FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
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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 No. 2-92801NY
Steiner Optics International, Inc.
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(Exact Name of Registrant as specified in its Charter)
Delaware 13-3239648
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Dr. Hans Frisch Strasse 9, D-95448 Bayreuth, Germany
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(Address of principal executive offices, zip code)
011 49 921 787960
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer:
(1) filed all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act over the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports: Yes ( ) No (X)
(2) has been subject to such filing requirements for the past 90 days:
Yes (X) No ( )
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, if definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-KSB. ( )
State issuer's revenues for its most recent fiscal year: $11,777,844
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock as of a specified day within the
past sixty (60) days:
There has been no market for issuer s shares within the past sixty (60) days.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the last known quote for such stock as of October
26, 1999, reported by the National Quotation Bureau Incorporated) is
$1,452,759.84.
State the number of shares outstanding of each of the Issuer's classes of
common equity as of October 26, 1999:
Common Stock, par value $.00001 per share 149,275,984
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(Class of Common Stock) (Number of Shares)
Transitional Small Business Disclosure Format: Yes ( ) No (X)
Documents Incorporated by Reference: none.
STEINER OPTICS INTERNATIONAL, INC., AND SUBSIDIARIES
PART I
Item 1. BUSINESS
General
Steiner Optics International, Inc., was incorporated in
Delaware in 1984 (the "Parent Corporation"). The Parent Corporation does
not conduct any significant business operations on its own; it functions
primarily as a holding company for Steiner Optik GmbH, a German limited
liability company and a wholly-owned subsidiary of the Parent Corporation
(the "Company"). The Parent Corporation uses its strategic position in New
York City to keep an eye on the U.S. markets, to conduct market research for
the Company and to advise the Company of new developments in the U.S. markets.
Steiner-Optik (SEA) Pte. Ltd., Singapore, the only subsidiary of the Company,
has had no operations since 1991; it was liquidated on December 27, 1999.
The Company designs, manufactures and markets high quality binoculars
(sold with warranties ranging from 10 to 30 years) and related products for
marine, hunting and leisure markets, as well as for military use. In addition,
the Company produces and sells optical components such as prisms and lenses for
use in industrial and consumer goods. The Company has targeted the hunting
market as a major area of future growth. In 1999 the Company introduced
several new products, the Wildlife Series and the Safari Series, to the Great
Outdoors market. See Products.
Products
Most of the Company's binoculars are designed to be lightweight,
rugged and corrosion-resistant; their bodies are made from reinforced fiber-
glass and covered, for additional protection, with ribbed soft rubber. In
addition, most of the Company's binoculars are designed to be waterproof,
tested to withstand pressure at five meters underwater, and filled with
nitrogen to prevent fogging in various weather conditions.
The Company's premier binocular product is the "Admiral Gold"
designed for the boating market and equipped with the newly-developed
proprietary 3D-Vision Coating to enhance the transmission of light and a
large, illuminated HD-stabilized compass that takes bearings accurate to a
single degree. The stray light reduction system further enhances the
transmission of light and offers a remarkably sharp view. The Admiral Gold
works well in all light and atmospheric conditions; it works exceptionally
well at night.
The Company also manufactures other products designed for the marine
(or boating) market, e.g., the "Electronic Commander II" equipped with
electronic fluxgate sensor and a compass that is accurate to 0.5 degree and
can take 10 bearings per second; "Commander III," a professional binocular
for offshore use that is equipped with a specially-designed HD-stabilized
compass with the fastest setting time and instant bearings in rough or choppy
conditions and provides clear and brilliant pictures in the toughest light
conditions; "Sailing 7x50," a binocular designed to military specifications
for use in rough conditions offshore; and "Navigator II," an extremely
lightweight marine compass binocular with a very attractive price and yet
remarkable performance.
The Company manufactures several hunting binoculars. The "Hunting
7x50" is designed as a night binocular; the "Hunting 9x40" is a lightweight
binocular well-suited for observation of game from great distances. In 1993
the Company introduced the "Hunting 8x56," a lightweight and light-sensitive
binocular most popular in Central Europe. Distinguished by improved visibility
at dusk and dawn, this binocular can also be used at night. At the same time
the Company introduced the "Hunting 12x40," a binocular particularly suited
for observation of game at great distances. (In 1998 the Hunting 12x40 was
discontinued everywhere except in the U.S.) The Company also manufactures the
"Hunting 8x30," the best binocular for low light observation where light
weight is critical; "Commander II 15x80", the long distance leader with an
integrated HD-stabilized compass and a range-finding reticle; the "Commander
III 7x50", with AC-optics specifically designed for extreme low light
conditions; and, finally, "Senator 10x50," capable of high 10 power
magnification for long-range spotting and viewing of distant subjects.
The Predator series is the latest addition to the line of hunting
binoculars manufactured by the Company. The Predator 8x22 is a compact, light-
weight, and moderately-priced binocular ideal for viewing wildlife from both
near and far. The Predator 8x30 features Steiner s renown green Penetrator
lens coating, used to facilitate the detection of game by adding contrast to
a woodland setting. The Predator 8x42 and the Predator 10x42 also feature
the Penetrator lens coating to block out colors of haze and foliage and to
increase the transmission of brown and red colors; this feature helps the
viewer to spot hidden game in the foliage. All binoculars in the Predator
series are waterproof and shockproof.
For sale in the sports and leisure markets, the Company offers the Safari
and Firebird series. The Safari 8x30 is a compact, moderately priced
binocular, with the new Steiner AP-Autolux glare blocker coating that filters
out unwanted reflections and allows the usable white light to reach the eyes.
Lightweight and water-resistant, the new "Safari II 8x30 is ideal for travel
and leisure use in all light conditions. This binocular also uses AP-Autolux
coating and provides virtually distortion-free images. The "Firebird T8x30"
provides a red coating on the lenses, that protects users' eyes from
ultraviolet radiation. During 1994 the Company supplemented this line of
products with the "Firebird 12x40," another binocular designed for
observation at greater distances and capable of filtering out ultraviolet
and infrared radiation.
In the 1990s the Company improved its "Rallye" series, developed several
years earlier, such as the "Rallye 20x80," an economically priced leisure
binocular ideally suited for astronomical observation. The Company also
developed other "Rallye" models such as "Rallye 8x30," a compact and light-
weight binocular, "Rallye 7x50," equally adequate for use on water or land
and preferred by the merchant marine; and "Rallye 10x50," designed to provide
maximum brightness while supplying more than adequate power. All Rallye
models are equipped with fully-coated precision optics encased in the
durable Makrolon housing.
Late in 1993 the Company introduced the "Miniscope 8x22", a monocle-
type scope that can be folded for convenient storage. (The Miniscope 8x22
was discontinued in 1999.) The Company also offers several other compact
binoculars. The latest additions to the line of binoculars that can be folded
for convenience are the "Rocky S 8x42" and "Rocky S 10x42." Both are designed
to spot birds or wildlife in difficult light conditions; both use the
exclusive Penetrator high-contrast optics. The Company also offers the
"Rocky 10x28," a high power binocular with a large diameter objective; the
"Rocky 8x24," the smallest and lightest of the "Rocky" models; and the "Rocky
12x28" that offers 12 times magnification.
The "Wildlife" series is the Company's latest, revolutionary
addition to its spectrum of binoculars; it is also the Company's entry into
the Great Outdoors market. Reinhold Messner, the famed solo climber of Mount
Everest, helps the Company to promote this series. The products in this series
- -- "Wildlife 8x30," "Wildlife 8x56" and "Wildlife 7x50" -- are extremely
robust yet unexpectedly lightweight. All of them utilize high contrast optics
to deliver clear, brilliant pictures, at any time of the day, anywhere one may
wander, i.e., in the mountains, in the forest, in the desert or at the coast.
All products in the "Wildlife" series are filled with nitrogen to prevent
fogging. "Wildlife 8x56" is particularly good at night; it provides clear
and bright pictures in low light conditions. All binoculars of this series are
equipped with Steiner-auto-focus that obviates the need for constant
refocusing and offers a sharp view over distances from 20 meters to infinity.
The Company warrants the products in this series for 30 years.
Finally, the Company manufactures binoculars for military
applications, custom-made to meet rigid specifications and equipped with
enhancements not found on civilian products, as well as produces optical
components for a wide variety of civil and military applications, systems and
measuring devices.
Late in 1999 the Company conducted intensive market research to
strengthen its world-wide distribution network and to direct all products and
marketing activities towards the target groups. The Company plans to introduce
new products during the first four (4) months of the year 2000.
Research and Development
The Company's research and development (R&D) department, historically in
the forefront of the Company's activities, has introduced many innovations
to the market, e.g., use of plastic for the housing, red coating for
filtering ultraviolet and infra-red radiation, integrated compass, etc. In
1998 11 engineers and technicians of the Company were engaged inthe R&D
activities at any given time; they focused on the development of new
products, as well as on improving the Company's manufacturing and quality
control practices. In 1998 the Company spent $148,778 on the R&D (as compared
with $114,279 in 1997). The increase in the R&D expenditures was due
primarily to the development of the Wildlife and Safari Series, as well as
other new products to be introduced in the year 2000.
Marketing, Distribution and Customers
In Germany the Company's products are sold to specialty and
department stores by the Company's in-house sales force and by independent
sales representatives, as well as through catalogues and wholesalers. Foreign
sales are made mainly through local independent distributors; some of the
distributors hold exclusive rights to distribute the Company's products within
their respective territories. In the past few years the Company substantially
extended its international distribution network, concentrating on the eleven
(11) members of the European Community that use the Euro as their currency in
general, and on the United Kingdom and France in particular. Finally, the
Company has completely overhauled its system of distribution in Germany.
In the past the Company relied exclusively on the network of independent sales
representatives there for all of the Company's products. In 1999 the Company
changed its marketing strategy. Since then the Company has been selling its
products to retailers of the marine and hunting products only through the
Company's distributors, but continued to sell directly to photo dealers and
opticians through its independent sales representatives.
Pioneer & Co., Inc., of Moorestown, N.J. ("Pioneer"), has been the
exclusive distributor of the Company's products in the U.S. since April 1982.
In 1997 and 1998 Pioneer accounted for 39% and 33%, respectively, of the
Company's total sales. The dramatic increases in sales in 1997-1998 were due
to a large order, placed by a foreign manufacturer of other products, for
"Hunting 8x30" binoculars. In 1999 Pioneer still accounted for roughly 33% of
the Company's total sales (essentially unchanged) but without the benefit of
a special order. Supra. The existing contract with Pioneer is scheduled to
expire on December 31, 2001. The Company and Pioneer are working on a
marketing plan for the next decade. As the trendsetter, the U.S. market for
consumer goods is particularly important to the Company.
The Company markets its products worldwide. Total sales in each
geographic area differ from year to year. During both 1997 and 1998, North
America accounted for the largest percentage of the total sales, i.e., 40.3%
and 37.3%, respectively. In 1997 and 1998, Germany accounted for 34.5% and
31.1% respectively; the remainder of Europe accounted for 14.1% and 18.1%,
respectively. Sales to the Middle East increased from 5.4% in 1997 to 9.5% in
1998, while sales to Asia decreased from 4.6% in 1997 to 2.2% in 1998. Sales
to the remaining areas remained almost the same, i.e., 1.3% in 1997 and 1.7%
in 1998.
Military sales usually account for 8-12% of the Company's annual sales,
but large orders could -- and in 1995 did -- increase that percentage
dramatically. Despite widely-publicized reduction in the armed services, the
Company's revenues from military sales have not decreased primarily because
the military now tends to buy less equipment of better quality.
The Company's marketing department, among other things, monitors the
performance of, and renders assistance to, the Company's distributors and sales
representatives. The marketing department runs seminars, prepares manuals for
the sales force, creates and coordinates advertising and promotions, point-of-
sale displays, press releases, product reports and exhibitions at specialty
trade and consumer shows. It also places printed advertisements in trade
journals and special interest magazines.
Advertising and marketing costs increased from approximately $317,000 in
1997 to roughly $584,000 in 1998. Several developments are responsible for
this increase. Over the past couple of years the Company developed new
catalogs, new marketing tools and new advertising displays, as well as hired
a new marketing director late in 1999. Finally, the Company substantially
expanded its presence at annual international exhibitions from 3-4 per year
in the past to 8-10 per year now. For example, the Company now regularly
participates in the Great Outdoor exhibition (held in Friedrichshafen) and
in 4-5 other annual exhibitions of products for the hunting markets.
Manufacturing Operation
The Company tends to book the majority of its sale orders in January-
February of each year when most trade shows take place. Hence, the Company
tends to accumulate inventory in November - December of each year so as to
meet the orders expected to arrive early in the succeeding year. Accordingly,
the Company's inventory-to-sales ratio tends to go up by the year-end and to
come down in the Spring-Summer when the orders are filled.
Finished goods represented approximately 31% of the Company's
inventory in 1998 (as compared to roughly 17% in 1997). A special order from
a military customer was produced in 1998 for delivery early in 1999; that
order accounted for this dramatic increase in finished goods. Work in progress
accounts for most of the remainder. Semi-finished glass is manufactured by
others to Steiner's specifications; hence, it is of limited utility to someone
other than Steiner. The lead-time for delivery of semi-finished glass is
roughly 5-6 months. Hence, Steiner must always keep sufficient quantity of
such glass on hand to allow for flexibility in the manufacturing process.
Most of the Company's products are manufactured at its facilities
in Bayreuth, Germany. The Company uses mostly modern equipment for the
production (grinding, polishing, etc.) of the optical components of its
product lines and continues to invest in machinery. In 1998 alone the Company
invested roughly $1 million into new machinery. The Company manufactures most
of its products out of raw materials such as glass, metals and plastic.
In 1993 the Company has begun to phase out the production of some components
in order to reduce expenses and lowered the production costs of several
products (at the very low end of its production line) by outsourcing the
manufacturing of some components. This process has continued to date. The
original counterparty in Eastern Europe turned out to be expensive and
unreliable, and the Company has moved its outsourcing operation to the Far
East where its counterparties have proven to be more reliable and more cost-
effective.
The Company is not dependent upon any single source of raw materials
and has no long-term supply agreements with anyone. In the Company's view,
there is adequate choice of suppliers for its foreseeable needs.
The Company sells most of its products in the German currency, the
Deutsche Mark, while pays most of its suppliers in their local currencies.
Purchases of supplies are appropriately hedged.
Competition
The binocular industry, relatively stable over the past few years,
has recently experienced a spate of mergers and acquistions. None of these
events is expected to affect the Company's position in the high-end segment of
the world market. The Company sells annually approximately $10 million worth
of binoculars. The size of the total market in binoculars remains relatively
obscure. (The Company is not aware of any reliable source of any statistical
information on the subject.) Among companies engaged in research, development
and manufacturing of binocular products, many have greater financial,
production, marketing and technological resources than the Company.
Competition in this industry centers on product quality, design and price, as
well as customer acceptance and support.
The Company believes that its reputation for innovation, the high
quality of its products, the durability of its binoculars and ease of focusing
them provide the Company with a competitive edge in the hunting and boating
markets.
The military market for binoculars requires special marketing and
manufacturing expertise necessary to comply with strict requirements of the
military. The Company is an approved supplier to several important military
services. It also supplies the police, customs and similar services in many
countries. The Company has been supplying the military market for many years
despite considerable competition.
Competition in the optical component industry is extremely
diversified. Competitors range from small engineering companies to large
automobile and airplane manufacturers. The Company believes that it competes
in this market through its recognized ability to find an engineering solution
to a difficult problem, rather than its capacity for delivering a quantity of
existing products.
Patent and Trademarks
The Company currently owns a number of patents worldwide. Several
of its patent applications pertaining to certain aspects of the technology
used in its binoculars are pending. The Company may not be able to enforce,
for financial or other reasons, the existing patents, however. Besides, the
existing patents may not be adequate to protect the Company from its
competitors. The fate of the pending patent applications is uncertain. The
Company places greater reliance on its customer relationships and the quality
of its products than on its ability to protect its intellectual property.
None of the patents are critical to the Company's ability to stay in business.
The "Steiner" trademark is registered in Germany and many other
European countries, the United States and certain Asian countries. Such
registration may not provide material protection to the Company because the
Company may not be able to protect, for financial or other reasons, its
trademark against infringement. Finally, the use of Company's trademark may
infringe upon trademarks or other rights of third parties. The Steiner
trademark is very important to the Company; it represents the goodwill of the
Company. The Company also holds a number of licenses to use trademarks
registered by others. These licenses are, likewise, very important to the
Company.
Backlog
The Company's backlog consists of confirmed but unfilled purchase
orders. The backlog was approximately $2,380,071 (approximately DM 3,989,000)
at December 31, 1998, as compared to approximately $2.47 million (approximately
DM 4,396,600) at December 31, 1997). Variations in backlog do not represent
future business trends fairly because unfilled orders fluctuate greatly with
the timing of orders and the product mix.
Employees
The Company trains many of its highly skilled employees. The
management considers the relations between the Company and its employees to
be satisfactory. None of the Company's employees are represented by labor
unions. As of December 31, 1999, the Company employed 125 persons (87 in
manufacturing and 38 in other departments). In 1998 the Company employed, on
the average, 118 persons (84 in manufacturing and 34 in other departments).
In 1997 the Company employed, on the average, 102 persons (68 in manufacturing
and 34 in other departments).
Item 2. PROPERTIES.
The Company owns its office and manufacturing facilities located in
Bayreuth, Germany. Two (2) buildings with 43,040 square feet are currently used
for manufacturing and warehousing; one (1) building with 12,912 square feet is
currently used for administration. All buildings are encumbered by seven
(7) mortgages: the first mortgage in the amount of DM 2,900,000 in favor of
Stadtsparkasse Bayreuth; the second and third mortgage in the amount of
DM 500,000 and DM 2,500,000, respectively, in favor of IKB, Munich; the three
(3) fourth equal mortgages, each in the amount of DM 1,000,000, two (2) in
favor of Stadtsparkasse Bayreuth, and one (1) in favor of HypoVereinsbank
Bayreuth; and the fifth mortgage in the amount of DM 700,000 in favor of
HypoVereinsbank Bayreuth. These mortgages secure long-term debt of the
Company. See Management's Discussion. The Company believes that its facilities
are adequately insured, well maintained, in good operating condition and
sufficient for the present level of its operations.
Item 3. LEGAL PROCEEDINGS.
The Company is not involved in legal proceedings at the present time.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED MATTERS.
The common stock of the Parent Corporation is quoted from time to
time on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc., and on the "Pink Sheets" of the National Quotation Bureau, Inc.
The following tables set forth the high and low bid quotations for
shares of the common stock from January 1, 1997 through December 31, 1998, as
reported by the National Quotations Bureau, Inc. The high and low bid
quotations for the Common Stock reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
1998 High Low
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Fourth Quarter $.01 $.01
Third Quarter $.01 $.01
Second Quarter $.01 $.01
First Quarter $.01 $.01
1997 High Low
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Fourth Quarter $.01 $.01
Third Quarter $.01 $.01
Second Quarter $.01 $.01
First Quarter $.01 $.01
There were approximately 2000 record holders of the common stock of the
Parent Corporation at December 31 of 1997. There were 1921 record holders of the
common stock of the Parent Corporation at December 16, 1998.
The ability of the Parent Corporation to pay dividends is not subject to
any restrictions. Nonetheless, the Parent Corporation has never paid cash
dividends. The management has no intention of declaring dividends in the
foreseeable future; all working capital will be devoted to the Company's
business.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company designs, manufactures and markets multi-purpose
binoculars, optical components and related products for sale throughout the
world. The Company is located in Germany. Most of sales are made in German
currency, the Deutsche Mark. Most purchases of components are made in the
currency of the respective supplier, e.g., in U.S. Dollars, Japanese Yen, etc.
All assets and liabilities compiled in the Company's balance sheet
are translated into U.S. Dollars at the prevailing currency exchange rates on
December 31 in the fiscal year being reported. On December 31, 1997 the
exchange rate was DM 1.78 per U.S. Dollar. On December 31, 1998 the currency
exchange rate was DM 1.676 per U.S. Dollar. See Note 1, Translation of Foreign
Currencies, to the Consolidated Financial Statements. All financial data
compiled in the Company's income statement is translated into U.S. Dollars at
the average currency exchange rates during the fiscal year being reported. The
average currency exchange rates for 1997 and 1998 were DM 1.7392 and
DM 1.7590 per U.S. Dollar, respectively.
The Comparison Between and Among
Years Ended December 31, 1997 and December 31, 1998
In 1998 the Company's net sales decreased 1.9% from $12,023,378
(DM 20,911,059) in 1997 to $11,793,252 (DM 20,743,976) in 1998.
The Company's export sales into the U.S. account, on the average,
for roughly a third of the Company s total sales. In 1997 several factors --
an improved distribution by Pioneer, a booming market in the U.S.,
introduction of new products by the Company and a weakening (against the U.S.
Dollar) Deutsch Mark -- combined to lift the Company's exports to the U.S. In
1998 sales to the U.S. were lower than in 1997 when a special order from a
foreign manufacturer contributed significantly to the sales to the U.S.
Although the Company did not have such (or comparable) special order in either
1998 or 1999, by 1999 the sales reached the level of 1997.
The Company's sales to military customers account, on the average,
for roughly 10% of the total sales. These sales stood at 10% in 1997 and 12%
in 1998.
In 1997 the Company's sales of industrial components constituted 25%
of domestic sales. By comparison, in 1998 the Company's sales of industrial
components constituted 16% of domestic sales. In 1997 and 1998 such sales
accounted for 3% and 5% of the total sales, respectively.
The Company's costs and expenses, expressed in U.S. Dollars, decreased
5.2% from 1997 to 1998.
In 1998 the Company changed the method of allocating costs between
the costs of sales and selling, general and administrative expenses in order
to enhance the accuracy of presenting the Company's financial condition and
the results of its operations. To facilitate comparison between 1997 and 1998,
the relevant amounts from 1997 are reclassified herein in accordance with the
new method. Thus recalculated, the Company's gross profit in 1997 increased by
10% (or approximately $1,100,000) from the amount previously reported for that
year. See Form 10-KSB for 1994-7.
The selling, general and administrative expenses increased 66.7% from
$2,580,336 in 1997 to $4,301,832 in 1998. This increase is due, in part, to
increased expenditures on distribution, marketing and advertising and, in
part, to the increased commissions on the increased sales. See Marketing,
Distribution, and Customers.
In U.S. Dollars, the Company's operating income increased $68,561
from 1997 to 1998 primarily due to the decrease of 2.7% in operating costs
from 1997 to 1998.
Expressed in U.S. Dollars, interest income increased 91.86% from
1997 to 1998. This increase was due, in part, to interest paid by a supplier
who missed a deadline and incurred interest charges. The amount of interest
earned by the Company on the loan made by it to Carl Steiner has remained
unchanged.
Expressed in U.S. Dollars, interest expense decreased 11.18% from
1997 to 1998. This decrease was due, in part, to the repayment of some loans
and the conversion of short-term credit lines to less expensive long-term
loans. The decreasing interest and discount rates also helped the Company to
lower its interest expense.
In 1997 the Company has adopted, effective as of January 1, 1998,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This development had no effect on the Company's net income (loss) or
the stockholder's equity.
In June 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes annual and interim reporting standards for various operating
segments of a company and related disclosures about its products, services,
geographic areas and major consumers. The Company adopted SFAS No. 131 in
1998. This development likewise had no effect on the Company's consolidated
financial statements.
The information technology utilized by the Company is new and free
of Year 2000 defects; the production technology is not. The Company has
replaced certain computers with Year 2000 defects. The Year 2000 problems did
not have any material effect on the Company's own computer systems due to
successful preparations. The Company spent approximately DM 200,000
(approximately $108,000 at the current exchange rate) on the issues presented
by the Year 2000.
Liquidity and Sources of Capital
The Company uses cash primarily for working capital, to support the
inventory and to pay debt service for capital expenditures. This need for cash
is currently met by internally generated funds and unsecured bank lines of
credit. The Company anticipates that these sources will be sufficient for the
planned ongoing research and development and for the Company's operations.
All of the Company's unsecured bank lines of credit are short-term
and call, by their terms, for the repayment of principal at the end of each
year. Consequently, the Company's obligations to repay such lines of credit
are treated as current liabilities on the Company's balance sheet and the
Company's working capital appears to be negative. Nonetheless, the Company
is reasonably sure, on the basis of decades of experience, that its bank lines
of credit will be timely renewed in due course even though the Company's
banks have no legal obligation to do so. This type of unsecured short term
lending is customary in Germany at the present time and, consequently, is not
a source of additional concern to the Company.
The Company s factoring agent as of January 1, 1999 is FMN Finance
House (Fortis Group) ( FMN ). The agreement between the Company and FMN
provides for the sale without recourse of receivables from the Company's
major customers in Germany, as well as other German and international
customers. During 1997 $6,537,388 of those receivables were sold at a total
cost of $85,536 including $59,650 in factoring fees and $25,886 in interest
expense. By comparison, during 1998 $8,048,300 of the receivables were sold at
a total cost of $166,492, including $67,114 in factoring fees and $99,378 in
interest expense. All such fees and expenses were charged to selling, general
and administrative expenses and interest expense, respectively, on the
Company's consolidated income statements. Amounts received from such sales in
each such year have been reported on the respective statements of cash flows
as operative activities.
At December 31, 1997, the Company had accrued expenses and other
current liabilities of $1,078,841. These liabilities represent, in part,
$163,444 in general taxes, $114,045 in warranty and credit notes and $188,443
in salaries and wages. At December 31, 1998, the Company had accrued expenses
and other current liabilities of $1,500,830. These liabilities represent,
in part, $195,424 in general taxes, $166,647 in warranty and credit notes and
$352,594 in salaries and wages. (The Company does not pay for overtime; rather,
the Company provides additional vacation time to its employees and accrues the
corresponding amount on its books.)
At December 31 in the years 1997 and 1998, the Company had long-term
debt in the aggregate amounts of $6,596,744 and $7,022,878, respectively.
Increasing the amount of long-term debt and decreasing the amounts of more
expensive short-term credits has allowed the Company to attain an improved
financial position.
Most of this debt is owed to two (2) banks. One of these banks holds
a note in the amount of DM 5,000,000 (approximately $2,702,702 at the current
exchange rate). The note bears interest at a rate of 6.98% per annum and
matures in February of 2002. The Company maintains an insurance policy on
the life of Carl Steiner, President of the Company. The cash value of this
policy stood at DM 3,338,853 on December 31, 1999. The cash value of this
policy as of February 2002 is expected to pay off the principal amount
of the note.
The other bank holds three (3) notes in the aggregate amount of
DM 2,355,077.80 (approximately $1,273,000) as of December 31, 1999; those
notes bear interest at annual rates of 5.6%, 7.7% and 8%, respectively, and
mature on December 30, 2002, March 30, 2006, and March 30, 2003, respectively,
if not renegotiated.
In 1993-4 Mr. Steiner paid DM 1,000,000 to the Parent Corporation
(DM 250,000 in December 1993 and DM 750,000 in December 1994) to enable the
Parent Corporation to make a desperately needed contribution to the capital
of the Company. Mr. Steiner expected to receive, in exchange, preferred stock
from the Parent Corporation, but the Parent Corporation has been unable to
issue preferred stock because none has been authorized. The Parent Corporation
has been unable to authorize the issuance of preferred stock because up until
now the Parent Corporation did not have current audited financial statements.
The Parent Corporation owes Mr. Steiner either DM 1,000,000 or preferred
stock (to be issued six (6) years later than agreed, but with different,
improved terms), or another equivalent compensation for his investment. The
Parent Corporation will make a decision on the appropriate compensation for
Mr. Steiner once it is current with its filing obligations.
The Company used to sponsor "Basket Bayreuth e. V." (until 1997
"Steiner Bayreuth e.V."), a basketball team then playing in the German
Basketball League, as a marketing tool and to generate goodwill for the
Company. In July 1997 the Company purchased five (5) years worth of future
advertising rights from the team for DM 700,000 to continue the advertising
campaign. In 1998 the Company purchased additional advertising rights,
advertising and promotions from the team for $99,000. These rights have no
current value, however, because Basket Bayreuth e.V. went bankrupt in May
1999.
In order to pay to the team the amount due, i.e., DM 700,000, the
Company waived the repayment of (a) the outstanding balance of loans made by
the Company to team in the approximate amount of $63,000 (approximately
DM 112,140) as of June 30, 1997, supra, and (b) approximately $147,000
(approximately DM 261,000) lent to the team by Carl Steiner, President of the
Company. (Mr. Steiner subsequently assigned such loan to the Company.) The
Company also paid approximately $55,000 to the team in cash and assumed two
(2) loans in the approximate amounts of $76,000 and $53,000, respectively,
made by a bank to the team.
The outstanding balances of the two (2) bank loans assumed by the
Company were approximately $112,000 and $129,000 as of December 31, 1998 and
1997, respectively. As of December 31, 1999, one of the loans was completely
repaid and the other loan had a remaining balance of approximately $33,143
(DM 61,315.24). The Company expects to pay out the remaining balance of the
second loan by August 31, 2001.
As of December 31, 1998 and 1997, the Company owed the team approximately
$75,000 and $57,000, respectively. The Company made other payments on behalf
of the team in 1998 and 1997 in the approximate amounts of $97,000 and
$19,000, respectively.
Finally, in the early 1990s the Company guaranteed another obligation
of the team in the amount of DM 100,000 owed by the team to a bank. Following
the bankruptcy of the team, the team no longer pays its debts as they become
due. Accordingly, the Company may have to repay the team's debt currently in
the amount of $44,309 (DM 80,000) to the bank, but not before the Company
contests this obligation.
Item 7. FINANCIAL STATEMENTS.
The following documents are filed as part of this report
INDEPENDENT AUDITORS' REPORT F1.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income and
Comprehensive Income for the Years Ended
December 31, 1998 and 1997 F2.
Consolidated Balance Sheets at December 31, 1998
and 1997 F3.
Consolidated Statements of Changes in Stockholders'
Deficiency for the Years Ended December 31, 1998 and
1997 F4.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 F5.
Notes to the Consolidated Financial Statements, Years
Ended December 31, 1998 and 1997 F6.
Item 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Parent Corporation are as
follows:
Name Age Position
- --------------------------------------------------------------
Carl Steiner 45 President, Chief Executive
Officer and Director
Robert Eckert 40 Controller, Chief Financial
Officer and Director
The directors and executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------
Carl Steiner 45 President, Chief Executive
Officer and Director
Robert Eckert 40 Managing Director
Carl Steiner has been President, Chief Executive Officer and
Director of the Company since January 1979 and of the Parent Corporation
since January 1989.
Robert Eckert was Controller of the Company from October 1987
through January 1990, then Chief Financial Officer of the Company from
January 1990 through October 1993, and, finally, Managing Director of the
Company since October 1993 to date. He has been Controller, Chief Financial
Officer and Director of the Parent Corporation since 1990.
The terms of office of all Directors and Executive Officers of the
Company are from the time of election until successors have been duly elected
and qualified. None of the Company's Directors or Executive Officers have any
family relationship with any other Director or Executive Officer.
Compliance With Section 16(a) of the Exchange Act
None of the directors, officers or 10% shareholders of the Company
failed to file on a timely basis reports required during 1997 and 1998 by
Section 16(a) of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded to, earned
by, or paid by the Company to Messrs. Steiner & Eckert, the Company's only
executive officers, for services rendered in all capacities to the Company
during the fiscal years ended December 31, 1997 and 1998, respectively:
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Position Year Salary Bonus Other(a)
- -----------------------------------------------------------------
Carl Steiner 1997(b) $140,244 $17,249 $16,439
(President & Chief
Executive Officer) 1998(c) $138,665 $17,055 $16,254
Robert Eckert 1997(b) $140,244 $23,713 $16,439
(Controller & Chief
Financial Officer) 1998(c) $138,665 $22,347 $16,254
(a) represents premiums paid by the Company to fund an annuity for
the benefit of Messrs. Steiner & Eckert. The Company purchased an
annuity to fund their pensions effective on their attaining the
age of 65 and equal to 50% of their then current compensation from
the Company (the "Pension Amount"). The Pension Amount will be
payable for the balance of their respective lives. Upon their death,
their widows will be entitled to receive, for the balance of their
respective lives, an amount equal to 60% of the Pension Amount, and
their children will be entitled to receive an amount equal, in the
aggregate, to 40% of the Pension Amount until they reach the age of
18 or, if they continue to be full-time students, until they reach
the age of 28.
(b) Based upon an average exchange rate of DM 1.7392 per U.S. Dollar
during 1997.
Based upon an average exchange rate of DM 1.7590 per U.S. Dollar
during 1998.
Employment Agreements
The Company has employment agreements with Messrs. Steiner and
Eckert. These agreements are cancelable at any time by either party. Messrs.
Steiner and Eckert get to use a company car and a pension plan. See Note 12.
Options/SAR Grants/Incentive Plans/Director Compensation
Until 1998 the executive officers did not hold any stock options,
SAR or other equity-related incentives and did not participate in any
incentive compensation plan. The members of the Board of Directors still do
not receive any compensation for their services qua members of the Board.
Commencing January 1, 1998, however, each director of the Parent Corporation
received $2,500 per month, and the Secretary of the Parent Corporation
received $500 per month, by way of incentive compensation, for work done by
them under the agreement dated December 15, 1997, between the Company and the
Parent Corporation. Pursuant to that agreement, the Parent Corporation
undertook to advertise products manufactured by the Company in international
markets, to conduct market surveys, to maintain customer contacts, to procure
special orders and to draft contracts with the Company's customers.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number of shares of Common Stock
owned beneficially as of December 31, 1997, 1998 and 1999, by each person
known to be the beneficial owner of more than five percent of the Parent
Corporation's voting securities, by each director and by all directors and
executive officers as a group. The Parent Corporation has no outstanding
securities other than the common stock. Unless otherwise noted, each
individual has sole voting and investment power for the shares indicated
below.
Shares of Common Percentage of Shares
Stock beneficially of Common Stock
Name owned beneficially owned
- -----------------------------------------------------------------------
Carl Steiner 104,046,694(a) 69.4
c/o Steiner Optik GmbH
Dr. Hans Frische Strasse 9
D-95488 Bayreuth Germany
Robert Eckert 0 0
c/o Steiner Optik GmbH
Dr. Hans Frische Strasse 9
D-95488 Bayreuth
Germany
All directors and exec-
utives officers as
a group (2 persons) 104,046,694(a) 69.4
(a) Includes 500,000 shares held by Mr. Steiner's son.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Carl Steiner, the Company's President, Chief Executive Officer
and the majority shareholder, was also the President of Basket Bayreuth e.V.,
a registered basketball club in Germany until July 1997. In the years ended
December 31, 1997 and 1998, the Company paid approximately $33,000 and
$196,000, respectively, to support this club. The Company also assumed
several loans made to the club by others; on December 31, 1997 and 1998, the
outstanding balances of these loans were $129,000 and $112,000, respectively.
At December 31, 1997 and 1998, Mr. Steiner owed the Company
$529,000, and $591,000, respectively. The principal of this loan, bearing
interest at 3.5%, is scheduled to be repaid in 10 equal annual payments,
commencing 2002 and ending 2011.
The Parent Corporation still owes Mr. Steiner for and on account of
two (2) payments in the aggregate amount of DM 1,000,000 (DM 250,000 in
December 1993 and DM 750,000 in December 1994) made by Mr. Steiner to the
Parent Corporation to make desperately needed contributions to the capital of
the Company.
Item 13. LIST OF EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Certificate of Incorporation of the Company, as amended
(filed as Exhibit 3.1 to the Company's Form 10-K for the
fiscal year ended December 31, 1991, File No. 2-92801NY).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the
Company's Form 10-K for the fiscal year ended December 31,
1991, File No. 2-92801NY).
10.1 Translation of Agreement dated April 1, 1982, between
Steiner Optik GmbH and Pioneer & Co., Inc. (filed as Exhibit
10.1 to the Company's Form 10-K for the fiscal year ended
December 31, 1991, File No. 2-92801NY).
10.2 Translation of Employment Agreement dated January 8, 1979,
between Steiner Optik GmbH and Carl Steiner (filed as
Exhibit 10.2 to the Company's Form 10-K for the fiscal year
ended December 31, 1991, File No. 2-92801NY).
10.3 Translation of Employment Agreement dated September 4, 1993,
between Steiner Optik GmbH and Robert Eckert.
21. Subsidiaries of the Company (filed as Exhibit 22 to the
Company's Form 10-K for the fiscal year ended December 31,
1991, File No. 2-92801NY).
27. Financial Data Schedule
(b) Reports on Form 8-K: none.
SIGNATURES
In accordance with Section 13 or 15(b) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
March 6, 2000
--------------
Date
STEINER OPTICS INTERNATIONAL, INC.
/s/ Carl Steiner
By:__________________________________
Carl Steiner,
President, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Carl Steiner March 6, 2000
__________________________ _______________
Carl Steiner, President, Date
Chief Executive Officer and
Director (Principal Executive
Officer)
/s/ Robert Eckert March 6, 2000
__________________________ ________________
Robert Eckert, Chief Financial Date
Officer and Director
(Principal Financial Officer)
FINANCIAL STATEMENTS
STEINER OPTICS INTERNATIONAL, INC.
AND SUBSIDIARY
Table of Contents
Page
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1998 and 1997 4
Consolidated Balance Sheets at December 31, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders'
Deficiency for the Years Ended December 31, 1998 and 1997 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997 7
Notes to the Consolidated Financial Statements, Years Ended
December 31, 1998 and 1997 8 - 21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Steiner Optics International, Inc.
We have audited the accompanying consolidated balance sheets of Steiner
Optics International, Inc. and Subsidiary as of December 31, 1998 and 1997
and the related consolidated statements of income and comprehensive income,
changes in stockholders' deficiency, and cash flows for the years ended
December 31, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Steiner
Optics International, Inc. and Subsidiary as of December 31, 1998 and 1997
and the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, in conformity with U.S. generally accepted
accounting principles.
Nuremberg, July 31, 1999
Dr. Roedl & Partner GmbH
Wirtschaftspruefungsgesellschaft
Steuerberatungsgesellschaft
Dr. Roedl Schreyer
Wirtschaftspruefer Wirtschaftspruefer
Steiner Optics International, Inc. and Subsidiary
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1998 1997
- ----------------------------------- -------- --------
Sales revenue $11,793,252 $12,023,378
Cost of sales 6,185,442 7,877,888
---------- ----------
Gross profit 5,607,810 4,145,490
---------- ----------
Operating expenses:
Selling, general and administrative 4,301,832 2,580,336
Research and development 148,778 114,279
Impairment loss - 362,236
---------- ----------
Total operating expenses 4,450,610 3,056,851
---------- ----------
Income from operations 1,157,200 1,088,639
Other income and expense
Interest expense 889,160 1,001,034
Interest income 48,999 25,538
Other income 65,877 65,489
Foreign currency transaction gains 159,931 308,743
---------- ----------
Total other expense 614,353 601,264
---------- ----------
Income from operations before income taxes 542,847 487,375
Income tax (benefit) provision (195,177) 120,939
---------- ----------
Net income $ 738,024 $ 366,436
---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 186,758 (178,240)
---------- ----------
Comprehensive income $ 924,782 $ 188,196
========== ==========
Basic earnings per share $ 0.00494 $ 0.00245
========== ==========
See accompanying notes to the consolidated financial statements.
Steiner Optics International, Inc. and Subsidiary
Consolidated Balance Sheets
at December 31, 1998 1997
- -------------------------------------- ------------- -------------
ASSETS
Current assets:
Cash $ 54,006 $ 264,087
Accounts receivable trade, net of allowance
for doubtful accounts of $15,000 and
$78,000 for 1998 and 1997 1,540,234 2,238,671
Other accounts receivable 222,809 107,630
Inventories 5,967,817 4,935,771
Prepaid expenses and other current assets 156,025 23,259
Deferred tax assets 472,879 357,599
--------- ---------
Total current assets 8,413,770 7,927,017
--------- ---------
Noncurrent assets:
Property, plant and equipment, net 5,003,937 4,068,639
Intangible assets, net 40,558 60,444
Assets related to pension plan obligation 482,820 403,057
Cash value of life insurance 1,733,447 1,285,513
Due from related parties 590,625 528,976
--------- ---------
Total noncurrent assets 7,851,387 6,346,629
---------- ----------
Total assets $16,265,157 $14,273,646
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Short-term debt $ 3,836,535 $ 4,139,838
Current portion of long-term debt 449,126 543,001
Current portion of capital lease obligations 362,458 104,045
Accounts payable 1,106,073 1,169,847
Due to related parties 703,905 686,337
Accrued expenses and other liabilities 1,500,830 1,078,841
---------- ----------
Total current liabilities 7,958,927 7,721,909
---------- ----------
Noncurrent liabilities:
Long-term debt, less current portion 7,022,878 6,596,744
Long-term capital lease obligations 724,270 64,958
Accrued pension liability, net 629,949 534,356
Deferred tax liabilities 75,319 426,647
---------- ----------
Total noncurrent liabilities 8,452,416 7,622,705
---------- ----------
Total liabilities 16,411,343 15,344,614
---------- ----------
Commitments and contingencies
Stockholders' deficiency:
Common stock $0.00001 par value;
authorized and issued 150,000,000 shares;
outstanding 149,333,500 shares 1,500 1,500
Additional paid-in capital 3,481,842 3,481,842
Accumulated deficit (4,017,378) (4,755,402)
Accumulated other comprehensive income 391,183 204,425
Common stock in treasury, at cost;
666,500 shares (3,333) (3,333)
---------- ----------
Total stockholders' deficiency (146,186) (1,070,968)
---------- ----------
Total liabilities and stockholders'
deficiency $16,265,157 $14,273,646
========== ==========
See accompanying notes to the consolidated financial statements.
Steiner Optics International, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Deficiency
Years ended December 31, 1998 and 1997
<TABLE>
Accumulated
Additional other
Common Paid-in Accumulated comprehensive Treasury
Stock Captial Deficit income Stock Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31,1996 $ 1,500 $ 3,481,842 $(5,121,838) $ 382,665 $ (3,333) $(1,259,164)
Net income 366,436 366,436
Translation adjustment (178,240) (178,240)
-------------------------------------------------------------------------
Balances at
December 31, 1997 1,500 3,481,842 (4,755,402) 204,425 (3,333) (1,070,968)
Net income 738,024 738,024
Translation adjustment 186,758 186,758
-------------------------------------------------------------------------
Balances at
December 31, 1998 $ 1,500 $ 3,481,842 $(4,017,378) $ 391,183 $ (3,333) $ (146,186)
====== ========== ========== ========= ======= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
Steiner Optics International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 1997
- -------------------------------------------- --------- ----------
Cash flows from operating activities:
Net income $ 738,024 $ 366,436
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 442,821 436,600
Impairment loss - 362,236
Deferred income taxes (466,975) (34,140)
Losses (gains) on the disposal of equipment 8,566 (1,600)
Bad debts 64,314 4,752
Changes in operating assets and liabilities:
Trade receivables 733,540 (1,050,777)
Other accounts receivable 47,933 (64,065)
Inventories (691,535) 93,027
Prepaid expenses and other current assets (152,594) (56,118)
Assets related to pension plan obligation (52,170) (49,094)
Cash value of life insurance (350,798) (94,199)
Accounts payable (129,934) 242,215
Due to related parties (23,841) 57,273
Accrued and other current liabilities 338,297 (44,437)
Accrued pension liability 59,490 79,337
--------- ---------
Total adjustments (172,886) (118,990)
--------- ---------
Net cash provided by operating activities 565,138 247,446
--------- ---------
Cash flows from investing activities:
Additions to intangible assets (16,647) (54,542)
Additions to property, plant and equipmen (126,220) (31,256)
Proceeds from sales of equipment - 1,600
--------- ---------
Net cash used in investing activities (142,867) (84,198)
--------- ---------
Cash flows from financing activities:
Principal repayments of capital lease obligations (223,626) (142,520)
Repayments of short-term debt, net (533,766) (936,442)
Proceeds from issuance of long-term debt 1,188,195 1,061,563
Principal repayments on long-term debt (1,293,749) (198,588)
---------- ---------
Net cash used by financing activities (862,946) (215,987)
---------- ---------
Effect of exchange rates on cash 230,594 (342,014)
Net decrease in cash (210,081) (394,753)
Cash, beginning of year 264,087 658,840
---------- ---------
Cash, end of year $ 54,006 $ 264,087
========== =========
Supplemental schedule of noncash investing and financing activities and of
cash flows:
1998 1997
-------------------------
Capital lease obligations incurred $ 1,088,070 $ 77,421
Additions to intangible assets - 393,258
Less: cash paid - (54,542)
---------- ---------
Liabilities assumed $ 1,088,070 $ 416,137
========== =========
Cash paid during the year:
Interest $ 958,000 $1,086,000
Income taxes $ 307,000 $ -
See accompanying notes to the consolidated financial statements.
Steiner Optics International, Inc. and Subsidiary
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND 1997
(1) Description of business and summary of significant accounting policies
DESCRIPTION OF BUSINESS
The Company's primary business is the design, manufacture and marketing of
multi-purpose binoculars for sale throughout the world. The Company also
manufactures and sells customized high-quality and precision optical products
designed to meet individual customer needs.
The Company's manufacturing facility and related operations are located in
Bayreuth, Germany.
ACCOUNTING PRINCIPLES
The financial statements have been prepared on a basis consistent with U.S.
generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Steiner Optics
lnternational, Inc. and its wholly-owned subsidiary in Germany (Steiner-Optik
GmbH). All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are generally recognized when products are shipped to customers.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's German subsidiary, where the German
Deutschmark is considered the functional currency, are translated into U.S.
dollars using the exchange rate in effect at the end of the fiscal year for
assets and liabilities and the weighted average exchange rate prevailing
during the year for results of operations. The related unrealized gains or
losses resulting from translation are reflected as a component of accumulated
other comprehensive income in stockholders' deficiency. Foreign currency
transaction gains and losses are included in the consolidated statements of
income as incurred.
HEDGING TRANSACTIONS
From time to time, the Company has entered into hedging transactions to
reduce its exposure to adverse fluctuations in foreign exchange rates from
its ongoing business operations. The forward exchange contracts fixed amounts
the Company was required to pay in 1998 in DM for Japanese Yen. At December
31, 1998, the Company had no forward exchange contracts. These transactions,
which were hedges of exposed liabilities, were accounted for using the accrual
method. When terminated, the exchange rate gains in the amount of approximately
$27,000 were accrued to 1998 net income.
ASSET AND LIABILITY INSTRUMENTS
The fair value of cash and temporary cash investments, short and long-term
receivables, accounts payable, and short and long-term debt was determined to
be not materially different from the carrying amount.
RECEIVABLES
The Company has an agreement with a factoring agent to sell its trade
receivables. The receivables are sold without recourse, and accordingly, no
bad debt reserve related to the net receivables sold is maintained. Expenses
related to the factoring activity have been charged to selling, general and
administrative expenses as incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is maintained to absorb losses inherent
in trade receivables based on management's judgment. Factors considered in
determining the level of the allowance include: trends in receivable volume,
quality and composition; historical loss experience; specific known risks;
and current, as well as anticipated specific and general economic factors that
may affect certain customers.
INVENTORIES
Raw materials are stated at the lower of purchase cost or market; work in
process and finished goods are stated at the lower of cost (which approximates
first-in, first-out) or market.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Recoverability of assets to be held and used is determined by the Company by
a comparison of the carrying amount of the assets to future undiscounted net
cash flows expected to be generated by the assets. Impairment, if any, is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets.
Method Estimated Useful Life
---------------------------------------
Buildings Straight line 10 - 50 years
Machinery and equipment Straight line 3 - 12 years
Furniture and fixtures Straight line 2 - 10 years
Repair and maintenance costs are expensed, while additions and improvements
are capitalized. The cost and related accumulated depreciation of assets sold
or retired are eliminated from the accounts and any gains or losses are
reflected in earnings.
INTANGIBLE ASSETS
Purchased software and patent are stated at cost less accumulated amortization
and the excess of cost over fair value of net assets of a purchased business
less accumulated amortization is recorded as goodwill.
Method Estimated Useful Life
-------------------------------------
Purchased software Straight line 6 - 7 years
Goodwill Straight line 10 years
Patent Straight line 18 years
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred and totaled
approximately $584,000 and $317,000 in 1998 and 1997, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Under this method, net deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled,
thereby giving current recognition to changes in tax rates and laws.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
PENSION PLAN
The compensation cost of an employee's pension benefit is recognized on the
net periodic pension cost method over the employee's approximate service
period.
BASIC EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the weighted
number of common shares outstanding (149,333,500 shares in 1998 and 1997). The
Company has a simple capital structure with no dilutive securities.
ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits".
This standard does not change the measurement or recognition of costs for
pensions or other postretirement benefits but rather standardizes disclosures
and eliminates those that are no longer useful. The Company adopted this
statement in 1998 and also restated the disclosure for 1997.
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The statement requires previously capitalized costs related
to start-up activities to be expensed as a cumulative effect of a change in
accounting principle when the statement is adopted. The impact of this new
standard will not have a significant effect on the Company's financial position
or results of operations.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
new accounting and reporting standards for the costs of computer software
developed or obtained for internal use. This statement will be applied
prospectively and is effective for fiscal years beginning after December 15,
1998. The impact of this new standard will not have a significant effect on
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133"), which is required to be
adopted in year 2000. SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes special accounting for three
different types of hedges. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements due
to the negligible amount of the Company's hedging activities.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified from amounts previously
reported to conform with the 1998 presentation.
(2) Other accounts receivable
Other accounts receivable consisted of the following at December 31, 1998
and 1997:
1998 1997
---------------------------------
Value added tax refund claim $ 219,771 $ 100,649
Trade fair fee refund claim 0 4,990
Miscellaneous 3,038 1,991
------- -------
Total $ 222,809 $ 107,630
======= =======
(3) Inventories
Inventories consisted of the following at December 31, 1998 and 1997:
1998 1997
---------------------------------
Raw materials $ 1,723,591 $ 1,601,963
Work in process 2,344,767 2,478,866
Finished goods 1,899,459 854,942
---------- ----------
Total inventories $ 5,967,817 $ 4,935,771
========= =========
(4) Property, plant and equipment
Property, plant and equipment and depreciation consisted of the following at
December 31, 1998 and 1997:
1998 1997
---------------------------------
Land and buildings $ 6,300,842 $ 5,937,196
Machinery and equipment 3,963,841 2,857,876
Furniture and fixtures 2,925,778 2,582,759
---------- ----------
Total cost 13,190,461 11,377,831
Less accumulated depreciation (8,186,524) (7,309,192)
---------- ----------
Total property, plant and
equipment, net $ 5,003,937 $ 4,068,639
========== ==========
Depreciation expense $ 403,788 $ 355,949
The Company's land and buildings are partially financed by a loan
collateralized by a life insurance policy on the President of the Company.
See Note (8).
(5) Intangible assets
Intangible assets and amortization consisted of the following at December
31, 1998 and 1997:
1998 1997
---------------------------------
Purchased software and patent $ 271,129 $ 238,838
Goodwill 113,203 113,203
---------- ----------
Total cost 384,332 352,041
Less accumulated amortization (343,774) (291,597)
---------- ----------
Total intangible assets, net $ 40,558 $ 60,444
========== ==========
Amortization expense $ 39,033 $ 80,651
Impairment of long-lived intangible assets
The Company purchased for $393,258 in 1997 advertising rights from a
professional sports team supported by the Company's President. The advertising
rights were subsequently determined to be of no value and the unamortized
balance was charged to earnings as an impairment loss in 1997.
(6) Short-term debt
The following is a summary of the Company's short-term debt:
1998 1997
------------------------------
Revolving credit agreements $ 1,129,547 $ 1,887,085
Bank notes 2,706,988 2,252,753
--------- ---------
Total short-term debt $ 3,836,535 $ 4,139,838
========= =========
Average balance outstanding $ 3,511,567 $ 3,724,568
Maximum interest rate charged 9.25% 10.25%
Minimum interest rate charged 2.50% 2.50%
Weighted average interest rate 5.82% 6.90%
The Company has revolving credit agreements with a number of banks that have
no stated expiration dates. Maximum borrowings under these agreements were
approximately $1,700,000 and $2,900,000 for 1998 and 1997, respectively. The
lines of credit are collateralized by the Company's inventory, land and
building and are considered due on demand. The bank notes represent short-
term borrowings which mature in 1999.
(7) Accrued expenses and other liabilities
Accrued expenses and other liabilities consisted of the following at December
31, 1998 and 1997:
1998 1997
------------------------------
Other accrued liabilities $ 459,028 $ 273,754
Salaries and wages 352,594 188,443
Income taxes payable 327,101 271,301
General taxes 195,424 163,444
Warranty and credit notes 166,647 114,045
Accrued interest 36 67,854
--------- ---------
$1,500,830 $1,078,841
========= =========
(8) Long-term debt
The following is a summary of the Company's long-term debt:
1998 1997
-----------------------------
Loans due 1999 through 2008,
average effective interest rate
6.1% in 1998 and 1997 $5,703,707 $5,385,545
Subordinated loans due 1999 through
2006, average effective interest
rate 7.1% in 1998 and 1997 1,503,977 1,505,324
Loans payable to an insurance company
due 2019, effective interest rate
8% in 1998 and 1997 264,320 248,876
---------- ----------
7,472,004 7,139,745
Less current portion of
long-term debt (449,126) (543,001)
--------- ---------
Long-term debt $7,022,878 $6,596,744
========== =========
The debt principal will be repaid according to the following schedule:
1998
--------
Lump sum at maturity in 2001-2002 $3,579,952
Lump sum at maturity in 2008 and later 318,019
Fixed schedule (monthly, quarterly or
semi-annually) 2,500,106
Annually (monthly or quarterly) 1,073,927
----------
$7,472,004
==========
Substantially all of the loans are collateralized by the Company's land and
buildings. Selected other loans are additionally collateralized by a life
insurance policy.
The fair value of the Company's long-term debt, based upon the discounting of
future cash flows using the Company's borrowing rate for loans of comparable
maturity, approximates the carrying value of such debt at December 31, 1998.
Future minimum payments under these obligations are as follows:
Year ended December 31,
1999 $ 449,126
2000 687,810
2001 1,099,850
2002 3,358,890
2003 357,275
and thereafter 1,519,053
---------
$7,472,004
=========
(9) Income taxes
The income tax (benefit) provision consists of the following:
1998 1997
------------------------------
Current German income taxes $ 265,522 $ 155,079
Current United States income taxes 6,276 0
Deferred German income taxes (79,154) (34,140)
Deferred United States income taxes (387,821) 0
-------- --------
(Benefit) provision for income taxes $(195,177) $ 120,939
======== ========
The combined statutory income tax rate, currently about 57%, includes
corporate income taxes at a rate of 45% for undistributed earnings, trade
taxes at a rate of 18.5% and the solidarity surcharge of 5.5% on corporate
income tax. The combined rate is lower than the sum of the three rates because
trade tax is deductible. When earnings are distributed, the corporate income
tax imposed on such earnings is reduced to 30%. Deferred tax assets and
liabilities are calculated at a combined German statutory rate of approximately
53% in 1998 and approximately 57% in 1997 with the exception of the net
operating loss carryforwards for U.S. income taxes only, which are calculated
using a 35% tax rate.
A reconciliation of income taxes computed at the combined German statutory
rate is as follows:
1998 1997
-------------------------
Expected income tax at the combined
rate applicable for retained earnings $ 308,431 $ 260,777
Increase (decrease) in corporate income
tax due to:
Changes in the valuation allowance on
the United States net operating loss (387,821) 0
Taxation on foreign operations (193,546) (250,093)
Trade taxes 33,364 26,221
Tax expenses related to prior years 27,427 0
Adjustments of deferred tax assets
and liabilities for changes in
enacted tax rates 7,370 0
Utilization of German net operating
loss carryforward 0 (188,925)
Changes in the valuation allowance
on the German net operating loss
carryforward 0 177,763
Changes in temporary differences 0 97,379
Other 9,598 (2,183)
-------- --------
(Benefit) provision for income taxes $(195,177) $ 120,939
======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998
and 1997 are presented below.
1998 1997
-------------------------
Current deferred tax assets (due to
differences in valuation):
Inventories $ 315,591 $ 321,304
Accounts Receivable 157,288 36,295
-------- --------
Current deferred tax asset $ 472,879 $ 357,599
======== ========
Non-current deferred tax assets (liabilities):
Net operating loss carryforwards
(U.S. income taxes only) $ 775,642 $ 849,077
Pension, due to differences in
valuation 162,327 150,386
Advertising rights, due to differences
in valuation 108,248 202,422
Plant and equipment, due to differences
in depreciation (733,715) (779,455)
-------- --------
Total non-current deferred tax assets 312,502 422,430
Less valuation allowance - U.S. net
operating loss carryforwards (387,821) (849,077)
-------- --------
Net non-current deferred tax liability (75,319) (426,647)
-------- --------
Net deferred tax asset (liability) $ 397,560 $ (69,048)
======== ========
Net decrease in the total valuation
allowance $ 461,256 $ 250,816
At December 31, 1998, the Company had net operating loss carryforwards for
U.S. federal income tax purposes of approximately $2.2 million which are
available to offset future U.S. Federal taxable income, if any, and expire
between 2003 and 2013. Such losses may only be offset against income earned
in the United States. The Company had significant U.S. Federal taxable income
in both 1997 and 1998 which justified a reduction in the valuation allowance
for U.S. net operating loss carryforwards from 100% to 50%.
(10) Pension benefits
The Company's wholly-owned German subsidiary has a defined benefit pension
obligation for the President and the Chief Financial Officer of the Company.
The benefits are based on 50% of their last annual salary prior to retirement.
In Germany there are no legal requirements to fund the pension obligation by
transferring cash to an outside funding agency. However, the Company has assets
related to pension plan obligations to provide for the funding of the plan
and the related obligation. The assets consist of life insurance policies
with cash surrender values.
In accordance with German law, unfunded vested rights are covered by mandatory
insurance to provide protection to the employees in case of the employer's
insolvency. For purposes of the mandatory insurance, vesting occurs after ten
years of membership in the plan or twelve years of service and three years of
membership (regardless of the contractual vesting). The vested obligation
under these terms is included in the accrued pension liability.
The following table sets forth the amounts presented in the Company's balance
sheets at December 31, 1998 and 1997 for the accrued pension liability, the
components of pension cost and the assumptions used in accounting for the
pension plan:
1998 1997
------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 649,776 $ 661,500
Service cost 25,320 33,825
Interest cost 28,552 38,143
Amortization of initial benefit obligation 5,616 5,551
Exchange loss (gain) 37,372 (89,243)
-------- --------
Benefit obligation at end of year $ 746,636 $ 649,776
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year $ 403,057 $ 406,520
Actual return on plan assets 18,616 14,663
Employer contribution 33,554 33,157
Exchange gain (loss) 27,593 (51,583)
-------- --------
Fair value of plan assets at end of year $ 482,820 $ 403,057
======== ========
DEVELOPMENT OF THE NET AMOUNT RECOGNIZED:
Funded status $(263,816) $(246,719)
Unrecognized initial benefit obligation 116,687 115,420
-------- --------
Net amount recognized $(147,129) $(131,299)
======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31
Discount rate 7% 7%
Rate of compensation increase 5% 5%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 25,320 $ 33,825
Interest cost 28,552 38,143
Amortization of initial benefit obligation 5,616 5,551
Exhange loss (gain) 37,372 (89,243)
-------- ---------
Net amount recognized $ 96,860 $ (11,724)
======== ========
The pension obligations have been calculated by an actuary.
(11) Commitments and contingencies
Operating leases
The Company has operating lease commitments for machinery, office equipment,
and motor vehicles. Lease terms are generally five years and many contain
renewal options. There are no escalation clauses. Minimum annual rentals
payable under these leases with remaining noncancelable terms of more than
one year are as follows:
Year ended December 31,
1999 $ 256,219
2000 112,087
2001 78,939
2002 53,727
2003 49,409
--------
Total minimum annual rents payable $ 550,381
========
Total rental expense charged to operations was approximately $202,000 and
$168,000 in 1998 and 1997, respectively.
Capital leases
The following is an analysis of property held under capital leases included
with owned property on the balance sheets at December 31:
1998 1997
-------------------------
Machinery and equipment $1,829,739 $ 797,146
Less accumulated depreciation (696,085) (529,778)
--------- ---------
Total machinery and equipment, net $1,133,654 $ 267,368
========= =========
The depreciation of assets recorded under capital leases is included in the
depreciation of property, plant and equipment.
The capital leases consist of noncancelable equipment leases expiring through
December 2003, payable in monthly installments including imputed interest at
various rates ranging from 5.63% to 14.8%. The fair value of the company's
capital leases, based upon the discounting of future cash flows using the
Company's borrowing rate, approximates the carrying value of such leases.
The following is a schedule by years of future minimum lease payments under
capital leases:
Year ended December 31,
1999 $ 410,603
2000 221,445
2001 221,445
2002 190,727
2003 179,833
---------
Total minimum lease payments 1,224,053
Less: amount representing
executionary costs and interest (137,325)
---------
Present value of minimum lease
payments $1,086,728
=========
Environmental remediation liabilities
The Company's German subsidiary was requested by the City of Bayreuth in 1992
to have a qualified environmental consultant investigate the groundwater
under the Company's land for possible contamination with certain chlorome-
thanes. The initial samples revealed contamination of the groundwater and soil
with substantial levels of chloromethanes as well as mineral oil and lead.
The environmental remediation issue was fully resolved in 1998 at a cost of
approximately $143,000.
Litigation
Steiner Optics International, Inc. and its subsidiary, from time to time, are
parties to various other legal proceedings arising from their operations. The
Company believes that the outcome of these proceedings, individually and in
the aggregate, will have no material effect on the financial position or
results of operations of the Company and its subsidiary.
(12) Related party transactions
The Company has purchased advertising rights,
advertising and other promotions from a professional basketball team supported
by the Company's President (See note 5). Total advertising rights, advertising
and promotions purchased by the Company amounted to $99,000 and $426,000 for
years ended 1998 and 1997, respectively. For the years ended December 31,
1998 and 1997, the Company owed the team approximately $75,000 and $57,000,
respectively. Those amounts were included in the accompanying consolidated
balance sheets as due to related parties.
The Company made other payments on behalf of the team which amounted to
approximately $97,000 and $19,000 in 1998 and 1997, respectively. The Company
also has assumed two loans granted to the team totaling approximately
$129,000. The outstanding balances were approximately $112,000 and $129,000
at December 31, 1998 and 1997, respectively. Additionally, the Company has
provided a guarantee on behalf of the team of approximately $60,000. During
1999 the team entered into bankruptcy proceedings and is currently in default
of its debts.
Due from related parties in the accompanying consolidated balance sheets
listed as a non-current asset, represents amounts due from the Company's
President. The Company's President owed the Company approximately $591,000
and $529,000 at December 31, 1998 and 1997, respectively. The principal is
scheduled to be repaid in 10 equal annual installments beginning in 2002 with
interest at 3.5%.
Due to related parties in the accompanying consolidated balance sheets in the
amount of $629,064 for all years presented represents amounts due to the
Company's President. The amounts do not bear interest and do not have any
scheduled repayment terms.
(13) Significant customers
There are two customers with whom the Company has derived over 10% of annual
revenues. The revenues derived from one of the customers - the Company's
United States distributor - are of a recurring nature and amounted to
approximately $3,971,000 and $4,667,000 in 1998 and 1997, respectively. The
revenues derived from the other customer are of a non-recurring nature and
amounted to approximately $1,370,000 in 1998.
(14) Segment and geographic information
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
statement, which the Company adopted in 1998 year, requires that companies
disclose information on their operational segments in accordance with their
internal reporting structures.
The Company only has one reportable segment, consisting of sales of optical
based products, principally binocular sales.
Net sales by geographic region were as follows (unaudited):
(thousands of dollars) 1998 1997
-----------------------
North America $ 4,403 $ 4,840
Germany 3,673 4,146
Remainder of Europe 2,139 1,690
Middle East 1,121 647
Asia 259 549
Other 198 151
------ ------
$11,793 $12,023
====== ======
The Company's income before income taxes from foreign and domestic operations
is as follows:
1998 1997
-------------------------
Income from foreign operations $ 258,480 $ 98,467
Income from domestic operations 284,367 388,908
-------- --------
Total income before taxes $ 542,847 $ 487,375
======== ========
(15) Year 2000 disclosures (unaudited)
The Company is in the process of assessing and, where necessary, remediating
its internal and external systems, and those of its material counterparties,
in light of the issues presented by the Year 2000. Based on the Company's
review of such issues, it has spent to date approximately $85,000 - by way of
corrective and precautionary actions - on the necessary upgrades and the
Company's new production planning system. This amount represents roughly 75%
of the total budget allocated by the Company to the Year 2000 issues. The
treasurer of the Company heads the assessment and remediation process.
The information technology utilized by the Company is new and free of Year
2000 defects; the production technology is not. The Company has determined to
replace, rather than attempt to remediate, certain computers with Year 2000
defects. Based on the assurances of the parties responsible for the
corrections, the Year 2000 problems are not expected to have any material
effect on the Company's own computer systems. The Company expects to spend up to
an additional $28,000 on the issues presented by the Year 2000.
The Company has also adopted a program to anticipate and attempt to avert the
effect on the Company of Year 2000 problems suffered by other organizations.
The Company is examining its vulnerabilities to problems with its key suppliers
and customers resulting from their inability to remediate and avert internal
and external Year 2000 problems. The Company has identified the organizations
critical to the Company's operations. The Company is in the process of
obtaining assessments and assurances from those organizations regarding their
Year 2000 readiness. The Company cannot guarantee that the systems of such
organizations will be Year 2000 compliant. As part of its contingency plans,
the Company is developing a list of alternative suppliers whom it might
engage in the event a key supplier delivers a product or service degraded by
a Year 2000 defect or such supplier is unable, due to any Year 2000 problem,
to fulfill its contractual obligations to the Company. The Company believes
that suitable substitutes for all critical organizations will be available.
At this time, the Company does not anticipate a material effect from Year
2000 problems on the Company's operations.
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 54,006
<SECURITIES> 0
<RECEIVABLES> 1,555,234
<ALLOWANCES> 15,000
<INVENTORY> 5,967,817
<CURRENT-ASSETS> 8,413,770
<PP&E> 13,190,461
<DEPRECIATION> 8,186,524
<TOTAL-ASSETS> 16,265,157
<CURRENT-LIABILITIES> 7,598,927
<BONDS> 724,270
0
0
<COMMON> 1,500
<OTHER-SE> (147,686)
<TOTAL-LIABILITY-AND-EQUITY> 16,265,157
<SALES> 11,793,252
<TOTAL-REVENUES> 11,793,252
<CGS> 6,185,442
<TOTAL-COSTS> 4,450,610
<OTHER-EXPENSES> 889,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 889,160
<INCOME-PRETAX> 542,847
<INCOME-TAX> (195,177)
<INCOME-CONTINUING> 738,024
<DISCONTINUED> 0
<EXTRAORDINARY> 186,758
<CHANGES> 0
<NET-INCOME> 924,782
<EPS-BASIC> .005
<EPS-DILUTED> .005
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