<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1994
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 GRAPHICS CORPORATION
(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)
----------------
Registrants telephone number, including area code: (817) 831-3911
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -----------------------
<S> <C>
Series A Common Stock, $.10 Par Value American Stock Exchange
Series B Common Stock, $.10 Par Value American Stock Exchange
</TABLE>
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
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1995, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $43,677,000 based upon the
closing price of the registrant's Common Stock on such date, 6 7/8 and 7 3/4
per share for Series A and Series B stock, respectively, as reported by the
American Stock Exchange. As of March 15, 1995, there were outstanding 7,139,243
shares of Series A stock and 2,234,959 shares of Series B stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statements for the annual meeting of stockholders of
the Company to be held during 1995 are incorporated by reference in Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STEVENS GRAPHICS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FORM 10-K
ITEM PAGE
--------- ----
<C> <S> <C>
PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 7
Item 3. Legal Proceedings.......................................... 7
Item 4. Submission of Matters to a Vote of Security Holders........ 8
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters...................................... 9
Item 6. Selected Financial Data.................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 8. Financial Statements and Supplementary Data................ 15
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant......... 35
Item 11. Executive Compensation..................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 35
Item 13. Certain Relationships and Related Transactions............. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 36
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Stevens Graphics Corporation ("Stevens Graphics") was incorporated in
Delaware in November 1986 to be a holding company for Stevens Corporation
("Stevens"), a Texas corporation that was incorporated in 1965. All references
to the "Company" include Stevens Graphics and its subsidiaries and
predecessors, unless the context otherwise requires.
GENERAL
The Company designs, manufactures, markets and services printing and
packaging press systems and related equipment. The Company manufactures
equipment capable of converting and printing, among other items, bottle and can
beverage container carriers, liquid container cartons, frozen and dry food
cartons, airline tickets, computer forms, direct mailings, banknotes, stamps,
lottery tickets and other security documents. The Company's line of printing
presses include offset, flexographic, rotogravure and intaglio presses. These
complete press systems are capable of multiple color and multiple size printing
and perform such related functions as numbering, punching, perforating,
slitting, cutting, creasing, folding and stacking. The presses can be custom
engineered for non-standard size and special auxiliary functions.
The Company's revenues are derived from the sale of printing presses, related
package-making equipment, collators, and auxiliary equipment, parts and
service. Representative customers of the Company have included Container
Corporation of America; Deluxe Corp.; NCR Corporation; Moore Business Forms;
Field Container; Eastman Kodak; Universal Packaging Company; James River
Corporation; International Paper Company; Willamette Corporation and The Mead
Corporation. Banknote and security printing system customers have included
among others, Ashton-Potter, the U.S. Bureau of Engraving and Printing, Banque
de France, and Bank of England Printing Works.
All of the Company's presses are "web" presses which print on paper or other
stock which is fed continuously from a roll or "web", as distinct from "sheet-
fed" presses which print on precut sheets of paper or other stock. The
advantages of "web-fed" presses over sheet-fed presses are that the rolls of
paper or other stock may be purchased and processed at a significantly lower
cost on a per sheet basis (for runs of over 50,000 copies) and that the presses
can operate two to eight times faster. While web-fed equipment enjoys a
significant market share in the business forms, packaging, and commercial
segments of the printing industry; the current use of sheet fed presses is
considerably more widespread in the packaging, currency and security segments
of the printing industry. The Company believes that growth opportunities (via
conversion of processes to web-fed) exists in these segments because of
production efficiencies and technological advantages that the Company believes
web-fed equipment enjoys over sheet-fed equipment.
HISTORICAL GROWTH AND RESTRUCTURING PLAN
The Company historically has grown internally and through the acquisition of
other printing and packaging equipment manufacturers to achieve its long-term
strategy of offering more diversified and integrated product lines. The Company
has implemented this strategy with the acquisitions of The Hamilton Tool
Company ("Hamilton") in December 1986, Zerand Corporation ("Zerand") in
February 1988, Bernal Rotary Systems, Inc. ("Bernal") in October 1988 and Post
Machinery Company, Inc. ("Post") in June 1990. Additionally, the Company formed
Stevens Security Systems, S.A. ("Stevens Security Systems") in Paris, France,
in 1991 and Stevens Security Systems International, Inc. ("SSI") in 1994, to
market banknote and security printing systems. Most recently, in January 1995,
the Company acquired certain assets of a small French company engaged in the
business of repair and service of printing presses to handle European customer
requirements (see Note B of Notes to the Consolidated Financial Statements of
the Company). The Company began a reorganization of its operating subsidiaries
in March 1990. Zerand and Bernal were merged into the Zerand-Bernal Group, Inc.
and Hamilton and Stevens were merged into the Hamilton-Stevens
<PAGE>
Group, Inc., both Delaware corporations, in order to eliminate certain
overlapping functions and redundant reporting requirements.
Under restructuring plans announced in January 1991 and December 1991, the
Company indicated its intention to sell certain assets, including portions or
all of the assets or businesses of certain of its acquisitions. This has been
substantially accomplished by (1) the $1.1 million sale of the Post factory in
May 1992, (2) the $7.3 million sale of substantially all remaining Post assets
in August 1993, and (3) the $5.0 million sale of a plant location in Grapevine,
Texas in February 1994. The Company presently has no agreements with respect to
any other sale of assets or businesses. No assurance can be given that the
Company will make any additional significant sales of assets or businesses or
as to what effect such sales, if any, will have on the Company's operations or
financial condition. Pursuant to the Company's current debt agreements, the
Company has only limited ability to make any additional acquisitions without
the consent of its lenders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Hamilton Acquisition. In December 1986, the Company acquired Hamilton, a
printing press manufacturer established in 1927. The Hamilton acquisition
enabled the Company to significantly broaden its product lines to include
presses and collators that serve additional needs of the commercial and
business forms segments of the printing industry not served previously by the
Company's products. Hamilton also manufactures offset equipment serving the
packaging segment of the printing industry as well as intaglio presses serving
the currency and securities segment.
Zerand Acquisition. In February 1988, the Company acquired Zerand, which was
established in 1962. Zerand specializes in manufacturing rotogravure and
flexographic printing presses and reciprocating cutter-creasers serving the
packaging segment of the printing industry. The acquisition of Zerand enabled
the Company to provide complete in-line printing and processing systems for
certain folding carton packaging operations.
Bernal Acquisition. In October 1988, the Company acquired Bernal, which was
established in 1972. Bernal is the primary domestic manufacturer of rotary
cutter-creasers serving the packaging segment of the printing industry. In
addition, Bernal manufactures hardened steel rotary dies and die sets which
have applications in industries both inside and outside of the printing
industry.
Garber Assets Acquired. Certain assets of Garber Engineering ("Garber") were
acquired in January 1989 by Stevens resulting in an augmented packaging product
line including the current System 2000 flexographic press and cutter for the
folding carton and liquid packaging segments of the printing industry.
Post Acquisition and Sale. In June 1990, the Company acquired Post, which was
established in 1984. Post designs, manufactures, markets, and services folding
carton and corrugated box forming machinery and ancillary equipment for the
packaging segment of the printing industry. Substantially all Post assets,
operations and product technology were sold in August 1993 to Bobst Group, Inc.
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Formation of Stevens Security Systems and SSI. In December 1991, the Company
formed Stevens Security Systems to provide complete narrow and wide-web
banknote and security document production systems on a world-wide basis. In May
1994, SSI was formed to manage the manufacture and coordinate all project
efforts of all international banknote and security document production systems.
SSMIO Assets Acquired. In January 1995, the Company acquired certain assets
of Societe Specialisee dans le Materiel d'Imprimerie Offset ("SSMIO"), a small
French company in bankruptcy. The Company formed Societe Specialisee dans le
Materiel d'Imprimerie ("SSMI") to continue the service and repair business for
European customer requirements, including the Company's installed base of
equipment.
2
<PAGE>
MARKETS AND PRODUCTS
The Company's products are generally used within the printing industry, which
itself consists of several segments, including commercial, newspapers,
periodicals, specialty machines, business forms, book publishing, packaging,
binding, banknotes, other security documents, and greeting cards. The Company's
products are designed to serve the packaging, specialty commercial and
banknotes and securities segments of the printing industry. The Company sells
to customers on a worldwide basis. See Note N of the Notes to the Consolidated
Financial Statements of the Company.
Packaging. The Company markets its presses and related equipment to companies
which manufacture packaging for products such as frozen food cartons, milk
cartons, cereal boxes, flexible seasoning packets and other flexible and heavy-
stock food and other packaging. The Company manufactures multiple size, web-
offset, flexographic, and gravure printing presses and related components of an
integrated system which will initially print the packaging and then cut,
crease, slit, collate, and stack the packaging. The Company's reciprocating
cutter-creasers and rotary cutter-creasers punch, perforate, cut and crease the
packaging material as it exits the printing press. The Company's customers
differentiate between reciprocating platen die cutters and rotary die cutting
applications on the basis of speed, flexibility, changeover and other factors.
The Company believes its packaging printing presses operate at higher speeds
with lower labor costs than the printing presses predominately used by printers
of food and other heavy-stock packaging products. Because of the technological
advantages and production efficiencies that it believes its web-fed equipment
enjoys over the sheet-fed equipment presently utilized by packaging printers,
the Company believes that the packaging segment of the printing industry will
be a primary source of growth in revenues in the immediate future.
Specialty Commercial. The Company markets its presses to printers which
produce products such as airline tickets, computer forms, stock and continuous
multi-set business forms, snap-out forms and continuous forms. The Company
services this market niche through production of web-fed offset presses and
web-fed collators. In "offset" printing, the inked image is transferred (off-
set) to an intermediate rubber blanket cylinder before it is printed on the
paper web or other stock. Collators are machines that assemble in proper order
numerous webs of preprinted and/or pre-processed paper to produce a completely
finished form, or to interleave webs of carbonless or carbon paper between webs
of printed paper.
The Company also markets its presses to printers that produce direct
mailings, place mats, film processing return envelopes, and a wide variety of
other printed products. The Company services this market niche through the
production of printing presses that are generally of a standard configuration,
but which can be adapted by the customer to suit various print size
requirements (a "multiple size press"). The Company's Multi-Size (R) presses
are designed for use by small to medium-sized commercial printers that handle a
variety of printed products and therefore have a requirement to change press
sizes frequently. The size change is accomplished through exchanging the
printing module inserts, which are designed to provide the printer the ability
to use the same press to produce, cost effectively, a range of sizes of printed
material. Cost effectiveness is achieved primarily through changing the press
size to match the paper size and thereby minimize waste.
The Company also markets and manufactures multiple size printing presses
capable of printing up to fifteen colors for use in large-scale printing
systems. These presses are high quality, heavy-duty automated machines and are
used to produce multi-color newspaper inserts, direct mailings, pari-mutuel
tickets, checks and a variety of other commercially printed products. The
majority of the Company's large-scale presses require custom engineering and
design work to meet customers' specific requirements or applications and are
constructed to exacting tolerances. These larger presses are designed with an
emphasis on high throughput and run at average press speeds of 1,000 to 2,000
feet per minute.
3
<PAGE>
The Company believes that its overall specialty commercial market is
expanding domestically. However, while the business forms segment is mature and
has declined domestically and in western Europe, we believe it still offers
growth opportunities in several areas of the third world.
Banknote and Securities. The Company markets its production and processing
systems in the worldwide banknote and securities printing industry to entities
which print banknotes, stamps, stock and bond certificates, passports,
travelers checks, lottery tickets and other security documents. Banknote
printing systems also include the ability to print, number, inspect and package
complete sets of banknotes independent of manual intervention. The Company
services this segment through the manufacture of intaglio presses which use
engraved metal plates with recessed printing images to apply paste-like ink to
paper under extreme pressure. In addition, certain currencies require presses
that combine the offset and intaglio printing processes.
AUXILIARY EQUIPMENT, PARTS AND SERVICE
The Company manufactures auxiliary equipment for its presses, collators, and
die cutters. 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.
The Company maintains a replacement parts inventory for its equipment. A
standard repair or replacement part normally can be shipped to a customer
within twenty-four hours after the order. To facilitate its parts and service
business, the Company maintains a file of drawings and other records for
individual machines it has built. The Company performs service on its
customers' machines through a staff of highly trained service technicians.
Historically, a significant portion of the Company's revenue has been
attributable to purchases of auxiliary equipment by customers who already own
equipment manufactured by the Company. The sale of auxiliary equipment and
parts and the provision of services have been relatively stable components of
the Company's business.
In line with its program of strong customer service, the Company provides
customers with product services and support through trained Company and dealer
service representatives. Product services includes financing assistance,
installation, field repairs, routine maintenance, replacement and repair parts,
operator training and technical consulting services. Product services and
support programs also are designed to promote the sale of auxiliary equipment.
During fiscal 1994, approximately 27% of the Company's revenues were
attributable to auxiliary equipment, parts and service.
MARKETING
The Company's sales engineers and managers market the Company's products to a
wide variety of United States, Canadian, European (western and eastern),
Pacific Rim, and other international customers. In 1990, the Company opened a
sales and service office in France to better serve its European customers. In
1995, a new operation (SSMI) was formed in France to continue and expand the
service and repair business of the Company. In addition, the Company has
expanded and restructured its system of international dealers through which it
effects foreign sales. The Company's marketing efforts include advertising,
participating in major domestic and international trade shows, customer
symposiums, and conducting periodic product maintenance seminars. The Company
conducts market research and analysis to study trends and participates in
pertinent trade associations.
4
<PAGE>
COMPETITION
The Company encounters substantial competition in marketing its products from
manufacturers of both sheet-fed and web-fed presses and related equipment.
Except for the banknote and securities products which are predominantly served
by sheet-fed equipment made by De LaRue Giori, the Company believes that the
segments of the printing industry in which it competes are served primarily by
manufacturers of web-fed equipment. The Company's web-fed competitors include
Bobst Group, Inc., M.A.N. Roland, De LaRue Giori, Komori-Chambon, Goebel, and
Cerutti. The Company believes that competition is based primarily on product
performance, web-fed versus sheet-fed technology, reliability, localized
customer service, price and delivery.
The Company believes that changes in currency valuations can affect the level
of its foreign sales as well as its position in the United States markets
relative to foreign competitors. Due to the significant length of time from the
receipt of orders to the receipt of revenues, the Company believes that a
prolonged shift in the value of the dollar can have a material effect on the
Company's profitability. The Company periodically hedges certain firm foreign
currency exchange transactions to minimize gains or losses on translation of
foreign currencies to U.S. dollars.
BACKLOG
The Company's backlog of unfilled orders was approximately $68.6 million and
$39.6 million at December 31, 1994 and 1993, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Backlog and Orders".
EMPLOYEES
At March 15, 1995, the Company had approximately 820 employees. Approximately
27% of the Company's employees are covered by a separate collective bargaining
agreement. The collective bargaining agreement expires in December 1997. The
Company has not experienced any strike or material work stoppage since a seven-
week strike at its Hamilton, Ohio facilities in the fourth quarter of 1990 and
believes that its employee relations are satisfactory.
RESEARCH AND DEVELOPMENT EXPENDITURE
See Note N of the Notes to the Consolidated Financial Statements of the
Company for data relating to research and development expenditures. In addition
to Company sponsored efforts, development work of varying amounts is funded by
customers who are in need of specialized equipment or processes. Research and
development costs are charged to operations as incurred.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION WITH THE COMPANY
---- --- -----------------------------------
<S> <C> <C>
Paul I. Stevens 80 Chairman of the Board, Chief Executive Officer and Director
Richard I. Stevens 56 President, Chief Operating Officer and Director
Allen J. Prochnow 44 Sr. Vice President, North American Operations
Kenneth W. Reynolds 56 Sr. Vice President Administration/Finance and Chief Financial Officer
</TABLE>
Paul I. Stevens founded Stevens in 1965 and founded the Company in 1986 to be
a holding company for Stevens. He has served the Company as Chairman of the
Board, Chief Executive Officer and a director since December 1986 and has
served Stevens as an officer and a director since its inception. In 1974, Mr.
Stevens
5
<PAGE>
founded Stevens Industries, Inc., a family-owned holding company which is an
affiliate of the Company and of which he is the controlling stockholder. Mr.
Stevens is the father of Richard I. Stevens.
Richard I. Stevens has served as President and a director of the Company
since December 1986 and Chief Operating Officer of the Company since April
1987. Mr. Stevens also served as Vice President and Assistant Secretary of the
Company from December 1986 until April 1987. He has served Stevens in various
capacities since its inception, including serving as its President from 1969
until December 1987, and has been a director of Stevens since 1969. Mr. Stevens
is a stockholder, officer and director of Stevens Industries, Inc. Mr. Stevens
is the son of Paul I. Stevens.
Allen J. Prochnow has served as Senior Vice President in charge of North
American Operations since November 1993, President of the Zerand-Bernal Group,
Inc. since July 1, 1991, and Vice President of the Company from August 1991 to
November 1993. Mr. Prochnow has over 20 years of industrial, financial, and
management experience, including 15 years in the packaging equipment
manufacturing industry. From October, 1990 to July 1991, he served as Group
Vice President of Zerand-Bernal Group. Mr. Prochnow joined Zerand as Treasurer
and Controller in the fall of 1979. In 1981, he was promoted to fill the new
Zerand position of Vice President, Finance, and in early 1988, he was appointed
to Vice President, Operations. From 1972 to 1979, Mr. Prochnow held various
positions with Peat, Marwick and Mitchell and the West Bend Company, including
Director of Planning and Financial Analyst with West Bend.
Kenneth W. Reynolds has served the Company as Senior Vice President Finance
and Administration and Chief Financial Officer since July 1993. From 1989 to
June 1993, Mr. Reynolds served Baldwin Technology Company, Inc. as Vice
President Finance and Administration and Chief Financial Officer. From 1987 to
1989, Mr. Reynolds served as Vice President Finance and Administration for
Modicon Inc., an AEG Company (Germany). From 1974 to 1987, he held various
positions with Harris Graphics Corporation and from 1965 to 1974, he held
various positions with Moore Business Forms, Inc.
Except as otherwise noted, no family relationships exist among the executive
officers of the Company.
6
<PAGE>
ITEM 2. PROPERTIES.
The following are the locations of the Company's executive and principal
manufacturing and research facilities.
<TABLE>
<CAPTION>
APPROX. OWNED OR
LOCATION USE SQ. FT. LEASED
-------- --- ------- --------
<C> <S> <C> <C>
Fort Worth, Texas Executive offices 12,400 Leased
Hamilton, Ohio Research facilities and 252,000 Owned
manufacturing of printing
presses, and collators,
administration offices and
sales facilities
New Berlin, Wisconsin Research facilities and 67,000 Owned
manufacturing of printing
presses, reciprocating cutter-
creasers, administration
offices and sales facilities
Manufacturing of printing 43,200 Leased
presses, research and storage
facilities
Rochester Hills, Michigan Manufacturing of rotary pressure 42,000 Leased
dies, cutter-creasers, and
related equipment, research
facilities, administration
offices and sales facilities
Fort Worth, Texas Manufacturing facility and 74,000 Owned
administration offices
</TABLE>
An idle manufacturing facility in Grapevine, Texas was sold for $5.0 million
in February 1994. See Notes F, K and M 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.
The Company is a party to several significant legal proceedings. On December
5, 1990, Howard Lasker as the representative of an alleged class consisting of
purchasers of the Company's common stock between October 18, 1989 and October
31, 1990, filed a lawsuit against the Company, and certain officers and
directors of the Company. The suit was certified as a class action in March
1992. On February 26, 1993, notice of the pendency of the class action was
mailed to stockholders of record of the Company and was published in the
national edition of the Wall Street Journal. The action, which was filed in the
United States District Court for the Northern District of Texas (Dallas
Division), alleges that the defendants, during the class period, engaged in a
course of action that deceived the investing public regarding the financial
condition and prospects of the Company, that as a consequence, the market value
of the Company's common stock was artificially inflated, and that the plaintiff
and other members of the class purchased Company common stock during the class
period at inflated prices. The plaintiff's written complaint, as amended,
refers to statements contained in press releases issued by the Company, in
certain periodic reports filed with the Securities and Exchange Commission, in
its reports to shareholders for the year ended December 31, 1989 and for
certain quarterly periods, and in remarks to shareholders at the Company's
annual meeting held in May 1990. The amended complaint alleges violations of
the federal securities laws and Texas statutory provisions dealing with real
estate and stock transactions, as well as negligent misrepresentation. The
plaintiff seeks to recover on behalf of the class both actual and exemplary
damages, interest, and attorney and expert fees. The officers and directors of
the Company named as defendants will be indemnified by the Company to the full
extent permitted by applicable law, in accordance with the Company's bylaws,
from costs and liabilities arising from this action. The lawsuit was set for
trial for February 1995, but was not reached on the docket. As of March 15,
1995, a new trial date had not been set. The Company believes that the
allegations in this lawsuit are substantially without basis and intends to
vigorously pursue its defenses.
In February 1990, the Environmental Protection Agency (the "EPA") issued a
Notice of Potential Liability and Request for Participation in Cleanup
Activities to approximately sixty parties, including Post
7
<PAGE>
Machinery Company, Inc., a subsidiary of the Company, in relation to the
disposition of certain substances which 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 1992 settlement 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 be
indemnified by certain of the remaining PRPs from further liability under the
EPA's 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 the Company 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 settlement or the agreement described above.
The Company believes it is fully indemnified with respect to its contribution
for those matters covered by the Group Participation Agreement. In connection
with the aforementioned environmental claim, the Company received
indemnification from Post's predecessor, PXL Holdings Corporation for its costs
in connection with the Coakley matter.
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, 1994.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Series A Stock and Series B Stock are listed on the American
Stock Exchange under the symbols SVGA and SVGB, respectively. As of March 15,
1995, approximately 7,139,200 shares of Series A Stock were outstanding held by
approximately 2,000 holders of record, and 2,234,900 shares of Series B Stock
were outstanding held by approximately 200 holders of record.
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 Stock and the
Series B Stock, all as reported on the composite Tape of American Stock
Exchange Listed Issues.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Series A Stock:
Year Ended December 31, 1993
First Quarter.......................................... $7 1/2 $4 7/8
Second Quarter......................................... 6 3/8 5 1/8
Third Quarter.......................................... 6 7/8 5 1/8
Fourth Quarter......................................... 7 1/8 6 1/4
Year Ending December 31, 1994:
First Quarter.......................................... 7 1/2 5 1/2
Second Quarter......................................... 6 5/8 5 1/4
Third Quarter.......................................... 6 1/8 5
Fourth Quarter......................................... 8 3/8 5 3/4
First Quarter 1995 (through March 15, 1995).............. 8 1/8 6 7/8
Series B Stock:
Year Ended December 31, 1993:
First Quarter.......................................... 7 1/8 4 1/2
Second Quarter......................................... 6 1/2 5 1/4
Third Quarter.......................................... 6 1/4 5 3/8
Fourth Quarter......................................... 7 3/8 6 1/2
Year Ending December 31, 1994:
First Quarter.......................................... 8 5/8 7 3/8
Second Quarter......................................... 7 1/2 7
Third Quarter.......................................... 7 1/8 7 1/8
Fourth Quarter......................................... 9 7
First Quarter 1995 (through March 15, 1995).............. 8 3/8 7 3/4
</TABLE>
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 and expansion 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 Series A
Stock and Series B Stock on a share-for-share basis. 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" and Note I of the Notes to Consolidated
Financial Statements of the Company.
9
<PAGE>
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.
The Company's acquisition of Post effective as of June 1, 1990, was accounted
for as a purchase. As a result, the operations and financial position of Post
are included in the financial statements of the Company through 1993.
Substantially all assets, operations and product technology of Post were sold
to Bobst Group, Inc. in 1993 (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note B of Notes to
Consolidated Financial Statements of the Company).
SELECTED FINANCIAL INFORMATION
INCOME STATEMENT DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1993 1992 1991 1990
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales..................... $106,694 $103,762 $84,160 $ 78,938 $117,431
Cost of sales................. 81,009 79,476 67,131 61,937 86,808
-------- -------- ------- -------- --------
Gross Profit.................. 25,685 24,286 17,029 17,001 30,623
Selling, general and
administrative expense....... 17,211 17,477 16,089 21,619 30,414
Restructuring Charge (3)...... -- -- -- 4,000 5,000
-------- -------- ------- -------- --------
Operating income (loss)....... 8,474 6,809 940 (8,618) (4,791)
Other income (expense)........ (4,139) (3,940) (5,647) (7,742) (6,802)
-------- -------- ------- -------- --------
Income (loss) before income
taxes, extra- ordinary
items and cumulative effect
of accounting change....... 4,335 2,869 (4,707) (16,360) (11,593)
Income tax (expense) benefit.. (1,908) (2,098) 1,525 2,825 3,820
-------- -------- ------- -------- --------
Income (loss) before
extraordinary items and
cumulative effect of
accounting change.......... 2,427 771 (3,182) (13,535) (7,773)
Extraordinary items (2)....... (85) -- 4,033 -- --
Cumulative effect of change in
method of accounting for
income taxes (1)............. -- 412 -- -- --
-------- -------- ------- -------- --------
Net income (loss)........... $ 2,342 $ 1,183 $ 851 $(13,535) $ (7,773)
======== ======== ======= ======== ========
Income (loss) per common share
before extra-ordinary items
and cumulative effect of
accounting change............ $ 0.26 $ 0.08 $ (0.36) $ (1.50) $ (0.87)
Extraordinary items per common
share (2).................... (.01) -- 0.45 -- --
Cumulative effect of
accounting change per common
share (1).................... -- 0.05 -- -- --
-------- -------- ------- -------- --------
Net income (loss) per common
share...................... $ 0.25 $ 0.13 $ 0.09 $ (1.50) $ (0.87)
======== ======== ======= ======== ========
Weighted average shares
outstanding.................. 9,256 9,129 9,017 9,014 8,918
======== ======== ======= ======== ========
</TABLE>
10
<PAGE>
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1993 1992 1991 1990
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and temporary investments...... $ 1,473 $ 3,768 $ 10,507 $ 30,488 $ 10,366
Working capital..................... 16,692 16,737 25,546 33,268 36,824
Total assets........................ 94,041 106,147 108,548 132,756 156,275
Long-term debt...................... 15,308 21,567 41,759 47,548 38,488
Total stockholders' equity.......... 40,965 36,520 35,782 35,184 48,711
</TABLE>
- --------
(1) Beginning January 1, 1993, income taxes were determined in accordance with
SFAS No. 109. Accordingly, the cumulative effect of this accounting change
in 1993 was a benefit of $412,000.
(2) Gain on involuntary conversion of assets in the 1992 Bernal fire and
resulting benefit of utilization of a net operating loss for income taxes.
Debt extinguishment costs incurred in 1994 related to the refinancing of
long-term debt. See Notes I and Q of Notes to the Consolidated Financial
Statements of the Company.
(3) The restructuring charges reflected the estimated costs of a restructuring
plan which included closing some facilities, combinations of operating
units, major personnel reassignments, reductions in number of employees,
severance compensation, and some asset sales. The plan was designed to
bring the Company's operating costs in line with the current order rates
and the recession in the capital goods industry. The cash outlay in 1992
and 1993 for this restructuring was approximately equal to the
restructuring charge. In 1992 and 1993, as expected, the Company realized
lower ongoing operating costs and substantial cash from the sales of idle
facilities and other assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
In August 1993, the Company sold a part of its packaging products business.
Specific assets of Post, including the product technology and related
intangibles were sold to Bobst Group, Inc., the U.S. operating unit of Bobst,
S.A. of Switzerland. The agreement provided for the transfer of manufacturing
operations over a four month transition period. Post retained its accounts
receivable (approximately $1.2 million), its work-in-process and finished goods
inventories (approximately $1.1 million) and its existing backlog of orders
(approximately $5.9 million). Post also retained substantially all of its
liabilities (approximately $2.5 million). The cash proceeds were approximately
$7.3 million, of which $6 million was used to permanently reduce senior debt.
Post contributed sales of approximately $13.5 million and income before
interest, corporate charges and taxes of approximately $4.6 million for 1993,
including a gain of $1.3 million on the sale of assets to Bobst Group, Inc.
The Company's Bernal Division in Troy, MI sustained a major fire in June
1992. As part of the fire recovery program, the Bernal Division relocated
operations to Rochester Hills, MI. While the Company initiated an immediate and
aggressive rebuilding program, temporary delays were experienced in the
delivery of new and repaired dies and equipment due to the capacity lost in the
fire. The Bernal Division has placed into service substantially all pieces of
replacement equipment and returned to full capacity during the first quarter of
1994.
The Company's replacement cost fire insurance and business interruption
insurance proceeds of $16.3 million in 1992, 1993, and 1994 were adequate to
cover the damages. During the fourth quarter of 1992, the Company recognized a
before-tax extraordinary gain of $5.3 million in connection with a settlement
that concluded certain equipment claims with the insurance carrier. See Note Q
of Notes to the Consolidated Financial Statements of the Company.
11
<PAGE>
Beginning January 1, 1993, income taxes were accounted for in accordance with
SFAS No. 109. Accordingly, the benefit of this accounting change in 1993 was
$412,000 ($0.05 per share).
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1994 and 1993
Sales. The Company's sales for 1994 increased by $2.9 million compared to
sales in 1993 due to increases in sales of packaging systems ($11.7 million)
and specialty machines printing systems ($14.1 million) offset by decreases in
banknote printing systems ($9.2 million) and the Post box forming systems sold
in 1993 ($13.5 million).
Gross Profit. The Company's gross profit for 1994 increased by $1.4 million
compared to gross profit in 1993 due primarily to the increase in volume for
packaging systems. Gross profit margin for 1994 increased to 24.1% of sales as
compared to 23.4% of sales for 1993. This increase in gross profit margin in
1994 was due primarily to changes in product mix.
Selling, general and administrative expenses. The Company's selling, general
and administrative expenses decreased by $0.3 million for 1994 compared to
selling, general and administrative expenses in 1993 due to small decreases in
personnel and related expenses in banknote printing systems operations.
Selling, general and administrative expenses for 1994 were 16.1% of sales
compared to 16.8% for 1993 due to increased sales.
Other Income (Expense). The Company's interest expense decreased by $1.6
million for 1994 compared to interest expense in 1993 due to reduced borrowings
by the Company as well as a slight decrease in interest rates. The reduced
borrowings were the result of debt reductions in August 1993, February 1994,
May 1994, and September 1994 through the application of proceeds from the sale
of Post and a manufacturing facility in Grapevine, Texas, the refinancing of
existing debt, and the sale of stock in September 1994. Interest income
decreased by $0.3 million in 1994 as compared to interest income in 1993 due to
the use of cash to reduce the Company's credit facilities. Other net expense
increased in 1994 by $1.4 million as compared to 1993 primarily because a $1.3
million gain on sale of certain assets of Post was included in other income in
1993, with no such corresponding event in 1994.
Comparison of Years Ended December 31, 1993 and 1992
Sales. The Company's sales for 1993 increased by $19.6 million compared to
sales in 1992 due to increases in sales of packaging systems ($19.1 million)
and banknote printing systems ($2.5 million), offset by decreases in business
forms and commercial printing systems ($2.2 million).
Gross Profit. The Company's gross profit for 1993 increased by $7.3 million
compared to gross profit in 1992 due primarily to the increase in volume for
packaging systems. Gross profit margin for 1993 increased to 23.4% of sales as
compared to 20.2% of sales for 1992. This increase in gross profit margin in
1993 was due primarily to changes in product mix and greater efficiencies
achieved at higher production levels, offset by higher outsourcing costs
resulting from the capacity lost in the Bernal fire and lower margins on
certain product offerings to reduce inventory.
Selling, general and administrative expenses. The Company's selling, general
and administrative expenses increased by $1.4 million for 1993 compared to
selling, general and administrative expenses in 1992 due to increases in sales
and other personnel and related expenses in packaging and currency systems
operations. Selling, general and administrative expenses for 1993 were 16.8% of
sales compared to 19.1% for 1992 due to increased sales.
Other Income (Expense). The Company's interest expense decreased by $1.1
million for 1993 compared to interest expense in 1992 due to reduced borrowing
by the Company as a result of a $6 million permanent debt reduction in August
1993 as well as a slight decrease in interest rates. Interest income decreased
by $0.5 million for 1993 as compared to interest income in 1992 due to the use
of cash to reduce the Company's credit facilities. The $1.3 million gain on
sale of certain assets of Post is included in other income in 1993.
12
<PAGE>
TAX MATTERS
Effective Tax Rates
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109) retroactive to
January 1, 1993. SFAS 109 required income taxes to be accounted for under the
liability method rather than in accordance with the deferred method as
previously required by Accounting Principles Board Opinion No. 11, "Accounting
for Income Taxes" (APB No. 11). SFAS 109 requires a company to recognize
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.
The cumulative effect of the adoption of SFAS 109 increased the Company's net
income by approximately $412,000 ($0.05 per share) in 1993. The Company's
effective tax rate was 44% in 1994. This rate during fiscal 1992 was 0%, due to
net operating loss and tax credit carry forwards for income tax purposes. As a
result of applying SFAS 109, $4,799,000 of previously unrecorded deferred tax
benefits from net operating loss and tax credit carry forwards incurred by the
Company were recognized at January 1, 1993. Under prior accounting, a part of
these benefits would have been recognized as a reduction of income tax expense
from continuing operations for 1993. Accordingly, the adoption of SFAS 109 at
the beginning of 1993 had the effect of increasing the federal tax rate applied
to operations for 1993 from 0% to 35%. The abnormally high tax rate for 1993
(approximately 73% of income before taxes) is primarily due to the effective
foreign and state income tax rate for 1993 and certain non-deductible charges,
including goodwill amortization and non-deductible Post goodwill expenses upon
the sale of Post's technology in August 1993.
LIQUIDITY AND CAPITAL RESOURCES
Refinancing of Existing Debt. At December 31, 1994, the Company's
indebtedness was comprised primarily of a bank credit facility due March 31,
1996 and Senior Subordinated Notes due June 30, 2000 (the "Subordinated
Notes"). As of December 31, 1994, there was outstanding $15.3 million under the
Subordinated Notes, bearing interest at the rate of 10.5% per annum, with
principal payments of $3.6 million being due on June 30, 1996 and each June 30
thereafter until a final payment of $0.86 million on June 30, 2000.
On May 2, 1994, the Company refinanced its then existing bank credit facility
with a new increased bank credit facility with Bank One, described below, and
consummated an agreement with the holders of its Subordinated Notes whereby the
Company used a portion of its cash on hand to make a $7.5 million principal
reduction (without premium or penalty) in exchange for a modification of the
Subordinated Note agreement reflecting, among other things, a reduction in the
interest rate from 12.0% to 11.25% and a deferral of scheduled amortization as
more fully described below.
In September 1994, the Company redeemed an additional $2.5 million of the
Subordinated Notes (without premium or penalty) as allowed in the revised
agreement with the holders of the Subordinated Notes. Sources for the
additional reduction were the net proceeds from a private placement of 300,000
shares of Series A common stock and bank borrowings. Pursuant to the amended
subordinated note agreement, this principal payment resulted in a reduction in
the interest rate to the minimum defined interest rate of 10.5%.
The new $20 million bank revolving line of credit (for both direct borrowings
and letters of credit) has a maturity of March 31, 1996, and amortization of
the Subordinated Notes will begin on June 30, 1996. The use of the facility for
letters of credit is limited to a maximum of $10.0 million until June 30, 1995
and $7.0 million thereafter. As of December 31, 1994 the unused line of credit
was $10.3 million.
Both the new bank agreement and the revised agreement with the holders of the
Subordinated Notes provide for joint and several guaranties by the domestic
operating subsidiaries of the Company. To secure
13
<PAGE>
the indebtedness and the guaranties, a first lien was granted to the banks, and
a second lien was granted to the holders of the Subordinated Notes, on
substantially all the assets of the Company and its domestic subsidiaries. The
amended subordinated note agreement provides for a release of collateral on
April 26, 1996 if certain conditions are met, including operating income in
1995 in excess of $7.3 million.
The loans under the new bank credit facility and revised Subordinated Note
agreement are subject to various restrictive covenants related to net income,
dividends, financial ratios, limitations on capital expenditures, additional
indebtedness, and financial reporting. Compliance with the limitations on
capital expenditures was waived by the lender for the year ended December 31,
1994. Under these provisions the Company will not be allowed to pay dividends
or make any acquisitions unless approved by the lenders. The most restrictive
covenants are the maintenance of (i) adjusted minimum net income of at least
$1.35 million for the year ending December 31, 1994, and $1.6 million
thereafter and (ii) adjusted tangible net worth of $25.1 million for the
quarter ending September 30, 1994 and increasing each quarter thereafter. If
the Company fails to meet the tangible net worth requirements, it can not be
remedied by raising additional equity.
Backlog and Orders. The Company's backlog of unfilled orders at December 31,
1994 was approximately $68.6 million compared to $39.6 million at December 31,
1993; an increase of 75%. The backlog included increases of $22.3 million of
packaging printing systems, $1.5 million of specialty web printing systems, and
$5.2 million of banknote printing systems orders over 1993. A banknote
inspection system order from the Bank of England represents the introduction of
new products and new technologies along with first time manufacturing effort;
this combination has historically been marginally profitable. The Bank of
England order requires the Company to develop a new approach to automatic
currency examination and inspection for sheet fed printing presses, which the
Company believes, if successful, should enable the Company to penetrate the
large sheet fed currency retrofit market.
Capital Expenditures. Historically, the Company's capital expenditures have
been approximately equal to depreciation and amortization charges relating to
capital equipment. At December 31, 1994, the Company had outstanding capital
expenditure purchase commitments of $1,636,000.
Replacement of Bernal assets destroyed in a major fire in June 1992 have been
at substantially higher cost than the previous basis of such assets. Insurance
coverage for replacement cost of assets destroyed has generated the funds for
such replacements. See Note Q of Notes to the Consolidated Financial Statements
of the Company.
Future Capital Needs. The Company's current estimate of cash provided from
operations is considered adequate to fund the Company's requirements for its
present business.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Management.................................................... 15
Independent Auditors' Report............................................ 16
Consolidated Balance Sheets--December 31, 1994 and 1993................. 17
Consolidated Statements of Income--Years Ended December 31, 1994, 1993
and 1992............................................................... 18
Consolidated Statements of Stockholders' Equity--Years Ended December
31, 1994,
1993 and 1992.......................................................... 19
Consolidated Statements of Cash Flows--Years Ended December 31, 1994,
1993 and 1992.......................................................... 20
Notes to Consolidated Financial Statements.............................. 21
Schedule II--Valuation and Qualifying Accounts--Years Ended December 31,
1994,
1993 and 1992.......................................................... 40
</TABLE>
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 Graphics Corporation have
been prepared by management and have been audited by Deloitte & Touche LLP, the
Company's independent auditors, whose report follows. 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 meets
with management to monitor the discharge of management's responsibilities. The
Committee also meets with the independent auditors, without management present,
to discuss internal accounting control, auditing, and financial reporting
matters.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Stevens Graphics Corporation
We have audited the accompanying consolidated balance sheets of Stevens
Graphics Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 8. 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 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 Stevens
Graphics Corporation and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994 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.
As discussed in Note J to the Consolidated Financial Statements, in 1993 the
Company changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
February 24, 1995
16
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
ASSETS 1994 1993
------ ------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 396 $ 968
Temporary investments (Note C)............................ 1,077 2,800
Trade accounts receivable, less allowance for losses of
$450 and $625 in 1994 and 1993, respectively............. 13,050 15,359
Costs and estimated earnings in excess of billings on
long-term contracts (Note D)............................. 12,478 8,214
Inventory (Note E)........................................ 20,198 24,303
Advances to affiliate..................................... -- 70
Property held for sale.................................... -- 5,063
Other current assets...................................... 498 2,231
------- --------
Total current assets.................................... 47,697 59,008
Property, plant and equipment, net (Notes F and M).......... 29,734 31,690
Other assets, net (Note G).................................. 16,610 15,449
------- --------
$94,041 $106,147
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable.................................... $11,372 $ 9,676
Billings in excess of costs and estimated earnings on
long-term contracts (Note D)............................. 3,390 1,592
Other current liabilities (Note H)........................ 8,942 8,610
Income taxes payable (Note J)............................. 279 225
Customer deposits......................................... 5,929 4,836
Advances from affiliate (Note M).......................... 932 --
Current portion of long-term debt (Note I)................ 161 17,332
------- --------
Total current liabilities............................... 31,005 42,271
Long-term debt (Note I)..................................... 15,308 21,567
Deferred income taxes (Note J).............................. 5,428 4,903
Deferred pension costs (Note L)............................. 1,335 886
Commitments and contingencies (Note K)
Stockholders' equity (Notes L and O):
Preferred stock, $.10 par value 2,000,000 shares
authorized, none issued and outstanding.................. -- --
Series A Common Stock, $.10 par value, 20,000,000 shares
authorized, 7,130,000 and 6,787,000 shares issued and
outstanding at December 31, 1994 and 1993, respectively.. 713 679
Series B Common Stock, $.10 par value, 6,000,000 shares
authorized, 2,236,000 and 2,236,000 shares issued and
outstanding at December 31, 1994 and 1993, respectively.. 224 224
Additional paid-in capital................................ 38,737 37,015
Foreign currency translation adjustment................... 68 (53)
Excess pension liability adjustment....................... (438) (664)
Retained earnings (deficit)............................... 1,661 (681)
------- --------
Total stockholders' equity.............................. 40,965 36,520
------- --------
$94,041 $106,147
======= ========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER,
---------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Net sales........................................ $106,694 $103,762 $84,160
Cost of sales.................................... 81,009 79,476 67,131
-------- -------- -------
Gross profit..................................... 25,685 24,286 17,029
Selling, general and administrative expenses..... 17,211 17,477 16,089
-------- -------- -------
Operating income................................. 8,474 6,809 940
Other income (expense):
Interest income................................ 647 956 1,412
Interest expense............................... (3,807) (5,361) (6,450)
Other, net..................................... (979) 465 (609)
-------- -------- -------
(4,139) (3,940) (5,647)
Income (loss) before income taxes, extraordinary
items and cumulative effect of accounting
change.......................................... 4,335 2,869 (4,707)
Income tax (expense) benefit (Note J)............ (1,908) (2,098) 1,525
-------- -------- -------
Income (loss) before extraordinary items and
cumulative effect of accounting change.......... 2,427 771 (3,182)
Extraordinary items, net of tax (Notes I and Q).. (85) -- 4,033
Cumulative effect of change in method of
accounting for income taxes (Note J)............ -- 412 --
-------- -------- -------
Net income..................................... $ 2,342 $ 1,183 $ 851
======== ======== =======
Income (loss) per common share:
Income (loss) before extraordinary items and
cumulative effect of accounting change.......... $ 0.26 $ 0.08 ($0.36)
Extraordinary items (Notes I and Q).............. (.01) -- 0.45
Accounting change (Note J)....................... -- 0.05 --
-------- -------- -------
Net income..................................... $ 0.25 $ 0.13 $ 0.09
======== ======== =======
Weighted average number of shares of common and
common stock equivalents outstanding during the
periods (Note O)................................ 9,256 9,129 9,017
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN EXCESS
SERIES A STOCK SERIES B STOCK ADDITIONAL CURRENCY PENSION RETAINED
---------------- ----------------- PAID-IN TRANSLATION LIABILITY EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT ADJUSTMENT (DEFICIT) TOTAL
------- ------- ------- ------- ---------- ----------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1,
1992................... 6,666 $ 666 2,348 $ 235 $36,978 $ 20 $ -- $(2,715) $35,184
Foreign currency
translation
adjustment............ -- -- -- -- -- (98) -- -- (98)
Excess pension
liability adjustment.. -- -- -- -- -- -- (155) -- (155)
Conversion of Series B
stock to Series A
stock................. 11 1 (11) (1) -- -- -- -- --
Net income............. -- -- -- -- -- -- -- 851 851
------- ------ ------- ------ ------- ---- ----- ------- -------
Balance, December 31,
1992................... 6,677 667 2,337 234 36,978 (78) (155) (1,864) 35,782
Foreign currency
translation
adjustment............ -- -- -- -- -- 25 -- -- 25
Excess pension
liability adjustment.. -- -- -- -- -- -- (509) -- (509)
Conversion of Series B
stock to Series A
stock................. 101 10 (101) (10) -- -- -- -- --
Exercise of stock
options............... 9 2 -- -- 37 -- -- -- 39
Net income............. -- -- -- -- -- -- -- 1,183 1,183
------- ------ ------- ------ ------- ---- ----- ------- -------
Balance, December 31,
1993................... 6,787 679 2,236 224 37,015 (53) (664) (681) 36,520
Sale of Stock.......... 300 30 -- -- 1,516 -- -- -- 1,546
Foreign currency
translation
adjustment............ -- -- -- -- -- 121 -- -- 121
Excess pension
liability adjustment.. -- -- -- -- -- -- 226 -- 226
Exercise of stock
options............... 43 4 -- -- 206 -- -- -- 210
Net income............. -- -- -- -- -- -- -- 2,342 2,342
------- ------ ------- ------ ------- ---- ----- ------- -------
Balance, December 31,
1994................... 7,130 $ 713 2,236 $ 224 $38,737 $ 68 $(438) $ 1,661 $40,965
======= ====== ======= ====== ======= ==== ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Cash provided by operations:
Net income.................. $ 2,342 $ 1,183 $ 851
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............. 4,944 4,635 4,341
Deferred taxes............ 525 2,110 --
Deferred pension costs.... 675 169 --
Other..................... 956 (131) 28
Cumulative effect of
change in method of
accounting for income
taxes.................... -- (412) --
Gain on involuntary
conversion............... -- -- (5,253)
Changes in operating assets
and liabilities net of
effects from purchase of
subsidiary:
Trade accounts receivable. 2,309 (726) (1,039)
Contract costs in excess
of billings.............. (2,466) (9,328) 9,541
Inventory................. 4,105 441 (571)
Refundable income taxes... -- -- 2,981
Other assets.............. (541) (1,485) (810)
Trade accounts payable.... 1,696 (386) 4,545
Other..................... 2,844 623 (7,849)
-------- ------- --------
Total cash provided by
(used in) operating
activities............. 17,389 (3,307) 6,765
-------- ------- --------
Cash provided by (used in) in-
vesting activities:
Additions to property, plant
and equipment.............. (2,356) (7,646) (6,872)
Proceeds from insurance and
sale of assets............. 4,630 243 7,686
Deposits and other.......... (284) 2,468 (615)
(Acquisition) disposal of
the net assets of
subsidiary net of cash and
temporary investments
acquired................... -- 5,941 --
-------- ------- --------
Total cash provided by
investing activities... 1,990 1,006 199
-------- ------- --------
Cash provided by (used in) fi-
nancing activities:
Net (payments on) long-term
debt....................... (23,430) (4,476) (26,945)
Sale of stock and exercise
of stock options........... 1,756 38 --
-------- ------- --------
Total cash used in
financing activities... (21,674) (4,438) (26,945)
-------- ------- --------
Increase (decrease) in cash
and temporary investments.... (2,295) (6,739) (19,981)
Cash and temporary investments
at beginning of year......... 3,768 10,507 30,488
-------- ------- --------
Cash and temporary investments
at end of year............... $ 1,473 $ 3,768 $ 10,507
======== ======= ========
Supplemental disclosure of
cash flow information:
Cash paid (refunded) during
the period for:
Interest.................. $ 3,580 $ 4,872 $ 9,224
Income taxes (refund)....... 1,243 707 (3,263)
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Stevens
Graphics Corporation and all of its wholly owned subsidiaries (the "Company").
All significant intercompany transactions have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenues 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 52% and 61% of inventory at December 31, 1994 and 1993,
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 a covenant not to compete, patent costs,
buildings and improvements held for sale, and goodwill. These are amortized
over the noncompete period, the remaining life of the patents, the depreciable
useful lives of the buildings, and thirty years, respectively.
Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109) in 1993. SFAS 109
required income taxes to be accounted for under the liability method rather
than in accordance with the deferred method as previously required by
Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" (APB
No. 11). SFAS 109 requires a company to recognize 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.
Income Per Common Share
Income per common share is based on the weighted average number of shares of
common and common stock equivalents (stock options, when dilutive) outstanding.
21
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
B. FORMATION OF SSMI AND SALE OF POST
In January 1995, the Company formed Societe Specialisee dans le Materiel
d'Imprimerie ("SSMI"), a French company, and acquired the assets of its
predecessor, Societe Specialisee dans le Materiel d'Imprimerie Offset ("SSMIO")
for approximately FF1.8 million ($368,000). SSMI is a company engaged in the
service and repair of printing presses. Assets acquired were recorded at fair
market values; there was no cost in excess of net assets acquired. The
acquisition did not have a material pro forma impact on operations.
In August 1993, the Company sold specific assets of Post including the
product technology and related intangibles to Bobst Group, Inc., the U.S.
operating unit of Bobst, S.A. of Switzerland. The agreement provided for the
transfer of manufacturing operations over a four month transition period. Post
retained its accounts receivable (approximately $1.2 million), its work-in-
process and finished goods inventories (approximately $1.1 million) and its
existing backlog of orders (approximately $5.9 million). Post also retained
substantially all of its liabilities (approximately $2.5 million). The cash
proceeds were approximately $7.3 million, of which $6 million was used to
permanently reduce senior debt. Post contributed sales of approximately $14
million and income before interest, corporate charges and taxes of
approximately $4.6 million for 1993, including a gain of $1.3 million on the
sale of assets to Bobst Group, Inc. The gain on assets sold is reflected in the
1993 results of operations as "other income". This gain was entirely offset by
the Company's abnormally high tax rate for this transaction, due in part to the
non-deductible Post goodwill expensed upon the sale of Post's technology.
C. TEMPORARY INVESTMENTS
Temporary investments (stated at cost, which approximates market) at December
31, 1994 and 1993 consisted of short term investments in commercial paper, with
original maturities within ninety days, and money management accounts.
D. 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, 1994 and
1993 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cost incurred on uncompleted contracts............ $ 27,097 $ 25,991
Estimated earnings................................ 11,699 3,465
----------- -----------
Revenues from long-term contracts................. 38,796 29,456
Less: Billings to date............................ 29,708 22,834
----------- -----------
$ 9,088 $ 6,622
=========== ===========
</TABLE>
22
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The $9,088,000 and $6,622,000 net differences are included in the
accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
------------------------
<S> <C> <C>
Cost and estimated earnings in excess of
billings on long-term contracts................ $12,478 $ 8,214
Billings in excess of costs and estimated
earnings on long-term contracts................ (3,390) (1,592)
----------- -----------
$ 9,088 $ 6,622
=========== ===========
</TABLE>
E. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Finished product................................... $ 5,332 $ 9,071
Work in progress................................... 6,670 7,992
Raw material....................................... 8,196 7,240
----------- -----------
$ 20,198 $ 24,303
=========== ===========
</TABLE>
As required by Accounting Principles Board Opinion No. 16, inventories of
acquired companies were recorded at their estimated fair value at the date of
acquisition less costs of disposition including a reasonable selling effort.
Accordingly, at December 31, 1994 and 1993 the financial accounting basis for
LIFO inventories exceeded the tax basis by approximately $4,724,000 and
$5,143,000, respectively. Replacement cost exceeds financial accounting LIFO
cost by approximately $3,219,000 and $3,071,000 at December 31, 1994 and 1993,
respectively.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
RANGE OF DECEMBER 31,
ESTIMATED USEFUL -----------------------
LIVES 1994 1993
---------------- ----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Land............................... NA $ 1,508 $ 1,508
Buildings and improvements......... 15-40 years 9,570 9,484
Machinery and equipment............ 5-18 years 27,393 27,982
Furniture and fixtures............. 3-10 years 9,441 7,866
Leasehold improvements............. 8-20 years 1,445 1,277
----------- -----------
49,357 48,117
Less accumulated depreciation and
amortization...................... 19,623 16,427
----------- -----------
$ 29,734 $ 31,690
=========== ===========
</TABLE>
23
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
G. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Goodwill, net of amortization of $3,088 and
$2,664, respectively............................ $ 9,897 $ 10,322
Patents, net of amortization of $1,904 and
$1,412, respectively............................ 1,981 2,154
Buildings and improvements held for sale......... 450 454
Performance bond deposits........................ 1,504 --
Intangible pension asset......................... 944 606
Other............................................ 1,834 1,913
----------- -----------
$ 16,610 $ 15,449
=========== ===========
</TABLE>
H. OTHER CURRENT LIABILITIES
Other current liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Salaries and wages................................ $ 1,635 $1,309
Taxes other than income taxes..................... 806 1,340
Employee benefits................................. 1,208 560
Accrued interest.................................. 464 826
Restructuring reserve............................. 57 628
Other accrued expenses............................ 4,772 3,947
----------- -----------
$ 8,942 $ 8,610
=========== ===========
</TABLE>
I. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Senior subordinated notes, interest at 10.5% (Net of
unamortized origination fees of $798 and $729) (1).... $ 14,463 $ 24,532
Notes payable to banks, interest at prime rate, plus
1.25% at December 31, 1994 (Net of unamortized
origination fees of $726 and $31) (2)................. 768 $ 12,979
Notes payable to financial institutions, varying
interest rates........................................ -- 969
Capital lease obligations due in varying installments.. 238 419
----------- -----------
15,469 38,899
Less current portion................................... 161 17,332
----------- -----------
$ 15,308 $ 21,567
=========== ===========
</TABLE>
- --------
(1) As part of the refinancing consummated in April 1994, the interest rate on
the Senior Subordinated Notes was reduced from 12% to 11.25%. It was
further reduced to an agreed upon 10.5% in September 1994 as a result of a
principal reduction of $2,500,000.
24
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) Pursuant to the April 1994 refinancing, the interest rate on the Company's
Senior Bank Credit Facility is prime +1.25% or 9.75% at December 31, 1994.
The interest rate on the Company's Senior Bank Credit Facility was at base
rate or prime (6%) at December 31, 1993. As a result of the Company's
achievement of certain net income levels and other conditions, the bank
credit agreement provides for a reduction in the interest rate to prime
+1%. The Company expects the change to be effective April 1, 1995.
At December 31, 1994, the Company's indebtedness was comprised primarily of a
bank credit facility due March 31, 1996 and Senior Subordinated Notes due June
30, 2000 (the "Subordinated Notes"). As of December 31, 1994, there was
outstanding $15.3 million under the Subordinated Notes, bearing interest at the
rate of 10.5% per annum, with principal payments of $3.6 million being due on
June 30, 1996 and each June 30 thereafter until a final payment of $0.86
million on June 30, 2000.
On May 2, 1994, the Company refinanced its then existing bank credit facility
with a new increased bank credit facility with Bank One, described below, and
consummated an agreement with the holders of its Subordinated Notes whereby the
Company used a portion of its cash on hand to make a $7.5 million principal
reduction (without premium or penalty) in exchange for a modification of the
Subordinated Note agreement reflecting, among other things, a reduction in the
interest rate from 12.0% to 11.25% and a deferral of scheduled amortization as
more fully described below.
In September 1994, the Company redeemed an additional $2.5 million of the
Subordinated Notes (without premium or penalty) as allowed in the revised
agreement with the holders of the Subordinated Notes. Sources for the
additional reduction were the net proceeds from a private placement of 300,000
shares of Series A common stock and bank borrowings. See Note O. Pursuant to
the amended subordinated note agreement, this principal payment resulted in a
reduction in the interest rate to the minimum defined interest rate of 10.5%.
The early extinguishment of debt in September 1994 resulted in an
extraordinary loss of $85,000 (or $0.01 per share), net of income tax benefit
of $67,000, as a result of the write-off of loan origination costs which were
being amortized over the life of the indebtedness.
The new $20 million bank revolving line of credit (for both direct borrowings
and letters of credit) has a maturity of March 31, 1996, and amortization of
the Subordinated Notes will begin on June 30, 1996. The use of the facility for
letters of credit is limited to a maximum of $10.0 million until June 30, 1995
and $7.0 million thereafter. As of December 31, 1994 the unused line of credit
was $10.3 million.
Principal maturities of the outstanding long-term debt at December 31, 1994,
are as follows (Amounts in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1995..................................... $ 161
1996.............................................................. 5,165
1997.............................................................. 3,604
1998.............................................................. 3,601
1999.............................................................. 3,600
2000 and thereafter............................................... 861
-------
16,992
Less unamortized loan origination fees........................ 1,523
-------
$15,469
=======
</TABLE>
25
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Both the new bank agreement and the revised agreement with the holders of the
Subordinated Notes provide for joint and several guaranties by the domestic
operating subsidiaries of the Company. To secure the indebtedness and the
guaranties, a first lien was granted to the banks, and a second lien was
granted to the holders of the Subordinated Notes, on substantially all the
assets of the Company and its domestic subsidiaries. The amended subordinated
note agreement provides for a release of collateral on April 26, 1996 if
certain conditions are met including operating income in 1995 in excess of $7.3
million.
The loans under the new bank credit facility and revised Subordinated Note
agreement are subject to various restrictive covenants related to net income,
dividends, financial ratios, limitations on capital expenditures, additional
indebtedness, and financial reporting. Compliance with the limitations on
capital expenditures was waived by the lender for the year ended December 31,
1994. Under these provisions the Company will not be allowed to pay dividends
or make any acquisitions unless approved by the lenders. The most restrictive
covenants are the maintenance of (i) adjusted minimum net income of at least
$1.35 million for the year ending December 31, 1994, and $1.6 million
thereafter and (ii) adjusted tangible net worth of $25.1 million for the
quarter ending September 30, 1994 and increasing each quarter thereafter. If
the Company fails to meet the tangible net worth requirements, it cannot be
remedied by raising additional equity.
J. INCOME TAXES
The Company and its domestic subsidiaries file consolidated income tax
returns. At December 31, 1994, the Company had the following losses and credits
available for carryforward for federal income tax purposes:
<TABLE>
<S> <C>
Net operating loss--expiring in 2006 and 2007.................. $ 571,000
General business credit--expiring in 2005...................... 616,000
Minimum tax credit--not subject to expiration.................. $1,668,000
</TABLE>
SFAS No. 109 was adopted by the Company in 1993. The cumulative effect of the
adoption of SFAS No. 109 increased the Company's net income by approximately
$412,000 ($0.05 per share) in 1993.
26
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of proper-
ty.............................................. $ 6,224 $ 6,801
Differences between book and tax basis of intan-
gibles.......................................... 753 829
Excess of tax over book pension cost............. 536 542
Differences between book and tax basis of LIFO
inventory....................................... 2,723 2,719
Earnings on long term contracts deferred for tax
purposes........................................ -- 440
Other............................................ 183 (174)
----------- -----------
10,419 11,157
----------- -----------
Deferred tax assets:
Reserves not currently deductible................ 2,497 3,176
Net operating loss, credit and other
carryforwards................................... 2,494 3,078
----------- -----------
4,991 6,254
----------- -----------
Net deferred tax liability....................... $ 5,428 $ 4,903
=========== ===========
</TABLE>
The effective state income tax rate for 1993 and certain non-deductible
charges, including goodwill amortization, comprise the principal reasons for
the abnormally high 1993 effective federal income tax rate of 73%. The
Company's effective tax rate during fiscal 1992 was 0%, due to net operating
loss and tax credit carryforwards for income tax purposes. As a result of
applying SFAS No. 109, $4,799,000 of previously unrecognized deferred tax
benefits from net operating loss and tax credit carryforwards were recognized
at January 1, 1993. Under prior accounting, a part of these benefits would have
been recognized as a reduction of income tax expense from continuing operations
in 1993. Accordingly, the adoption of SFAS No. 109 at the beginning of 1993 had
the effect of increasing the effective tax rate applied to continuing
operations for 1993 from 0% to 34%.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current provision (benefit) for income taxes......... $ 1,383 $ 785 $ (305)
Deferred provision (benefit) for income taxes:
Current............................................ -- -- --
Non-current........................................ 525 1,313 (1,220)
------- ------- --------
525 1,313 (1,220)
------- ------- --------
$ 1,908 $ 2,098 $ (1,525)
======= ======= ========
</TABLE>
27
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax expense results from differences in the basis of assets and
liabilities between income tax and financial reporting purposes. The sources of
these differences and the tax effect of each were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Excess of tax over book depreciation/amortization
(book over tax)................................... $ 95 $ (143) $ 180
Excess of tax over book pension cost (book over
tax).............................................. (20) 77 65
Warranty cost and inventory reserves charged to
expense on books, but not deductible until paid
for tax purposes (tax over book).................. 191 (241) 94
Employee benefits accrued but not paid currently
(tax over book)................................... (112) (61) 65
Restructuring charge............................... 103 388 1,372
Gain on involuntary conversion..................... -- 196 1,786
Less deferred tax expense attributable to extraor-
dinary items...................................... -- -- (1,220)
Excess of book over tax loss on sale of intangibles
and fixed assets.................................. (261) (961) --
Less utilization of tax loss carryforward and oth-
er................................................ 529 2,058 (3,562)
------ ------- --------
$ 525 $ 1,313 $ (1,220)
====== ======= ========
</TABLE>
The Company's effective tax rate varies from the statutory federal income tax
rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit), at statutory rate*......... $ 1,474 $ 975 $ (1,600)
Amortization and depreciation of writeup to fair
value for assets acquired, not deductible for tax
purposes......................................... -- -- 377
Foreign sales corporation earnings................ (174) -- --
Goodwill expense, not deductible for tax purposes. 140 1,037 --
Other, net........................................ 196 (174) 3
State and local taxes............................. 257 237 4
Foreign taxes..................................... 15 23 16
Accounting limitation on deferred tax benefit..... -- -- (325)
------- ------- --------
Actual tax expense (benefit)...................... $ 1,908 $ 2,098 $ (1,525)
======= ======= ========
</TABLE>
- --------
* Calculated from income before income tax excluding extraordinary item and
cumulative effect of accounting change.
28
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
K. COMMITMENTS AND CONTINGENCIES
The Company leases equipment, office and manufacturing 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, 1994,
1993 and 1992 was approximately $520,000, $566,000, and $617,000, 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, 1994:
<TABLE>
<CAPTION>
OPERATING
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Year ending December 31,1995........................ $392
1996................................................ 321
1997................................................ 223
1998................................................ 0
1999................................................ 0
----
Total minimum lease payments...................... $936
====
</TABLE>
At December 31, 1994, the Company had no major capital equipment leases and
outstanding capital expenditure purchase commitments of $1,634,000.
The Company is contingently liable for approximately $1.7 million at December
31, 1994, 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 or results of operations
of the Company as a result of these agreements is remote.
The Company is a party to a number of legal actions arising in the ordinary
course of its business. 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, either individually or in the aggregate, will
materially affect the Company's operations or financial position.
L. EMPLOYEE BENEFIT PLANS
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. With the
institution of this plan, the assets of existing profit sharing plans were
vested in participant accounts and merged into the 401(k) savings retirement
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 ($9,240 in 1994) and a discretionary
matching contribution by the Company for non-union employees. For the years
1994 and 1993, the Company agreed to match 25% of non-union employee elective
contributions up to 4% of employee 1994 and 1993 annual compensation. Company
contributions to profit sharing plans were $106,000 in 1994, $44,000 in 1993,
and $107,000 in 1992.
The Company has defined benefit pension plans covering its employees at
December 31, 1994. In 1992 these plans were changed to cover all employees of
the Company. Such 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. The
assets of the pension plans are maintained in trusts and consist primarily of
equity and fixed income securities. Pension expense was $630,000 in 1994,
$468,000 in 1993, and $392,000 in 1992.
29
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994, the Company has recorded an
additional pension liability of $1,382,000 and a corresponding intangible asset
of $944,000 and reduction of equity of approximately $438,000 before adjustment
for tax effects.
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 1994 and 1993.
<TABLE>
<CAPTION>
1994 STATUS OF PLANS 1993 STATUS OF PLANS
------------------------- -------------------------
PLANS WHERE PLANS WHERE
PLANS WHERE BENEFITS PLANS WHERE BENEFITS
ASSETS EXCEED EXCEED ASSETS EXCEED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- ----------- ------------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested................... $1,543 $2,603 $1,664 $2,967
Non-vested............... 175 168 99 5
------ ------ ------ ------
Accumulated benefit
obligation................ $1,718 $2,771 $1,763 $2,972
====== ====== ====== ======
Plan assets at fair value.. $2,195 $1,863 $2,952 $2,216
Projected benefit
obligation................ 2,167 2,771 2,045 2,972
------ ------ ------ ------
Projected benefit
obligation in excess of
(less than) plan assets... (28) 908 (907) 756
Unrecognized prior service
cost...................... 960 (944) 1,028 (606)
Unrecognized net gain
(loss).................... (17) (438) 535 (664)
Unrecognized net asset
(liability) at January 1,
1987...................... (387) -- (429) --
Adjustment required to
recognize minimum
liability................. -- 1,382 -- 1,270
------ ------ ------ ------
Pension liability
recognized in balance
sheet..................... $ 528 $ 908 $ 227 $ 756
====== ====== ====== ======
</TABLE>
Net periodic pension cost was composed of the following elements:
<TABLE>
<CAPTION>
1994 1993
----- -----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Service cost................................................. $ 490 $ 494
Interest cost................................................ 494 456
Actual return on plan assets:
Loss (gain)................................................ 157 (989)
Deferred (loss) gain....................................... (611) 473
Net amortization and deferral................................ 100 34
----- -----
Net period pension cost.................................... $ 630 $ 468
===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Major assumptions used:
Discount rate............................................. 8.6% 7.5% 8.0%
Expected long-term rate of return on assets............... 8.5% 8.5% 8.5%
Rate of increase in compensation levels................... 4.0% 4.0% 5.0%
</TABLE>
30
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 aggregating $723,000
and $75,000 were paid or charged to expense pursuant to the plans in 1994 and
1993, respectively, while there were none in 1992.
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."
M. 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 of
$1.2 million as a subcontractor on a major contract. During 1994, the Company
paid approximately $287,000 to Xytec on this contract. In addition, Xytec
previously provided certain computer hardware and software to the Company. The
Company's payments during 1993 of approximately $113,000 are included in net
property, plant and equipment in the accompanying consolidated balance sheet at
December 31, 1993.
Two company directors and officers are partners in a venture that leases
office facilities to the Company. Amounts paid to the partnership as rent and
maintenance were approximately $111,000 in 1994, 1993, and 1992, respectively.
In January and February 1994, Stevens Industries, Inc. advanced an aggregate
of $900,000 to Stevens Security Systems, S.A. in exchange for a Stevens
Security Systems, S.A. 6% note due February 1995. These advances were repaid in
full in February 1995. Advances to affiliate of approximately $70,000 and $0 at
December 31, 1993 and 1994, respectively, included net advance payments to
Stevens Industries, Inc. for its expenses and costs related to activities of
the Company.
N. RESEARCH AND DEVELOPMENT, SALES TO MAJOR CUSTOMERS AND FOREIGN SALES
For the years ended December 31, 1994, 1993, and 1992, the Company incurred
research and development expenses of approximately $2,162,000, $1,489,000, and
$1,348,000, respectively.
Net sales to customers outside of the United States in 1994, 1993, and 1992
were approximately $14,957,000, $30,414,000, and $25,694,000, respectively.
In 1994, 1993, and 1992, no single customer accounted for more than 10% of
total sales, except for a $26 million project with the Banque de France. This
contract resulted in sales of approximately $3 million in 1994, $13 million in
1993, and $10 million in 1992.
O. STOCK TRANSACTIONS AND VOTING RIGHTS
In September 1994, the Company sold 300,000 shares of Series A common stock
at $5.50 per share in a private placement. Net proceeds of $1,546,000, after
related expenses of $104,000, were used to extinguish Senior Subordinated debt.
The sale of stock and bank borrowings enabled the reduction of $2,500,000 of
Senior Subordinated debt and reduced the interest rate on this indebtedness
from 11.25% to 10.5%.
31
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 stock
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
the 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 795,500, 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 for the last three years follows:
<TABLE>
<CAPTION>
SERIES A SERIES B
STOCK STOCK OPTION PRICE
OPTION OPTION PER SHARE
-------- -------- ------------
<S> <C> <C> <C>
Stock Option Plan:
Balance, January 1, 1992.................... 301,750 33,750 $6.67-15.00
Granted................................... 402,000 -- 4.56
Cancelled................................. (301,750) (33,750) 6.67-15.00
-------- ------- -----------
Balance, December 31, 1992.................. 402,000 -- $ 4.56
Granted................................... 30,000 5.50
Exercised................................. (8,500) 4.56
Cancelled................................. (19,000) 4.56
-------- ------- -----------
Balance December 31, 1993................... 404,500 -- $4.56- 5.50
Granted................................... 256,000 3.50- 6.50
Exercised................................. (43,000) 4.56- 5.50
Cancelled................................. (5,000) 4.56
-------- ------- -----------
Balance December 31, 1994................... 612,500 -- $4.56- 6.50
======== ======= ===========
</TABLE>
Options for 344,500 shares are exercisable at December 31, 1994.
32
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SERIES A SERIES B
STOCK STOCK OPTION PRICE
OPTION OPTION PER SHARE
-------- -------- ------------
<S> <C> <C> <C>
Directors and Others:
Balance January 1, 1992...................... 64,250 14,250 $6.67-15.00
Granted.................................... 24,500 -- 4.56
Cancelled.................................. (49,250) (14,250) 6.67-15.00
------- ------- -----------
Balance, December 31, 1992 and December 31,
1993........................................ 39,500 -- $4.56-15.00
Granted.................................... 70,000 5.65-6.00
------- ------- -----------
Balance, December 31, 1994................... 109,500 -- $4.56-15.00
======= ======= ===========
</TABLE>
Options for 109,500 shares are exercisable at December 31, 1994.
P. QUARTERLY RESULTS (UNAUDITED)
The following table summarizes results for each of the four quarters for the
years ended December 31, 1994, and 1993. 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).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994:
Net sales...................... $20,930 $21,281 $29,085 $35,398
Gross profit................... $ 5,561 $ 5,214 $ 6,750 $ 8,160
Income before extraordinary
loss.......................... $ 72 $ 163 $ 954 $ 1,238
Income before extraordinary
loss per share................ $ 0.01 $ 0.02 $ 0.10 $ 0.13
Net income..................... $ 72 $ 163 $ 869 $ 1,238
Net income per share........... $ 0.01 $ 0.02 $ 0.09 $ 0.13
1993:
Net sales...................... $25,295 $27,138 $29,033 $22,296
Gross profit................... $ 5,376 $ 6,513 $ 6,283 $ 6,114
Income before accounting
change........................ $ 18 $ 345 $ 190 $ 218
Income before accounting change
per share..................... $ 0.00 $ 0.04 $ 0.02 $ 0.02
Net income..................... $ 430 $ 345 $ 190 $ 218
Net income per share........... $ 0.05 $ 0.04 $ 0.02 $ 0.02
</TABLE>
Q. EXTRAORDINARY ITEMS RESULTING FROM EARLY EXTINGUISHMENT OF DEBT AND
INSURANCE SETTLEMENT
The early extinguishment of debt in September 1994 resulted in an
extraordinary loss of $85,000, net of income tax benefit of $67,000, as a
result of prepayment expenses and the write-off of loan origination costs which
were being amortized over the life of the indebtedness.
During the fourth quarter of 1992, the Company recognized a before-tax
extraordinary gain of $5,253,000 in connection with a settlement that concluded
certain equipment claims under the Company's replacement cost property
insurance related to a fire which destroyed a substantial portion of its
manufacturing facility and equipment at the Company's Bernal Division in Troy,
Michigan in June 1992. The after-tax gain on this involuntary conversion of
assets was $3,467,000 ($0.39 per share).
33
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, this gain from involuntary conversion resulted in the
utilization of net operating loss carryforwards for income taxes of $566,000
($0.06 per share).
R. 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
disclosures 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.
Performance bond deposits
The fair values for performance bond deposits are estimated using discounted
cash flow analyses based upon U.S. Treasury notes due in 1996.
Long-Term Debt
The carrying amounts of the Company's borrowings under its revolving credit
agreements approximate fair value. The fair values of the Company's other long-
term debt either approximate fair value or are estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
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 cash and 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.
Concentrations 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, 1994, the Company had no significant concentrations of credit
risk.
34
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1994 are as follows (Amounts in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
Cash and temporary investments........................... $ 1,473 $ 1,473
Performance bond deposits................................ 1,504 1,400
Long-term debt........................................... 15,308 15,300
Off-balance-Sheet Financial Instruments:
Letters of credit...................................... -0- 8,251
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 1995 (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 I 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 TRANSACTION.
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.
35
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1994 fiscal year.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
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 --Form of Indemnity Agreement.(2)(14)
10.2 --Printing Press Contract dated October 21, 1986 between the Bureau of
Engraving and Printing and The Hamilton Tool Company ("Hamilton"),
and related letter dated July 8, 1987 from the Bureau of Engraving
and Printing, lifting the stop work arrangement and Decision of the
Comptroller General of the United States dated June 15, 1987
affirming the award of the Printing Press Contract to Hamilton.(2)
10.3 --Second Amended and Restated Stock Option Plan of the Company.(5)(14)
10.4 --Description of Stevens Graphics Incentive Plan.(3)(14)
10.5 --Description of Hamilton Life Insurance Payroll Deduction
Plan.(2)(14)
10.6 --Labor Agreement, dated July 2, 1994, between Hamilton-Stevens Group,
Inc. and the International Union United Automobile, Aerospace and
Agricultural Implement Workers of America.(11)
10.7 --Contract for Purchase of Leasehold, dated September 27, 1975,
between Crawford Steel Construction Company, Inc. and Hamilton, and
related Guaranty, Agreement to Provide Security for Guaranty,
Assignment of Lease, Lease, and Indenture of Mortgage.(2)
10.8 --Agreement for Sale of Land for Private Redevelopment, dated November
16, 1981 between Hamilton and the City of Hamilton, as amended, and
related Quit Claim Deed.(2)
10.9 --Chem-Dyne Site Trust Fund Agreement, dated September 23, 1985.(2)
</TABLE>
36
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.10 --Lease Agreement between Space Unlimited Joint Venture #3 and Stevens
Corporation ("Stevens"), dated September 11, 1981 and related lease
addendum.(2)
10.11 --First Extension Agreement dated January 19, 1987 between Stevens and
Space Unlimited Joint Venture #3.(3)
10.12 --First Amended Joint Venture Agreement of Space Unlimited Joint
Venture #3, dated June 26, 1980 and related Assignment of Joint
Interest and Loan Modification, Assumption Agreement and
Release.(2)
10.13 --Second Extension Agreement between the Company and Space Unlimited
Joint Venture #3.(6)
10.14 --Stevens Graphics Corporation Pension Plan and Trust.(6)(14)
10.15 --Stevens Graphics Corporation Profit Sharing and 401(k) Savings
Retirement Plan.(6)(14)
10.16 --Contract between Zerand Export Limited and Vsesojuznoe
Vneshneekonomichskoe Objedinenie "TECHNOEXPORT" dated March 20,
1989.(7)
10.17 --Lease Agreement between Rochester Hills Executive Park and Zerand-
Bernal Group, Inc.(8)
10.18 --Severance Agreement among the Company, Post and Robert F.
Hopkins.(6)
10.19 --Restated and Amended Subordinated Debt Agreement dated March 27,
1992, together with forms of Subordinated Notes and Subordinated
Guaranties.(6)
10.20 -- Amended and Restated Itercreditor and Subordination Agreement dated
April 26, 1994.(9)
10.21 --Contract of Sale between the Company and the Banque de France.(6)
10.22 --Agreement between Xytec Corporation and Hamilton-Stevens Group,
Inc.(10)
10.23 --Asset Purchase Agreement dated July 20, 1993 among Post Machinery
Company, Inc., the Company and Bobst Group, Inc.(11)
10.24 --Letter Agreement dated August 5, 1993 among the Company, Post
Machinery Company, Inc., Bobst Group, Inc. and Bobst, S.A.(11)
10.25 --Intellectual Property Purchase Agreement dated August 5, 1993 among
the Company, Post Machinery Company, Inc. and Bobst S.A.(11)
10.26 --Loan and Security Agreement, dated as of April 26, 1994, by and
between the Company and Bank One, Milwaukee, N.A.(9)
10.27 --Fourth Agreement to Amended and Restated Senior Subordinated Note
Agreement dated April 29, 1994.(9)
10.28 --First Amendment to Loan and Security Agreement, dated as of August
24, 1994, among the Company, Bank One Milwaukee, N.A. and certain
subsidiaries of the Company.(13)
10.29 --Form of Stock Purchase Agreement dated as of September 16, 1994
between the Company and certain investors.(12)
11.1 --Computation of Net Income per Common Share.(15)
21.1 --Subsidiaries of the Company.(15)
23.1 --Consent of Deloitte & Touche LLP.(15)
27.1 --Financial Data Schedule.(15)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Registrant'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 Registrant's Registration Statement
on Form S-1 (No. 33-15279) and incorporated herein by reference.
37
<PAGE>
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-24486) and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's report on Form 8-A
filed August 19, 1988 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1994 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-32089) and incorporated herein by reference.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1993 and incorporated herein
by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994 and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K filed August 12, 1993 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-3 (No. 33-84246) and incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1994 and incorporated herein
by reference.
(14) Management contract or compensatory plan or arrangement.
(15) Filed herewith.
38
<PAGE>
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 Graphics Corporation
By /s/ Kenneth W. Reynolds
-----------------------------------
Kenneth W. Reynolds
Chief Financial Officer and Sr.
Vice President Finance and
Administration
Date: March 20, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Paul I. Stevens Chairman of the Board and March 20, 1995
- ------------------------------------
Paul I. Stevens Chief Executive Officer
/s/ Richard I. Stevens President, Chief Operating
- ------------------------------------ Officer
Richard I. Stevens and Director March 20, 1995
/s/ Constance I. Stevens Director March 20, 1995
- ------------------------------------
Constance I. Stevens
Director March 20, 1995
- ------------------------------------
Donald H. Wedin
/s/ Gene E. Overbeck Director March 20, 1995
- ------------------------------------
Gene E. Overbeck
/s/ John W. Stodder Director March 20, 1995
- ------------------------------------
John W. Stodder
Director March 20, 1995
- ------------------------------------
Robert H. Brown, Jr.
/s/ James D. Cavanaugh Director March 20, 1995
- ------------------------------------
James D. Cavanaugh
</TABLE>
39
<PAGE>
SCHEDULE II
STEVENS GRAPHICS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE AT TO COSTS CHARGED AT END
BEGINNING AND TO OTHER OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1994
Allowance for doubtful
accounts.............. $ 625,000 $ 11,000 $(173,000) $ 13,000(1) $450,000
Year Ended December 31,
1993
Allowance for doubtful
accounts.............. $ 816,000 $258,000 $(220,000) $ 229,000(1) $625,000
Year Ended December 31,
1992
Allowance for doubtful
accounts.............. $1,584,000 $258,000 $ -- $1,026,000(1) $816,000
</TABLE>
- --------
(1) Write off of uncollectible accounts.
40
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGES
------- -------------------- ------------
<C> <S> <C>
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 --Form of Indemnity Agreement.(2)(14)
10.2 --Printing Press Contract dated October 21, 1986
between the Bureau of Engraving and Printing and The
Hamilton Tool Company ("Hamilton"), and related
letter dated July 8, 1987 from the Bureau of
Engraving and Printing, lifting the stop work
arrangement and Decision of the Comptroller General
of the United States dated June 15, 1987 affirming
the award of the Printing Press Contract to
Hamilton.(2)
10.3 --Second Amended and Restated Stock Option Plan of the
Company.(5)(14)
10.4 --Description of Stevens Graphics Incentive
Plan.(3)(14)
10.5 --Description of Hamilton Life Insurance Payroll
Deduction Plan.(2)(14)
10.6 --Labor Agreement, dated July 2, 1994, between
Hamilton-Stevens Group, Inc. and the International
Union United Automobile, Aerospace and Agricultural
Implement Workers of America.(11)
10.7 --Contract for Purchase of Leasehold, dated September
27, 1975, between Crawford Steel Construction
Company, Inc. and Hamilton, and related Guaranty,
Agreement to Provide Security for Guaranty,
Assignment of Lease, Lease, and Indenture of
Mortgage.(2)
10.8 --Agreement for Sale of Land for Private Redevelopment,
dated November 16, 1981 between Hamilton and the
City of Hamilton, as amended, and related Quit Claim
Deed.(2)
10.9 --Chem-Dyne Site Trust Fund Agreement, dated September
23, 1985.(2)
10.10 --Lease Agreement between Space Unlimited Joint Venture
#3 and Stevens Corporation ("Stevens"), dated
September 11, 1981 and related lease addendum.(2)
10.11 --First Extension Agreement dated January 19, 1987
between Stevens and Space Unlimited Joint Venture
#3.(3)
10.12 --First Amended Joint Venture Agreement of Space
Unlimited Joint Venture #3, dated June 26, 1980 and
related Assignment of Joint Interest and Loan
Modification, Assumption Agreement and Release.(2)
10.13 --Second Extension Agreement between the Company and
Space Unlimited Joint Venture #3.(6)
10.14 --Stevens Graphics Corporation Pension Plan and
Trust.(6)(14)
10.15 --Stevens Graphics Corporation Profit Sharing and
401(k) Savings Retirement Plan.(6)(14)
10.16 --Contract between Zerand Export Limited and
Vsesojuznoe Vneshneekonomichskoe Objedinenie
"TECHNOEXPORT" dated March 20, 1989.(7)
10.17 --Lease Agreement between Rochester Hills Executive
Park and Zerand-Bernal Group, Inc.(8)
10.18 --Severance Agreement among the Company, Post and
Robert F. Hopkins.(6)
10.19 --Restated and Amended Subordinated Debt Agreement
dated March 27, 1992, together with forms of
Subordinated Notes and Subordinated Guaranties.(6)
10.20 -- Amended and Restated Itercreditor and Subordination
Agreement dated April 26, 1994.(9)
10.21 --Contract of Sale between the Company and the Banque
de France.(6)
10.22 --Agreement between Xytec Corporation and Hamilton-
Stevens Group, Inc.(10)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGES
------- -------------------- ------------
<C> <S> <C>
10.23 --Asset Purchase Agreement dated July 20, 1993 among
Post Machinery Company, Inc., the Company and Bobst
Group, Inc.(11)
10.24 --Letter Agreement dated August 5, 1993 among the
Company, Post Machinery Company, Inc., Bobst Group,
Inc. and Bobst, S.A.(11)
10.25 --Intellectual Property Purchase Agreement dated August
5, 1993 among the Company, Post Machinery Company,
Inc. and Bobst S.A.(11)
10.26 --Loan and Security Agreement, dated as of April 26,
1994, by and between the Company and Bank One,
Milwaukee, N.A.(9)
10.27 --Fourth Agreement to Amended and Restated Senior
Subordinated Note Agreement dated April 29, 1994.(9)
10.28 --First Amendment to Loan and Security Agreement, dated
as of August 24, 1994, among the Company, Bank One
Milwaukee, N.A. and certain subsidiaries of the
Company.(13)
10.29 --Form of Stock Purchase Agreement dated as of
September 16, 1994 between the Company and certain
investors.(12)
11.1 --Computation of Net Income per Common Share.(15)
21.1 --Subsidiaries of the Company.(15)
23.1 --Consent of Deloitte & Touche LLP.(15)
27.1 --Financial Data Schedule.(15)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Registrant'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 Registrant's Registration Statement
on Form S-1 (No. 33-15279) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-24486) and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's report on Form 8-A
filed August 19, 1988 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1994 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (No. 33-32089) and incorporated herein by reference.
(8) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1993 and incorporated herein
by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994 and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K filed August 12, 1993 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-3 (No. 33-84246) and incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1994 and incorporated herein
by reference.
(14) Management contract or compensatory plan or arrangement.
(15) Filed herewith.
<PAGE>
EXHIBIT 11.1
STEVENS GRAPHICS CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME PER COMMON SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993 1992
------ ------ -------
<S> <C> <C> <C>
Primary and fully diluted:
Weighted average shares outstanding................... 9,122 9,015 9,014
Assumed exercise of Series A and B stock options
(treasury stock method).............................. 134 114 3
------ ------ -------
Total common share equivalents........................ 9,256 9,129 9,017
====== ====== =======
Income (loss) before extraordinary items and cumulative
effect of accounting change........................... $2,427 $ 771 $(3,182)
Extraordinary items.................................... (85) -- 4,033
Cumulative effect of accounting change for income
taxes................................................. -- 412 --
------ ------ -------
Net income............................................. $2,342 $1,183 $ 851
====== ====== =======
Per share amounts--
Primary and fully diluted:
Income (loss) before extraordinary items.............. $ 0.26 $ 0.08 $ (0.36)
Extraordinary items................................... (.01) -- 0.45
Cumulative effect of accounting change................ -- 0.05 --
------ ------ -------
Net income............................................. $ 0.25 $ 0.13 $ 0.09
====== ====== =======
</TABLE>
<PAGE>
Exhibit 22.1
------------
Material Subsidiaries
---------------------
Country or State Name(s) Under Which
Name of Subsidiary of Incorporation Subsidiary Does Business
------------------ ---------------- ------------------------
1. Hamilton - Stevens Group, Inc. Delaware Hamilton
Hamilton Tool
Stevens
2. Zerand-Bernal Group, Inc. Delaware Zerand
Bernal
Bernal Rotary Systems
3. Post Machinery Company, Inc. Delaware Post
Post Machinery Company
4. Stevens Security Systems, S.A. France
5. Printing & Packaging Texas
Equipment Finance Corp.
6. Stevens Security Systems Delaware
International, Inc.
7. Societe Specialisee dans France SSMI
le Materiel d'Imprimerie
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-25949 and 33-36852 on Form S-8, and Registration Statement No. 33-84246
on Form S-3 of Stevens Graphics Corporation and subsidiaries, of our report
dated February 24, 1995, appearing in this Annual Report on Form 10-K of Stevens
Graphics Corporation and subsidiaries for the year ended December 31, 1994.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 22, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF STEVENS GRAPHICS CORPORATION AND
SUBSIDIARIES AS OF DECEMBER 31, 1994 AND FOR THE YEAR THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,473
<SECURITIES> 0
<RECEIVABLES> 13,500
<ALLOWANCES> 450
<INVENTORY> 20,198
<CURRENT-ASSETS> 47,697
<PP&E> 49,357
<DEPRECIATION> 19,623
<TOTAL-ASSETS> 94,041
<CURRENT-LIABILITIES> 31,005
<BONDS> 15,308
<COMMON> 937
0
0
<OTHER-SE> 40,028
<TOTAL-LIABILITY-AND-EQUITY> 94,041
<SALES> 106,694
<TOTAL-REVENUES> 106,694
<CGS> 81,009
<TOTAL-COSTS> 81,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11
<INTEREST-EXPENSE> 3,807
<INCOME-PRETAX> 4,335
<INCOME-TAX> 1,908
<INCOME-CONTINUING> 2,427
<DISCONTINUED> 0
<EXTRAORDINARY> (85)
<CHANGES> 0
<NET-INCOME> 2,342
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
