-----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, SkoMZb5OxljgCPTUEjhj5AHgnC8grOR+vFb471xFDDU8VEtF2y2+6ues6xbNcKv+ LltLIIn2KzFqRvGGj0p/Ug== 0000926236-99-000033.txt : 19990331 0000926236-99-000033.hdr.sgml : 19990331 ACCESSION NUMBER: 0000926236-99-000033 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEVENS INTERNATIONAL INC CENTRAL INDEX KEY: 0000817644 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 752159407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09603 FILM NUMBER: 99577971 BUSINESS ADDRESS: STREET 1: 5500 AIRPORT FRWY CITY: FORT WORTH STATE: TX ZIP: 76117 BUSINESS PHONE: 8178313911 MAIL ADDRESS: STREET 1: PO BOX 3330 CITY: FORT WORTH STATE: TX ZIP: 76113 FORMER COMPANY: FORMER CONFORMED NAME: STEVENS GRAPHICS CORP DATE OF NAME CHANGE: 19920703 10-K405 1 ========================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM 10-K -------------------------------------- (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9603 ------------------------------------- STEVENS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) ------------------------------------- Delaware 75-2159407 (State of other jurisdiction of (IRS Employer incorporation or organization) identification No.) 5500 Airport Freeway 76117 Fort Worth, Texas (Zip Code) (Address of Principal Executive Offices) -------------------------------------- Registrant'stelephone number, including area code: (817) 831-3911 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class which registered Series A Stock, $0.10 Par Value American Stock Exchange Series B Stock, $0.10 Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant'sknowledge, 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. Yes X No ____ As of March 19, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $5,400,000 based upon the closing price of the registrant'sCommon Stock on such date, $0.875 and $0.75 per share for Series A and Series B stock, respectively, as reported by the American Stock Exchange. As of March 19, 1999, there were outstanding 7,443,174 shares of Series A stock and 2,058,959 shares of Series B stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of stockholders of the Company to be held during 1999 are incorporated by reference in Part III. ================================================================= STEVENS INTERNATIONAL, INC. TABLE OF CONTENTS Form 10-K Item Page PART I Item 1. Business . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . 12 Item 3. Legal Proceedings . . . . . . . . . . . . 12 Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . . . . 13 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters . . 14 Item 6. Selected Financial Data . . . . . . . . . 15 Item 7. M anagement's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 16 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . 23 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 42 PART III Item 10. Directors and Executive Officers of the Registrants 43 Item 11. Executive Compensation . . . . . . . . . 43 Item 12. Security Ownership of Certain Beneficial Owners and Management 43 Item 13. Certain Relationships and Related Transactions 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . 43 PART I Item 1. Business. Stevens International, Inc. was incorporated in Delaware in November 1986. (All references to the "Company" or "Stevens" include Stevens International, Inc. and its subsidiaries and predecessors, unless the context otherwise requires.) The statements in this report that are forward looking are based upon current expectations and actual results may vary. See "Cautionary Statements" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. The Company's business has changed significantly in the last several years due to fundamental changes in web-fed printing press markets, the large operating losses that the Company sustained in 1996 and 1997 and the Company's need to have reduced indebtedness. Sales of the Post Machinery Co. division (1993), the Bernal division (1997), the Zerand division (1998) and the Hamilton Machining Center (1998) have enabled the Company to substantially reduce indebtedness. The anticipated 1999 sale of assets currently held for sale at the Hamilton production division will complete the consolidation of Company operations in Texas, and will further reduce overhead costs. Anticipated consolidated revenues for 1999 are $17 to $22 million. General Stevens designs, manufactures, markets and services web-fed packaging and printing systems and related equipment for its customers in the packaging industry and in the specialty/commercial and banknote and securities segments of the printing industry. The Company's technological and engineering capabilities allow it to combine the four major printing technologies in its systems. The Company combines various types of equipment, including printing presses, die cutting equipment and delivery systems, into complete integrated systems, which are capable of providing finished products in a single press pass. These systems sell for prices ranging from $1 million to over $10 million. The Company also manufactures auxiliary and replacement parts and provides service for its equipment which represented 60%, 45%, and 50% of the Company's net sales for 1998, 1997 and 1996, respectively. Stevens' equipment is used by its customers to produce hundreds of end-products, including food and beverage containers, banknotes, postage stamps, lottery tickets, direct mail inserts, personal checks and business forms. The Company has an installed base of more than 3,000 machines in over 50 countries. The Company also markets and manufactures high-speed image processing systems primarily for use in the banknote and securities printing industry. All of the Company's presses are "web-fed" presses, which print on paper or other substrate that is fed continuously from a roll (the "web"), as distinct from traditional "sheet-fed" presses, which print on pre-cut sheets of paper or other substrate. Although sheet-fed equipment is still dominant in the segments of the packaging industry and the banknote and securities segment of the printing industry that are served by the Company, the Company believes that numerous opportunities exist to convert certain users of sheet-fed equipment to its web-fed packaging and printing systems because of certain efficiencies inherent in the web-fed process. The Company's main computer system and software are not currently year 2000 compliant. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions, invoices or other similar normal business activities. Based on a recent assessment, the Company has determined that it will need to modify a significant portion of its software so that its computer system will properly utilize data beyond December 31, 1999. The Company plans on completing its Year 2000 modifications by the end of its second quarter of fiscal 1999 utilizing certain software upgrades and internal resources for all program changes. As a result, the Company anticipates costs of $50,000 to $75,000 will be incurred to complete its Year 2000 program modifications. There can be no assurance that this time frame will be achieved and actual results could differ materially from these plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Overview of 1998 and 1997 The Company continued to experience a decrease in sales during 1998 and 1997, which primarily reflected the sale of various divisions and a continuation of the slowdown in orders that the Company has experienced for the last several years. Orders for 1998 ($10.2 million) fell to 34.2% of the previous year, with such decline concentrated primarily in packaging and specialty web products. The Company believes the decrease in orders is due to excess capacity of and competitive pressures on its customers, and in part to liquidity problems faced by the Company. In response to the continuing order slowdown, the Company continued to implement a significant restructuring plan which included large work force and cost reductions and the consolidation of certain facilities and operating functions. As part of the restructuring plan, and in an effort to cut costs and improve cash flow, the Company intends to improve its productivity by eliminating certain product lines and consolidating manufacturing and assembly at its Fort Worth, Texas, location. The Company believes this restructuring plan has helped and will continue to help in its efforts to return to profitability. Results of Operations Sale of Hamilton Machining Center in July 1998 On July 28, 1998 the Company sold the real and personal property at its Hamilton, Ohio machining center ("HMC") and the major portion of its machinery and equipment at its assembly facility in Hamilton, Ohio for an aggregate consideration of approximately $4.33 million. This transaction resulted in the recording of a second quarter 1998 loss on sale of assets of approximately $0.8 million and an additional loss of $0.5 million in the third quarter of 1998 as a result of HMC inventory and other inventory that was abandoned by the Company and included in the sale. Proceeds of the transaction were used to repay the $4 million secured bridge term loan from the Company's new bank lender (the "Bridge Loan") which was loaned to the Company on June 30, 1998, transaction fees and certain real and personal property taxes. HMC had outside sales of $1.2 million and operating losses of $0.35 million in 1997. The Company has replaced certain of the capabilities of its machining center with a group of new and traditional suppliers. Sale of Assets of Zerand Division in April 1998 On April 27, 1998, the Company sold substantially all the assets of its Zerand division to Valumaco Incorporated, a new company formed for the asset purchase. In addition, Valumaco Incorporated assumed certain liabilities of the Zerand division. The assets sold included the real property, platen die cutter systems, and other original Zerand products such as delivery equipment, wide-web rotogravure printing systems, stack flexographic printing systems, unwind and butt splicer systems, and related spare parts, accounts payable, and other assumed liabilities. Excluded from the transaction were the System 2000 flexographic printing systems and the System 9000 narrow-web rotogravure printing systems produced at the Zerand division and related accounts receivable, inventory and engineering drawings. The sale price was approximately $13.7 million, which consisted of cash proceeds of $10.1 million, a one- year $1 million escrow "hold back", and the purchaser's assumption of approximately $2.6 million of certain liabilities of Zerand, including the accounts payable. This transaction resulted in an approximate $10 million reduction of the Company's senior secured bank debt. In 1997, Zerand contributed sales of approximately $11.6 million and approximately $1.8 million of income before interest, corporate charges and taxes. The Company realized an approximate $3.6 million gain on the sale of Zerand assets. Sale of Bernal Division in March 1997 In March 1997, the Company consummated the sale of substantially all of the assets of its Bernal division including the product technology and related intangibles to Bernal International, Inc., a new company formed for the asset purchase. The sale price was approximately $20 million, which consisted of cash proceeds of approximately $15 million, and the purchaser's assumption of approximately $5 million of certain liabilities of Bernal including the accounts payable. This transaction resulted in a $12 million permanent reduction of the Company's senior debt. In 1996, Bernal contributed sales of approximately $17.8 million and approximately $0.7 million income before interest, corporate charges and taxes. Stevens experienced a loss of $3.5 million on the sale of Bernal assets which was reflected in the 1996 results of operations. This asset sale resulted in a tax charge of $1.2 million from a taxable gain due to the non-deductible Bernal goodwill expensed upon the sale of Bernal's technology. Debt Restructuring On June 30, 1998 the Company refinanced a major portion of its secured indebtedness ("the Debt Restructuring") as part of its plan to reduce its debt. Through a combination of new secured bank borrowings of approximately $6 million, and loans from its Chairman, CEO and principal shareholder, Paul I. Stevens, aggregating $4.5 million, the Company paid off principal amounts due its senior secured bank lender and its secured senior subordinated notesholders, aggregating approximately $19.5 million. Repayment of the secured senior subordinated notes resulted in an extraordinary gain on early extinguishment of debt of approximately $11.2 million. Under its current credit facility, the Company's maximum borrowings are limited to a borrowing base formula, which cannot exceed $7.5 million in the form of direct borrowings and letters of credit. As of December 31, 1998 there were $2.38 million in direct borrowings and no standby letters of credit outstanding under the bank credit facility, with no additional availability for such borrowings. The Company's bank credit facilities have first liens on certain assets of the Company, principally inventory, accounts receivable, and the Company's Texas real estate. Paul I. Stevens loans aggregating $4.64 million at December 31, 1998 have first liens on certain assets of the Company, principally certain Ohio assets that are being held for sale, the remaining $0.5 million escrow holdback on the sale of Zerand, the assets of a foreign subsidiary, and certain accounts receivable for new customer equipment. The Company was paid $500,000 of the Zerand escrow holdback funds net of amounts owed to the purchaser on November 6, 1998. Because these holdback funds collateralize certain Paul I. Stevens advances, the $500,000 was paid to him to reduce his secured loans to the Company. Interest on the bank credit facility is 1.25% over prime with a two- year maturity on the revolving credit facility. The amount borrowed on the revolving credit facility was approximately $2.38 million on December 31, 1998. The Company paid in full a $4.0 million bank Bridge Loan on July 28, 1998 from the sale of HMC and the major portion of its machinery and equipment at its assembly facility in Hamilton, Ohio. The secured loans from Paul I. Stevens are due June 30, 2000 and bear interest at rates that vary up to 2% over bank prime. The borrowings under the bank credit facility are subject to various restrictive covenants related to financial ratios as well as limitations on capital expenditures and additional indebtedness. The Company is not allowed to pay dividends. Industry Overview Stevens markets its systems to its customers in two distinct worldwide industries the packaging industry and the printing industry. Although both the packaging and printing industries utilize printing in the manufacturing process, the printed products have significantly different applications. In the packaging industry, the printed product functions as the container for the end product, such as food and beverage containers. In the printing industry, the printed product is the end product, such as direct mail inserts, postage stamps and personal checks. The Company's products are designed to serve the (1) commercial and specialty printing industry, (2) banknote and securities segments of the printing industry, (3) the paperboard packaging industry, and (4) the flexible packaging industry. The packaging industry consists of several large segments, some of which the Company does not serve. The Company's products are designed to serve the folding carton, liquid carton, and the flexible packaging segments of the packaging industry. The printing industry also consists of several large segments in which the Company does not participate - including newspapers, periodicals and book publishing. Economic Forecasts The Company believes that, in the industry segments which it serves, several major market trends exist that are influencing the development and enhancement of packaging and printing equipment systems. These trends include an increasing emphasis on productivity, changing retailing practices including greater market segmentation and increasing environmental regulation. In addition the industry is experiencing a considerable consolidation process with numerous customer consolidations taking place in each of the last several years. Productivity. Productivity in the printing industry (as measured by output per employee) is one of the lowest among major industries in the United States. The purchasers of packaging and printing equipment continue to seek methods of reducing per unit costs in response to increased labor and raw materials costs, such as paper and paperboard. As a result, purchasers of packaging and printing equipment want to improve efficiency by reducing inventories, "in process" production time, waste and labor costs. Purchasers, therefore, are demanding more productive equipment including integrated systems capable of running at high speeds and producing finished product in a single press pass. The Company believes its web systems technology meets these demands for higher productivity. Retailing Practices. Retail shelf space is becoming increasingly expensive and scarce. In order to more effectively utilize shelf space, consumer product manufacturers are placing greater emphasis on the appearance of the package as a selling tool for the product. As a result, purchasers of packaging and printing equipment are being required by their customers to produce packaging with improved graphics through an increased number of colors, improved color quality and application of color enhancing coatings. These requirements have increased the complexity of the packaging and printing processes. The Company believes its products provide a production solution to these requirements. Market Segmentation. Market segmentation, or target marketing, where products are marketed to specific geographic areas or demographic groups, has resulted in increased product and packaging variety and an increased demand for distinct packaging and more specialized printing. In response to this trend, which has resulted in shorter press runs, purchasers of packaging and printing equipment systems are demanding greater system flexibility and automation to permit quick and less expensive change-over from one product run to another. The Company believes its technology has distinct advantages in meeting these demands. Environmental Regulation. Increasingly stringent environmental laws, rules and regulations, both domestically and internationally, have caused purchasers of packaging and printing equipment to focus on volatile organic compounds, printing inks, coatings and chemicals used for platemaking and equipment maintenance which are environmentally safer. As a result, purchasers of packaging and printing equipment are increasingly seeking ecologically-friendly processes such as the use of flexographic printing with water based inks. The Company is an industry leader in advanced flexo technology. Business Strategy The Company's objective is to rebuild the Company into a strong international business as a manufacturer of packaging and printing systems through its strategy of providing complete systems solutions to its customers. The principal elements of this strategy include the following: Technological Advancements. The Company demonstrates its technological advancements through its research and development efforts and new product introductions. This included the introduction of the System 2000 and 9000 series flexographic and rotogravure printing press systems, respectively. The Company works closely with manufacturers of related consumables, i.e., printing plates, anilox rolls, inks, paper and similar products, to create new product enhancements. Historically, the Company's gross expenditures for research and development (including customer funded projects) have exceeded 5% of net sales. Integrated Systems. The Company provides fully integrated web-fed packaging and printing systems which are capable of producing a finished product by taking paper or other substrate through one continuous, uninterrupted process. The Company works closely with its customers in the design and development of its integrated systems to meet their specific manufacturing needs. For many of its customers, the Company is a single-source supplier of their packaging and printing systems. The Company has the technological and engineering expertise to combine any of the four major printing methods (lithography, flexography, rotogravure and intaglio) together with die cutters and creasers and product delivery systems purchased from other suppliers into a single system. The Company believes that its ability to provide customized systems solutions provides it with a competitive advantage over other packaging and printing equipment manufacturers. Conversion to Web-Fed Systems. The Company believes that, because of the increased productivity inherent in the web-fed process, significant opportunities exist to convert users of sheet-fed equipment over to web-fed systems in the segments of the packaging and printing industries that it serves. While web-fed equipment has been successfully utilized for many years in some segments of the printing industry which the Company does not serve (including newspapers and periodicals), sheet- fed equipment is predominant in the folding carton segment of the packaging industry and in the banknote and securities segment of the printing industry. International Marketing. The Company plans to continue its international marketing efforts in order to capitalize on growth opportunities developing in Asia and in Eastern Europe for packaging and printing systems and to further geographically diversify its sales base. In the past several years, the Company has taken a number of initiatives to strengthen its international marketing efforts. In 1991, the Company established a European sales subsidiary and in 1995 acquired a European repair and service company (see "Marketing") to fill an important need and to better service products installed in Europe. In addition, in 1998 the Company added Ferrostaal A.G., of Essen, Germany, a division of The MAN Group as its agent in China and in certain other parts of the world. Products The Company markets a broad range of packaging and printing equipment systems to the packaging industry and the specialty/commercial and banknote and securities segments of the printing industry. The Company's complete systems integrate a variety of equipment, including printing presses, die cutters and creasers and product delivery systems. Such systems generally include equipment manufactured by the Company and also that produced by other manufacturers with the Company acting as a "systems integrator". The Company also sells system components independently of complete systems. The components of these systems include: Printing Presses. The Company offers all four major printing processes on a worldwide basis for its web-fed packaging and printing systems including flexographic, offset lithographic, rotogravure and intaglio printing and in combinations. Flexography, which historically was well suited for printing large areas of solid color, is typically the least expensive printing process. However, with Stevens technological advances, certain System 2000 flexographic machines are capable of printing quality that rivals offset lithography, at much lower costs. Offset lithography, which is the most widely used printing process, is a process that until now has typically provided a higher quality printed product than flexography. Rotogravure, which uses etched cylinders in the printing process, is a higher quality, more expensive process than either flexography or offset lithography. Intaglio printing, which is the most technologically complex and expensive printing process, utilizes engraved plates and applies ink under extreme pressure to print banknotes and other security documents. Die Cutters and Creasers. The Company believes that it offers, through preferential OEM agreements, a broad array of platen die cutters and rotary cutting products and technology in the packaging and printing industries. Auxiliary Equipment, Parts and Customer Service. The Company manufactures auxiliary equipment and replacement parts and provides service for its presses, collators and die cutters. During 1998, 1997, and 1996, 60%, 45%, and 50%, respectively, of the Company's net sales, were attributable to auxiliary equipment, parts and service. Generally, auxiliary equipment allows the customer to expand the capabilities of its existing equipment by increasing production capacity or by providing such additional features as forward numbering, batch delivery and special types of finishing, such as punching, perforating and folding. Auxiliary equipment also includes print towers to add additional colors and additional collating stations. Customer Service. The Company provides a customer service program including product services and support through trained Company and dealer service representatives. Product services include installation, field repairs, routine maintenance, replacement and repair parts, operator training and technical consulting services. Parts can be delivered the same day or overnight in North America, and within 24-48 hours worldwide. Product services and support programs also are designed to promote the sale of auxiliary equipment. Automatic Currency Examination ("ACE") Equipment. The Company markets and manufactures high-speed image processing systems primarily for use in the banknote and security printing industry. The Company offers an ACE system used for the examination of banknotes with error detection capabilities for overt and covert anti-counterfeit components and other printing errors. Marketing The Company primarily markets its products domestically through direct sales engineers and managers and internationally through its agent network. In 1990, the Company opened a sales and service office in France to better serve its European customers. In 1995, the Company formed Societe Specialisee dans le Materiel d Imprimerie ("SSMI"), to acquire a European printing press repair and service company. SSMI not only enables the Company to provide better service to its European customers, but it also operates as an on-going business. The Company's traditional marketing efforts include advertising, participating in major domestic and international trade shows and customer symposiums, and conducting periodic product maintenance seminars. The Company also conducts limited market research and analyses to reveal and study trends in addition to actively participating in various trade associations. Customers The Company's customers include packaging companies, printing companies, paper companies, check printers, business forms companies and central bank and private banknote and securities printers. Competition The Company encounters substantial competition in marketing its products from manufacturers of both sheet-fed and web-fed presses and related equipment. The Company believes that in its selected segments of the packaging and printing industries its competitors are primarily manufacturers of web-fed equipment. The Company's principal web-fed competitors are Bobst, S.A., Komori-Chambon and Goebel. The Company believes that the packaging industry is also served by manufacturers of offset sheet-fed equipment such as Koening and Bauer-Albert Frankenthal (KBA)-Planeta, Heidelberg, M.A.N. Roland and Komori. The banknote and securities markets are predominately served by sheet-fed equipment made by Koenig and Bauer-Albert Frankenthal (KBA) and marketed by De La Rue Giori. The Company believes that competition for its products is based primarily on product performance, web-fed versus sheet-fed technology, reliability, customer service, price and delivery. Research and Development Company development projects are funded in varying amounts by customers who are in need of specialized equipment or processes. Research and development costs are charged to operations as incurred and the total of gross expenditures (including customer-funded projects) has exceeded 5% of net sales in recent years. Employees As of March 1, 1999, the Company had approximately 90 employees. With the closing of the Hamilton plant in 1998, the Company no longer employs any collective bargaining employees. Backlog and Orders The backlog of the Company consists of orders that have met strict criteria, including having a signed contract with appropriate down payments received. Further, to be included in backlog, these orders must also have a reasonable expectation of being manufactured, shipped and paid for within contract terms. Additionally, the backlog does not generally include a significant amount of service and parts orders, which have been in the 30% to the 50% range of the Company's sales volume for the last three years. The absolute value of the backlog varies with the amount of percentage of completion revenue recognized in any one period. This value can fluctuate since the Company experiences an average six to nine month period between the booking of the order and its final shipment. The Company's backlog of unfilled orders as of December 31, 1998 was approximately $2.5 million compared to $12.0 million at December 31, 1997 (excluding the Zerand division), a decrease of 79%. The backlog included a decrease of $8.4 million in packaging, and $1.1 million in French repair and service orders. The current decline in backlog is the result of both the sale of operating divisions and a significant decline in orders. While the decline may be attributable to general economic conditions affecting the printing and packaging industry and technical advances of electronic information transfer, the Company believes the decline in orders is primarily attributable to a loss of orders to its competition due in part to liquidity problems faced by the Company. Executive Officers The executive officers of the Company are as follows: Name Age Principal Position with the Company ---- --- ----------------------------------- Paul I. Stevens 84 Chairman of the Board, Chief Executive Officer and Director Richard I. Stevens 60 President, Chief Operating Officer and Director Hans W. Kossler 58 Senior Vice President, Operations Constance I. Stevens 55 Vice President - Administration, Assistant Secretary and Director George A. Wiederaenders 57 Vice President, Treasurer and Chief Accounting Officer Paul I. Stevens founded the Company in 1965. He has served the Company as Chairman of the Board and Chief Executive Officer since its inception. In 1974, Mr. Stevens founded Stevens Industries, Inc., a family-owned holding company that is an affiliate of the Company and of which he is the controlling stockholder. Mr. Stevens is the father of Richard I. Stevens and Constance I. Stevens. Richard I. Stevens is President, Chief Operating Officer and a director of the Company and has served in each of these capacities for at least five years. From May 1992 to December 1993, Mr. Stevens served as President and General Manager of the Company's Hamilton division. He joined the Company in 1965 and became President in 1969. In 1973 he was elected to the Board of Directors. Mr. Stevens is active in industry professional associations. He has been a director of The Association for Suppliers of Printing and Publishing Technologies (NPES) since 1982. In October 1995, Mr. Stevens was elected Chairman of the Board of NPES for a two-year term. Mr. Stevens is the son of Paul I. Stevens. Hans W. Kossler has served the Company as Senior Vice President - Operations since May 1996. From December 1995 to May 1996 he served the Company as Vice President - Manufacturing after joining the Company in October 1995 as Manufacturing Assistant to the President. From January 1994 to October 1995, Mr. Kossler served North American Consulting as a Managing Partner. From August 1989 to January 1994, he served Gemini Consulting, Inc. as a Senior Consultant. Prior to this, from August 1979 to August 1989, Mr. Kossler served Bell Helicopter-Textron in several capacities, including Production Manager for the V-22 Osprey Project. Constance I. Stevens has served as a director of the Company since April 1987. Ms. Stevens has served as Vice President - Administration and Assistant Secretary to the Company since July 1995. From July 1989 to July 1995, Ms. Stevens served as the President of a project management consulting firm in Carmel, California. From May 1980 until July 1989, Ms. Stevens served as the managing partner of Merritt Associates of Carmel, California, an architectural design and real estate development firm. Ms. Stevens is the daughter of Paul I. Stevens. George A. Wiederaenders has served as Vice President, Treasurer and Chief Accounting Officer since May 1996. He has been Chief Accounting Officer of the Company since July 1993, was Treasurer of the Company from September 1987 to August 1993 and had served Stevens as it Vice President - Finance from December 1985 to April 1988. From January 1981 to December 1985, Mr. Wiederaenders was Executive Vice President and Treasurer of Manufactured Energy Products, Inc., a manufacturer of wireline trucks and skids for oilfield exploration. Mr. Wiederaenders served in various capacities with the public accounting firm of Coopers & Lybrand in Texas from 1967 to 1978, including general practice audit partner from 1976 to 1978 and managing partner of the Austin, Texas office from June 1977 to 1978. Except as otherwise noted, no family relationships exist among the executive officers of the Company. Factors That Could Affect Future Performance This report contains certain forward looking statements about the business and financial condition of the Company, including various statements contained in "Management's Discussions and Analysis of Financial Condition and Results of Operations." The actual results of the Company could differ materially from those forward looking statements. The following information sets forth certain factors that could cause the actual results to differ materially from those contained in the forward looking statements. Liquidity Concerns. The Company's viability as a going concern is dependent upon the continuing restructuring of its operations, the successful sale of its current product offerings, and, ultimately, profitability. Competition. The packaging and printing equipment industry is highly competitive, and many of the industry participants possess greater management, financial and other resources than those possessed by the Company. The Company encounters substantial competition in marketing its products from manufacturers of both sheet-fed and web-fed presses and related equipment. The Company believes that in selected segments of the packaging and printing industries its competitors are primarily manufacturers of web-fed equipment. The Company's principal web-fed competitors are Bobst S.A., Komori-Chambon, and Goebel. The Company believes that the packaging industry is also served by manufacturers of offset sheet-fed equipment, such as Koenig and Bauer-Albert Frankenthal (KBA)-Planeta, Heidelberg, M.A.N. Roland and Komori. The banknote and securities markets are predominately served by sheet-fed equipment marketed by De La Rue Giori. The Company believes that competition for its products is based primarily on product performance, web-fed versus sheet-fed technology, reliability, customer service, price and delivery. Economic Downturn. Sales of the Company's packaging and printing products may be adversely affected by general economic and industry conditions and downturns, and particularly by the price of paper and paperboard. The Company's business and results of operations may be adversely affected by inflation, interest rates, unemployment, paper prices, and other general economic conditions reflecting a downturn in the economy, which may cause customers to defer or delay capital expenditure decisions. The Company incurred significant losses in 1997 and 1996 of $19.2 million and $34.2 million, respectively; and in 1990 and 1991 of $7.8 and $13.5 million, respectively. These losses were caused by many factors, including a slowdown in its customers' capital spending that surfaced in the fourth quarter of 1995; changing printing technology that affected demand for the Company's business forms printing systems, which prior to 1990 represented a substantial portion of the Company's revenues, and by a general economic downturn which impacted or delayed capital expenditure decisions by its customers. Sales of business forms and specialty web printing press systems have historically been subject to cyclical variation based upon specific and general economic conditions, and there can be no assurance that the Company will maintain profitability during downturns. Technological Advances in the Printing Industry. The packaging and printing industry has experienced many technological advances over the last decade, and the Company expects such advances to continue. Packaging and printing companies generally want more efficient packaging and printing press systems in order to reduce inventories, "in process" production time, waste and labor costs. These technological advancements could result in the development of additional competition for all or a portion of the Company's products and could adversely affect the competitive position of the Company's products. Although the Company has rights in a significant number of issued patents in the United States and elsewhere, management believes that patent protection is less significant to the Company's competitive position than certain other factors. These factors include the Company's in-depth knowledge of the industry and the skills, know-how and technological expertise of the Company's personnel. Dependence Upon New Technologies and Product Development. Technological leadership, enhanced by the introduction and development of new products, is an important objective of the Company's business strategy. In accordance with this business strategy, the Company's newly developed products were a significant factor in the Company's growth in 1994 and 1995. In the last three fiscal years, the Company's gross expenditures for research and development (including customer funded projects) exceeded 5% of net sales. The Company believes that its continued success will be dependent, in part, upon its ability to develop, introduce and market new products and enhancements. Many difficulties and delays are encountered in connection with the development of new technologies and related products. There can be no assurance that the Company will be able to continue to design, develop and introduce new products that will meet with market acceptance. International Business Risks. In 1998 and 1997, international sales represented 35% and 25% of net sales, respectively. The Company expects that international sales will continue to represent a significant portion of its total sales. Sales to customers outside the United States are subject to risks, including the imposition of governmental controls, the need to comply with a wide variety of foreign and United States export laws, political and economic instability, trade restrictions, changes in exchange rates, tariffs and taxes, longer payment cycles typically associated with international sales, and the greater difficulty of administering business overseas as well as general economic conditions. Although substantially all of the Company's international orders are denominated in United States dollars, some orders are denominated in foreign currencies and, accordingly, the Company's business and results of operations may be affected by fluctuations in interest and currency exchange rates. Fluctuations in foreign currencies may also affect the Company's foreign sales, and, since many of the Company's competitors are foreign, fluctuations in foreign currencies may also affect the Company's competitive position in the United States markets. The Company periodically enters into foreign exchange contracts to hedge the risk that eventual net cash flows will be adversely affected by changes in exchange rates. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as do the laws of the United States. Manufacturing Risks and Availability of Raw Materials. Disruption of operations at the Company's primary manufacturing facility or any of its subcontractors for any reason, including work stoppages, fire, earthquake or other natural disasters, would cause delays in shipments of the Company's products. There can be no assurance that alternate manufacturing capacity would be available, or if available, that it could be obtained on favorable terms or on a timely basis. The principal raw materials used in the manufacturing of printing press systems are high grade steel and alloys used in the making of gears, rollers and side frames. Steel is in very available supply throughout the world. Impact of Estimates Upon Quarterly Earnings. The Company derives the majority of its revenues from the sale of packaging and printing press systems, with prices for each system and most orders ranging from $1 million to over $10 million. The Company's policy is to record revenues and earnings for orders in excess of $1 million on the percentage of completion basis of accounting, while revenues for orders of less than $1 million are recognized upon shipment or when completed units are accepted by the customer. The percentage of completion method of accounting recognizes revenues and earnings over the build cycle of the press system as work is being performed based upon the cost incurred to date versus total estimated contract cost and management's estimate of the overall profit in each order. In the event that the Company determines it will experience a loss on an order, the entire amount of the loss is charged to operations in the period that the loss is identified. The Company believes that the percentage of completion method of accounting properly reflects the earnings process for major orders. The informed management judgments inherent in this accounting method may cause fluctuations within a given accounting period, which could be significant. During each accounting period, other management assessments include estimates of warranty expense, allowances for losses on trade receivables and many other similar informed judgments. Litigation. As a result of the Company's continuous liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of the actions can be settled, or if named a defendant in such actions in the future, the Company will be able to settle such claims in the future. In addition, the Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. See "Legal Proceedings." Environmental Costs, Liabilities and Related Matters. The Company's production facilities and operations are subject to a variety of federal, state, local and foreign environmental, health and job safety laws and regulations. The Company is not aware of any conditions or circumstances that, under applicable environmental, health or safety regulations or requirements, will require expenditures by the Company that management believes would have a material adverse effect on its businesses. However, environmental liabilities (especially those relating to discontinued production or waste disposal practices) are very difficult to quantify, and it is possible that environmental litigation or regulatory action may require significant unanticipated expenditures or otherwise adversely affect the Company. See "Legal Proceedings." Control by Principal Stockholders. As of March 19, 1999, Paul I. Stevens, Stevens Industries, Inc. and members of the immediate family of Paul I. Stevens beneficially own approximately 13% and 93% of the outstanding Series A and Series B Common Stock of the Company, respectively, representing 72.4% of the combined voting power. As a result, the Stevens family alone is able to elect a majority of the Board of Directors and otherwise continue to influence the direction and policies of the Company and the outcome of any other matter requiring shareholder approval, including mergers, consolidations and the sale of all or substantially all of the assets of the Company, and, together with others, to prevent or cause a change in control of the Company. Volatility of Stock Price. The Company's Series A Common Stock market price has ranged from a high of $19 5/8 per share in the first quarter of 1990 to a low of $0.50 per share in the fourth quarter of 1998. The market price of the Company's Series A Common Stock may be subject to substantial fluctuations related to the announcement of financial results, new product introductions, new orders or order cancellations by the Company or by its competitors or by announcements of other matters related to the Company's business. In addition, there can be no assurance that the price of the Series A Common Stock will not fluctuate in the future due to a multiplicity of factors outside of the Company's control. These factors include general economic and stock market conditions, investor perceptions and mood swings, levels of interest rates and the value of the dollar. Dependence On Key Personnel. The Company's success depends, to a significant extent, on the Company's Chairman of the Board and Chief Executive Officer, Paul I. Stevens, on its President and Chief Operating Officer, Richard I. Stevens and on other members of its senior management. The loss of the services of Paul or Richard Stevens, or any of its other key employees, could have a material adverse effect on the Company. The Company maintains a key man life insurance policy on Paul I. Stevens in the amount of $2,000,000. The Company's future success will also depend in part upon its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be successful in attracting and retaining such personnel. Rapid Growth and Decline of Revenues. The Company's annual revenue has fluctuated dramatically over the years ranging from 30% growth in 1995 to a 52% decrease in 1996. The growth was largely attributable to the development and sale of new products. In light of this growth, the Company increased the amount of expenditures on its research and development programs, particularly in conjunction with the development of new products. In recent years, the Company curtailed many expenditures in response to the slowness of new orders which has been due, in large part, to certain product performance issues related to the new products. These performance issues also severely impacted the Company's liquidity, necessitating large lay offs of personnel, a restructuring of operations to lower operating levels, and consolidation of functions and facilities. In addition, the Company has reduced capital expenditures and implemented certain other cost reduction measures. Acquisitions. The Company may from time to time acquire or enter into strategic alliances concerning technologies, product lines or businesses that are complementary to those of the Company. There can be no assurance that the Company will be able to conclude any acquisitions in the future on terms favorable to it or that, once consummated, such acquisitions will be advantageous to the Company. Item 2. Properties. The following are the locations of the Company's executive and principal manufacturing and research facilities. In addition, the Company leases a small sales office in Europe on a month-to-month basis. The Company believes its facilities are adequate for its present needs. Owned Approx. or Location Use Sq. Ft. Leased -------- --- ------ ------ Fort Worth, Texas Executive and engineering 12,400 Leased offices Hamilton, Ohio Manufacturing facility 130,000 Owned Held for sale. Fort Worth, Texas Manufacturing facility and 74,000 Owned administration offices Villers sous St. Repair and service facility 13,000 Owned Leu, France and administration offices See notes G, J and L of the notes to consolidated financial statements of the Company for information relating to property, plant and equipment and leases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." Item 3. Legal Proceedings. In 1997, the Company filed a suit seeking damages and injunctive relief against Paul W. Bergland, a former vice-president, for, among other things, theft of trade secrets, fraud, breach of contract, and breach of a confidential relationship. On March 3, 1997, Bergland filed his original answer and a counterclaim. ConverTek, Inc., a corporation in which Bergland claims an ownership interest, joined the suit as a counter claimant against the Company. This litigation was settled in July 1998 with no payment of damages on the part of any of the parties to the lawsuit. As a result of the Company's continuing liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of these actions can be settled or that the Company, if named a defendant in such actions in the future, will be able to settle such claims in the future. In February 1990, the Environmental Protection Agency ("EPA") issued a Notice of Potential Liability and Request for Participation in Cleanup Activities to approximately 60 parties, including Post Machinery Company, Inc., a subsidiary of the Company, in relation to the disposition of certain substances that could be characterized as "hazardous wastes" which purportedly were taken to the Coakley Landfill Site ("Coakley Site") in North Hampton, New Hampshire prior to 1982. A committee representing the potentially responsible parties ("PRPs") negotiated a settlement in the form of consent decrees (the "Consent Decrees") with EPA and the State of New Hampshire covering the closure and capping of the Coakley Site. The PRPs also agreed that certain of the PRPs, including Post, would no longer be obligated to participate in the cleanup at the Coakley Site in return for a contribution of a fixed amount into escrow, and such PRPs would be indemnified by certain of the remaining PRPs from further liability under the EPA's current action. Post contributed $86,719 under this agreement. EPA is currently conducting an investigation of ground water conditions under a wetlands area adjacent to the site. EPA has not given notice to any parties of potential liability for ground water under the wetlands. There can be no assurances that no further claims will be brought related to the Coakley Site, or sites affected by contamination from the Coakley Site, or that any claims which might be brought would be covered by the Consent Decrees or the agreement described above. In connection with the aforementioned environmental claim, the Company was indemnified and reimbursed by Post's predecessor, PXL Holdings Corporation, for its costs in connection with the Coakley matter. No assurance can be given regarding the outcome of any pending case; however, a negative outcome in excess of insurance coverage could have a material adverse effect on the Company's business, operating results and financial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. The Company's Series A Common Stock and Series B Common Stock are traded on the American Stock Exchange under the symbols SVGA and SVGB, respectively. The following table sets forth for the periods indicated the range of the high and the low closing sale prices per share for the Series A Common Stock and the Series B Common Stock, all as reported on the Composite Tape of the American Stock Exchange Listed Issues. Series A Series B Common Stock Common Stock High Low High Low ------- ------ ------ ------- Year Ending December 31, 1997: First Quarter $1 3/4 $ 9/16 $2 7/8 $1 3/4 Second Quarter 1 7/16 1/2 2 3/4 15/16 Third Quarter 2 1/4 1 4 2 1/2 Fourth Quarter 3 1/4 1 1/8 4 3 1/4 Year Ending December 31, 1998 First Quarter $2 1/2 $1 1/2 $3 15/16 $3 3/8 Second Quarter 3 13/16 1 4 3/8 3 3/8 Third Quarter 3 11/16 1 4 1/4 1 1/4 Fourth Quarter 1 3/8 9/16 1 1/4 13/16 First Quarter 1999 $1 1/4 $ 5/8 $1 13/16 $ 3/4 (through March 19, 1999)
As of March 19, 1999, approximately 7,443,000 shares of the Series A Common Stock were outstanding and held by approximately 200 holders of record, and 2,059,000 shares of the Series B Common Stock were outstanding and held by approximately 65 holders of record. The Company no longer meets the eligibility requirements for listing its stock on the American Stock Exchange and, accordingly, is subject to delisting proceedings at the option of the American Stock Exchange. Negotiations regarding such listing have been on-going since 1997. The American Stock Exchange has notified the Company of its intention to delist the Company's stock. The Company plans to appeal this decision but there can be no assurance that such appeal will be successful. The Company has not paid cash dividends on its capital stock. The current policy of the Company's Board of Directors is to retain any future earnings to provide funds for the operation of the Company's business. Consequently, the Company does not anticipate that cash dividends will be paid on the Company's capital stock in the foreseeable future. If, however, cash dividends are paid, such dividends will be paid equally to holders of the Series A Common Stock and the Series B Common Stock on a share-for-share basis. See "Description of Capital Stock." In addition, the Company's current credit facility restricts the Company's ability to pay dividends. For a discussion of restrictions of the Company's ability to pay dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." Item 6. Selected Financial Data. The following tables set forth selected historical financial information for the indicated periods for the Company. The historical information is derived from the Consolidated Financial Statements of the Company. STATEMENT OF OPERATIONS (In thousands except per share data) Year Ended December 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Net sales $ 22,207 $ 35,151 $ 65,659 $139,181 $106,694 Cost of sales 17,877 34,011 74,243 108,307 81,009 ------- ------- ------- ------- ------- Gross profit (loss) (1) 4,330 1,140 (8,584) 30,874 25,685 Selling, general and administrative expense 7,379 9,837 22,485 21,437 17,211 Restructuring charge (3) -- -- 1,300 -- -- Loss on impairment of assets 573 6,347 -- -- -- Loss on sale of assets -- -- 3,472 -- -- ------- ------- ------- ------- ------- Operating income (loss) (3,622) (15,044) (35,841) 9,437 8,474 Gain on sale of assets 2,203 -- -- -- -- Other income (expense) (1,956) (4,396) (5,379) (3,478) (4,139) ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary items (3,375) (19,440) (41,220) 5,959 4,335 Income tax (expense) benefit (75) 213 7,000 (1,660) (1,908) ------- ------- ------- ------- ------- Income (loss) before extraordinary items (3,450) (19,227) (34,220) 4,299 2,427 Extraordinary items (2) 11,221 -- -- -- (85) ------- ------- ------- ------- ------- Net income (loss) $ 7,771 $(19,227) $(34,220) $ 4,299 $ 2,342 ======= ======= ======= ======= ======= Per Common Share - Basic: Income (loss) before extraordinary items $(0.36) $(2.03) $(3.62) $0.46 $0.27 Extraordinary items (2) 1.18 -- -- -- (0.01) ------- ------- ------- ------- ------- Net income (loss) - basic $ 0.82 $(2.03) $(3.62) $0.46 $0.26 ======= ======= ======= ======= ======= Per Common Share - Diluted: Income (loss) before extraordinary items $(0.36) $(2.03) $(3.62) $0.45 $0.26 Extraordinary items (2) 1.18 -- -- -- (0.01) ------- ------- ------- ------- ------- Net income (loss) - diluted $0.82 $(2.03) $(3.62) $0.45 $0.25 ======= ======= ======= ======= ======= Weighted average shares outstanding - basic 9,492 9,457 9,451 9,408 9,122 ======= ======= ======= ======= ======= Weighted average shares outstanding - diluted 9,492 9,457 9,451 9,553 9,256 ======= ======= ======= ======= =======
BALANCE SHEET DATA (In thousands) Year Ended December 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------ ------- ------- ------- ------ Cash and temporary investments $ 164 $ 211 $ 3,338 $ 814 $ 1,473 Working capital (deficit) 1,965 (10,894) (11,476) 38,127 16,692 Total assets 14,651 31,890 77,417 117,647 94,041 Long-term debt 5,244 55 113 33,470 15,308 Total stockholders equity (deficit) $(2,955) $(9,611) $ 10,896 $ 45,372 $ 40,965
Cautionary Statement The statements in this Form 10-K, including this Management's Discussion and Analysis, that are forward looking are based upon current expectations and actual results may differ materially. Therefore, the inclusion of such forward looking information should not be regarded as a representation of the Company that the objectives or plans of the Company will be achieved. Such statements include, but are not limited to, the Company's expectations regarding the operations and financial condition of the Company. Forward looking statements contained in this Form 10-K and included in this Management's Discussion and Analysis, involve numerous risks and uncertainties that could cause actual results to differ materially including, but not limited to, the effect of changing economic conditions, business conditions and growth in the printing and paperboard converting industry, the Company's ability to maintain its lending arrangements, or if necessary, access external sources of capital, implementing current restructuring plans and accurately forecasting capital expenditures. In addition, the Company's future results of operations and financial condition may be adversely impacted by various factors including, primarily, the level of the Company's sales. Certain of these factors are described in the description of the Company's business, operations and financial condition contained in this Form 10-K. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. General The Company derives its revenues from the sale of packaging and printing equipment systems and related equipment to customers in the packaging industry and the specialty/commercial and security and banknote segments of the printing industry. The Company's net sales have fluctuated from a high of $139.2 million in 1995 to a low of $22.2 million in 1998. The Company continued to experience a decrease in sales during 1998, which reflected a continuation of the slowdown in its customers orders that the Company has experienced since the fourth quarter of 1995. Orders for 1998 ($10.2 million) fell to 34.2% of the previous year, primarily in packaging and specialty web products. The Company believes that in addition to the decline due to the sale of various operating divisions the decrease in orders represents industry-wide purchase delays, and a loss of orders to its competition due in part to product performance issues and in part to liquidity problems faced by the Company. In response to the continued order slowdown, the Company continued to implement a significant restructuring plan which included large work force and cost reductions and the consolidation of certain facilities and operating functions. Results of Operations The following table sets forth, for the periods indicated, certain income statement data as percentages of net sales Year Ended December 31, ----------------------- 1998 1997 1996 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 80.5% 96.8% 113.1% ----- ----- ----- Gross profit (loss) 19.5% 3.2% (13.1%) Selling, general and administrative expenses 33.2% 28.0% 34.2% Restructuring charge -- -- 2.0% Loss on impairment of assets 2.6% 18.0% -- Loss on sale of assets -- -- 5.3% ----- ----- ----- Operating income (loss) (16.3%) (42.8%) (54.6%) Other income (expense): Gain on sale of assets 9.9% -- -- Interest, net ( 7.1%) (10.2%) (6.0%) Other, net ( 1.7%) (2.3%) (2.2%) ----- ----- ----- Income (loss) before income taxes and extraordinary items (15.2%) (55.3%) (62.8%)
Comparison of Years Ended December 31, 1998 and 1997 Net Sales. The Company's net sales for the year ended December 31, 1998 decreased by $12.9 million, or 36.8%, compared to the same period in 1997, due primarily to decreased sales of packaging systems products ($4.7 million) and to the sale of the Zerand division in April 1998, which contributed $4.3 million in 1998 sales and $11.6 million in 1997 sales. In addition, the Company experienced decreases in its French repair and service sales ($0.9 million). Sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. The Company sold these rights in lieu of a long repossession and resale process. Gross Profit. The Company's gross profit for the year ended December 31, 1998 increased by $3.2 million compared to gross profit in the same period in 1997 due primarily to shipment of products at near normal product margins. In addition, the Company evaluated its last-in first-out ("LIFO") inventory reserve following the sale of assets, including the inventory, at HMC and other inventory usage in 1998. The financial impact of the calculated decrement in the LIFO inventory for the year ended December 31, 1998 was $1.3 million. Accordingly, the gross profit for the year was increased $1.3 million ($0.14 per share) and the LIFO reserve was reduced $1.3 million. Gross profit margin for 1998 increased to 19.5% of sales as compared to 3.2% for 1997. This increase in gross profit margin in 1998 was due primarily to product mix, shipment of products at near normal margins, decreased warranty expenses, and the benefit of the reduction in the LIFO reserve. Sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. The Company sold these rights in lieu of a long repossession and resale process. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses decreased by $2.5 million, or 25%, for the year ended December 31, 1998 compared to the same period in 1997. The decrease was due to cost reduction efforts at corporate headquarters and at manufacturing locations in connection with the reduced volume of sales, as well as the impact of the sale of the Zerand division. Selling, general and administrative expenses for the year ended December 31, 1998 were 33.2% of sales compared to 28% of sales for the same period of 1997 due to the very low sales in 1998 compared to 1997. The Company's continuing cost reductions in 1998 did not equate to the overall percentage decrease in sales, and especially the sales decrease in the last half of 1998. Loss on Impairment of Assets. In connection with the continuing consolidation of operating facilities, the Company decided in November 1997 to sell certain production facilities. Based upon bids received or other pertinent valuations, the Company recorded a fourth quarter 1998 charge of $0.57 million to reflect the estimated ultimate realizable value of one production and one inventory storage facility in Hamilton, Ohio held for sale (See Note D of Notes to the Financial Statements). Gain on Sale of Assets. The gain on sale of assets of $2.2 million for the year ended December 31, 1998 included a $3.6 million gain on the April 1998 sale of the Zerand division assets, offset by a $1.4 million loss on the sale of the HMC in July 1998. Other Income (Expense). The Company's interest expense decreased by $2.0 million for the year ended December 31, 1998 compared to the same period in 1997 due to the reduced borrowings in 1998 resulting from the application of the Zerand and Bernal sale proceeds to pay bank indebtedness, and the extinguishment of subordinated indebtedness at June 30, 1998, offset by an increased cost of borrowing in 1998. Interest income was negligible for the years ended December 31, 1998 and 1997. Comparison of Years Ended December 31, 1997 and 1996 Net Sales. The Company's net sales for the year ended December 31, 1997 decreased by $30.5 million, or 46.5%, compared to the same period in 1996, due primarily to decreased sales of packaging systems products and to the sale of the Bernal division in 1997, which contributed $17.8 million in 1996 sales. Packaging system product sales decreased by $12.7 million, or 45%, primarily due to a lack of sales of the System 2000 flexographic and System 9000 rotogravure printing systems and platen cutters. Security and banknote product sales increased by $0.3 million while the European service repair and maintenance facility sales decreased by $0.3 million. On a geographic basis, net sales to international customers for the year ended December 31, 1997 were $8.8 million, or 25% of sales as compared to $22.6 million, or 26.2%, of net sales for 1996, due primarily to the strength of the U.S. dollar, which makes U.S. goods more expensive, and the general turmoil in the Asian economies. Sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. The Company sold these rights in lieu of a long repossession and resale process. Gross Profit. The Company's gross profit for the year ended December 31, 1997 increased by $9.7 million, or 113.3%, compared to the 1996 gross margin loss, primarily due to the dramatically reduced product development and warranty costs aggregating approximately $5.0 million in 1997 versus $20.6 million in 1996. Gross profit for 1997 was 3.2% of net sales as compared to a gross margin loss of (13.1%) for the same period in 1996. This increase in gross profit percentage was primarily due to the reduced product development and warranty costs in 1997. These reduced costs for various new press systems were offset by the reduced sales volume in 1997 and increased costs from the absorption of fixed costs over a lower volume of shipments and costs incurred in completing the Automatic Currency Examination ("ACE") system for the Bank of England Printing Works. In addition, Bernal contributed $3.5 million in gross profit in 1996 and none in 1997. As stated above, sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses decreased by $12.6 million, or 56.3%, for the year ended December 31, 1997 compared to the same period in 1996. This decrease was due to stringent cost reduction measures taken by the Company to reduce its advertising, personnel and related costs of operating divisions, and its corporate administrative costs. In addition the Company realized a $4.5 million reduction in bad debt expense for 1997 as compared to 1996. Also Bernal's selling, general and administrative expenses were $2.5 million in 1996 and none in 1997. Loss on Impairment of Assets. In connection with the consolidation of operating facilities, the Company decided in November 1997 to sell certain production facilities. Based upon bids received or other pertinent valuations, the Company recorded a charge of $6.3 million to reflect the estimated ultimate realizable value of two production facilities and certain inventory housed in these facilities (See Note D of Notes to the Financial Statements). Other Income (Expense). The Company's gross interest expense decreased by $0.3 million, or 8%, compared to 1996. This was due to overall slightly reduced 1997 borrowings by the Company following the sale of Bernal in March 1997 and the resulting reduction of its bank credit facility. Interest income was approximately the same for 1997 as compared to 1996. Tax Matters The Company's effective state and federal income tax rate ("effective tax rate") was 0.3%, 0.6%, and 17% for the years ended December 31, 1998, 1997 and 1996, respectively. This decrease in the effective tax rate was due to the uncertainty of future tax benefits from future operations. Quarterly Results (Unaudited) The following table summarizes results for each of the four quarters for the years ended December 31, 1998, and 1997. Three Months Ended March 31, June 30, Sept.30, December 31, ------ ------ ------- ------ (In thousands, except per share data) 1998: Net sales $ 9,697 $ 5,343 $ 2,737 $ 4,430 Operating income (loss) $ 557 $(1,813) $ (987) $ (1,379) Extraordinary item -- $11,221 -- -- Net income (loss) $ (416) $11,556 $ (1,785) $ (1,584) Net income (loss) per common share - basic $ (0.04) $ 1.22 $ (0.19 $ (0.17) Net income (loss) per common share - diluted $ (0.04) $ 1.13 $ (0.19 $ (0.17) 1997: Net sales $ 8,780 $ 7,311 $ 8,157 $ 10,903 Operating (loss) $(1,956) $(2,418) $ (956) $ (9,714) Net (loss) $(2,999) $(3,405) $ (1,956) $(10,867) Net income (loss) per common $ (0.32) $ (0.36) $ (0.20) $ (1.15) share - basic and diluted
The Company attributes the operating and net loss for the fourth quarter of 1998 to (1) a continuing decline in orders ($3.0 million versus $20.3 million for the last six months of 1998 and 1997, respectively); (2) a non-cash charge for loss on impairment of assets of $0.57 million and (3) unabsorbed overhead costs due to the low shipment volume in the quarters. The Company attributes the operating and net loss for the fourth quarter of 1997 to (1) a continuing decline in orders ($20.3 million versus $25.1 million for the last six months of 1997 and 1996, respectively); (2) a non-cash charge for loss on impairment of assets of $6.3 million; (3) a provision for bad debt expense of $0.6 million; and (4) unabsorbed overhead costs due to the low shipment volume in the quarter. The Company has taken certain continuing cost reduction actions to adjust its expected 1999 production to the reduced order flow in 1998. Liquidity and Capital Resources The Company requires capital primarily to fund its ongoing operations, to service its existing debt and to pursue its strategic objectives including new product development and penetration of international markets. The Company's working capital needs typically increase because of a number of factors, including the duration of the manufacturing process and the relatively large size of most orders. Historically, the Company has funded its capital requirements with cash provided by operating activities, borrowings under credit facilities, issuances of long-term debt and the sale and private placement of common stock. Net cash provided by (used in) operating activities was $(5.9) million in 1998, $(3.3) million in 1997, and $2.6 million in 1996. Net cash provided by (used in) operating activities (before working capital requirements) was $(4.5) million in 1998, $(10.4) million in 1997 and $(33.6) million in 1996. Working capital provided (used) cash of $(1.4) million in 1998, $7.0 million in 1997 and $33.4 million in 1996. The Company's working capital needs increase during periods of sales growth because of a number of factors, including the duration of the manufacturing process and the relatively large size of most orders. During periods of sales decline such as 1998 and 1997, the Company's working capital provides cash as receivables are collected and inventory is utilized. The Company's capital expenditures for 1998, 1997 and 1996 were $0.2 million, $0.1 million and $0.5 million, respectively, and were used primarily for certain machinery and equipment modernization. On June 30, 1998 the Company refinanced a major portion of its secured indebtedness ("the Debt Restructuring") as part of its plan to reduce its debt. Through a combination of new secured bank borrowings of approximately $6 million, and loans from its Chairman, CEO and principal shareholder, Paul I. Stevens, aggregating $4.5 million, the Company paid off principal amounts due its senior secured bank lender and its secured senior subordinated noteholders, aggregating approximately $19.5 million. Repayment of the secured Senior Subordinated Notes resulted in an extraordinary gain on early extinguishment of debt of approximately $11.2 million. Under its credit facility, the Company's maximum borrowings are limited to a borrowing base formula, which cannot exceed $7.5 million in the form of direct borrowings and letters of credit. As of December 31, 1998 there were $2.38 million in direct borrowings and no standby letters of credit outstanding under the bank credit facility, with no additional availability for such borrowings. The Company's bank credit facilities have first liens on certain assets of the Company, principally inventory, accounts receivable, and the Company's Texas real estate. Paul I. Stevens loans aggregating $4.64 million at December 31, 1998 have first liens on certain assets of the Company, principally certain Ohio assets that are being held for sale, the remaining $0.5 million escrow hold back on the sale of the Zerand division, the assets of a foreign subsidiary, and certain accounts receivable for new customer equipment. The Company was paid $500,000 of the Zerand escrow hold back funds net of amounts owed to the purchaser on November 6, 1998. Because these hold back funds collateralize certain Paul I. Stevens advances, the $500,000 was paid to him to reduce his secured loans to the Company. Interest on the bank credit facility is 1.25% over prime with a two- year maturity on the revolving credit facility. The amount borrowed on the revolving credit facility was approximately $2.38 million on December 31, 1998. The Company paid in full a $4.0 million bank Bridge Loan on July 28, 1998 from the sale of HMC and the major portion of its machinery and equipment at its assembly facility in Hamilton, Ohio. The secured loans from Paul I. Stevens are due June 30, 2000 and bear interest at rates that vary up to 2% over bank prime. The borrowings under the bank credit facility are subject to various restrictive covenants related to financial ratios as well as limitations on capital expenditures and additional indebtedness. The Company is not allowed to pay dividends. The Company's pension plans have 1999 minimum payments due of approximately $0.5 million payable on or before September 15, 1999. See Note M of Notes to Financial Statements. With the expected April 1999 sale of the Hamilton, Ohio manufacturing facility, and assuming that one of several strategic, financial alternatives, principally the return of normalized order flow rates and the additional sale of assets, among others presently being pursued by the Company is consummated, management believes that cash flow from operations will be adequate to fund its existing operations and repay scheduled indebtedness over the next 12 months. In addition, the Company may incur, from time to time, additional short- and long-term bank indebtedness (under its existing credit facility or otherwise) and may issue, in public or private transactions, its equity and debt securities to provide additional funds necessary for the continued pursuit of the Company's operational strategies. The availability and terms of any such sources of financing will depend on market and other conditions. There can be no assurance that such additional financing will be available or, if available, will be on terms and conditions acceptable to the Company. Through December 31, 1998, the Company's Chairman and Chief Executive Officer has loaned the Company $1.66 million for its short-term cash requirements. As of December 31, 1998, this amount has not been repaid. The success of the Company's plans will continue to be impacted by its ability to achieve a satisfactory level of orders for printing systems, timely deliveries, the degree of international orders (which generally have less favorable cash flow terms and require letters of credit that reduce credit availability), and improved terms of domestic orders. While the Company believes it is making progress in these areas, there can be no assurance that the Company will be successful in these endeavors. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Not required for the company. Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements and Financial Statement Schedules Page Number Report of Management 21 Report of Independent Certified Public Accountants 22 Independent Auditors Report 23 Consolidated Balance Sheets -- December 31, 1998 and 1997 24 Consolidated Statements of Operations -- Years Ended December 31, 1998, 1997 and 1996 25 Consolidated Statement of Stockholders Equity -- Years Ended December 31, 1998, 1997 and 1996 26 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996 27 Notes to Consolidated Financial Statements 28 Schedule II -- Valuation and Qualifying Accounts -- Years Ended December 31, 1998, 1997 and 1996 46 All other schedules are not submitted because they are not applicable or not required or because the information is included in the consolidated financial statements or notes thereto. Report of Management The consolidated financial statements of Stevens International, Inc. have been prepared by management and have been audited by certified public accountants whose report follow. The management of the Company is responsible for the financial information and representations contained in the financial statements and other sections of the annual report. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. In preparing the financial statements, it is necessary that management make informed estimates and judgments based upon currently available information of the effects of certain events and transactions. In meeting its responsibility for the reliability of the financial statements, management depends on the Company's system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and are properly recorded. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors pursues its oversight role for the accompanying financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of the Company. The Committee also meets with the independent auditors, without management present, to discuss internal accounting control, auditing, and financial reporting matters. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Stevens International, Inc. We have audited the accompanying consolidated balance sheet of Stevens International, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders equity, and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides 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 Stevens International, Inc. and subsidiaries as of December 31, 1998, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. We have also audited Schedule II for the year ended December 31, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has experienced a significant reduction in its sales volume and has experienced continuing losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GRANT THORNTON LLP Dallas, Texas March 19, 1999 INDEPENDENT AUDITORS REPORT Board of Directors and Stockholders Stevens International, Inc. We have audited the accompanying consolidated balance sheets of Stevens International, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the two years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 8 for each of the two years ended December 31, 1997. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stevens International, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein for each of the two years in the period ended December 31, 1997. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note B of notes to the consolidated financial statements in the 1997 Form 10-K, the Company has negative working capital at December 31, 1997, negative cash flows from operations for the year ended December 31, 1997, and anticipates that negative cash flows from operations will continue. In addition, as discussed in Note J of notes to the financial statements in the 1997 Form 10-K, at December 31, 1997, the Company would not have been in compliance with certain covenants of its long-term debt agreements had the lenders not waived the covenants and extended the debt due dates. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters are also described in Note B of notes to the 1997 Form 10-K. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Fort Worth, Texas March 31, 1998 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) December 31, --------------- ASSETS 1998 1997 ------ ------ Current assets: Cash $ 164 $ 211 Trade accounts receivable, less allowance for losses of $529 and $374 in 1998 and 1997, respectively 1,711 3,158 Costs and estimated earnings in excess of billings on long-term contracts 665 2,209 Inventories 6,146 6,610 Other current assets 1,076 759 Assets held for sale 988 14,735 ------ ------ Total current assets 10,750 27,682 Property, plant and equipment, net 2,600 2,409 Other assets, net 1,301 1,799 ------ ------ $14,651 $31,890 ====== ====== LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Trade accounts payable $ 3,035 $ 2,691 Billings in excess of costs and estimated earnings on long-term contracts --- 133 Other current liabilities 3,705 6,322 Income taxes payable 75 --- Customer deposits 310 802 Advances from stockholder 1,645 950 Current portion of long-term debt 15 27,678 ------ ------ Total current liabilities 8,785 38,576 Long-term debt 2,294 55 Note payable - stockholder 2,950 --- Accrued pension costs 3,577 2,870 Commitments and contingencies --- --- Stockholders equity: Preferred stock, $0.10 par value, 2,000,000 shares authorized , none issued and outstanding --- --- Series A Common Stock, $0.10 par value, 20,000,000 shares authorized, 7,418,000 and 7,391,000 issued and outstanding at December 31, 1998 and 1997, respectively 741 739 Series B Common Stock, $0.10 par value, 6,000,000 shares authorized, 2,085,000, and 2,098,000 shares issued and outstanding at December 31, 1998 and 1997, respectively 209 210 Additional paid-in capital 39,961 39,941 Accumulated other comprehensive (loss) (4,150) (3,014) Retained deficit (39,716) (47,487) ------ ------ Total stockholders equity (deficit) (2,955) (9,611) ------ ------ $14,651 $31,890 ====== ====== See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share data) Year Ended December 31, ------------------------------- 1998 1997 1996 ------- ------- ------- Net sales $ 22,207 $ 35,151 $ 65,659 Cost of sales 17,877 34,011 74,243 ------- ------- ------- Gross profit (loss) 4,330 1,140 (8,584) Selling, general and administrative expenses 7,379 9,837 22,485 Restructuring charge -- -- 1,300 Loss on impairment of assets 573 6,347 -- Loss on sale of assets -- -- 3,472 ------- ------- ------- Operating (loss) (3,622) (15,044) (35,841) Other income (expense): Gain on sale of assets 2,203 -- -- Interest income 13 95 63 Interest expense (1,580) (3,666) (3,984) Lawsuit settlement expense -- (700) Other, net (389) (825) (758) ------- ------- ------- 247 (4,396) (5,379) ------- ------- ------- (Loss) before taxes and extraordinary item (3,375) (19,440) (41,220) Income tax benefit (expense) (75) 213 7,000 ------- ------- ------- (Loss) before extraordinary item (3,450) (19,227) (34,220) Extraordinary gain on debt extinguishment 11,221 -- -- ------- ------- ------- Net income (loss) $ 7,771 $(19,227) $(34,220) ======= ======= ======= Net income (loss) per common share Income (loss) before $(0.36) $(2.03) $(3.62) extraordinary gain Extraordinary gain 1.18 -- -- ------- ------- ------- Net income (loss) - basic and diluted $0.82 $(2.03) ($3.62) ======= ======= ======= Weighted average number of shares of common and common stock equivalents outstanding during the periods - basic and diluted 9,492 9,457 9,451 ======= ======= ======= See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Amounts in thousands) Accumulated Additional Other Series A Stock Series B Stock Paid-In Retained Comprehensive Shares Amount Shares Amount Capital (Deficit) Loss Total ----- ---- ----- ---- ------- ------ ------ ------ Balance, January 1, 1996 7,312 $731 2,139 $214 $39,144 $ 5,960 $ (677) $45,372 Net loss -- -- -- -- -- (34,220) -- (34,220) Foreign currency translation adjustment -- -- -- -- -- -- (526) (526) Excess pension liability adjustment -- -- -- -- -- -- (430) (430) ------ Comprehensive loss (35,176) ------ Conversion of Series B stock to Series A stock 28 3 (28) (3) -- -- -- -- Lawsuit settlement -- -- -- -- 700 -- -- 700 ----- ---- ----- ---- ------- ------ ------ ------ Balance, December 31, 1996 7,340 734 2,111 211 39,844 (28,260) (1,633) 10,896 Net loss -- -- -- -- -- (19,227) -- (19,227) Foreign currency translation adjustment -- -- -- -- -- -- (602) (602) Excess pension liability adjustment -- -- -- -- -- -- (779) (779) ------ Comprehensive loss (20,608) ------ Conversion of Series B stock to Series A stock 13 1 (13) (1) -- -- -- -- Exercise of stock warrants 38 4 -- -- 97 -- -- 101 ----- ---- ----- ---- ------- ------ ------ ------ Balance, December 31, 1997 7,391 739 2,098 210 39,941 (47,487) (3,014) (9,611) Net income -- -- -- -- -- 7,771 7,771 Foreign currency translation adjustment -- -- -- -- -- -- (295) (295) Excess pension liability adjustment -- -- -- -- -- -- (841) (841) ----- Comprehensive income 6,635 ----- Exercise of stock options 14 1 -- -- 20 -- -- 21 Conversion of Series B stock to Series A stock 13 1 (13) (1) -- -- -- -- ----- ---- ----- ---- ------- ------ ------ ------ Balance, December 31, 1998 7,418 $ 741 2,085 $ 209 $39,961 $(39,716) $(4,150) $(2,955) ===== ==== ===== ==== ======= ====== ====== ====== See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December, ------------------------- 1998 1997 1996 ------- ------- ------- Cash provided by operations: Net income (loss) $ 7,771 $(19,227) $(34,220) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 934 3,350 4,188 Extraordinary gain on debt extinguishment (11,221) -- -- Deferred and refundable taxes -- -- (4,536) Accrued pension costs (134) 253 212 Lawsuit settlement expense -- -- 700 Loss on impairment of assets 573 6,347 -- (Gain) loss on sale of assets (2,203) -- 3,472 Other (294) (620) (957) Changes in operating assets and liabilities net of effects from purchase of subsidiary in 1995: Trade accounts receivable 1,446 7,780 12,525 Contract costs in excess of billings 1,411 (357) 15,402 Inventories 464 2,551 5,781 Refundable income taxes (48) 2,464 (1,630) Other assets (36) 5,871 (541) Trade accounts payable 344 (5,631) (2,527) Other liabilities (4,934) (6,143) 4,687 ------- ------- ------- Total cash provided by (used in) operating activities (5,927) (3,362) 2,556 ------- ------- ------- Cash provided by (used in) investing activities: Additions to property, plant and equipment (232) (93) (470) Proceeds from insurance and sale of assets -- -- -- Deposits and other 16 397 294 Disposal of the net assets of divisions 14,733 10,384 -- ------- ------- ------- Total cash provided by (used in) investing activities 14,517 10,688 (176) ------- ------- ------- Cash provided by (used in) financing activities: Increase (decrease) in current portion of (13,848) (10,496) 34,059 long-term debt Net increase (decrease) in long-term debt 5,190 (58) (33,915) Sale of stock and exercise of stock options 21 101 -- ------- ------- ------- Total cash provided by (used in) financing activities (8,637) (10,453) 144 ------- ------- ------- Increase (decrease) in cash (47) (3,127) 2,524 Cash at beginning of year 211 3,338 814 ------- ------- ------- Cash at end of year $ 164 $ 211 $ 3,338 ======= ======= ======= Supplemental disclosure of cash flow information: Interest $ 614 $ 1,252 $ 3,544 Income taxes -- (2,677) (969) See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1998, 1997 and 1996 A. Summary of Significant Accounting Policies Nature of Operations Stevens International, Inc. (the "Company") designs, manufactures, markets, and services web-fed packaging and printing systems and related equipment for its customers in the packaging industry, and in the specialty/commercial and banknote and securities segments of the printing industry. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes revenue on the sale of equipment and parts when units are shipped or when completed units are accepted by the customer. Revenue and cost on certain long-term contracts are recognized as work is performed, based upon the percentage that incurred costs bear to estimated total contract costs (percentage of completion method). In the event of an anticipated loss under the percentage of completion method, the entire amount of the loss is charged to operations during the accounting period in which the amount of the anticipated loss is determined. Inventory Approximately 31% and 74% of inventory at December 31, 1998 and 1997, respectively, is valued at the lower of cost, using the last-in, first-out (LIFO) method, or market with the remainder valued using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of three to forty years for the related assets. Other Assets Included in other assets are patent costs, and goodwill. These are amortized over the remaining life of the patents, and thirty years, respectively. Income Taxes The Company accounts for income taxes under the liability method and recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Asset Impairment of Long Lived Tangible and Intangible Assets Potential impairment of long-lived tangible and intangible assets is assessed annually (unless economic events warrant more frequent reviews) on an asset-by-asset basis. Translation of Foreign Currency The financial position and results of operations of the Company's foreign subsidiaries are measured using local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange at the balance sheet date. Translation gains and losses are deferred as a separate component of shareholders equity, unless there is a sale or complete liquidation of the underlying foreign investments. Aggregate foreign currency transaction gains and losses are included in determining net earnings. Use of Estimates 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 certain assets, liabilities, revenues and expenses as of and for the reporting period. Estimates and assumptions are also required in the disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from such estimates. Stock-Based Compensation Compensation expense is recorded with respect to stock option grants to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. This method calculates compensation expense on the measurement date (usually the date of grant) as the excess of the current market price of the underlying Company stock over the amount the employee is required to pay for the shares, if any. The expense is recognized over the vesting period of the grant or award. The Company does not intend to elect the fair value method of accounting for stock-based compensation encouraged, but not required, by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". See Note P. Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential common shares relating to the exercise of stock options have been excluded from the computation as the effect of such conversion would be anti-dilutive. Recently Issued Accounting Standards In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose statements. It requires (a) classification of items of other comprehensive income by their nature in a financial statement and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid- in surplus in the equity section of the balance sheet. The Company adopted SFAS No. 130 during the quarter ended March 31, 1998. B. Liquidity Concerns The Company continues to experience a decrease in sales due to a declining market for the Company's products and competitive pressures. The Company has continued to implement a significant restructuring plan, which included large work force and cost reductions and the sale and consolidation of certain facilities and operating functions. The Company requires capital to fund its ongoing operations, to service its existing debt and to pursue its strategic objectives including new product development. Further, the Company has been dependent on the ability of its Chairman and Chief Executive Officer, Paul I. Stevens, to provide certain amounts of working capital over and above that provided by the Company's bank credit facility. The Company also must continue to meet certain financial covenants imposed by its bank credit facility. The Company's viability is dependent upon its ability to meet its obligations to its bank lender and to Mr. Stevens, and ultimately, a return to profitability. C. Divestiture of Division Assets in 1998 and 1997 Sale of Hamilton Machining Center in July 1998 On July 28, 1998 the Company sold the real and personal property at its Hamilton, Ohio machining center ("HMC") and the major portion of its machinery and equipment at its assembly facility in Hamilton, Ohio for an aggregate consideration of approximately $4.33 million. This transaction resulted in a second quarter 1998 loss on sale of assets of approximately $0.8 million and an additional loss of $0.5 million in the third quarter of 1998 as a result of HMC inventory and other inventory that was abandoned by the Company and included in the sale. Proceeds of the transaction were used to repay the $4 million secured bridge term loan from the Company's new bank lender (the "Bridge Loan") which was loaned to the Company on June 30, 1998. HMC had outside sales of $1.2 million and operating losses of $0.35 million in 1997. The Company has replaced certain of the capabilities of its machining center with a group of new and traditional suppliers. Sale of Assets of Zerand Division in April 1998 On April 27, 1998, the Company sold substantially all the assets of its Zerand division to Valumaco Incorporated, a new company formed for the asset purchase. In addition, Valumaco Incorporated assumed certain liabilities of the Zerand division. The assets sold included the real property, platen die cutter systems, and other original Zerand products such as delivery equipment, wide-web rotogravure printing systems, stack flexographic printing systems, unwind and butt splicer systems, and related spare parts, accounts payable, and other assumed liabilities. Excluded from the proposed transaction were the System 2000 flexographic printing systems and the System 9000 narrow-web rotogravure printing systems produced at the Zerand division and related accounts receivable, inventory and engineering drawings. The sale price was approximately $13.7 million, which consisted of cash proceeds of $10.1 million, a one- year $1 million escrow "hold back", and the purchaser's assumption of approximately $2.6 million of certain liabilities of Zerand, including the accounts payable. If certain machinery sold to Valumaco Incorporated is not sold within eleven months of the closing date, the Company is obligated to repurchase the equipment at a purchase price of $0.9 million. Any remaining balance in the escrow holdback may be used to offset the purchase price. This transaction resulted in an approximate $10 million reduction of the Company's senior secured bank debt In 1997, Zerand contributed sales of approximately $11.6 million and approximately $1.8 million of income before interest, corporate charges and taxes. The Company realized an approximate $3.6 million gain on the sale of Zerand assets. Sale of Bernal Division in March 1997 In March 1997, the Company sold substantially all the assets of its Bernal division including the product technology and related intangibles to Bernal International, Inc., a new company formed for the asset purchase. The cash proceeds were approximately $15 million, and in addition, the purchaser assumed certain liabilities of Bernal, including the accounts payable. This transaction resulted in a $12 million permanent reduction of the Company's senior debt. In 1996, Bernal contributed sales of approximately $17.8 million and approximately $0.7 million income before interest, corporate charges and taxes. . D. 1998 and 1997 Loss on Impairment of Assets In connection with the continuing consolidation of operating facilities, the Company decided in November 1997 to sell certain production facilities. Based upon bids received or other pertinent valuations, the Company recorded a 1998 fourth quarter non-cash charge of $0.57 million to reflect the estimated ultimate realizable value of one production and one inventory storage facility in Hamilton, Ohio held for sale. The production facility sale is anticipated in 1999. The aggregate carrying value of these assets in 1998, prior to the impairment adjustment was $1.4 million. In 1997 a similar estimate of ultimate realizable value ($14.7 million) of three facilities in Ohio and the Zerand Division was completed. (See Note C of Notes to the Financial Statements for assets sold in 1998). A 1997 fourth quarter non-cash charge of $6.3 million was recorded to reflect the estimated realizable value of the Ohio facilities and certain inventory housed in the facilities. E. Costs and Estimated Earnings on Uncompleted Long-Term Contracts Unbilled costs and estimated earnings on uncompleted contracts represent revenue earned but not billable under terms of the related contracts being accounted for using the percentage of completion revenue recognition method. A summary of all costs and related progress billings at December 31, 1998 and 1997 follows: December 31, ---------------- 1998 1997 ------ ------ (Amounts in thousands) Cost incurred on uncompleted $5,155 $6,059 contracts Estimated earnings -- 1,311 ------ ------ Revenue from long-term contracts 5,155 7,370 Less: Billings to date 4,490 5,294 ------ ------ $ 665 $2,076 ====== ====== The $665,000 and $2,076,000 net differences are included in the accompanying balance sheets under the following captions: December 31, ---------------- 1998 1997 ------ ------ (Amounts in thousands) Cost and estimated earnings in excess of billings on long-term $ 665 $2,209 contracts Billings in excess of costs and estimated earnings on long-term contracts - (133) ------ ------ $ 665 $2,076 ====== ======
F. Inventories Inventories consist of the following: December 31, ---------------- 1998 1997 ------ ------ (Amounts in thousands) Finished product $ 630 $1,413 Work in progress 1,458 2,723 Raw material and purchased parts 4,058 2,474 ------ ------ $6,146 $6,610 ====== ======
Replacement cost exceeds financial accounting LIFO cost by approximately $1,938,000 and $3,204,000 at December 31, 1998 and 1997, respectively. G. Property, Plant and Equipment Property, plant and equipment consists of: Range of December 31, Estimated Useful 1998 1997 Lives ------ ------- ---------------- (Amounts in thousands) Land N/A $ 477 $ 477 Building and improvements 15-40 years 1,867 953 Machinery and equipment 5-18 years 1,001 155 Furniture and fixtures 3-10 years 3,227 1,903 Leasehold improvements 8-20 years 295 742 ------ ------ 6,867 4,230 Less: accumulated depreciation and amortization 4,267 1,821 ------ ------ $2,600 $ 2,409 ====== ======
H. Other Assets Other assets consist of: December 31, 1998 1997 ----- ----- (Amounts in thousands) Goodwill, net of amortization of $133 and $120, respectively $ 251 $ 264 Patents, net of amortization of $282 and $277, respectively 62 66 Intangible pension asset 166 386 Banknote and securities technology intangible asset 752 967 Other 70 116 ----- ----- $1,301 $1,799 ===== =====
I. Other Current Liabilities Other current liabilities consist of: December 31, 1998 1997 ----- ----- (Amounts in thousands) Salaries and wages $ 190 $ 552 Taxes other than income taxes 760 913 Employee benefits 827 1,200 Accrued interest 406 1,182 Contract reserves 533 1,988 Warranty reserve 544 332 Other accrued expenses 445 155 ----- ----- $3,705 $6,322 ===== =====
J. Long-Term Debt Long-term debt consists of the following: December 31, 1998 1997 ----- ------ (Amounts in thousands) Senior subordinated notes, interest at 10.5% (Net of unamortized origination fees of $63) - paid in 1998 $ -- $16,434 Paul I. Stevens, interest at prime rate plus 2% 2,950 -- Notes payable to banks, interest at prime rate plus 1.25% at December 31, 1998 (Net of unamortized origination fees of $88 and $53) 2,291 11,222 Other 18 77 ----- ------ 5,259 27,733 Less: current portion 15 27,678 ----- ------ $5,244 $ 55 ===== ======
The interest rate on direct borrowings under the Company's Bank Credit Facility at December 31, 1998 is at the lender's prime rate (8.0%) plus 1.25% (or 9.25%). Under its credit facility, the Company may borrow up to $7.5 million in the form of direct borrowings and letters of credit. As of December 31, 1998 there was $2.38 million in direct borrowings and $0 in standby letters of credit outstanding under the credit facility. At December 31, 1997, $11.2 million of the Company's borrowings were at the lender's prime rate of interest (8.50%) plus 2%. On June 30, 1998 the Company refinanced a major portion of its secured indebtedness ("the Debt Restructuring") as part of its plan to reduce its debt. Through a combination of new secured bank borrowings of approximately $6 million, and loans from its Chairman, CEO and principal shareholder, Paul I. Stevens, aggregating $4.5 million, the Company paid off principal amounts due its senior secured bank lender and its secured senior subordinated noteholders, aggregating approximately $19.5 million. Repayment of the secured senior subordinated notes resulted in an extraordinary gain on early extinguishment of debt of approximately $11.2 million. Under its credit facility, the Company's maximum borrowings are limited to a borrowing base formula, which cannot exceed $7.5 million in the form of direct borrowings and letters of credit. As of December 31, 1998 there were $2.38 million in direct borrowings and no standby letters of credit outstanding under the bank credit facility, with no additional availability for such borrowings. The Company's Bank Credit Facility has first liens on certain assets of the Company, principally inventory, accounts receivable, and the Company's Texas real estate. Paul I. Stevens loans aggregating $4.6 million at December 31, 1998 have first liens on certain assets of the Company, principally certain Ohio assets that are being held for sale, the remaining $0.5 million escrow holdback on the sale of Zerand, the assets of a foreign subsidiary, and certain accounts receivable for new customer equipment. The Company was paid $500,000 of the Zerand escrow holdback funds net of amounts owed to the purchaser on November 6, 1998. Because these holdback funds collateralize certain P. I. Stevens advances, the $500,000 was paid to him to reduce his secured loans to the Company. Interest on the bank credit facility is 1.25% over prime with a two- year maturity on the revolving credit facility. The amount borrowed on the revolving credit facility was approximately $2.38 million on December 31, 1998. The Company paid in full a $4.0 million bank Bridge Loan on July 28, 1998 from the sale of HMC and the major portion of its machinery and equipment at its assembly facility in Hamilton, Ohio. The secured loans from Paul I. Stevens are due June 30, 2000 and bear interest at rates that vary up to 2% over bank prime. The borrowings under the bank credit facility are subject to various restrictive covenants related to financial ratios as well as limitations on capital expenditures and additional indebtedness. The Company is not allowed to pay dividends. Principal maturities of the outstanding long-term debt at December 31, 1998, are as follows (Amounts in thousands): Year ending December 31, 1999. . .. . . . . . . . . $ 15 2000 . . . . . . . . . . . . . . . . . . . . . 5,317 ----- 5,332 Less unamortized loan origination fees. . . . . . . 88 ----- $5,244 ===== Through December 31, 1998, the Company's Chairman and Chief Executive Officer has loaned the Company $1.6 million for its short-term cash requirements. K. Income Taxes The Company and its domestic subsidiaries file consolidated income tax returns. At December 31, 1998, the Company had the following losses and credits available for carryforward for federal income tax purposes: Net operating loss - expiring in 2011 and 2012 . . . . $10,582,000 General business credit -- expiring in 2005, 2009 and 2010 . . . . . . . . . . . . . $ 1,552,000 Minimum tax credit -- not subject to expiration . . . . . . . . . . . . . . . . . $ 832,000 During 1998, the Company recognized income from cancellation of indebtedness of $11,221,000. Pursuant to Internal Revenue Code Section 108, this amount is not includible in taxable income; however, it does reduce the Company's net operating loss carryforward as of January 1, 1999. The $10,582,000 net operating loss carryforward described above has been reduced for the impact of the 1998 cancellation of indebtedness transaction. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1998 and 1997 are as follows: December 31, 1998 1997 ------ ------- (Amounts in thousands) Deferred tax liabilities: Difference between book and tax basis of property $(1,055) $ 656 Difference between book and tax basis of intangibles (1) (1) Excess of tax over book pension cost 380 41 Differences between book and tax LIFO inventory reserves 1,916 2,722 Other (91) (79) ----- ----- 1,149 3,339 ----- ----- Deferred tax assets: Difference between book and tax basis of pension liability 557 557 Reserves not currently deductible 3,626 4,401 Net operating loss, credit and other carryforwards 5,993 11,453 ----- ----- 10,176 16,411 Valuation allowance (9,027) (13,072) ----- ----- 1,149 3,339 ===== ===== Net deferred tax liability $ -0- $ -0- ===== =====
The provisions for income taxes consists of the following: Year Ended December 31, 1998 1997 1996 ---- ---- ------ (Amounts in thousands) Current provision (benefit) for income taxes $ 75 $(213) $(2,464) Deferred provision (benefit) for income taxes -- -- (4,536) ---- ---- ------ $ 75 $(213) $(7,000) ==== ==== ======
The Company's effective tax rate varies from the statutory federal income tax rate for the following reasons: December 31, 1998 1997 1996 ------ ------ ------- (Amounts in thousands) Tax expense (benefit), at statutory rate $ 2,642 $(6,732) $(14,015) Goodwill expense, not deductible for tax purposes 1,483 73 1,576 Other, net (5) (258) (357) State and local taxes -- (213) (359) Valuation allowance (4,045) 6,917 6,155 ------ ------ ------- Actual tax expense (benefit) $ 75 $ (213) $ (7,000) ====== ====== =======
L. Commitments and Contingencies The Company leases equipment and office facilities under operating leases. These leases in some instances include renewal provisions at the option of the Company. Rent expense for the years ended December 31, 1998, 1997, and 1996 was approximately $246,000, $293,000, and $865,000, respectively. The following is a schedule by year of minimum rental payments due under non-cancelable leases with initial or remaining minimum lease terms in excess of one year as of December 31, 1998: Operating --------- (Amounts in thousands) Year ending December 31, 1999 $118 2000 117 2001 116 2002 113 2003 and thereafter 111 --- Total minimum lease payments $575 === At December 31, 1998, the Company had no capital equipment leases and no outstanding capital expenditure purchase commitments. The Company is contingently liable for approximately $0.2 million at December 31, 1998, under terms of customer financing arrangements. These arrangements provide for a loss sharing formula whereby the Company generally is responsible for 15% of the ultimate net loss, if any, in the event of default by the customers on their financing agreements. Management believes the likelihood of materially adverse effects on the financial position, cash flows or results of operations of the Company as a result of these agreements is remote. The Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. In management's opinion, the Company has adequate legal defense and/or insurance coverage regarding each of these actions and does not believe that such actions, if they occur either individually or in the aggregate, will materially affect the Company's operations or financial position. M. Employee Benefit Plan Effective January 1, 1992, the Company adopted a profit sharing and 401(k) savings retirement plan to cover all non-union employees of the Company. In 1994, union employees of the Company were covered under this plan. The 401(k) plan provides for a tax deferred employee elective contribution up to 15% of annual compensation or the maximum amount allowed as determined by the Internal Revenue Code ($10,000 in 1998 and $9,500 in 1997) and a discretionary matching contribution by the Company for non-union employees. Company matching contributions were $-0- in 1998, 1997 and 1996. The Company also sponsors defined benefit pension plans covering its employees. The two plans provide for monthly benefits, normally at age 65, after completion of continuous service requirements. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Due to reductions of all employees covered under the union plan, the union plan experienced substantial disbursements during 1998, 1997 and 1996 for lump sum distributions upon participants termination of employment. The magnitude of these disbursements during 1996 reduced the funded liability of the plan at December 31, 1996 to a level which required a special liquidity shortfall contribution to the plan as of January 15, 1997 of approximately $600,000. The Company did not make this special liquidity shortfall contribution which has, by Federal law, resulted in suspension of lump sum payments to plan participants and has subjected the Company to a 10% excise tax penalty on January 15, 1997 and further penalties if steps are not taken to remedy the shortfall. The shortfall on the union plan was remedied in 1997 as a result of the suspension of lump sum payments. The gains experienced on plan assets in 1997 were also part of the remedy. Similar shortfall issues remain in 1998 because of the magnitude of the layoffs of personnel in 1997 and 1998. The assets of the pension plans are maintained in trusts and consist primarily of equity and fixed income securities. Pension expense was $395,000 in 1998, $145,000 in 1997, and $1,183,000 in 1996. Beginning January 1, 1989, the Company was required to recognize a liability in the amount of the Company's unfunded accumulated benefit obligation, with an equal amount to be recognized as either an intangible asset or a reduction of equity, net of applicable deferred income taxes. Based upon actuarial and plan asset information as of December 31, 1998, the Company has recorded a pension liability of $4.0 million and a corresponding intangible asset of $0.16 million, and a reduction of equity of $3.1 million. Benefits under the salaried retirement plan were frozen as of April 30, 1997, which eliminated future benefit accruals for participants in the salaried retirement plan. The impact of this plan amendment was to reduce pension expense by $360,000 in 1997. The following table summarizes the funded status of the Company's defined benefit pension plans and the related amounts recognized in the Company's consolidated financial statements for 1998 and 1997. Status of Plans 1998 1997 ----- ----- (Amounts in thousands) Actuarial present value of benefit obligations: Vested $6,662 $5,371 Non-vested -- 511 ----- ----- Accumulated benefit obligation $6,662 $5,882 ===== ===== Plan assets at fair value $2,637 $2,463 Projected benefit obligation 6,662 5,882 ----- ----- Projected benefit obligation in excess of plan assets 4,025 3,419 Unrecognized prior service cost (358) (386) Unrecognized net gain (loss) (3,279) (2,245) Adjustment required to recognize minimum liability. 3,637 2,631 ----- ----- Pension liability recognized in balance sheet $4,025 $3,419 ===== ===== Net periodic pension cost was composed of the following elements: December 31, 1998 1997 1996 ---- ---- ----- (Amounts in thousands) Service cost $ 37 $ 268 $ 605 Interest cost 408 420 624 Prior service cost adjustment 45 -- 90 Curtailment Gain -- (360) -- Actual return on plan assets: Loss (gain) (239) (175) (284) Net amortization and deferral 144 (8) 148 ---- ---- ----- Net periodic pension cost $ 395 $ 145 $1,183 ==== ==== ===== December 31, 1998 1997 1996 ---- ---- ---- Major assumptions used: Discount rate 6.5% 6.5% 7.5% Expected long-term rate of return on assets 8.5% 8.5% 8.5% Rate of increase in compensation levels 0.0% 0.0% 0.0%
The Company has executive incentive plans which provide additional compensation for officers and key employees based upon income and attainment of other predetermined goals and objectives. Such incentives aggregated $-0- in 1998 and 1997 and $10,000 in 1996. In addition to providing certain retirement benefits, the Company has insurance coverage available for certain health care and life insurance benefits for retired personnel on a fully reimbursable basis. Since the cost of these programs is paid for by retired employees, no expenses are recorded in accordance with guidelines in Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions." N. Related Party Transactions The Company and Xytec, a subsidiary of Stevens Industries, Inc. one of the principal shareholders of the Company, entered into an agreement during 1994 for Xytec to provide software and computer related services and equipment as a subcontractor on a major contract. During 1998, 1997 and 1996, the Company paid approximately $856,000, $594,000, and $671,000, respectively, to Xytec on this contract. Two company directors and officers were partners in a venture that leased office facilities to the Company through September 30, 1998. Amounts paid to the partnership as rent and maintenance were approximately $84,000 in 1998, and $111,000 in 1997 and 1996. Through December 31, 1998, Paul I. Stevens, the Company's Chairman and Chief Executive Officer has loaned the Company $1.6 million for its short-term cash requirements and $2.95 million on a long-term arrangement. (See Note J of Notes to Financial Statement.) As of December 31, 1998, this amount has not been repaid. O. Research and Development, Sales to Major Customers and Foreign Sales For the years ended December 31, 1998, 1997, and 1996, the Company incurred gross company funded research and development expenses of approximately $172,000, $44,000, and $624,000, respectively. Net sales to customers outside of the United States in 1998, 1997, and 1996 were approximately $7,851,000, $8,796,000, and $22,659,000, respectively. Shipments to one customer in 1998, Field Packaging Co. LLP and one customer in 1997, Universal Packaging Company, exceeded 10% of total sales. In 1996 no single customer accounted for more than 10% of total sales in one year. The Company has no foreign exchange contracts. P. Stock Transactions and Voting Rights In June 1996, resolution of the Company's class action lawsuit, which had been in litigation for five years, resulted in a one-time $700,000, $(0.07) per share charge to second quarter operations. In this settlement, the Company paid no cash, but agreed to issue warrants valued at $700,000 to purchase the Company's Series A stock. The warrants were exercisable over a one-year period from October 31, 1996 and represented the right to purchase up to 737,619 shares of Series A stock from the Company at an exercise price of $2.672 per share. Exercise of the warrants in 1997 for approximately 38,000 shares resulted in $101,000 of additional equity to the Company. The Series A and Series B stock differ only as to voting and conversion rights. As to matters other than the election of directors, the holders of Series A stock and Series B stock vote together as a class, with each holder of Series A stock having one-tenth of one vote for each share of Series A held and each holder of Series B stock having one vote for each share of Series B stock held. Holders of Series A stock, voting separately as a class, are entitled to elect 25% of the total membership of the board of directors. Holders of Series B stock, voting separately as a class, are entitled to elect the remaining directors. The shares of Series B stock are convertible, share-for-share, into shares of Series A stock at the election of the holder thereof at any time. Once a share of Series B stock is converted into a share of Series A stock, such share of Series A stock may not be converted into any other security. The Company's certificate of incorporation further provides that the Company may not engage in a merger or consolidation with any other corporation unless each holder of Series A stock and each holder of Series B stock receives identical consideration per share in the merger or consolidation. If a dividend other than a stock dividend is to be paid, it will be paid equally to holders of both series of common stock, share-for-share. If a stock dividend is to be paid to holders of common stock, it must be paid proportionately to the holders of both series of common stock either (a) in Series A stock to holders of both Series A and Series B stock or (b) in Series A stock to holders of Series A stock and in Series B stock to holders of Series B stock. In 1987, the Company adopted a stock option plan in which incentive and nonqualified stock options may be granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant for each incentive option and at not less than 85% of the fair market value at the date of the grant for each nonqualified option. The aggregate number of common shares for which options may be granted is 795,000, subject to adjustment for stock splits and other capital adjustments. The plan permits the grant of options for a term of up to ten years. Outstanding options are generally exercisable either immediately or in two installments beginning one year after the date of grant and expire five to seven years after the date of grant. Options to purchase shares of common stock have also been granted to directors and others who are not eligible to participate in the 1987 employee plan. A summary of stock option activity for the last three years follows: Series A Weighted Average Stock Option Exercise Price ------- ----- Stock Option Plan: Balance at January 1, 1996 762,900 $5.72 Cancelled (210,000) 6.00 ------- ----- Balance at December 31, 1996 552,900 $5.63 Granted 345,000 1.50 Cancelled (502,900) 5.33 ------- ----- Balance at December 31, 1997 395,000 $2.18 Granted 285,000 1.50 Exercised (14,100) 1.50 Cancelled (70,900) 5.27 ------- ----- Balance at December 31, 1998 595,000 $1.50 ======= ===== Series A Weighted Average Stock Option Exercise Price ------- ----- Directors and Others: Balance at January 1, 1996 109,500 $5.98 Granted 25,000 2.62 Cancelled (20,000) 6.51 ------- ----- Balance at December 31, 1996 114,500 5.15 Granted 35,000 1.50 Cancelled (39,500) 5.22 Balance at December 31, 1997 110,000 $3.97 ------- ----- Granted 25,000 2.25 ------- ----- Balance at December 31, 1998 135,000 $3.65 ======= ===== Stock Options outstanding as of December 31, 1998 are as follows: Options Outstanding Options Exercisable ------------------- --------------------------- Weighted Weighted Weighted Average Average Average Range of Years to Exercise Exercise Exercise Prices Number Expiration Price Number Price ------------ ------- ---- ---- ------- ---- $1.50 595,000 3.35 $1.50 595,000 $1.50 $5.50 - $7.19 50,000 6.30 $3.65 135,000 $3.65 $1.50 - $3.00 85,000 6.30 ------- ------- $1.50 - $7.19 730,000 730,000 ======= =======
The Company applies the intrinsic value method in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan, as described above, the Company's net income would have been reduced by $0.3 million in 1998, $0.3 million in 1997, and $0.01 million in 1996. Earnings per share would have been reduced by $0.03 per share in 1998, $0.03 per share in 1997, and $0.00 in 1996. Weighted average grant-date fair value of options in 1998 $(1.05), 1997 $(0.83) and 1996 $(0.93) were calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: 1998 1997 1996 ---- ---- ---- Expected volatility 60% 60% 89.7% Expected dividend yield 0 0 0 Expected option term 5 years 5 years 5 years Risk-free rate of return 5.5% 7.5% 4.8% Q. Quarterly Results (Unaudited) The following table summarizes results for each of the four quarters for the years ended December 31, 1998 and 1997. Income per share for each year does not necessarily equal the sum of the four quarters due to the impact of common stock equivalents (stock options). Three Months Ended March 31, June 30, September 30, December 31, ------ ------- ------- -------- (Amounts in thousands except per share data) 1998: Net sales $ 9,697 $ 5,343 $ 2,737 $ 4,430 Operating income (loss) $ 557 $(1,813) $ (987) $ (1,379) Extraordinary item -- $11,221 -- -- Net income (loss) $ ( 416) $11,556 $(1,785) $ (1,584) Net (loss) per common share - basic $ (0.04) $ 1.22 $ (0.19) $ (0.17) Net (loss) per common share - diluted $ (0.04) $ 1.13 $ (0.19) $ (0.17) 1997: Net sales $ 8,780 $ 7,311 $ 8,157 $ 10,903 Operating (loss) $(1,956) $(2,418) $ (956) $( 9,714) Net (loss) $(2,999) $(3,405) $(1,956) $(10,867) Basic and diluted net (loss) per share $ (0.32) $ (0.36) $ (0.20) $ (1.15)
The Company attributes the operating and net loss for the fourth quarter of 1998 to (1) a continuing decline in orders ($3.0 million versus $20.3 million for the last six months of 1998 and 1997, respectively); (2) a non-cash charge for loss on impairment of asset values of $0.57 million and (3) unabsorbed overhead costs due to the low shipment volume in the quarter. The Company attributes the operating and net loss for the fourth quarter of 1997 to (1) a continuing decline in orders ($20.3 million versus $25.1 million for the last six months of 1997 and 1996, respectively); (2) a non-cash charge for loss on impairment of asset values of $6.3 million; (3) a provision for bad debt expense of $0.6 million; and (4) unabsorbed overhead costs due to the low shipment volume in the quarter. R. Business Segment Data (Amounts in 000's) (a) Effective March 31, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information which changes the way the Company reports information about its operating segments. The Company has three business segments: Banknote Inspection, Printing & Packaging Equipment (web-fed printing presses and related parts and service), French Repair & Service Company (repair, moving and servicing presses in Europe), and Zerand Platen Cutter Equipment (cutter-creaser equipment for packaging-sold in 1998). Total Revenue Deprec . Income (loss) Unusual Assets & Amort. From Oper. Items ------- ------ ------- ------ ------ Segments in 1998 ---------------- Banknote Inspection, Printing & Packaging Equipment $ 12,920 $13,590 $ 807 $(4,453) $(1,973) (1) French Repair & Service Company 1,731 4,312 33 133 0 Zerand Platen Cutter Equipment - Sold 0 4,305 94 698 3,600 (2) ------------------------------------------------ Totals 14,651 22,207 934 (3,622) 1,627 Segments in 1997 ---------------- Banknote Inspection, Printing & Packaging Equipment 15,153 18,965 2,775 (17,220) (6,347) (3) French Repair & Service Company 1,928 4,592 38 371 0 Zerand Platen Cutter Equipment 14,809 11,594 537 1,805 0 ------------------------------------------------ Totals 31,890 35,151 3,350 (15,044) (6,347) Segments in 1996 ---------------- Banknote Inspection, Printing & Packaging Equipment 32,497 21,433 1,831 (35,814) (26,600)(4) French Repair & Service Company 2,033 6,093 19 910 0 Zerand Platen Cutter Equipment 20,391 20,294 582 (1,644) 0 Bernal Rotary Cutter Equipment 22,496 17,839 1,756 707 0 ------------------------------------------------ Totals 77,417 65,659 4,188 (35,841) (26,600)
Notes: (1) Represents Loss on Impairment of Asset Values - (-$573) and Loss on Sale of Hamilton Machining Center (-$1,400). (2) Represents Gain on Sale of Zerand Division Assets ($3,600). (3) Represents Loss on Impairment of Asset Values at Hamilton, Ohio Facilities (-$6,347). (4) Represents Restructuring Charges (-$1,300); Product Development Costs (-$15,100); Warranty Costs (-$5,500); Provision for Bad Debts (-$4,000), and Lasker Warrants Expense (-$700). (b) Sales by geographic area were as follows: Year ended December 31, 1998 1997 1996 ------- ------- ------- United States $ 14,355 $ 24,132 $ 39,376 Europe 6,178 6,714 12,873 Asia 898 3,200 11,307 Other 776 1,105 2,103 ------- ------- ------- Total revenues $ 22,207 $ 35,151 $ 65,659 ======= ======= ======= S. Financial Instruments, Market and Credit Risk Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosure about Fair Value of Financial Instruments", is a part of a continuing process by the FASB to improve information on financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosure for such financial instruments as defined by the Statement: Cash and Temporary Investments The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Long-Term Debt The carrying amounts of the Company's borrowings under its revolving credit agreements approximate fair value. Letters of Credit The Company utilizes letters of credit to back certain financing instruments and insurance policies. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place. Concentrations of Credit Risk Financial instruments which potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. The Company's policy is designed to limit exposure to any one institution. The Company's periodic evaluations of the relative credit standing of these financial institutions are considered in the Company's investment strategy. Concentration of credit risk with respect to trade accounts receivable are limited due to the number of entities comprising the Company's customer base and their dispersion across the printing and graphic arts industries. As of December 31, 1998, the Company had no significant concentrations of credit risk. The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 are as follows: Carrying Amount Fair Value --------------- ---------- (Amounts in thousands) Cash and temporary investments $164 $164 Performance bond deposits -0- -0- Long-term debt $5,244 $5,244 Off-Balance Sheet Financial Instruments: Letters of credit $-0- $-0- T. Accumulated Other Comprehenaive Income Minimum Accumulated Foreign Pension Other Currency Liability Comprehensive (Amounts in 000's) Items Adjustments Income ------- ------ ------ Balance January 1, 1996 $ 359 $(1,036) $ (677) Current period change (526) (430) (956) ------- ------ ------ Balance December 31, 1996 (167) (1,466) (1,633) Current period change (602) (779) (1,381) ------- ------ ------ Balance December 31 1997 (769) (2,245) (3,014) Current period change (295) (841) (1,136) ------- ------ ------ Balance December 31, 1998 $ (1,064) $(3,086) $(4,150) ======= ====== ======
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. (a)On May 21, 1998, Stevens International, Inc. (the "Company") dismissed Deloitte & Touche LLP ("Deloitte & Touche") as its principal independent accountants. The decision to dismiss Deloitte & Touche was approved by the Company's Board of Directors as well as the Audit Committee of the Board of Directors. Deloitte & Touche's report on the Company's financial statements for each of the fiscal years ended December 31, 1997 and 1996 did not contain an adverse opinion or disclaimer of opinion. However, such reports were qualified or modified as to uncertainties involving factors raising substantial doubt about the Company's ability to continue as a going concern. There were no adjustments in the consolidated financial statements that might result from the outcome of this uncertainty. During the Company's past two fiscal years and the periods following December 31, 1997, there were no disagreements between the Company and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which if not resolved to the satisfaction of Deloitte & Touche would have caused it to make reference to the subject matter(s) of the disagreement(s) in connection with its reports. A letter from Deloitte & Touche confirming the statements contained in this Item 9(a) was filed as an exhibit to Form 8-K filed on May 29, 1998. (b)On May 21, 1998, the Company retained Grant Thornton LLP to serve as the Company's principal independent accountants. During the Company's past two fiscal years and the periods following December 31, 1997, the Company did not consult Grant Thornton LLP regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements. PART III Item 10. Directors and Executive Officers of the Registrant. The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held during 1999 (the "Proxy Statement") under the heading "Election of Directors", which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under "Executive Officers of the Registrant" in Item 1 of this report, which information is incorporated herein by reference. The information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Section 16 Requirements", which information is incorporated herein by reference. Item 11. Executive Compensation. The information concerning management compensation and transactions with management is set forth in the Proxy Statement under the heading "Management Compensation and Transactions", which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Stockholders and Management Ownership", which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Management Compensation and Transactions", which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Financial Statements: The financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules" at Item 8. (2) Financial Statement Schedules: The financial statement schedules filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules" at Item 8. (3) Exhibits The exhibits filed as a part of this report are listed under "Exhibits" at subsection (c) of this Item 14. (b) Reports on Form 8-K: No report of Form 8-K was filed on behalf of the Registrant during the last quarter of the Company's 1998 fiscal year. (c) Exhibits: Exhibit Number Description of Exhibit ------- ----------------------------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company.(1) 3.2 Bylaws of the Company, as amended. (2) 4.1 Specimen of Series A Common Stock Certificate. (3) 4.2 Specimen of Series B Common Stock Certificate. (4) 10.1 Seventh Amendment to Credit Agreement dated December 31, 1997 by and between the Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.2 Eighth Amendment to Credit Agreement dated January 23, 1998 by and between the Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.3 Ninth Amendment to Credit Agreement dated February 6, 1998 by and between the Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.4 Amendment to Credit Agreement dated February 28, 1998 by and between the Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.5 Eleventh Amendment to Credit Agreement dated March 31, 1998 by and between the Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.6 Twelfth Amendment to Credit Agreement dated April 16, 1998 by and between Bank of America Texas, N.A., the Company, PMC Liquidation, Inc., and Printing and Packaging Equipment Finance Corporation.(5) 10.7 Loan Agreement dated June 30, 1998 by and between Wells Fargo Bank, National Association and the Company. (6) 10.8 Loan Agreement dated June 30, 1998 by and between Paul I. Stevens and the Company.(6) 10.9 Standard Deposit Receipt and Real Estate Purchase Contract dated June 30, 1998 by and between the Company, J.J.L. Holdings Company Ltd. And M.B.A. Holdings Company, Ltd.(7) 10.10 Standard Form Asset Purchase Contract dated June 30, 1998 by and between the Company, J.J.L. Holdings Company Ltd. And M.B.A. Holdings Company, Ltd.(7) 10.11 Asset Contract to Purchase Real Estate dated February 8, 1999 by and between the Company and Production Manufacturing, Inc. (*) 21 Subsidiaries of the Company. (*) 23.1 Consent of Grant Thornton LLP. (*) 23.2 Consent of Deloitte & Touche LLP. (*) 27.1 Financial Data Schedule. (*) ________ * Filed herewith. (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-15279) and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-24486) and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's report on Form 8-A filed August 19, 1988 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's report on Form 10-Q filed for the period ended March 31, 1998 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's report on Form 10-Q filed for the period ended June 30, 1998 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's report on Form 8-K/A filed September 18, 1998 and incorporated herein by reference. 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. STEVENS INTERNATIONAL, INC. By: /s/ PAUL I. STEVENS Paul I. Stevens Chairman of the Board, Chief Executive Officer, and Acting Chief Financial Officer Date: March 26, 1999 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ PAUL I. STEVENS Chairman of the Board and March 26, 1999 Paul I. Stevens Chief Executive Officer /s/ RICHARD I. STEVENS President, Chief Operating March 26, 1999 Richard I. Stevens Officer and Director /s/ CONSTANCE I. STEVENS Vice President, Secretary March 26, 1999 Constance I. Stevens and Director /s/ JAMES D. CAVANAUGH Director March 26, 1999 James D. Cavanaugh /s/ MICHEL A. DESTRESSE Director March 26, 1999 Michel A. Destresse /s/ EDGAR H. SCHOLLMAIER Director March 26, 1999 Edgar H. Schollmaier SCHEDULE II STEVENS INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Period Expenses Accounts Deductions Period ------ -------- -------- ---------- ------ Year Ended December 31, 1998 Allowance for doubtful accounts $ 374,000 $ 194,000 $ 23,000 $ (62,000)(1) $ 529,000 Year Ended December 31, 1997 Allowance for doubtful accounts $4,225,000 $ (305,000) $(2,849,000)(2) $ (697,000)(1) $ 374,000 Year Ended December 31, 1996 Allowance for doubtful accounts $ 655,000 $4,043,000 $ (181,000) $ (292,000) $4,225,000 _____________ (1) Write off of uncollectible accounts. (2) Reclassification of allowance for doubtful accounts to "assets held for sale". INDEX TO EXHIBITS Sequentially Numbered Exhibit Number Description of Exhibit Pages ------- ----------------------------- ----- 3.1 Second Amended and Restated Certificate of Incorporation of the Company.(1) 3.2 Bylaws of the Company, as amended.(2) 4.1 Specimen of Series A Common Stock Certificate.(3) 4.2 Specimen of Series B Common Stock Certificate.(4) 10.11 Asset Contract to Purchase Real Estate dated February 8, 1999 by and between the Company and Production Manufacturing, Inc. (*) 21. Subsidiaries of the Company. (*) 48 23.1 Consent of Grant Thornton LLP.(*) 49 23.2 Consent of Deloitte & Touche LLP.(*) 50 27.1 Financial Data Schedule.(*) 51 * Filed herewith. (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-15279) and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-24486) and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's report on Form 8-A filed August 19, 1988 and incorporated herein by reference.
EX-10.11 2 EXHIBIT 10.11 CONTRACT TO PURCHASE This is a legally binding contract. If not understood, seek legal advice. OM COLLIERS, INC. dba COLLIERS INTERNATIONAL 525 Vine Street, Suite 1700 Cincinnati, Ohio 45202 513-421-4884 Date: February 8, 1999 FAX: 513-421-1215 1. PROPERTY DESCRIPTION: The undersigned Purchaser offers to purchase from the Owner through OM Colliers, Inc. dba Colliers International and its cooperative broker, if any, hereinafter "Broker" the following described Real Estate ("Real Estate") with improvements and fixtures thereon and with all appurtenant rights, privileges and easements, located in the City of Hamilton, Butler County, Ohio, known as an approximately 130,000 square foot two (2) building industrial complex that is situated on approximately 12.5 acres and whose address is 851 Walnut Street as described in Exhibit "A". 2. INCLUDED IN THE SALE: The Real Estate shall include, without limitation, all electrical, lighting, and plumbing fixtures, heating, air conditioning equipment and all other fixtures, if any, permanently a part of the Real Estate and the improvements thereon. 3. PERSONAL PROPERTY: The following items of personal property shall be included in the sale: All cranes, rails, bridges and motors located in the premises. All Security Systems, air lines, air compressors, dock equipment, and buss ducts. 4. OWNER'S CERTIFICATION: The Real Estate is zoned I-2 and B-2 and is not located in a flood plain; and to the best of Owner's actual knowledge without independent investigation, inquiry or analysis, there is not located in or about the property any toxic, hazardous, or contaminated substances in violation of applicable environmental laws and there are no underground storage tanks; and is free from any and all City, State and Federal orders affecting the Real Estate as of the date of acceptance of this offer. 5. PURCHASER'S EXAMINATION: Purchaser is relying solely upon his/her own examination of the real estate and inspections herein required, if any, for its physical condition and character, and the real estate's suitability for purchaser's intended use thereof and not upon any representations by the real estate agents involved, except for those made by said agents directly to the purchaser in writing. At closing, Purchaser shall accept the Property in "AS IS" condition without any representation, warranty or covenant from Owner except for those set forth in this Contract. 6. PRICE AND TERMS: The Purchase Price shall be Seven Hundred and Twenty Five Thousand Dollars ($725,000), payable as cash at closing. a) EARNEST MONEY: Fifteen Thousand Dollars ($15,000) Earnest Money to apply toward the Purchase Price is to be deposited in Broker's escrow account upon acceptance of this Contract pending Closing. In the event that this Contract to Purchase does not close for any reason other than default on the part of the Purchaser, the Purchaser's Earnest Money will be promptly and fully 1refunded. Such refund shall be in addition to any remedy, including specific performance, available to Purchaser. If Purchaser defaults in the performance of this Contract, then the Earnest Money shall be paid to the owner, not as liquidated damages, but to apply to damages which Owner may suffer on account of the default of Purchaser. b) BALANCE: The balance of the Purchase Price shall be payable as cash at closing. 7. CONTINGENCIES: The following shall be conditions precedent to Purchaser's obligation to purchase the property: a) On or before April 9, 1999, Purchaser shall have determined that financing can be obtained to purchase the Property in an amount and on terms satisfactory to Purchaser, in Purchaser's sole and absolute discretion. Purchaser agrees to apply for and to make a diligent effort to obtain said financing. If the commitment for said financing shall not be obtained on or before April 9, 1999, Purchaser may terminate this contract by giving Seller written notice thereof on or before said date. b) On or before April 9, 1999, Purchaser shall have determined that Owner's title to the Property is acceptable to Purchaser in Purchaser's sole and absolute discretion. Promptly upon the parties' execution of this Contract, Purchaser shall select a reputable title insurance company and order a commitment for an owner's title insurance policy. The cost of obtaining the commitment, and the premium for the owner's policy, shall be paid by Purchaser. Purchaser shall provide a copy of the commitment to owner upon Purchaser's receipt thereof. If title to the Property, as reflected in the commitment, is not acceptable to Purchaser, Purchaser shall so notify Owner in writing on or before April 9, 1999, otherwise, objections to title are waived and this contingency shall be deemed waived except as to matters later created. In the event of an objection, Owner may attempt to clear the title of such matters, and the Closing date shall be extended if necessary; but either party may terminate this Contract if such matters cannot be corrected or Owner elects not to attempt to correct them or Owner fails to remove such matters within a reasonable time, by giving written notice of such termination to the other party, and in such event the Earnest Money shall be promptly returned to Purchaser. At Closing, Owner shall deliver a title affidavit to Purchaser in a form acceptable to Purchaser. c) Delivery of possession of the Property to Purchaser, immediately Upon waiving of all contingencies and deposit of escrow with Seller. d) On or before April 9, 1999, Purchaser shall have determined that the zoning of the Property is satisfactory to Purchaser, in Purchaser's sole and absolute discretion, and the Purchaser's intended use will conform with applicable local, county, and state laws and regulations, and with existing park covenants, in Purchaser's sole and absolute discretion. e) On or before April 29, 1999, Purchaser shall have determined that the environmental condition of the Property is satisfactory to the Purchaser, in the Purchaser's sole and absolute discretion. Upon the execution of this Contract, Seller shall cause to be ordered from the environmental consulting firm selected by the Seller, a Phase I environmental audit report on the Property, a copy of which will be sent to Purchaser for Purchaser's review. The cost of the Phase I environmental audit report shall be paid by the Purchaser. f) On or before April 9, 1999 Purchaser shall have determined that the Property is satisfactory for Purchaser's intended use, in Purchaser's sole and absolute discretion. During the period from the date hereof through April 9, 1999 (the "Inspection Period"), Purchaser shall have the right to inspect the Property, including but not limited to, the soil, subsoil, topography, existing fill, drainage, surface and groundwater quality, air and water rights, availability of utilities, zoning, legal compliance, access, suitability of the Property for Purchaser's manufacturing process, assessments, encroachments, structural, mechanical, and architectural components, heating, ventilating, and air conditioning components, plumbing and electrical components, curbs, driveways, and parking areas, roof, gutters, downspouts, siding, and windows and all other inspections deemed necessary by Purchaser. During the inspection Period, Purchaser and Purchaser's consultants, agents, inspectors, contractors, and employees directed by Purchaser, may enter the Property during regular business hours as reasonably necessary to inspect the Property, to perform any needed tests, and to plan any improvements on the Property. Purchaser shall not make excavations or test borings, disturb any plants, trees or shrubs, or engage in other activities destructive to the Property absent specific written consent from Seller, which consent shall not be unreasonably withheld. Purchaser shall notify Owner (by telephone or in writing) of the dates and times during which Purchaser or Purchaser's agents will be on the Property, and Owner or Owner's agents shall have the right to accompany Purchaser or Purchaser's agents while they are on the Property. Purchaser shall indemnify, defend and hold Owner harmless from and against any and all claims, actions, liability, damages, costs and expenses arising or relating to Purchaser's activities on the Property, and Purchaser shall promptly repair and any and all damage to the Property caused by Purchaser or its agents in connection therewith. If Purchaser determines that the Property is unsatisfactory to Purchaser based upon its inspections and investigations, Purchaser may terminate this Contract by giving Owner written notice thereof on or before April 9, 1999, in which event the Earnest Money shall be promptly refunded to Purchaser. Otherwise, this contingency shall be deemed satisfied. g) After Purchaser waives its' contingencies but before closing, Seller shall at its sole cost and expense separate (create an alley and disconnect the roof and any shared electrical services) the facility they intend to retain to the reasonable satisfaction of the Purchaser. h) After Purchaser waives its' contingencies but before closing, Seller shall remove all drums and items which may affect the environmental status of the property. i) After Purchaser 3waives its' contingencies but before closing, Seller shall designate what personal property Seller wishes to store Seller's retained facility after Purchaser takes occupancy of purchased property. Purchaser agrees to provide the labor necessary to dispose of or relocate Seller's personal property, except for any hazardous waste material. All other costs (dumpsters, hauling, etc.) shall be at the expense of the Seller. Seller and Purchaser agree to negotiate a reasonable storage fee for personal property that remains until Seller disposes of or relocates the personal property. In the event any of the contingencies set forth in this section 7 are not satisfied or waived by Purchaser, Purchaser may terminate this Contract by giving written notice thereof to Owner on or before April 9, 1999, and Purchaser shall promptly receive a refund of the Earnest Money. If Purchaser does not so notify Owner, all of the contingencies set forth in this section 7 shall be deemed satisfied (except, with regard to the title contingency, as to matters later created). 8. CONVEYANCE AND CLOSING: Owner shall be responsible for transfer taxes, conveyance fees, deed preparation; and shall convey marketable title to the Real Estate by deed of general warranty in fee simple absolute, with release of dower, if any, in writing, to the purchaser or purchaser's designee or nominee. Closing will be held within thirty (30) days of waiving of all contingencies. 9. POSSESSION: Possession shall be given upon Purchasers waiving of all contingencies and deposit of escrow with Seller. Purchaser shall be granted rent free occupancy until closing and Purchaser shall be responsible for all cost associated with building occupancy, including but not limited to real estate taxes, property insurance and building maintenance. 10. PRORATIONS: Real estate taxes, installments of assessments, if any, shall be prorated as of the date of occupancy by Purchaser. Owner shall receive a credit for any prepaid taxes. 11. CONDITION OF IMPROVEMENTS: Owner agrees that upon delivery of deed, the improvements constituting part of the Real Estate shall be in the same condition as they are on the date of this offer, reasonable wear and tear excepted. Owner shall continue to insure the improvements until Closing. In the event of loss before Closing such loss may be repaired by and at the cost of Owner prior to Closing, and if not so repaired, the Purchaser may elect to accept the property in its damaged condition, or terminate this Contract, and upon such termination Purchaser shall be entitled to a return of the Earnest Money. 12. INDEMNITY BY OWNER: Owner recognizes that Colliers International is relying on all information provided herein or supplied by Owner in connection with the Real Estate, and agrees to indemnify and hold Colliers International, its sales associates and cooperating brokers harmless from any claims, demands, damages, suits, liabilities, costs and expenses (including reasonable attorney's fees) arising out of any intentional misrepresentation made herein by Owner or because of intentional concealment by the Owner. 13. SOLE CONTRACT: The parties agree that this Contract constitutes their entire agreement, and that no oral or implied agreement exists. Any amendments to this agreement shall be made in writing, signed by both parties and copies shall be attached to all copies of this original agreement. This Contract shall be binding not only upon the parties hereto but also upon their heirs, administrators, executors, successors and assigns. 14. AGENCY DISCLOSURE: Purchaser and Owner acknowledge receipt of the attached Agency Disclosure Statement submitted for their review and signature. Owner authorizes Broker to divide commissions received under this Contract with cooperating brokers, if any, regardless of their agency relationships with the parties. 15. EXPIRATION AND APPROVAL: This offer shall remain open for acceptance until 12:00 noon Cincinnati time on Tuesday February 9, 1999, and a signed copy shall be promptly returned to Purchaser or Owner, as the case may be, upon acceptance by the other party. Production Manufacturing Inc. or assigns /s/ John G. Halpin /s/ James E. Napier ___________________________ ________________________________ Witness Purchaser: February 9, 1999 @ 9:56 AM President Date:______________________ _______________________________ Brokers (if any): West Shell - Listing Agent, Colliers Intl.- Buyers Agent 16. RECEIPT OF BROKER: I hereby acknowledge receipt of a check in the amount of Fifteen Thousand Dollars ($15,000) from Production Manufacturing Inc. which shall be deposited upon execution of this Contract by both parties as Earnest Money to be retained by West Shell Inc. (Broker) in accordance with this Contract. The Earnest Money check shall be promptly returned if offer is rejected. Broker:____________________________ By:________________________________ Date:______________________________ 17. ACTION BY SELLER: The undersigned Seller has read and fully understands the foregoing offer and hereby: ( X ) accepts said offer and agrees to convey the Real Estate according to the above terms and conditions, ( ) rejects said offer, or ( ) counteroffers according to the above modifications initialed by Seller, which counter offer shall become null and void if not accepted in writing on or before 6 o'clock (P.M.) CINCINNATI TIME________________, 19_____. Seller acknowledged that the Ohio Agency Disclosure Statement is signed and attached. Seller agrees to pay West Shell a commission ("Commission") of six (6)% of the Purchase Price at Closing and further authorizes West Shell to pay Colliers Intl. fifty percent (50%) of the "commission" at closing and to apply as much of the Earnest Money as may be necessary to pay Commission. No commission shall become due and payable until the closing occurs and Owner receives the net sales proceeds. STEVENS INTERNATIONAL INC. /s/ Marsha D. Ogura By: /s/ George A. Wiederaenders ________________________________ __________________________________ Witness Seller February 8, 1999 __________________________________ Date EX-21 3 Exhibit 21 Material Subsidiaries of the Company Country or State Name(s) Under Which Name of Subsidiary of Incorporation Subsidiary Does Business ------------------ ---------------- ------------------------ 1. Stevens International, S.A. France 2. Societe Specialisee dans France SSMI le Materiel d'Imprimerie EX-23.1 4 Exhibit 23.1 Consent of Grant Thornton LLP Consent of Independent Certified Public Accountants We have issued our report dated March 19, 1999 accompanying the consolidated financial statements and schedules incorporated by reference in the Annual Report of Stevens International, Inc. on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statements of Stevens International, Inc. on Form S- 3 (File No. 33-84246) and on Form S-8 (File No. 33-25949, File No. 33-36852, and File No. 333-00319). /s/ GRANT THORNTON LLP GRANT THORNTON LLP Dallas, Texas March, 19, 1999 EX-23.2 5 Exhibit 23.2 Consent of Deloitte & Touche LLP Independent Auditors' Consent We consent to the incorporation by reference in Registration Statements No. 33-25949, No. 33-36853 and No. 333-00319 of S t evens International, Inc. on Form S-8 and Registration Statement No. 33-84246 of Stevens International, Inc. on Form S-3 of our report dated March 31, 1998 appearing in this Annual Report on Form 10-K of Stevens International, Inc. for the year ended December 31,1998. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Fort Worth, Texas March 29, 1999 EX-27.1 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 164 0 2,240 529 6,146 10,750 6,867 4,267 14,651 8,785 5,244 0 0 950 (3,905) 14,651 22,207 22,207 17,877 25,256 389 0 1,580 (3,375) 75 (3,450) 0 11,221 0 7,771 .82 .82
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