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