UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9603
STEVENS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2159407
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5500 Airport Freeway, Fort Worth, Texas 76117
(Address of principal executive offices) (zip code)
817/831-3911
(Registrant's telephone number, including area code)
__________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 XX No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Each Class Outstanding at November 6, 1998
Series A Stock, $0.10 Par Value 7,418,174
Series B Stock, $0.10 Par Value 2,083,959
<PAGE>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
December 31, 1997 and September 30, 1998
(unaudited)
Consolidated Condensed Statements of Operations 4
Three and Nine months ended September 30, 1998 and
1997 (unaudited)
Consolidated Condensed Statements of 5
Stockholders' Equity December 31, 1997 and
Nine months ended September 30, 1998 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
Nine months ended September 30, 1998 and 1997
(unaudited)
Notes to Consolidated Condensed Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
CAUTIONARY STATEMENT - This Form 10-Q may contain statements which
constitute "forward-looking" information as that term is defined in
the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission ("SEC") in its rules, regulations
and releases. Stevens International, Inc. (the "Company") cautions
investors that any such forward-looking statements made by the Company
are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements. Some
of the factors that could cause actual results to differ materially
from estimates contained in the Company's forward-looking statements
are set forth in the Form 10-K for the year ended December 31, 1997.
<PAGE>
<TABLE>
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except share data)
September 30, December 31,
1998 1997
ASSETS (unaudited)
------ ------
<S> <C> <C>
Current assets:
Cash $ 41 $ 211
Trade accounts receivable, less allowance
for losses of $355 and $374 in 1998 and
1997, respectively 3,433 3,158
Costs and estimated earnings in excess of
billings on long-term contracts 246 2,209
Inventory (Note 3) 5,835 6,610
Other current assets 1,536 759
Assets held for sale (Note 6) 1,700 14,735
------ ------
Total current assets 12,791 27,682
Property, plant and equipment, net 2,603 2,409
Other assets, net 1,600 1,799
------ ------
$16,994 $31,890
====== ======
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,317 $ 2,691
Billings in excess of costs and estimated
earnings on long-term contracts --- 133
Other current liabilities 3,815 6,322
Income taxes payable 75 ---
Customer deposits 799 802
Advances from affiliates --- 950
Current portion of long-term debt(Note 4) 1,154 27,678
------ ------
Total current liabilities 9,160 38,576
Long-term debt 5,763 55
Accrued pension costs 2,870 2,870
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value,
2,000,000 shares authorized, none issued
and outstanding --- ---
Series A common stock, $0.10 par value,
20,000,000 shares authorized, 7,419,000
and 7,391,000 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 742 739
Series B common stock, $0.10 par value,
6,000,000 shares authorized, 2,084,000 and
2,098,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997,
respectively 208 210
Additional paid-in-capital 39,961 39,941
Foreign currency translation adjustment (1,333) (769)
Excess pension liability adjustment (2,245) (2,245)
Retained (deficit) (38,132) (47,487)
------ ------
Total stockholders' equity (deficit) (799) (9,611)
------ ------
$16,994 $31,890
====== ======
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $ 2,737 $ 8,157 $17,777 $24,248
Cost of sales 2,147 7,154 14,222 22,866
------ ------ ------ ------
Gross profit 590 1,003 3,555 1,382
Selling, general and
administrative expenses 1,577 1,959 5,798 6,712
------ ------ ------ ------
Operating income (loss) (987) (956) (2,243) (5,330)
Other income (expense):
Interest income --- 79 --- 94
Interest expense (238) (876) (1,439) (2,745)
Other, net (57) (416) (308) (592)
Gain (loss)on sale of assets (503) --- 2,199 ---
(Note 6) ------ ------ ------ ------
(798) (1,213) 452 (3,243)
Income (loss) before income
taxes and extraordinary item (1,785) (2,169) (1,791) (8,573)
Income tax (expense) benefit --- 213 (75) 213
------ ------ ------ ------
Income (loss) before
extraordinary item (1,785) (1,956) (1,866) (8,360)
Extraordinary item (Note 4):
Gain on early extinguishment
of debt, net of tax effect --- --- 11,221 ---
------ ------ ------ ------
Net income (loss) ($1,785) ($1,956) $9,355 ($8,360)
====== ====== ====== ======
<PAGE>
Earnings (loss) per share -
basic (Note 8):
Income (loss) before ($0.19) ($0.20) ($.19) ($0.88)
extraordinary item
Gain on early extinguishment
of debt --- --- 1.18 ---
------ ------ ------ ------
Net income (loss) - basic ($0.19) ($0.20) $0.99 ($0.88)
====== ====== ====== ======
Earnings (loss) per share -
diluted (Note 8):
Income (loss) before
extraordinary item ($0.19) ($0.20) ($0.19) ($0.88)
Gain on early extinguishment
of debt --- --- 1.16 ---
------ ------ ------ ------
Net income (loss) - diluted ($0.19) ($0.20) $0.97 ($0.88)
====== ====== ====== ======
Weighted average number of
shares of common stock
outstanding during the periods
- basic (Note 8) 9,488 9,451 9,488 9,451
====== ====== ====== ======
Weighted average number of
shares of common and common stock
equivalents outstanding during
the periods - diluted (Note 8) 9,488 9,451 9,682 9,451
====== ====== ====== ======
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(Amounts in thousands)
Shares Amount
------ -------
<S> <C> <C>
Series A Stock
Balance, December 31, 1997 7,391 $ 739
Conversion of Series B stock to Series A 14 2
stock
Exercise of Stock Options 14 1
------ -------
Balance, September 30, 1998 7,419 $ 742
Series B Stock
Balance, December 31, 1997 2,098 $ 210
Conversion of Series B stock to Series A stock (14) (2)
------ -------
Balance, September 30, 1998 2,084 $ 208
====== =======
Additional Paid-In Capital
Balance, December 31, 1997 $ 39,941
Warrants awarded to related party (Note 4) 1,150
Warrants declined by related party (Note 4) (1,150)
Exercise of Stock Options 20
-------
Balance, September 30, 1998 $ 39,961
=======
Foreign Currency Adjustment
Balance, December 31, 1997 ($769)
Translation adjustments (564)
-------
Balance, September 30, 1998 ($1,333)
=======
Pension Liability Adjustment
Balance, December 31, 1997 ($2,245)
-------
Balance, September 30, 1998 ($2,245)
=======
Retained Earnings (Deficit)
Balance, December 31, 1997 ($47,487)
Net income for nine months ended September 30, 1998 9,355
-------
Balance, September 30, 1998 ($38,132)
=======
Stockholders' Equity (Deficit) at September 30, 1998 ($799)
=======
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
Nine Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Cash provided by operations:
Net income (loss) $ 9,355 ($8,360)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 790 2,772
Other (564) (382)
Changes in operating assets and liabilities:
Trade accounts receivable (275) 5,922
Contract costs in excess of billings 1,829 32
Inventory 775 1,104
Refundable Income Taxes (48) 2,400
Other assets (793) 1,318
Trade accounts payable 626 (5,688)
Other liabilities (3,385) (4,991)
------ ------
Total cash provided by (used in) operating activities 8,310 (5,873)
Cash provided by (used in) investing activities:
Additions to property, plant and equipment (215) (33)
Disposal of Zerand division and HMC
(1998), and Bernal Division (1997) 12,530 14,298
------ ------
Total cash provided by (used in)
investing activities 12,315 14,265
------ ------
Cash provided by (used in) financing activities:
Exercise of stock options 21 ---
Net proceeds from (repayments of)
long - term debt 5,708 ---
(Decrease) in current portion of
long - term debt (26,524) (11,080)
------ ------
Total cash provided by (used in)
financing activities (20,795) (11,080)
------ ------
Increase (decrease) in cash and
temporary investments (170) (2,688)
Cash and temporary investments at
beginning of period 211 3,338
------ ------
Cash and temporary investments at end of period $ 41 $ 650
====== ======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest $ 591 $ 862
Income taxes 1 (2,527)
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<PAGE>
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
1. The consolidated condensed balance sheet as of September 30, 1998,
the consolidated condensed statement of stockholders' equity for the
nine months ended September 30, 1998, the consolidated condensed
statements of operations for the three and nine months ended
September 30, 1998 and 1997, and the consolidated condensed
statements of cash flows for the nine month periods then ended have
been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as
of September 30, 1998 and the results of operations for the three
and nine months ended September 30, 1998 and 1997 and the cash flows
for the nine months ended September 30, 1998 and 1997 have been
made. The December 31, 1997 consolidated condensed balance sheet is
derived from the audited consolidated balance sheet as of that date.
Complete financial statements for December 31, 1997 and related
notes thereto are included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (the "1997 Form 10-K").
The above financial statements have been prepared in accordance with
the instructions to Form 10-Q and therefore do not include all
information included in the 1997 Form 10-K. The results of
operations for the three and nine months ended September 30, 1998
and 1997 are not necessarily indicative of the results to be
expected for the full year.
2. The Company designs, manufactures, markets and services web-fed
packaging and printing systems and related equipment for its
customers in the packaging industry and in the specialty/commercial
and banknote and security segments of the printing industry. The
Company also markets and manufactures high-speed image processing
systems primarily for use in the banknote and security printing
industry. The Company combines various types of equipment capable
of converting and printing, among other items, food and beverage
containers, liquid container cartons, banknotes, postage stamps,
lottery tickets, direct mail inserts, personal checks and business
forms. The Company's technological and engineering capabilities
allow it to combine any of the four major printing technologies
(offset, flexography, rotogravure and intaglio) in its systems.
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
form size and special auxiliary functions.
<PAGE>
3. Inventories consist of the following:
September 30, December31,
1998 1997
(Amounts in thousands)
----- -----
Finished product $ 885 $1,413
Work in progress 2,620 2,723
Raw materials 2,330 2,474
----- -----
$5,835 $6,610
===== =====
4. The bank credit facilities have first liens on certain assets of the
Company, principally inventory, accounts receivable, and the
Company's Texas real estate. Paul I. Stevens' loans aggregating
$4.58 million at September 30, 1998 have first liens on certain
assets of the Company, principally certain Ohio assets that are
being held for sale, a $1 million escrow hold back on the sale of
Zerand, the assets of a foreign subsidiary, and certain accounts
receivable for new equipment recently installed at a customer
location.
On June 30, 1998 the Company refinanced a major portion of its
debt structure as part of its plan to dramatically reduce its
debt. Through a combination of new secured bank borrowings of
approximately $6 million, and loans from its Chairman, CEO and
principal shareholder, Paul I. Stevens, aggregating $4.5 million,
the Company paid off both its Senior bank lender and its Senior
Subordinated notes, aggregating approximately $19.5 million. The
repayment of the Company's Senior Subordinated notes resulted in an
extraordinary gain on early extinguishment of debt of approximately
$11.2 million, or $1.16 per share for the nine months ended
September 30, 1998 ($1.10 per share for the six months ended June
30, 1998 due to potential dilution of warrants which were declined
in the third quarter).
On June 29, 1998 the Board of Directors of the Company approved the
issuance to Paul I. Stevens of warrants to purchase 680,000 shares
of Series A Common Stock of the Company at $0.50 per share as
consideration for his loans to the Company and his personal
guarantee of $4 million of the bank borrowings. The warrants
enable Mr. Stevens to buy 680,000 shares of stock with certain
restrictions over the next 5 years at the indicated price. The
Company obtained a fairness opinion on the value of the loans and
guarantees of Mr. Stevens. The Board of Directors determined that
the value of the warrants issued to Mr. Stevens is less than the
fair value of his loans and guarantees. For accounting purposes, an
amount of $1.15 million was reflected in the June 30, 1998 balance
sheet as a debt discount and an increase in paid-in capital based
upon the Black-Scholes formula for valuing warrants and options. In
the third quarter of 1998 Mr. Stevens declined to accept
this additional consideration due to the potential dilution to
shareholders. Accordingly, the debt discount and the increase in
paid-in capital recorded at June 30, 1998 was reversed in the
quarter ended September 30, 1998.
<PAGE>
For a description of the status of the bank credit facility
at September 30, 1998, see "Liquidity and Capital Resources".
Substantially all assets of the Company continue to be pledged as
collateral on the Company's credit facilities.
5. As a result of the Company's continuing liquidity problems, the
Company has been the subject of lawsuits, from time to time, with
respect to the Company's inability to pay certain vendors on a
timely basis. To date, all of such actions have been settled. The
Company is subject to various claims, including product liability
claims, which arise in the ordinary course of business, and is a
party to various legal proceedings that constitute ordinary routine
litigation incidental to the Company's business. A successful
product liability claim brought against the Company in excess of its
product liability coverage could have a material adverse effect upon
the Company's business, operating results and financial condition.
In management's opinion, the Company has adequate legal defenses
and/or insurance coverage in respect to each of these legal actions
and does not believe that they will materially affect the
Company's operations, liquidity, or financial position. See "Legal
Proceedings" herein and in the 1997 Form 10-K.
6. A description of the Company's divestitures in 1998 and 1997 follow:
Sale of Hamilton Machining Center in July 1998
On July 28, 1998 the Company sold the real and personal property at
its Hamilton, Ohio machining center ("HMC") and the major portion of
its machinery and equipment at its assembly facility in Hamilton,
Ohio for an aggregate consideration of approximately $4.35 million.
This transaction resulted in the recording of a second quarter 1998
loss on sale of assets of approximately $0.8 million and an
additional loss of $0.5 million in the third quarter of 1998 as a
result of HMC inventory and other inventory that was abandoned by
the Company and included in the sale . Proceeds of the transaction
were used to repay the $4 million secured bridge term loan from the
Company's new bank lender (the "Bridge Loan") which was loaned to
the Company on June 30, 1998, transaction fees and certain real and
personal property taxes. HMC had outside sales of $1.2 million and
operating losses of $0.35 million in 1997. The Company has replaced
certain of the capabilities of its machining center with a group of
new and traditional suppliers.
<PAGE>
Sale of Assets of Zerand Division in April 1998
On April 27, 1998, the Company sold substantially all the assets of
its Zerand division to Valumaco Incorporated, a new company formed
for the asset purchase. In addition, Valumaco Incorporated assumed
certain liabilities of the Zerand division. The assets sold
included the real property, platen die cutter systems, and other
original Zerand products such as delivery equipment, wide-web
rotogravure printing systems, stack flexographic printing systems,
unwind and butt splicer systems, and related spare parts, accounts
payable, and other assumed liabilities. Excluded from the proposed
transaction were the System 2000 flexographic printing systems and
the System 9000 narrow-web rotogravure printing systems produced at
the Zerand division and related accounts receivable, inventory and
engineering drawings. The sale price was approximately $13.7
million, which consisted of cash proceeds of $10.1 million, a one-
year $1 million escrow "hold back", and the purchaser's assumption
of approximately $2.6 million of certain liabilities of Zerand,
including the accounts payable.
This transaction resulted in an approximate $10 million reduction of
the Company's senior secured bank debt. In 1997, Zerand contributed
sales of approximately $11.6 million and approximately $1.8 million
of income before interest, corporate charges and taxes. The Company
realized an approximate $3.6 million gain on the sale of Zerand
assets.
Sale of Bernal Division in March 1997
In March 1997, the Company sold substantially all the assets of its
Bernal division including the product technology and related
intangibles to Bernal International, Inc., a new company formed for
the asset purchase. The cash proceeds were approximately $15
million, and in addition, the purchaser assumed certain liabilities
of Bernal, including the accounts payable. This transaction
resulted in a $12 million permanent reduction of the Company's
senior debt. In 1996, Bernal contributed sales of approximately
$17.8 million and approximately $0.7 million income before interest,
corporate charges and taxes.
7. Due to accumulated losses, there are no recoverable income taxes for
the nine months ended September 30, 1998 and 1997. The tax expense
of $75,000 for the three and nine months ended September 30, 1998 is
due to the alternative minimum taxes imposed on the gain on sale of
assets.
<PAGE>
8. In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" ("EPS") which established new standards for
computing and presenting EPS. SFAS No. 128 replaced the
presentation of primary EPS with a presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock. EPS amounts for 1998 and 1997 have been presented
and, where appropriate, restated to conform to the SFAS No. 128
requirements. Since the Series A and Series B stock have
identical dividend and participation rights in the Company's
earnings, they have been considered to be comparable in the
calculation.
9. Comprehensive income, as defined in Statement of Financial
Accounting Standards No. 130, includes foreign currency
translation adjustments and is calculated below:
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ----- ------
Net income (loss) ($1,785) ($1,956) $9,355 ($8,360)
Foreign Currency
TranslationAdjustments (249) (226) (564) (550)
------ ------ ----- ------
Comprehensive income (loss) ($2,034) ($2,182) ($8,791) ($8,910)
====== ====== ====== ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000 Compliance Disclosure
The Company's main computer system and software are not currently year
2000 compliant. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have date
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, but not
limited to, a temporary inability to process transactions, invoices, or
other similar normal business activities.
<PAGE>
Based on a recent assessment, the Company has determined that it will
need to modify a significant portion of its software so that its
computer system will properly utilize data beyond December 31, 1999.
The Company is working on its Year 2000 modifications, and plans to
complete such modifications by the end of the second quarter of 1999
utilizing certain software upgrades and consultant and internal
resources for all program changes. As a result, the Company does not
anticipate any material costs to complete its Year 2000 program
modifications. There can be no assurance that this time frame will be
achieved and actual results could differ materially from these plans.
Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer
codes and similar uncertainties.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended September 30, 1998 and 1997
Sales The Company's sales for the nine months ended September 30, 1998
decreased by $6.5 million (or 26.7%) compared to sales in the same
period in 1997 due primarily to sales decreases in packaging products
($3.7 million) principally as a result of the sale of Zerand on April
27, 1998, and decreases in specialty web products sales ($2.2 million)
and banknote and currency system sales ($0.6 million). Sales and
gross profit in 1997 include $0.7 million in proceeds from the sale of
certain press system contract rights. The Company sold these rights in
lieu of a long repossession and resale process. Sales in 1998 included
$4.3 million of Zerand sales which division was sold by the Company in
April, 1998.
Gross Profit The Company's gross profit for the nine months ended
September 30, 1998 increased by $2.2 million compared to gross profit
in the same period in 1997 due primarily to shipment of products at
near normal product margins. In addition, the Company evaluated its
last-in first out ("LIFO") inventory reserve following the sale of
assets, including the inventory, at HMC and other inventory usage in
1998. The financial impact of the calculated decrement in the LIFO
inventory for the nine months ended September 30, 1998 was $0.9
million. Accordingly, the gross profit for the nine months was
increased $0.9 million ($0.09 per share) and the LIFO reserve was
reduced $0.9 million. Gross profit margin for 1998 increased to 20% of
sales as compared to 5.7% of sales for 1997. This increase in gross
profit margin in 1998 was due primarily to product mix, shipment of
products at near normal margins, decreased warranty expenses, and the
benefit of the reduction of the LIFO reserve. Sales and gross profit
in 1997 include $0.7 million in proceeds from the sale of certain press
system contract rights. The Company sold these rights in lieu of a
long repossession and resale process.
<PAGE>
Selling, General and Administrative Expenses The Company's selling,
general and administrative expenses decreased by $0.9 million (or
13.6%) for the nine months ended September 30, 1998 compared to the
same period in 1997 due to cost reduction efforts at corporate
headquarters and at manufacturing locations in connection with the
reduced volume of sales, as well as the impact of the sale of Bernal
and Zerand. Selling, general and administrative expenses for the nine
months ended September 30, 1998 were 32.6% of sales compared to 27.7%
of sales for the same period in 1997 due to the very low sales in 1998
compared to 1997. The Company's continuing cost reductions in 1998 did
not equate to the overall percentage decrease in sales, and especially
the sales decrease in the third quarter.
Other Income (Expense) The Company's interest expense decreased by
$1.2 million for the nine months ended September 30, 1998 compared to
the same period in 1997 due to the reduced borrowings in 1998 resulting
from the application of the Zerand and Bernal sale proceeds to pay down
bank indebtedness, and the extinguishment of subordinated indebtedness
at June 30, 1998, offset by an increased cost of borrowing in 1998.
Interest income was negligible for the nine months ended September 30,
1998 and 1997.
Comparison of Three Months Ended September 30, 1998 and 1997
Sales The Company's sales for the three months ended September 30,
1998 decreased by $5.4 million (or 66.4%) compared to sales in the same
period in 1997 due primarily to sales decreases in packaging products
($2.3 million) resulting from the sale of Zerand on April 27, 1998, and
specialty web products ($3.1 million).
Gross Profit (Loss) The Company's gross profit for the three months
ended September 30, 1998 decreased by $0.4 million compared to gross
profit in the same period in 1997 due primarily to the very low sales
volume in 1998 for the Company's products, and the burden of excess
capacity and unabsorbed manufacturing costs. In addition, the Company
evaluated its LIFO inventory reserve following the sale of assets,
including the inventory, at HMC and other inventory usage in the third
quarter of 1998. The financial impact of the calculated decrement in
the LIFO inventory for the three months ended September 30, 1998 was
$0.9 million. Accordingly, the gross profit for the three months was
increased $0.9 million ($0.09 per share) and the LIFO reserve was
reduced $0.9 million. Gross profit margin for the third quarter of 1998
increased to 21.6% of sales as compared to 12.3% for 1997. This
increase in gross profit margin in 1998 was due primarily to reduced
warranty costs in 1998 and the benefit of the reduction of the LIFO
reserve in 1998.
Selling, General and Administrative Expenses The Company's selling,
general and administrative expenses decreased by $0.4 million (or
19.5%) for the three months ended September 30, 1998 compared to the
same period in 1997 due to continuing cost reduction efforts at
corporate headquarters and manufacturing locations, and the sale of
Zerand. Selling, general and administrative expenses for the three
months ended September 30, 1998 were 57.6% of sales compared to 24.0%
of sales for the same period in 1997 due to the 66.4% decrease in sales
in 1998 described above without corresponding percentage decreases in
expenses.
<PAGE>
Other Income (Expense) The Company's interest expense decreased by
$0.5 million for the three months ended September 30, 1998 compared to
the same period in 1997 due to the reduced borrowings in 1998 resulting
from the application of the Zerand and Bernal sale proceeds to pay down
bank indebtedness and the extinguishment of subordinated indebtedness
at June 30, 1998, offset by an increased cost of borrowing in 1998.
Interest income was negligible for the three months ended September 30,
1998 and 1997.
TAX MATTERS
The Company's effective state and federal income tax rate ("effective
tax rate") was 0% and 2.6% for the three months and over 100% and 0.9%
for the nine months ended September 30, 1998 and 1997, respectively.
The income taxes in 1998 result from the alternative minimum tax on
sale of certain assets, primarily Zerand. Due to accumulated losses,
there are no recoverable income taxes for the nine months ended
September 30, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The Company's bank credit facilities have first liens on certain assets
of the Company, principally inventory, accounts receivable, and the
Company's Texas real estate and machining center in Ohio. Paul I.
Stevens' loans aggregating $4.58 million at September 30, 1998 have
first liens on certain assets of the Company, principally certain Ohio
assets that are being held for sale, a $1 million escrow holdback on
the sale of Zerand, the assets of a foreign subsidiary, and certain
accounts receivable for new equipment being installed at a customer
location. The Company was paid $500,000 of the Zerand escrow holdback
funds net of amounts owed to the purchaser on November 6, 1998.
Because these holdback funds collateralize certain P. I. Stevens
advances, the $500,000 was paid to him to reduce his secured loans to
the Company.
Interest on the new bank loans is 1 1/4% over prime with a two-year
maturity on the revolving credit facility. The amount borrowed on the
revolving credit facility was approximately $2.357 million on September
30, 1998. The Company paid in full a $4.0 million bank Bridge Loan on
July 28, 1998 from the sale of HMC and the major portion of its
machinery and equipment at its assembly facility in Hamilton, Ohio.
The secured loans from Paul I. Stevens are due June 30, 2000 and bear
interest at rates that vary up to 2% over bank prime.
On June 30, 1998 the Company refinanced a major portion of its secured
indebtedness ("the Debt Restructuring") as part of its plan to
dramatically reduce its debt. Through a combination of new secured
bank borrowings of approximately $6 million, and loans from its
Chairman, CEO and principal shareholder, Paul I. Stevens, aggregating
$4.5 million, the Company paid off both its Senior secured bank lender
and its secured Senior Subordinated Notes, aggregating approximately
$19.5 million. Repayment of the secured Senior Subordinated Notes
resulted in an extraordinary gain on early extinguishment of debt of
approximately $11.2 million, or $1.16 per share for the nine months
ended September 30, 1998.
<PAGE>
As a result of its sale of Zerand (see Note 6 of Notes to Consolidated
Condensed Financial Statements), the Company was able to make principal
payments on its bank credit facility of approximately $10 million on
April 27, 1998.
The Company requires capital primarily to fund its ongoing operations,
to service its existing debt and to pursue its strategic objectives
including new product development and penetration of international
markets. The Company's working capital needs typically increase
because of a number of factors, including the duration of the
manufacturing process and the relatively large size of most orders.
Net cash provided by (used in) operating activities (before working
capital requirements) was $9.58 and ($5.97) million for the nine
months ended September 30, 1998 and 1997, respectively. Working
capital (used) provided cash of ($1.27) and $0.1 million for the nine
months ended September 30, 1998 and 1997, respectively. The Company's
debt restructuring in 1998 resulted in new debt facilities, an
improved balance sheet and provided additional borrowing capacity for
the Company's operations.
Under its credit facility at September 30, 1998, the Company's maximum
borrowings were limited to a borrowing base formula, which could not
exceed $7.5 million in the form of direct borrowings and letters of
credit. As of September 30, 1998 there were $2.357 million in direct
borrowings and no standby letters of credit outstanding under the bank
credit facility, with additional availability for such borrowings of
$99,000.
At September 30, 1998, $2.357 million of the Company's bank borrowings
were at the lender's prime rate of interest (8.25%) plus 1.25%, or a
total of 9.5% interest. The interest rate for the three months ended
September 30, 1998 was 9.75%, with the rate decreasing to 9.5% on
September 30, 1998. The amounts borrowed under the credit facility
have been used for working capital. The loans from Paul I. Stevens for
working capital bear interest at 10%.
The borrowings under the bank credit facility are subject to various
restrictive covenants related to financial ratios as well as
limitations on capital expenditures and additional indebtedness. The
Company is not allowed to pay dividends.
With the above described Debt Restructuring, and assuming that sales
return to annual levels of $25 to $30 million, and one of several
strategic, financial alternatives, principally the additional sale of
assets and loans from Paul I. Stevens, among others presently being
pursued by the Company is consummated, management believes that cash
flow from operations will be adequate to fund its existing operations
and repay scheduled indebtedness over the next 12 months.
<PAGE>
There can be no assurance that future sales of assets, if any, can be
successfully accomplished on terms acceptable to the Company. Under
current circumstances, the Company's ability to continue as a going
concern depends upon the obtaining of new orders, further redeployment
of assets, and a return to profitable operations. If the Company is
unsuccessful in its efforts, it may continue to be unable to meet its
obligations or fulfill the covenants in its revised debt agreements, as
well as other obligations, making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
In addition, the Company may incur, from time to time, additional
short- and long-term bank indebtedness (under its new credit facility
or otherwise) and may issue, in public or private transactions, its
equity and debt securities to provide additional funds necessary for
the continued pursuit of the Company's operational strategies. The
availability and terms of any such sources of financing will depend on
market and other conditions. There can be no assurance that such
additional financing will be available or, if available, will be on
terms and conditions acceptable to the Company.
The Company's two defined benefit pension plans have had substantial
disbursements during prior years for lump sum distributions upon
termination of participant employment. Because of the magnitude of the
Company's reductions of employees from 1996 through 1998, the plan
assets were reduced to levels which required a special liquidity
shortfall contribution to the union plan as of January 15, 1997 of
approximately $600,000 (See Note M. of Notes to the Consolidated
Financial Statements in the 1997 Form 10-K). Although this shortfall
contribution payment was not made, the union plan shortfall condition
was remedied in 1997 due to the curtailment of lump sum payments and
net gains in asset values. Salaried plan benefits were frozen as of
April 30, 1997 to eliminate future benefit accruals for participants.
Because of liquidity problems in the pension plans, the Company's
ability to pay additional participant lump sum pension plan
distributions has been severely limited to avoid future shortfall
conditions.
In addition there are funding deficiencies in each of the plans as
current plan assets are less than the projected benefit obligations
prescribed by the plans. The assets of the pension plans are
maintained in trusts and consist primarily of equity and fixed income
securities. It is the Company's general funding policy to contribute
amounts deductible for federal income tax purposes. The Company is
evaluating the steps necessary to fund the plans on a rational basis
over a period not to exceed 10 years, however there can be no assurance
that the Company will be successful in this effort.
Backlog and Orders The Company's backlog of unfilled orders at
September 30, 1998 was approximately $4.2 million compared to $12.0
million at December 31, 1997 (excluding Zerand backlog), a decrease of
(65%). The backlog decrease consists primarily of decreases in the
orders for major press systems. The backlog at September 30 in each of
the preceding five years has ranged from a low of $19.4 million in 1997
to a high of $70.3 million in 1994.
<PAGE>
The reduction in backlog is the result of a reduced order flow in 1997
and 1998. Orders (excluding Zerand) for the nine months ended
September 30, 1998 were $7.4 million compared to $22.9 million for
the comparable period in 1997, a decrease of $17.2 million while
shipments decreased $6.4 million. The Company believes the above noted
reduced order flow is the result of the sale of Zerand ($2.7 million),
fluctuations in the flow of major printing and packaging system orders,
and in part to liquidity problems faced by the Company. As a result,
the Company is continuing to adjust its rate of future production and
accompanying costs to match this reduced order flow.
When sales are recorded under the completed contract method of
accounting, the Company normally experiences a six to nine month lag
between the time new orders are booked and the time they are reflected
in sales and results of operations. Larger orders, which are accounted
for using the percentage of completion method of accounting, are
reflected in sales and results of operations as the project progresses
through the manufacturing cycle.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In 1997, the Company filed a suit seeking damages and injunctive relief
against Paul W. Bergland, a former vice-president, for, among other
things, theft of trade secrets, fraud, breach of contract, and breach
of a confidential relationship. On March 3, 1997, Bergland filed his
original answer and a counterclaim. ConverTek, Inc., a corporation in
which Bergland claims an ownership interest, has joined the suit as a
counter claimant against the Company. This litigation was settled in
July 1998 with no payment of damages on the part of any of the parties
to the lawsuit.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description of Exhibit
3.1 Second Amended and Restated Certificate of
Incorporation of the Company. (1)
3.2 Bylaws of the Company, as amended. (2)
4.1 Specimen of Series A Common Stock Certificate. (3)
4.2 Specimen of Series B Common Stock Certificate. (4)
10.1 Standard Deposit Receipt and Real Estate Purchase
Contract dated June 30, 1998 by and between the
Company, J.J.L. Holdings Company Ltd. And M.B.A.
Holdings Company, Ltd. (5)
Exhibit Number Description of Exhibit
10.21 Standard Form Asset Purchase Contract dated June
30, 1998 by and between the Company, J.J.L.
Holdings Company Ltd. and M.B.A. Holdings Company,
Ltd. (5)
11.1 Computation of Net Income per Common Share. (*)
27.1 Financial Data Schedule. (*)
* Filed herewith.
(1) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990 and incorporated
herein by reference.
(2) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (No. 33-15279) and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1 (No. 33-24486) and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's report on Form 8-
A filed August 19, 1988 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's report on Form 8-
K / A filed September 18, 1998 and incorporated herein by
reference.
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K and Form 8-K/A
dated July 28, 1998 to report the sale of the real and personal
property of its Hamilton, Ohio Machining Center and the major
portion of its machinery and equipment at its assembly facility in
Hamilton, Ohio, under Item 2. Acquisition or Disposition of Assets.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Stevens International, Inc. has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STEVENS INTERNATIONAL, INC.
Date: November 12, 1998 By: /s/ Paul I. Stevens
Paul I. Stevens
Chief Executive Officer
and Acting Chief Financial Officer
<TABLE>
EXHIBIT 11.1
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES
COMPUTATIONS OF NET INCOME (LOSS) PER COMMON SHARE
(UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic and diluted:
Weighted average shares outstanding-
basic 9,488 9,451 9,488 9,451
Assumed exercise of Series A and B
stock options
(Treasury stock method)
--- --- 194 ---
------ ------ ------ ------
Total common share equivalents - diluted 9,488 9,451 9,682 9,451
====== ====== ====== ======
Income (loss) before extraordinary item ($1,785) ($1,956) ($1,866) ($8,360)
Extraordinary item (Note 4):
Gain on early extinguishment of
debt, net of tax effect --- --- 11,221 ---
------ ------ ------ ------
Net income (loss) ($1,785) ($1,956) $9,355 ($8,360)
====== ====== ====== ======
Earnings (loss) per share-basic (Note 8)
Income (loss) before extraordinary item ($0.19) ($0.20) ($0.19) ($0.88)
Gain on early extinguishment of debt --- --- 1.18 ---
------ ------ ------ ------
Net income (loss) - basic ($0.19) ($0.20) $0.99 ($0.88)
====== ====== ====== ======
Earnings (loss) per share - diluted
(Note 8)
Income (loss) before extraordinary item ($0.19) ($0.20) ($0.19) ($0.88)
Gain on early extinguishment of debt --- --- 1.16 ---
------ ------ ------ ------
Net income (loss) - diluted ($0.19) ($0.20) $0.97 ($0.88)
====== ====== ====== ======
See notes to consolidated condensed financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF STEVENS INTERNATIONAL, INC.
AND SUBSIDIARIES AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 41
<SECURITIES> 0
<RECEIVABLES> 3,788
<ALLOWANCES> 355
<INVENTORY> 5,835
<CURRENT-ASSETS> 12,791
<PP&E> 4,424
<DEPRECIATION> 1,821
<TOTAL-ASSETS> 16,994
<CURRENT-LIABILITIES> 9,160
<BONDS> 5,763
0
0
<COMMON> 950
<OTHER-SE> (1,749)
<TOTAL-LIABILITY-AND-EQUITY> 16,994
<SALES> 17,777
<TOTAL-REVENUES> 17,777
<CGS> 14,222
<TOTAL-COSTS> 20,020
<OTHER-EXPENSES> 308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,439
<INCOME-PRETAX> (1,791)
<INCOME-TAX> 75
<INCOME-CONTINUING> (1,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 11,221
<CHANGES> 0
<NET-INCOME> 9,355
<EPS-PRIMARY> .99
<EPS-DILUTED> .97
</TABLE>
