, 1997, Plan assets exceeded projected benefit obligations by $24,040. Under present tax laws, the Company's ability to realize the full value of this asset is limited. Due to the sale of the Sidney division (described in Note 2), employment of essentially all Sidney division and certain corporate employees was terminated. As a result, the Company realized a Plan curtailment gain of $318, which reduced the loss on the sale of the Sidney division in 1997. Net periodic pension expense (income) includes the following components:
1997 1996 1995 - ----------------------------------------------------------- Service cost-benefits earned during the period $ 636 $ 455 $ 525 Interest cost on projected benefit obligation 1,481 1,380 1,396 Actual return on assets (8,668) (5,310) (7,829) Net amortization and deferral 4,639 1,587 5,940 ---------------------------------- $ (1,912) $ (1,888) $ 32 ==================================
The Plans funded status and accounting assumptions at December 31, 1997 and 1996 are as follows:
1997 1996 - -------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $17,797 and $18,022 at December 31, 1997 and 1996, respectively $(18,197) $(18,562) ============================ Projected benefit obligation for services rendered to date $(20,048) $(20,703) Plan assets at fair value, primarily common stocks, pooled investment funds and U.S. Government securities 44,088 37,742 ---------------------------- Plan assets in excess of projected benefit obligation 24,040 17,039 Unrecognized net (gain) loss (7,955) (3,071) Unrecognized transition asset (362) (691) ---------------------------- Prepaid pension cost $ 15,723 $(13,277 ============================ Assumptions: Discount rate 7.25% 7.25% Compensation increases 4.50% 4.50% Rate of return on assets 8.50% 8.50%
18 23 Unrecognized gains and losses are amortized ratably over five years. Assets in the plans include common stock of the Company with a fair value of $792 and $823 at December 31, 1997 and 1996, respectively. The Monarch Machine Tool Company Retirement Savings Plan (the Savings Plan) enables substantially all full-time domestic employees to participate and contribute up to 15% of their salary to the Savings Plan upon completion of six months of service. Company matching and profit-sharing contributions are determined annually by the Board of Directors. During 1997, 1996 and 1995, the Company made matching contributions of 10% and no profit-sharing contributions. Total expense was $145, $142, and $126 in 1997, 1996 and 1995, respectively. 9. OTHER ASSETS Included in other assets at December 31, 1997 is land and buildings carried at $2,945 which are held for sale or are not an integral part of the Company's operations. A significant portion of the land and buildings is being leased to the buyer of the Sidney division at an annual rate of $160 through July 2002. Under this lease agreement, the lessee is responsible to pay for essentially all costs of operating the leased assets (including taxes and utilities) while the Company is required to only pay for maintenance and repair costs which exceed $18 per year and property and casualty insurance. The Company may terminate the lease with six months notice at any time after July 31, 1998. During the fourth quarter of 1997, the Company reviewed the recoverability of the net book value of the land and building which housed the former Sidney division, due to the sale of the business. The Company has determined that the carrying amount exceeds the estimated fair value of the property and accordingly recorded an impairment of $1,500 ($.26 per share after applicable income taxes of $510) which is included in the impairment and other disposal costs line item in the consolidated statements of operations and retained earnings. This determination is based on the estimated cash flow to be received from the lease and the estimated fair market value of the property if it were to be sold. During 1996, the Company realized a gain of $3,863 ($.68 per share after applicable income taxes of $1,313) from the sale of properties which were available for sale as a result of the discontinuance of a business in 1992 and the consolidation of certain of the Company's German business operations. 10. ACCRUED LIABILITIES Accrued liabilities include the following:
1997 1996 - ----------------------------------------------------------- Accrued start-up and warranty costs $ 7,266 $ 2,111 Self-insurance reserves 1,482 1,159 Environmental reserve 1,450 1,500 Wages and benefits 1,238 1,577 Accrued taxes 817 1,985 Accrued commissions 547 1,279 Customer deposits 434 1,232 Other 2,782 3,133 ------------------------- $ 16,016 $ 13,976 =========================
11. DEBT SHORT-TERM BORROWINGS The Company has various domestic and foreign lines of credit and revolving credit facilities available for up to $19,000, at interest rates ranging from 7.25% to 8.00%, with terms expiring during 1998. The Company had not borrowed any amounts under these facilities at December 31, 1997 ($1,500 borrowed at December 31, 1996), but had $5,838 of the available amount reserved against the issuance of letters of credit ($6,548 at December 31, 1996). The weighted average interest rate on all outstanding short-term borrowing at December 31, 1996 was 6.6%. LONG-TERM BORROWINGS The Company has a revolving credit facility of $20,000 (Credit Facility) with two banks until April 30, 1998, at which time the Company has the option to convert any outstanding amounts into a term loan payable in equal quarterly installments from June 1998 through April 2001. Interest on any outstanding loans is based on LIBOR plus between .75% and 1.5% dependent upon a certain financial ratio (effectively 6.22% at December 31, 1997). A commitment fee of 3/8% per annum must be paid quarterly on the daily average unused amount of the Credit Facility. At December 31, 1997 and 1996, the Company has $2,000 and $18,000, respectively, outstanding under the Credit Facility. The amount available to the Company under the Credit Facility is limited based on levels of inventory and accounts receivable, which limit is further reduced by any amount borrowed under a $7.5 million line of credit included in the above short-term borrowings. At December 31, 1997, the company has $15 million available to borrow under this Credit Facility. The Credit Facility requires the Company to comply with various covenants which include, among others, maintaining certain financial ratios and limiting the amount available for payment of dividends. As of December 31, 1997, the maximum amount of retained earnings available for dividends is $2,196. 19 24 A German subsidiary has two term loans outstanding with a balance of $175 and $297 at December 31, 1997 and 1996, respectively. The loans bear interest at 5.5% and 6.75% per annum and mature on March 30, 1999 and September 30, 2000, respectively. However, due to the planned disposition of this subsidiary, as described in Note 2, the Company intends to re-pay the outstanding balances in 1998. Accordingly, the debt is classified as current at December 31, 1997. Principal payments are due semi-annually with interest payable quarterly. Future payments due under all long-term borrowing arrangements are as follows: 1998 $ 577 1999 646 2000 704 2001 248 -------- 2,175 Less current portion (577) -------- $ 1,598 ========
12. 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 was completed by an engineering firm and submitted to EPS Region II in 1995. The 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 1997, the EPA published a proposed Record of Decision ("ROD"), which is awaiting final approval. The ROD basically incorporates the remediation program proposed by the PRPs based on the Feasibility Study. Following the expected approval of the ROD, the PRPs expect to either negotiate an agreement with the non-participating PRPs concerning past and prospective expenses or to commence an action against the non-participants. 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. The attorneys for the 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 PRPs 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. The Company accrued $1,600 in 1993 for its share of the estimated costs associated with the ultimate resolution of this matter. In 1995, the Company received a settlement of $350 from six insurance carriers in exchange for releasing the carriers from the claims which were asserted by the Company in this matter. Based upon information presently available, the Company believes that the $1,450 it has reserved at December 31, 1997 is adequate to provide for its share of the estimated costs for resolution of this issue. However, 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. 13. CONTINGENCIES The Company is self-insured for a portion of the cost of the health care benefits it provides its employees with an aggregate annual self-insured claim limit of $3,300. The Company is also self-insured for workers' compensation for those divisions located in Ohio and 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. The Company is a defendant in various legal actions, primarily product liability claims, arising in the ordinary course of business. The Company believes that 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. 14. 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. 15. STOCK-BASED COMPENSATION PLANS The 1994 Employees Stock Option Plan ("the 1994 Plan") provides for the issuance of up to 100,000 shares of com- 20 25 mon stock in connection with non-qualified 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. As of December 31, 1997, options for 73,000 shares remain available for grant under the 1994 Plan. In 1997, the Company granted 75,000 non-qualified stock options to an officer. The options granted during 1997 have a term of 10 years and vest on the sixth anniversary of the date of grant, or earlier if certain stock prices are achieved. A summary of the status of the Company's stock options as of December 31, 1997, 1996, 1995 and the changes during the years ending on those dates is presented below.
Weighted Number Average of Exercise Shares Price - ------------------------------------------------------------ Outstanding December 31, 1994 40,900 $11.65 Granted 4,900 $10.19 Cancelled (2,000) $ 9.69 -------------------- Outstanding December 31, 1995 43,800 $11.49 Granted - - Cancelled or expired (500) $10.19 -------------------- Outstanding December 31, 1996 43,300 $11.50 Granted 75,000 $ 8.44 Cancelled or expired (6,000) $11.95 -------------------- Outstanding December 31, 1997 112,300 $09.43 ====================
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for option grants. Accordingly, no compensation expense has been recognized for the stock options granted in 1997 or 1995. Had the compensation cost for the Company's stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" the related compensation expenses charged to operations, on a pre-tax basis, would have been $59 in 1997, $3 in 1996 and $1 in 1995. SFAS 123 does not apply to options granted prior to 1995. The weighted average fair value of options granted during 1997 and 1995 was $2.55 and $2.69, respectively. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions.
Assumption: 1997 1995 - ----------------------------------------------------------- Expected Term 7 years 5 years Expected Volatility 24.5% 24.5% Expected Dividend Yield 2.37% 1.96% Risk-Free Interest Rate 5.72% 6.22%
The following table summarizes information about stock options at December 31, 1997.
Options Outstanding Options Exercisable ------------------- --------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contract Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - --------------------------------------------------------------------- $ 8.44-$10.19 96,600 8.57 $ 8.74 9,900 $ 9.73 $11.38-$13.94 15,700 1.96 $13.71 15,450 $13.75 - --------------------------------------------------------------------- $ 8.44-$13.94 112,300 7.64 $ 9.43 25,350 $12.18
During 1997, the Company issued 17,000 shares of restricted stock which vest over a two year period from date of grant. During 1997, the Company recorded $30,000 as compensation expense associated with shares of restricted stock. The Company also has a Restricted Stock Bonus Plan which authorizes the awarding of up to 50,000 common shares to employees. No common shares have been awarded under this Plan. 16. 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 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:
1997 1996 1995 - ---------------------------------------------------------- Balance, beginning of year $ 227 $ 25 $ 62 ---------------------------- Translation adjustment increase (decrease): Net long-term assets (124) (67) 82 Net current assets (251) 269 (119) ---------------------------- Total adjustment (375) 202 (37) ---------------------------- Balance, end of year $ (148) $ 227 $ 25 ============================
Currency exchange losses during 1997 and 1996 were approximately $456 and $293, respectively, relating primarily to the Company's German operations and were not significant in 1995. 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 or losses in connection with the contract are included in the consolidated statements of operations and retained earnings. There were no outstanding contracts at December 31, 1997 and the value of the outstanding contracts at December 31, 1996 were not significant to the Company's financial position. 21 26 17. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in three primary industries in which it designs and builds machine tool, coil processing and coating and laminating equipment. All Company products are sold by direct Company sales people and independent agents throughout the United States and the world. Approximately 11%, 17%, and 16% of the Company's consolidated revenues for 1997, 1996 and 1995, 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. Business segment information is presented below:
1997 1996 1995 - ---------------------------------------------------------- Sales: Machine tools $ 41,561 $ 55,328 $ 49,534 Coil processing 62,221 57,383 57,651 Coating and laminating 3,618 3,623 8,313 Adjustments and eliminations (284) (806) (507) ---------------------------------- $ 107,116 $ 115,528 $ 114,991 ================================== Operating income (loss): Machine tools $ (2,887)$ (9,258) $ (1,980) Coil processing 591 (789) 2,122 Coating and laminating (1,875) (902) 1,182 Corporate (679) (271) (104) ---------------------------------- $ (4,850)$ (11,220) $ 1,220 ================================== Total assets: Machine tools $ 34,161 $ 56,122 $ 57,930 Coil processing 31,017 40,288 41,403 Coating and laminating 3,271 1,787 8,560 Corporate 13,063 8,871 3,233 Adjustments and eliminations (5,643) (4,156) (9,778) ---------------------------------- $ 75,869 $ 102,912 $ 101,348 ================================== Depreciation and amortization: Machine tools $ 797 $ 955 $ 1,013 Coil processing 643 803 647 Coating and laminating 125 197 118 ---------------------------------- $ 1,565 $ 1,955 $ 1,778 ================================== Capital expenditures: Machine tools $ 212 $ 589 $ 478 Coil processing 223 434 869 Coating and laminating 69 78 725 Corporate 161 - - ---------------------------------- $ 665 $ 1,101 $ 2,072 ==================================
Geographic information is presented below:
1997 1996 1995 - ---------------------------------------------------------- Sales: United States $ 92,374 $ 97,088 $ 88,439 Europe 15,026 19,246 27,059 Adjustments and eliminations (284) (806) (507) ---------------------------------- $ 107,116 $ 115,528 $ 114,991 ================================== Operating income (loss): United States $ (1,133)$ (8,691) $ 540 Europe (3,038) (2,258) 784 Corporate (679) (271) (104) ---------------------------------- $ (4,850)$ (11,220) $ 1,220 ================================== Total assets: United States $ 54,331 $ 83,318 $ 84,207 Europe 14,118 14,879 23,686 Corporate 13,063 8,871 3,233 Adjustments and eliminations (5,643) (4,156) (9,778) ---------------------------------- $ 75,869 $ 102,912 $ 101,348 ==================================
18. 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 value. 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. 22 27 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Dayton, Ohio February 19, 1998 except for Note 2 for which the date is March 12, 1998 23 28 BOARD OF DIRECTORS [PHOTO] Hopkins Bertrand Richardson Lundeen Enouen Rigot Clemens Connelly Goulet JOHN A. BERTRAND WILLIAM A. ENOUEN DAVID E. LUNDEEN President Senior Vice President & President & Chief Executive A. O. Smith Electrical Products Chief Financial Officer - Retired Officer - Retired Company The Mead Corporation The Monarch Machine Tool Company RICHARD E. CLEMENS DR. WALDEMAR M. GOULET, PH.D President & Chief Executive Professor of Finance JOHN M. RICHARDSON Officer Wright State University Senior Vice President - Retired The Monarch Machine Tool A. O. Smith Corporation Company KENNETH H. HOPKINS Chairman & Chief Executive JOSEPH M. RIGOT GERALD L. CONNELLY Officer Partner Executive Vice President & Field Abrasive Incorporated Thompson Hine & Flory LLP Chief Operating Officer Robbins & Myers, Inc.
EXECUTIVE OFFICERS RICHARD E. CLEMENS KARL A. FRYDRYK PAUL J. MALONEY President & Vice President & Vice President & Chief Executive Officer Chief Financial Officer General Manager - Stamco U.S. ROBERT A. SKODZINSKY PATRICK M. FLAHERTY ROBERT B. RIETHMAN President - Machine Tool Division Vice President - Treasurer Operations Improvement FREDERICK G. SHARP EARL J. HULL President - Stamco Division TIMOTHY P. GIBSON Secretary Vice President - Human Resources
24 EX-21 8 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Monarch has five consolidated subsidiaries, each of which is wholly-owned, as follows (During 1998, the Company intends to finalize the closing of each of the subsidiaries in Germany.): 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 9 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 19, 1998, except for Note 2 as to which the date is March 12, 1998, on our audits of the consolidated financial statements and financial statement schedule of The Monarch Machine Tool Company and Subsidiaries as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Dayton, Ohio March 27, 1998 EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) CONSOLIDATED BALANCE SHEET, CONSOLIDATED INCOME STATEMENTS AND CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 5,022 0 26,762 0 11,142 46,905 38,720 30,071 75,869 31,827 0 0 14 5,664 35,591 75,869 107,116 107,116 92,151 111,966 455 1,507 424 (5,305) (1,103) (5,305) 0 0 0 (4,202) (1.12) (1.12)
-----END PRIVACY-ENHANCED MESSAGE-----