-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtR/FSuS4VEh9P+RbGWbidCRSCplpXXbi9xB+3T8dh1qlh58kpPR2JAGo4MM8reO yEFxcXg0qyjyRYRrmel+/Q== 0000926236-00-000042.txt : 20000414 0000926236-00-000042.hdr.sgml : 20000414 ACCESSION NUMBER: 0000926236-00-000042 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEVENS INTERNATIONAL INC CENTRAL INDEX KEY: 0000817644 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 752159407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09603 FILM NUMBER: 600706 BUSINESS ADDRESS: STREET 1: 5700 E. BELKNAP ST. CITY: FORT WORTH STATE: TX ZIP: 76117 BUSINESS PHONE: 8178313911 MAIL ADDRESS: STREET 1: 5700 E. BELKNAP ST. CITY: FORT WORTH STATE: TX ZIP: 76117 FORMER COMPANY: FORMER CONFORMED NAME: STEVENS GRAPHICS CORP DATE OF NAME CHANGE: 19920703 10-K405 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM 10-K -------------------------------------- (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1999 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.) 5700 E. Belknap St. 76117 Fort Worth, Texas (Zip Code) (Address of Principal Executive Offices) -------------------------------------- Registrant's telephone 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 *(1) Series A Stock, $0.10 Par Value Over The Counter Bulletin Board (OTCBB) Series B Stock, $0.10 Par Value Over The Counter Bulletin Board (OTCBB) 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's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ X ] No [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $7,105,000 based upon the last trade of the registrant's Series B Common Stock on February 22, 2000 at $2 per share and the closing price of the Series A Common Stock on March 23, 2000 at $1c per share as reported by the OTCBB. As of March 23, 2000, there were outstanding 7,466,347 shares of Series A stock and 2,035,786 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 2000 are incorporated by reference in Part III. ============================================================================ *1 Effective August 2, 1999 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 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 43 PART III Item 10. Directors and Executive Officers of the Registrants 43 Item 11. Executive Compensation 43 Item 12. Security Ownership of Certain Beneficial Owners and Management 43 Item 13. Certain Relationships and Related Transactions 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 43 PART I Item 1. Business. Stevens International, Inc. was incorporated in Delaware in November 1986. (All references to the "Company" or "Stevens" include Stevens International, Inc. and its subsidiaries and predecessors, unless the context otherwise requires.) The statements in this report that are forward looking are based upon current expectations and actual results may vary. See "Cautionary Statements" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. The Company's business has changed significantly in the last several years due to fundamental changes in web-fed printing press markets, the large operating losses that the Company sustained in 1996 and 1997 and the Company's need to have reduced indebtedness. Sales of the Post Machinery Co. division (1993), the Bernal division (1997), the Zerand division (1998), the Hamilton Machining Center (1998) and the Hamilton, Ohio production and storage facility (1999) have enabled the Company to substantially reduce indebtedness. 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 76% of the Company's net sales for 1999, 60% of net sales for 1998, and 45% of net sales for 1997. 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. Private Placement of $1 Million 10% Convertible Subordinated Notes Payable Due March 31, 2003 In April 2000, the Company completed a private placement of $1 million of 10% convertible subordinated notes ("the Notes"). Net proceeds of the Notes will be used for working capital. The Notes were issued in increments of $50,000 and are convertible into 2,000,000 shares of Series A Common Stock ("SVEIA") of the Company at $0.50 per share, subject to adjustment. The conversion of the Notes is at the holder's option anytime on or after the fifteenth day following the original issue date of the Notes and prior to the close of business on their maturity date. Issue costs for the Notes aggregated approximately $151,000. The Company has committed to register the shares that would be issuable upon conversion of the Notes. Dilution to existing shareholders would occur as a result of the conversion of the Notes to 2 million shares of Series A common stock. Should all the notes be converted, these shareholders would own approximately 17% of the outstanding stock of the Company. The first quarter of 2000 will include a charge for interest expense of $1 million with a corresponding $1 million increase in "Paid in Capital in Excess of Par Value." Liens on Company Assets Substantially all assets of the Company continue to be pledged as collateral on the Company's credit facilities. Throughout the recent history of the Company the Senior Bank lenders have had first liens on accounts receivable, inventory, the real and personal property in Tarrant County, Texas, and all intangibles of the Company. Beginning June 30, 1998, Paul I. Stevens, the Company's Chairman and CEO and principal lender, was granted first liens on the "holdback" from the sale of Zerand in 1998, certain international contracts, and various real and personal property in Butler County, Ohio, as well as second lien positions on accounts receivable, inventory, the real and personal property in Tarrant County, Texas, and all intangibles of the Company. The Company was unable to pay certain pension plan minimum payments due on September 15, 1999. Accordingly, the Company filed the necessary forms with the Pension Benefit Guaranty Corporation ("PBGC") to initiate distress terminations of the Company's two defined benefit pension plans. The PBGC is a federal agency that insures and protects pension benefits in certain pension plans when the sponsoring company cannot make the required contributions to fund projected benefit obligations of the plans. As a result of the "distress termination" filing in September 1999, the PBGC in November 1999 and February 2000 filed $1.6 million in federal liens against all property and rights to property of the Company on behalf of the Company's Pension Plan for Bargaining Unit Employees. In December 1999, the PBGC granted a subordination of their lien interests to the extent of $4 million in favor of the Company's Senior lender, Wells Fargo Credit, Inc., in order to induce the Senior lender to facilitate further loans or extend financial accommodations to the Company. In February 2000, the PBGC granted a subordination of their lien interests to Paul I. Stevens on advances of no more than $550,000 by Mr. Stevens subsequent to February 7, 2000. The PBGC reserved certain rights and remedies with respect to prior advances to the Company by Mr. Stevens. Overview of 1999 and 1998 The Company continued to experience a decrease in sales during 1999 and 1998, which primarily reflected the sale of various divisions and a continuation of the reduced order flow that the Company has experienced for the last several years. Orders for 1999 ($11.1 million) increased 8.8% over the previous year. The increase occurred in packaging and specialty web products. In response to the low volume of orders, the Company continued its work force and cost reductions and the consolidation of certain facilities and operating functions. In an effort to cut costs and improve cash flow, the Company has eliminated certain product lines and consolidated manufacturing and assembly at its Fort Worth, Texas, location. The Company believes these actions have helped and will continue to help in its efforts to return to profitability. Results of Operations A description of the Company's recent divestitures follow. Sale of SSMI In January 2000, the Company sold its French repair and service company, SSMI, for a net aggregate consideration of $198,000. The transaction resulted in an aggregate loss of $1.65 million, including a loss on sale of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million which had been previously reported as a charge against stockholder equity in accumulated other comprehensive loss. SSMI had 1999 revenues of $3 million and an operating loss of $0.13 million. Net proceeds of this transaction were used to repay a portion of the loans from P. I. Stevens, which were partially collateralized by a lien on this subsidiary. Sale of Hamilton Production and Storage Facilities In the second quarter of 1999, the Company concluded the sale of the real property at its Hamilton, Ohio production facility for an aggregate consideration of $725,000. The transaction resulted in a small loss due to certain unanticipated costs of vacating the facility. An inventory storage facility at Hamilton, Ohio was sold in August 1999 for an aggregate consideration of $70,000. With the conclusion of this transaction, all real property in Ohio has now been sold. Proceeds of these transactions were used to repay certain expenses of the sale, certain property taxes and repay a portion of the $2.5 million loan from Paul I. Stevens, which was partially collateralized by a lien on these production and storage facilities. Sale of Hamilton Machining Center in July 1998 In July, 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 In April, 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. Industry Overview Stevens markets its systems to its customers in two distinct worldwide industries-the packaging industry and the printing industry. Although both the packaging and printing industries utilize printing in the manufacturing process, the printed products have significantly different applications. In the packaging industry, the printed product functions as the container for the end product, such as food and beverage containers. In the printing industry, the printed product is the end product, such as direct mail inserts, postage stamps and personal checks. The Company's products are designed to serve the (1) commercial and specialty printing industry, (2) banknote and securities segments of the printing industry, (3) the paperboard packaging industry, and (4) the flexible packaging industry. The packaging industry consists of several large segments, some of which the Company does not serve. The Company's products are designed to serve the folding carton, liquid carton, and the flexible packaging segments of the packaging industry. The printing industry also consists of several large segments in which the Company does not participate - including newspapers, periodicals and book publishing. Economic Forecasts The Company believes that, in the industry segments which it serves, several major market trends exist that are influencing the development and enhancement of packaging and printing equipment systems. These trends include an increasing emphasis on productivity, changing retailing practices-including greater market segmentation-and increasing environmental regulation. In addition the industry is experiencing a considerable consolidation process with numerous customer consolidations taking place in each of the last several years. Productivity. Productivity in the printing industry (as measured by output per employee) is one of the lowest among major industries in the United States. The purchasers of packaging and printing equipment continue to seek methods of reducing per unit costs in response to increased labor and raw materials costs, such as paper and paperboard. As a result, purchasers of packaging and printing equipment want to improve efficiency by reducing inventories, "in process" production time, waste and labor costs. Purchasers, therefore, are demanding more productive equipment including integrated systems capable of running at high speeds and producing finished product in a single press pass. The Company believes its web systems technology meets these demands for higher productivity. Retailing Practices. Retail shelf space is becoming increasingly expensive and scarce. In order to more effectively utilize shelf space, consumer product manufacturers are placing greater emphasis on the appearance of the package as a selling tool for the product. As a result, purchasers of packaging and printing equipment are being required by their customers to produce packaging with improved graphics through an increased number of colors, improved color quality and application of color enhancing coatings. These requirements have increased the complexity of the packaging and printing processes. The Company believes its products provide a production solution to these requirements. Market Segmentation. Market segmentation, or target marketing, where products are marketed to specific geographic areas or demographic groups, has resulted in increased product and packaging variety and an increased demand for distinct packaging and more specialized printing. In response to this trend, which has resulted in shorter press runs, purchasers of packaging and printing equipment systems are demanding greater system flexibility and automation to permit quick and less expensive change-over from one product run to another. The Company believes its technology has distinct advantages in meeting these demands. Environmental Regulation. Increasingly stringent environmental laws, rules and regulations, both domestically and internationally, have caused purchasers of packaging and printing equipment to focus on volatile organic compounds, printing inks, coatings and chemicals used for platemaking and equipment maintenance which are environmentally safer. As a result, purchasers of packaging and printing equipment are increasingly seeking ecologically-friendly processes such as the use of flexographic printing with water based inks. 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 currency examination equipment, the System 2000 flexographic and System 9000 rotogravure printing press systems. The Company works closely with manufacturers of related consumables, i.e., printing plates, anilox rolls, inks, paper and similar products, to create new product enhancements. Historically, the Company's gross expenditures for research and development (including customer funded projects) have exceeded 5% of net sales. Integrated Systems. The Company provides fully integrated web-fed packaging and printing systems which are capable of producing a finished product by taking paper or other substrate through one continuous, uninterrupted process. The Company works closely with its customers in the design and development of its integrated systems to meet their specific manufacturing needs. For many of its customers, the Company is a single- source supplier of their packaging and printing systems. The Company has the technological and engineering expertise to combine any of the four major printing methods (lithography, flexography, rotogravure and intaglio) together with die cutters and creasers and product delivery systems purchased from other suppliers into a single system. The Company believes that its ability to provide customized systems solutions provides it with a competitive advantage over other packaging and printing equipment manufacturers. Conversion to Web-Fed Systems. The Company believes that, because of the increased productivity inherent in the web-fed process, significant opportunities exist to convert users of sheet-fed equipment over to web-fed systems in the segments of the packaging and printing industries that it serves. While web-fed equipment has been successfully utilized for many years in some segments of the printing industry which the Company does not serve (including newspapers and periodicals), sheet-fed equipment is predominant in the folding carton segment of the packaging industry and in the banknote and securities segment of the printing industry. 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 the following system components independently of complete systems. 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. These systems are used for the examination of banknotes with error detection capabilities for overt and covert anti-counterfeit components and other printing errors. The ACE system achieves the final link in the long-sought goal of complete machine- based production, processing, and distribution of banknotes. The ACE system has resulted from many years of technical development of banknote inspection by the Bank of England Printing Works, and continued development and close cooperation with the Company over the last six years. ACE is based on a high-speed digital image processor capable of completely examining each note on both sides of a sheet of banknotes in a single pass through the machine at rates up to 10,000 sheets per hour. ACE enhances productivity by replacing the requirement for examination personnel, reducing the number of related security personnel, and by removing a severe bottleneck in the production flow of a banknote printing works. ACE further provides the standard of consistency for production quality required in the public distribution process of banknotes. ACE electronically identifies banknotes that do not meet customer defined quality standards. Once identified, the defective currency is automatically removed from the manufacturing process. In addition to currency inspection and extraction, the ACE system also accounts for the number of sheets entering and exiting the automated examination process. 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 the Company's 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 and collators, which represented 76% of the Company's net sales for 1999, 60% of net sales for 1998, and 45% of net sales for 1997. 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. Marketing The Company primarily markets its products domestically through direct sales engineers and managers and internationally through its agent network. 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 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 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, 2000, the Company had approximately 55 employees. With the closing of the Hamilton plant in 1998, the Company no longer employs any collective bargaining employees. Backlog and Orders The backlog of the Company consists of orders that have met strict criteria, including having a signed contract with appropriate down payments received. Further, to be included in backlog, these orders must also have a reasonable expectation of being manufactured, shipped and paid for within contract terms. Additionally, the backlog does not generally include a significant amount of service and parts orders, which have been in the 30% to the 50% range of the Company's sales volume for the last three years. The absolute value of the backlog varies with the amount of percentage of completion revenue recognized in any one period. This value can fluctuate since the Company experiences an average six to nine month period between the booking of the order and its final shipment. The Company's backlog of unfilled orders as of December 31, 1999 was approximately $2.5 million compared to $2.5 million at December 31, 1998. Executive Officers The executive officers of the Company are as follows: Name Age Principal Position with the Company ---------------- --- ----------------------------------- Paul I. Stevens 85 Chairman of the Board, Chief Executive Officer and Director Richard I. 61 President, Chief Operating Officer Stevens and Director Constance I. 56 Vice President - Administration, Stevens Assistant Secretary and Director George A. 58 Vice President, Treasurer and Chief Wiederaenders Accounting Officer Paul I. Stevens founded the Company in 1965. He has served the Company as Chairman of the Board and Chief Executive Officer since its inception. In 1974, Mr. Stevens founded Stevens Industries, Inc., a family-owned holding company that is an affiliate of the Company and of which he is the controlling stockholder. Mr. Stevens is the father of Richard I. Stevens and Constance I. Stevens. Richard I. Stevens is President, Chief Operating Officer and a director of the Company and has served in each of these capacities for at least five years. From May 1992 to December 1993, Mr. Stevens served as President and General Manager of the Company's Hamilton division. He joined the Company in 1965 and became President in 1969. In 1973 he was elected to the Board of Directors. Mr. Stevens is active in industry professional associations. He has been a director of The Association for Suppliers of Printing and Publishing Technologies (NPES) since 1982. In October 1995, Mr. Stevens was elected Chairman of the Board of NPES for a two-year term. Mr. Stevens is the son of Paul I. Stevens. 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. The Company's Financial Condition Is Poor. The Company is currently experiencing severe liquidity problems and has been unable to pay all of its obligations when they have become due. The Company has had operating losses in each of the last four years, with net sales declining substantially each year since 1995. Since 1997, cash flow from operations has been insufficient to meet the Company's cash requirements. Unless the Company obtains substantial orders for printing equipment in the near future, the Company may be forced to file for bankruptcy. The Company's liabilities may currently exceed the value of its assets. 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 losses of $34.2 million in 1996 and $19.2 million in 1997. These losses were caused by many factors, including a slowdown in its customers' capital spending that surfaced in the fourth quarter of 1995; changing printing technology that affected demand for the Company's business forms printing systems, which prior to 1990 represented a substantial portion of the Company's revenues, and by a general economic downturn which impacted or delayed capital expenditure decisions by its customers. Sales of business forms and specialty web printing press systems have historically been subject to cyclical variation based upon specific and general economic conditions, and there can be no assurance that the Company will maintain profitability during downturns. Technological Advances in the Printing Industry. The packaging and printing industry has experienced many technological advances over the last decade, and the Company expects such advances to continue. Packaging and printing companies generally want more efficient packaging and printing press systems in order to reduce inventories, "in process" production time, waste and labor costs. These technological advancements could result in the development of additional competition for all or a portion of the Company's products and could adversely affect the competitive position of the Company's products. Although the Company has rights in a significant number of issued patents in the United States and elsewhere, management believes that patent protection is less significant to the Company's competitive position than certain other factors. These factors include the Company's in-depth knowledge of the industry and the skills, know-how and technological expertise of the Company's personnel. Dependence Upon New Technologies and Product Development. The Company's industry is highly competitive and is characterized by technological advances and new product introductions and improvements. The Company believes that its future success depends upon its ability to enhance current products, to develop and introduce new and superior products on a timely basis and at acceptable pricing, to respond to evolving customer requirements, and to design and build products which achieve general market acceptance. The ability of the Company to compete successfully will depend on its ability to maintain a technically competent research and development staff and to stay ahead of technological changes and advances in the industry. Many difficulties and delays are encountered in connection with the development of new technologies and related products. There can be no assurance that new products will establish long-term life cycles or assure long-term field use. Moreover, there can be no assurance that any refined or improved versions of current products or any new products that may be introduced in the future will be commercially viable. Current competitors or new market entrants could introduce new or enhanced products with features which render the Company's technology, or products incorporating the Company's technology, obsolete or less marketable. International Business Risks. International sales represented 38% of net sales in 1999, 35% in 1998 and 25% in 1997. The Company expects that international sales will continue to represent a significant portion of its total sales. International operations are subject to various risks, including exposure to currency fluctuations, political and economic instability, differing economic conditions and trends, differing trade and business laws, unexpected changes in applicable laws, rules, regulatory requirements or tariffs, difficulty in staffing and managing foreign operations, longer customer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences and varying degrees of intellectual property protection. Fluctuations in currency exchange rates could result in lower sales volume reported in U.S. dollars. Fluctuations in foreign exchange rates are unpredictable and may be substantial, and, since many of the Company's competitors are foreign, fluctuations in foreign countries may also affect the Company's competitive position in the United States market. Any event causing a sudden disruption of international sales could have a material adverse effect on the Company's operations. There can be no assurance that the Company will be successful if it engages in such practices to a significant degree in the future. Manufacturing Risks and Availability of Raw Materials. Disruption of operations at the Company's primary manufacturing facility or any of its subcontractors for any reason, including work stoppages, fire, earthquake or other natural disasters, would cause delays in shipments of the Company's products. There can be no assurance that alternate manufacturing capacity would be available, or if available, that it could be obtained on favorable terms or on a timely basis. The principal raw materials used in the manufacturing of printing press systems are high grade steel and alloys used in the making of gears, rollers and side frames. Steel is in very available supply throughout the world. Impact of Estimates Upon Quarterly Earnings. The Company derives the majority of its revenues from the sale of packaging and printing press systems, with prices for each system and most orders ranging from $1 million to over $10 million. The Company's policy is to record revenues and earnings for orders in excess of $1 million on the percentage of completion basis of accounting, while revenues for orders of less than $1 million are recognized upon shipment or when completed units are accepted by the customer. The percentage of completion method of accounting recognizes revenues and earnings over the build cycle of the press system as work is being performed based upon the cost incurred to date versus total estimated contract cost and management's estimate of the overall profit in each order. In the event that the Company determines it will experience a loss on an order, the entire amount of the loss is charged to operations in the period that the loss is identified. The Company believes that the percentage of completion method of accounting properly reflects the earnings process for major orders. The informed management judgments inherent in this accounting method may cause fluctuations within a given accounting period, which could be significant. During each accounting period, other management assessments include estimates of warranty expense, allowances for losses on trade receivables and many other similar informed judgments. Litigation. As a result of the Company's continuous liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of the actions can be settled, or if named a defendant in such actions in the future, the Company will be able to settle such claims in the future. In addition, the Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. See "Legal Proceedings." Environmental Costs, Liabilities and Related Matters. The Company's production facilities and operations are subject to a variety of federal, state, local and foreign environmental, health and job safety laws and regulations. The Company is not aware of any conditions or circumstances that, under applicable environmental, health or safety regulations or requirements, will require expenditures by the Company that management believes would have a material adverse effect on its businesses. However, environmental liabilities (especially those relating to discontinued production or waste disposal practices) are very difficult to quantify, and it is possible that environmental litigation or regulatory action may require significant unanticipated expenditures or otherwise adversely affect the Company. See "Legal Proceedings." Control by Principal Stockholders. As of March 20, 2000, Paul I. Stevens and persons and entities related to him beneficially own approximately 13% of the outstanding Series A Common Stock and 93% of the outstanding Series B Common Stock of the Company. This ownership represents 72.4% of the combined voting power. Although the impact of the Stevens' holdings is not believed to be material to the operations of the Company, such control may have the effect of reducing liquidity of the stock which may affect shareholder value. Volatility of Stock Price. The Company's Series A Common Stock market price in the last few years has ranged from a high of $4.50 per share in the second quarter of 1998 to a low of $0.09 per share in the fourth quarter of 1999. The trading price of the Common Stock is likely to continue to be highly volatile and subject to wide fluctuations in response to factors related to the announcement of financial results, new product introductions, new orders or order cancellations by the Company or 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, including general economic and stock market conditions, investor perceptions, levels of interest rates and the value of the U.S. dollar. Dependence On Key Personnel. The Company's success is largely dependent on the personal efforts of Paul I. Stevens, its Chairman of the Board and Chief Executive Officer, Richard I. Stevens, its President and Chief Operating Officer, and on various other members of its senior management. The loss or interruption of the services of such individuals could have a material adverse effect on the Company's business or prospects. The success of the Company may also be dependent on its ability to hire and retain additional qualified sales, marketing and other personnel. Competition for qualified personnel in the Company's industry is intense, and there can be no assurance that the Company will be able to hire or retain additional qualified personnel. In addition, past financial performance of the Company may limit its ability to hire and retain management professionals. 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 50% decrease in 1999. The growth was largely attributable to the development and sale of new products. In light of this growth, the Company increased the amount of expenditures on its research and development programs, particularly in conjunction with the development of new products. In recent years, the Company curtailed many expenditures in response to the slowness of new orders which has been due, in large part, to certain product performance issues related to the new products. These performance issues also severely impacted the Company's liquidity, necessitating large lay offs of personnel, a restructuring of operations to lower operating levels, and consolidation of functions and facilities. In addition, the Company has reduced capital expenditures and implemented certain other cost reduction measures. Acquisitions. The Company may from time to time acquire or enter into strategic alliances concerning technologies, product lines or businesses that are complementary to those of the Company. There can be no assurance that the Company will be able to conclude any acquisitions in the future on terms favorable to it or that, once consummated, such acquisitions will be advantageous to the Company. Item 2. Properties. The following are the locations of the Company's executive and principal manufacturing and research facilities. In addition, the Company leases a small sales office in Europe on a month-to-month basis. The Company believes its facilities are adequate for its present needs. Approx. Owned or Location Use Sq. Ft. Leased - ----------------- --------------------------------- ------ ------ Fort Worth, Texas Executive and engineering offices 12,400 Leased Fort Worth, Texas Manufacturing facility and 74,000 Owned 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. 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. No assurance can be given regarding the outcome of any 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. On September 15, 1999 the Company filed the necessary forms with the Pension Benefit Guaranty Corporation (PBGC) to initiate distress terminations of the Company's two defined benefit pension plans. The PBGC is a federal agency that insures and protects pension benefits in certain pension plans when the sponsoring company cannot make the required contributions to fund projected benefit obligations of the plans. The Company's low volume of printing press sales has resulted in extensive lay-offs, plant closings and sales of certain operating divisions over the past three years. The reduction in employment has, in turn, created a higher than normal demand for pension benefits necessitating the Company's decision to file for distress termination of the plans. The filings began a series of negotiations with the PBGC regarding funding of the pension benefits of employees. In November 1999 and February 2000, the PBGC filed federal liens aggregating $1.6 million against all property and rights to property of the Company on behalf of the Company's Pension Plan for Bargaining Unit Employees. As a result of the Company's continuing liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of these actions can be settled or that the Company, if named a defendant in such actions in the future, will be able to settle such claims in the future. In February 1990, the Environmental Protection Agency ("EPA") issued a Notice of Potential Liability and Request for Participation in Cleanup Activities to approximately 60 parties, including Post Machinery Company, Inc., a subsidiary of the Company, in relation to the disposition of certain substances that could be characterized as "hazardous wastes" which purportedly were taken to the Coakley Landfill Site ("Coakley Site") in North Hampton, New Hampshire prior to 1982. A committee representing the potentially responsible parties ("PRPs") negotiated a settlement in the form of consent decrees (the "Consent Decrees") with EPA and the State of New Hampshire covering the closure and capping of the Coakley Site. The PRPs also agreed that certain of the PRPs, including Post, would no longer be obligated to participate in the cleanup at the Coakley Site in return for a contribution of a fixed amount into escrow, and such PRPs would be indemnified by certain of the remaining PRPs from further liability under the EPA's current action. Post contributed $86,719 under this agreement. EPA is currently conducting an investigation of ground water conditions under a wetlands area adjacent to the site. EPA has not given notice to any parties of potential liability for ground water under the wetlands. There can be no assurances that no further claims will be brought related to the Coakley Site, or sites affected by contamination from the Coakley Site, or that any claims which might be brought would be covered by the Consent Decrees or the agreement described above. In connection with the aforementioned environmental claim, the Company was indemnified and reimbursed by Post's predecessor, PXL Holdings Corporation, for its costs in connection with the Coakley matter. No assurance can be given regarding the outcome of any pending case; however, a negative outcome in excess of insurance coverage could have a material adverse effect on the Company's business, operating results and financial condition. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1999. 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 SVEIA and SVEIB, 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, or closing prices as reported by the Over-the-Counter Bulletin Board daily summaries. Series A Series B Common Stock Common Stock ----------------- ------------------ High Low High Low ------- ------ ------- ------- 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 Year Ending December 31, 1999: First Quarter ..................... $1 1/4 $ 5/16 $1 3/16 $ 11/16 Second Quarter .................... 1 1/4 5/16 13/16 1/2 Third Quarter ..................... 11/16 1/4 1/2 1/4 Fourth Quarter .................... 1/2 3/32 1/2 1/4 First Quarter 2000 (through March 23, 2000)......... $2 1/4 $ 1/4 $2 $ 1/16
As of March 23, 2000, approximately 7,466,000 shares of the Series A Common Stock were outstanding and held by approximately 200 holders of record, and 2,036,000 shares of the Series B Common Stock were outstanding and held by approximately 65 holders of record. 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." Recent Sales of Unregistered Securities On March 31, 2000, the Company received the net proccees of a private placement of $1 million 10% convertible subordinated notes payable due March 31, 2003 (see Item 1, Business and Note U of Notes to Consolidated Financial Statements). The notes are convertible into 2,000,000 shares of Series A Common Stock (SVEIA), subject to adjustment. The Company issued these unregistered securities in reliance upon Rule 504 of Regulation D of the Securities Act of 1933, as amended. Item 6. Selected Financial Data. The following tables set forth selected historical financial information for the indicated periods for the Company. The historical information is derived from the Consolidated Financial Statements of the Company. STATEMENT OF OPERATIONS (In thousands except per share data) Year Ended December 31, --------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------- Net sales $11,137 $22,207 $35,151 $65,659 $139,181 Cost of sales 7,813 17,877 34,011 74,243 108,307 ------ ------ ------ ------ ------- Gross profit (loss) (1) 3,324 4,330 1,140 (8,584) 30,874 Selling, general and administrative expense 4,909 7,379 9,837 22,485 21,437 Restructuring charge (3) - - - 1,300 -- Loss on impairment of assets 200 573 6,347 -- -- Loss on sale of assets -- -- -- 3,472 -- ------ ------ ------ ------ ------- Operating income (loss) (1,785) (3,622) (15,044) (35,841) 9,437 Gain (loss) on sale of assets (4) (1,682) 2,203 -- -- - Other income (expense) (817) (1,956) (4,396) (5,379) (3,478) ------ ------ ------ ------ ------- Income (loss) before income taxes and extraordinary item (4,284) (3,375) (19,440) (41,220) 5,959 Income tax (expense) benefit - (75) 213 7,000 (1,660) ------ ------ ------ ------ ------- Income (loss) before extraordinary item (4,284) (3,450) (19,227) (34,220) 4,299 Extraordinary item (2) -- 11,221 - - - ------ ------ ------ ------ ------- Net income (loss) $(4,284) $ 7,771 $(19,227) $(34,220) $ 4,299 ====== ====== ====== ====== ======= Per Common Share - Basic: Income (loss) before extraordinary item $ (0.45) $ (0.36) $ (2.03) $ (3.62) $0.46 Extraordinary item (2) - 1.18 - - - ------ ------ ------ ------ ------- Net income (loss) - basic $ (0.45) $0.82 $ (2.03) $ (3.62) $ 0.46 ====== ====== ====== ====== ======= Per Common Share - Diluted: Income (loss) before extraordinary item $ 0.45 $ (0.36) $ (2.03) $(3.62) $ 0.45 Extraordinary item (2) -- 1.18 - - - ------ ------ ------ ------ ------- Net income (loss) - diluted. $ 0.45 $ 0.82 $ (2.03) $ (3.62) $ 0.45 ====== ====== ====== ====== ======= Weighted average shares outstanding - basic 9,502 9,492 9,457 9,451 9,408 ====== ====== ====== ====== ======= Weighted average shares outstanding - diluted 9,502 9,492 9,457 9,451 9,553 ====== ====== ====== ====== ======= BALANCE SHEET DATA (In thousands) Year Ended December 31, -------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- -------- ------- Cash and temporary investments .. $ 6 $ 164 $ 211 $ 3,338 $ 814 Working capital (deficit) ....... 1,178 1,965 (10,894) (11,476) 38,127 Total assets .................... 10,262 14,651 31,890 77,417 117,647 Long-term debt .................. 6,158 5,244 55 113 33,470 Total stockholders' equity (deficit) $(5,396) $(2,955) $(9,611) $10,896 $45,372 ______________________________ (1) Includes increase in gross profit in 1999 of $1.2 million and in 1998 of $1.3 million as a result of a decrement in the LIFO inventory at December 31, 1999 and 1998, respectively. (2) In 1998, gain on early extinguishment of debt was $11.2 million. (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. (4) Includes loss on January, 2000 sale of SSMI, the Company's French repair and service company, of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million which had been previously reported as a charge against stockholder equity in "accumulated other comprehensive loss".
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 $11.1 million in 1999. The Company continued to experience a decrease in sales during 1999 and 1998, which primarily reflected the sale of various divisions and a continuation of the reduced order flow that the Company has experienced for the last several years. Orders for 1999 of $11.1 million increased 8.8% over the previous year. The increase occurred in packaging and specialty web products. In response to the low volume of orders, the Company continued its work force and cost reductions and the consolidation of certain facilities and operating functions. In an effort to cut costs and improve cash flow, the Company has eliminated certain product lines and consolidated manufacturing and assembly at its Fort Worth, Texas, location. The Company believes these actions have helped and will continue to help in its efforts to return to profitability. Results of Operations The following table sets forth, for the periods indicated, certain income statement data as percentages of net sales Year Ended December 31, ----------------------- 1999 1998 1997 ----- ----- ----- Net sales ....................... 100.0% 100.0% 100.0% Cost of sales ................... 70.2% 80.5% 96.8% ----- ----- ----- Gross profit (loss) ............. 29.8% 19.5% 3.2% Selling, general and administrative expenses 44.1% 33.2% 28.0% Loss on impairment of assets .... 1.8% 2.6% 18.0% ----- ----- ----- Operating income (loss) ......... (16.1%) (16.3%) (42.8%) Other income (expense): Gain (loss) on sale of assets (15.1%) 9.9% - Interest, net .............. ( 6.6%) ( 7.1%) (10.2%) Other, net ................. ( 0.7%) ( 1.7%) ( 2.3%) ----- ----- ----- Loss before income taxes and extraordinary items ...................... (38.5%) (15.2%) (55.3%)
Comparison of Years Ended December 31, 1999 and 1998 Sales. The Company's sales for the year ended December 31, 1999 decreased by $11.1 million (or 49.8%) compared to sales in the same period in 1998 due primarily to decreases in packaging system products ($5.6 million) and French service and repair sales ($1.2 million). A total of $4.3 million of the decrease resulted from sales of Zerand, which was sold on April 27, 1998. Gross Profit. The Company's gross profit for the year ended December 31, 1999 decreased by $1.0 million compared to gross profit in the same period in 1998. The gross profit margin increased to 29.8% of sales as compared to 19.5% in the comparable period in 1998 due (1) to product mix, shipment of products at near normal margins, and reduced depreciation and product development costs in 1999, and (2) the Company's evaluation of its last-in first-out ("LIFO") inventory reserve and corresponding decrement in the calculated LIFO reserve. The Company evaluated its LIFO inventory reserve principally because of the sale of its machining and production facilities in Ohio in mid-1998 and the complete 1998 changeover of manufacturing philosophy from a "machine and make the component parts" to a "purchase the machined part." This LIFO evaluation process reduced the current year LIFO reserve calculation and, accordingly, increased the gross profit by $1.2 million (or $0.13 per share) for the year ended December 31, 1999. Selling, General and Administrative Expenses. The Company's selling, general, and administrative expenses decreased by $2.4 million (or 33.5%) for the year ended December 31, 1999 compared to the same period in 1998 due to cost reduction efforts at corporate headquarters and manufacturing locations in connection with the reduced volume of sales, as well as the impact of the sale of Zerand. Selling, general and administrative expenses for the year ended December 31, 1999 were 44.1% of sales compared to 33.5% of sales for the same period in 1998 due to the huge reduction in sales in 1999. The reduction in expenses was not proportionate to the reduction in sales discussed above. Other Income (Expense). The Company's interest expense decreased by $0.8 million for the year ended December 31, 1999 compared to the same period in 1998 due to the reduced borrowings in 1999 resulting from the application of the Zerand and Hamilton sale proceeds to pay down bank indebtedness and the early extinguishment of $17.3 million of subordinated notes, offset by an increased cost of borrowing in 1999. Interest income was negligible for the year ended December 31, 1999 and 1998. Comparison of Years Ended December 31, 1998 and 1997 Net Sales. The Company's net sales for the year ended December 31, 1998 decreased by $12.9 million, or 36.8%, compared to the same period in 1997, due primarily to decreased sales of packaging systems products ($4.7 million) and to the sale of the Zerand division in April 1998, which contributed $4.3 million in 1998 sales and $11.6 million in 1997 sales. In addition, the Company experienced decreases in its French repair and service sales ($0.9 million). Sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. The Company sold these rights in lieu of a long repossession and resale process. Gross Profit. The Company's gross profit for the year ended December 31, 1998 increased by $3.2 million compared to gross profit in the same period in 1997 due primarily to shipment of products at near normal product margins. In addition, the Company evaluated its last-in first-out ("LIFO") inventory reserve following the sale of assets, including the inventory, at HMC and other inventory usage in 1998. The financial impact of the calculated decrement in the LIFO inventory for the year ended December 31, 1998 was $1.3 million. Accordingly, the gross profit for the year was increased $1.3 million ($0.14 per share) and the LIFO reserve was reduced $1.3 million. Gross profit margin for 1998 increased to 19.5% of sales as compared to 3.2% for 1997. This increase in gross profit margin in 1998 was due primarily to product mix, shipment of products at near normal margins, decreased warranty expenses, and the benefit of the reduction in the LIFO reserve. Sales and gross profit in 1997 include $0.7 million in proceeds from the sale of certain press system contract rights. The Company sold these rights in lieu of a long repossession and resale process. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses decreased by $2.5 million, or 25%, for the year ended December 31, 1998 compared to the same period in 1997. The decrease was due to cost reduction efforts at corporate headquarters and at manufacturing locations in connection with the reduced volume of sales, as well as the impact of the sale of the Zerand division. Selling, general and administrative expenses for the year ended December 31, 1998 were 33.2% of sales compared to 28% of sales for the same period of 1997 due to the very low sales in 1998 compared to 1997. The Company's continuing cost reductions in 1998 did not equate to the overall percentage decrease in sales, and especially the sales decrease in the last half of 1998. Loss on Impairment of Assets. In connection with the continuing consolidation of operating facilities, the Company decided in November 1997 to sell certain production facilities. Based upon bids received or other pertinent valuations, the Company recorded a fourth quarter 1998 charge of $0.57 million to reflect the estimated ultimate realizable value of one production and one inventory storage facility in Hamilton, Ohio held for sale (See Note D of Notes to the Financial Statements). Gain on Sale of Assets. The gain on sale of assets of $2.2 million for the year ended December 31, 1998 included a $3.6 million gain on the April 1998 sale of the Zerand division assets, offset by a $1.4 million loss on the sale of the HMC in July 1998. Other Income (Expense). The Company's interest expense decreased by $2.0 million for the year ended December 31, 1998 compared to the same period in 1997 due to the reduced borrowings in 1998 resulting from the application of the Zerand and Bernal sale proceeds to pay bank indebtedness, and the extinguishment of subordinated indebtedness at June 30, 1998, offset by an increased cost of borrowing in 1998. Interest income was negligible for the years ended December 31, 1998 and 1997. Tax Matters The Company's effective state and federal income tax rate ("effective tax rate") was 0% for 1999, 0.3% for 1998, and 0.6% for 1997. 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, 1999, and 1998. Three Months Ended ------------------------------------------ March 31, June 30, Sept.30, December 31, ------ ------ ------- ------ (In thousands, except per share data) 1999: Net sales ................... $ 3,314 $ 2,575 $ 2,415 $ 2,833 Operating income (loss) ..... $ 270 $ 297 $ (830) $ (1,522) Net income (loss) ........... $ 43 $ 5 $ (994) $ (3,338) Net income (loss) per common share - basic and diluted .. $ 0.005 $ 0.00 $ (0.10) $ (0.35) 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)
The Company attributes the operating and net loss for the fourth quarter of 1999 to (1) a continuing decline in sales volume, (2) accrual for losses on certain major contracts and LIFO inventory, and (3) unabsorbed overhead costs due to the low shipment volume in the quarter, and (4) loss on January 2000 sale of SSMI of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million which had been previously reported as a charge against stockholders equity in "accumulated other comprehensive loss". 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 has taken certain continuing cost reduction actions to adjust its expected 2000 production to the order flow in 1999. 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. Net cash provided by (used in) operating activities was $(1.6) million in 1999, $(5.9) million in 1998, and $(3.3) million in 1997. Net cash provided by (used in) operating activities (before working capital requirements) was $(1.9) million in 1999, $(4.5) million in 1998, and $(10.4) million in 1997. Working capital provided (used) cash of $0.3 million in 1999, $(1.4) million in 1998, and $7.0 million in 1997. 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. In April 2000, the Company completed a private placement of $1 million of 10% convertible subordinated notes ("the Notes"). Net proceeds of the Notes will be used for working capital. The Notes were issued in increments of $50,000 and are convertible into 2,000,000 shares of Series A Common Stock ("SVEIA") of the Company at $0.50 per share, subject to adjustment. The conversion of the Notes is at the holder's option anytime on or after the fifteenth day following the original issue date of the Notes and prior to the close of business on their maturity date. Issue costs for the Notes aggregated approximately $151,000. The Company's capital expenditures were $0.1 million in 1999, $0.2 million in 1998, and $0.1 million in 1997 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. The Company's bank credit facility bears interest at 13% over prime and matures June 30, 2001. Under the bank facility, the Company's maximum borrowings are limited to a borrowing base formula, which cannot exceed $4.0 million and may be in the form of direct borrowings and letters of credit. As of December 31, 1999 there were $2.07 million in direct borrowings and no standby letters of credit outstanding, with approximately $0.2 million additional availability for such borrowings. The Company is not in compliance with some of the covenants of its senior bank line of credit loan agreement. The principal default involved the failure to make the required pension plan payments in 1999 and 2000, which necessitated the filing of a distress termination request (see below). The Company's senior lender has declined to grant waivers of the defaults. Although the bank can declare the full amount of the loan immediately payable at any time, it has not done so. The senior bank debt is classified as a current obligation at December 31, 1999. 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 $6.1 million at December 31, 1999 have first liens on certain assets of the Company, principally a $0.5 million platen cutter relating to the hold back on the sale of the Zerand division, the assets of a foreign subsidiary, and certain accounts receivable for new customer equipment. Mr. Stevens has second liens on all other assets of the Company. 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 collateralized certain Paul I. Stevens advances, the $500,000 was paid to him to reduce his secured loans to the Company. The secured loans from Paul I. Stevens are due June 30, 2001 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 was unable to pay certain pension plan minimum payments due on September 15, 1999. Accordingly, the Company filed the necessary forms with the Pension Benefit Guaranty Corporation ("PBGC") to initiate distress terminations of the Company's two defined benefit pension plans. The PBGC is a federal agency that insures and protects pension benefits in certain pension plans when the sponsoring company cannot make the required contributions to fund projected benefit obligations of the plans. The Company's low volume of printing press sales has resulted in extensive lay-offs, plant closings and sales of certain operating divisions over the past three years. The reduction in employment has, in turn, created a higher than normal demand for pension benefits necessitating the Company's decision to file for distress termination of the plans. The filings have begun a series of negotiations with the PBGC regarding funding of the pension benefits of employees. The PBGC, on behalf of the Company's pension plan for bargaining unit employees, has filed liens in the aggregate amount of $1.6 million. 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, 1999, the Company's Chairman and Chief Executive Officer has loaned the Company $6.16 million for its short-term cash requirements. As of December 31, 1999, this amount has not been repaid. The success of the Company's plans will continue to be impacted by its ability to achieve a satisfactory level of orders for printing systems, timely deliveries, the degree of international orders (which generally have less favorable cash flow terms and require letters of credit that reduce credit availability), and improved terms of domestic orders. While the Company believes it is making progress in these areas, there can be no assurance that the Company will be successful in these endeavors. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Not required for the company. Item 8. Financial Statements and Supplementary Data. Index to Consolidated Financial Statements and Financial Statement Schedules Page Number ------ Report of Management......................................... 20 Report of Independent Certified Public Accountants .......... 21 Independent Auditors' Report ................................ 22 Consolidated Balance Sheets -- December 31, 1999 and 1998 ... 23 Consolidated Statements of Operations -- Years Ended December 31, 1999, 1998 and 1997 ................................... 24 Consolidated Statement of Stockholders' Equity -- Years Ended December 31, 1999, 1998 and 1997 ................... 25 Consolidated Statements of Cash Flows -- Years Ended December 31, 1999, 1998 and 1997 ................................... 26 Notes to Consolidated Financial Statements .................. 27 Schedule II -- Valuation and Qualifying Accounts -- Years Ended December 31, 1999, 1998 and 1997..................... 45 All other schedules are not submitted because they are not applicable or not required or because the information is included in the consolidated financial statements or notes thereto. Report of Management The consolidated financial statements of Stevens International, Inc. have been prepared by management and have been audited by certified public accountants, whose reports follow. The management of the Company is responsible for the financial information and representations contained in the financial statements and other sections of the annual report. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. In preparing the financial statements, it is necessary that management make informed estimates and judgments based upon currently available information of the effects of certain events and transactions. In meeting its responsibility for the reliability of the financial statements, management depends on the Company's system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and are properly recorded. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors pursues its oversight role for the accompanying financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of the Company. The Committee also meets with the independent auditors, without management present, to discuss internal accounting control, auditing, and financial reporting matters. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Stevens International, Inc. We have audited the accompanying consolidated balance sheets of Stevens International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years 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 audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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, 1999, and 1998, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. We have also audited Schedule II for the years ended December 31, 1999 and 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 24, 2000 (except for Note U as to which the date is March 31, 2000) INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Stevens International, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1997 of Stevens International, Inc. and subsidiaries. Our audit also included the financial statement schedule listed in the Index at Item 8 for the year 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 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 provided a reasonable basis for our opinion. In our opinion, the consolidated financial statements of Stevens International, Inc. and subsidiaries referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year 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 the year ended December 31, 1997. The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note B of notes to the consolidated financial statements in the 1997 Form 10-K, the Company has negative working capital at December 31, 1997, negative cash flows from operations for the year ended December 31, 1997, and anticipates that negative cash flows from operations will continue. In addition, as discussed in Note J of notes to the financial statements in the 1997 Form 10-K, at December 31, 1997, the Company would not have been in compliance with certain covenants of its long-term debt agreements had the lenders not waived the covenants and extended the debt due dates. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters are also described in Note B of notes to the 1997 Form 10-K. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Fort Worth, Texas March 31, 1998 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
December 31, -------------------- 1999 1998 ------ ------ ASSETS Current assets: Cash $ 6 $ 164 Trade accounts receivable, less allowance for losses of $70 and $529 in 1999 and 1998, respectively 936 1,711 Costs and estimated earnings in excess of billings on long-term contracts 109 665 Inventories 6,303 6,146 Other current assets 93 1,076 Assets held for sale 363 988 ------ ------ Total current assets 7,810 10,750 Property, plant and equipment, net 1,795 2,600 Other assets, net 657 1,301 ------ ------ $10,262 $14,651 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,120 $ 3,035 Other current liabilities 1,691 3,705 Income taxes payable 110 75 Customer deposits 641 310 Advances from stockholder --- 1,645 Current portion of long-term debt 2,070 15 ------ ------ Total current liabilities 6,632 8,785 Long-term debt --- 2,294 Note payable - stockholder 6,158 2,950 Accrued pension costs 3,110 3,577 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, 7,459,000 and 7,418,000 issued and outstanding at December 31, 1999 and 1998, respectively 745 741 Series B Common Stock, $0.10 par value, 6,000,000 shares authorized, 2,042,000 and 2,085,000 shares issued and outstanding at December 31, 1999 and 1999, respectively 205 209 Additional paid-in capital 39,961 39,961 Accumulated other comprehensive (loss) (2,549) (4,150) Retained deficit (44,000) (39,716) ------ ------ Total stockholders' equity (deficit) (5,638) (2,955) ------ ------ $10,262 $14,651 ====== ====== See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share data) Year Ended December 31, ----------------------------- 1999 1998 1997 ------ ------ ------- Net sales $11,137 $22,207 $ 35,151 Cost of sales 7,813 17,877 34,011 ------ ------ ------- Gross profit 3,324 4,330 1,140 Selling, general and administrative expenses 4,909 7,379 9,837 Loss on impairment of assets 200 573 6,347 ------ ------ ------- Operating (loss) (1,785) (3,622) (15,044) Other income (expense): Gain (loss) on sale of assets (1,682) 2,203 - Interest income 31 13 95 Interest expense (769) (1,580) (3,666) Other, net (79) (389) (825) ------ ------ ------- (2,499) 247 (4,396) ------ ------ ------- (Loss) before taxes and extraordinary item (4,284) (3,375) (19,440) Income tax benefit (expense) -- (75) 213 ------ ------ ------- (Loss) before extraordinary item (4,284) (3,450) (19,227) Extraordinary gain on debt extinguishment - 11,221 - ------ ------ ------- Net income (loss) $(4,284) $ 7,771 $(19,227) ====== ====== ======= Net income (loss) per common share Income (loss) before extraordinary gain $ (0.45) $ (0.36) $ (2.03) Extraordinary gain - 1.18 - ------ ------ ------- Net income (loss) - basic and diluted $ (0.45) $ 0.82 $ (2.03) ====== ====== ======= Weighted average number of shares of common and common stock equivalents outstanding during the periods - basic and diluted 9,502 9,492 9,457 ====== ====== ======= See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Amounts in thousands) Accumulated Additional Other Series A Stock Series B Stock Paid-In Retained Comprehensive Shares Amount Shares Amount Capital (Deficit) Loss Total ----- ---- ----- ---- ------- ------ ------ ------ Balance, January 1, 1997 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 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) Net loss - - - - - (4,284) - (4,284) Foreign currency translation adjustment - - - - - - (1,064) (1,064) Excess pension liability adjustment - - - - - - 537 537 ----- Comprehensive loss (2,683) Conversion of Series B to Series A stock 41 4 (41) (4) - - - - ----- ---- ----- ---- ------- ------ ------ ------ Balance, December 31, 1999 7,459 $ 745 2,044 $ 205 $39,961 $(44,000) $(2,549) $(5,638) ===== ==== ===== ==== ====== ======= ====== ====== See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December, ----------------------------- 1999 1998 1997 ------- ------- ------- Cash provided by operations: Net income (loss) $ (4,284) $ 7,771 $(19,227) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 906 934 3,350 Extraordinary gain on debt extinguishment - (11,221) - Accrued pension costs 71 (134) 253 Loss on impairment of assets 200 573 6,347 (Gain) loss on sale of assets 1,682 (2,203) -- Other (521) (294) (620) Changes in operating assets and liabilities net of effects from purchase of subsidiary in 1995: Trade accounts receivable 775 1,446 7,780 Contract costs in excess of billings 555 1,411 (357) Inventories (157) 464 2,551 Refundable income taxes 48 (48) 2,464 Other assets 978 (36) 5,871 Trade accounts payable (915) 344 (5,631) Other liabilities (913) (4,934) (6,143) ------- ------- ------- Total cash provided by (used in) operating activities (1,575) (5,927) (3,362) ------- ------- ------- Cash provided by (used in) investing activities: Additions to property, plant and equipment (117) (232) (93) Proceeds from insurance and sale of assets - - - Deposits and other - 16 397 Disposal of the net assets of divisions 945 14,733 10,384 ------- ------- ------- Total cash provided by (used in) investing activities 828 14,517 10,688 ------- ------- ------- Cash provided by (used in) financing activities: Increase (decrease) in current portion of long-term debt (15) (13,848) (10,496) Net increase (decrease) in long-term debt 604 5,190 (58) Sale of stock and exercise of stock options - 21 101 ------- ------- ------- Total cash provided by (used in) financing activities 589 (8,637) (10,453) ------- ------- ------- Increase (decrease) in cash (158) (47) (3,127) Cash at beginning of year 164 211 3,338 ------- ------- ------- Cash at end of year $ 6 $ 164 $ 211 ======= ======= ======= Supplemental disclosure of cash flow information: Interest $ 258 $ 614 $ 1,252 Income taxes - -- (2,677) See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1999, 1998 and 1997 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 53 % of inventory at December 31, 1999 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. The LIFO method was used for 31% of the inventory at December 31, 1998. 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. Patent costs are amortized over the remaining life of the patents, and goodwill is amortized over thirty years. Income Taxes The Company accounts for income taxes under the liability method and recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Asset Impairment of Long Lived Tangible and Intangible Assets Potential impairment of long-lived tangible and intangible assets is assessed annually (unless economic events warrant more frequent reviews) on an asset-by-asset basis. Translation of Foreign Currency The financial position and results of operations of the Company's foreign subsidiaries are measured using local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange at the balance sheet date. Translation gains and losses are deferred as a separate component of shareholders' equity, unless there is a sale or complete liquidation of the underlying foreign investments. Aggregate foreign currency transaction gains and losses are included in determining net earnings. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting period. Estimates and assumptions are also required in the disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from such estimates. Stock-Based Compensation Compensation expense is recorded with respect to stock option grants to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. This method calculates compensation expense on the measurement date (usually the date of grant) as the excess of the current market price of the underlying Company stock over the amount the employee is required to pay for the shares, if any. The expense is recognized over the vesting period of the grant or award. The Company does not intend to elect the fair value method of accounting for stock-based compensation encouraged, but not required, by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". See Note P. Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential common shares relating to the exercise of stock options have been excluded from the computation as the effect of such conversion would be anti- dilutive. B. Liquidity Concerns The Company continues to experience a decrease in sales due to a declining market for the Company's products and competitive pressures. The Company has continued to implement a significant restructuring plan, which included large work force and cost reductions and the sale and consolidation of certain facilities and operating functions. The Company requires capital to fund its ongoing operations, to service its existing debt and to pursue its strategic objectives including new product development. Further, the Company has been dependent on the ability of its Chairman and Chief Executive Officer, Paul I. Stevens, to provide certain amounts of working capital over and above that provided by the Company's bank credit facility. The Company also must continue to meet certain financial covenants imposed by its bank credit facility. The Company's viability is dependent upon its ability to meet its obligations to its bank lender and to Mr. Stevens, and ultimately, a return to profitability. C. Divestiture of Division Assets Sale of SSMI In January 2000, the Company sold its French repair and service company, SSMI, for a net aggregate consideration of $198,000. The transaction resulted in an aggregate loss of $1.65 million, including a loss on sale of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million which had been previously reported as a charge against stockholder equity in accumulated other comprehensive loss. SSMI had 1999 revenues of $3 million and an operating loss of $0.13 million. Net proceeds of this transaction were used to repay a portion of the loans from Paul I. Stevens, which were partially collateralized by a lien on this subsidiary. Sale of Hamilton Production and Storage Facilities in 1999 In the second quarter of 1999, the Company concluded the sale of the real property at its Hamilton, Ohio production facility for an aggregate consideration of $725,000. The transaction resulted in a small loss due to certain unanticipated costs of vacating the facility. An inventory storage facility at Hamilton, Ohio was sold in August 1999 for an aggregate consideration of $70,000. With the conclusion of this transaction, all real property in Ohio has now been sold. Proceeds of these transactions were used to repay certain expenses of the sale, certain property taxes and repay a portion of the $2.5 million loan from Paul I. Stevens, the Company's chairman and chief executive officer, which was partially collateralized by a lien on these production and storage facilities. 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. The Company was obligated in 1999 to repurchase a platen cutter at a purchase price of $0.9 million. The remaining balance in the escrow holdback was used to partially offset the price of the platen cutter. This 1998 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. D. 1999 and 1998 Loss on Impairment of Assets In September 1999 certain inventory assets were determined to be worthless. A third quarter 1999 non-cash charge of $0.2 million was recorded to reflect this impairment of value. 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 which were sold. The production facility was sold in 1999. The aggregate carrying value of these assets in 1998, prior to the impairment adjustment was $1.4 million. 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, 1999 and 1998 follows: December 31, ----------------- 1999 1998 ----- ----- (Amounts in thousands) Cost incurred on uncompleted contracts $ 205 $5,155 Estimated earnings 106 -- ----- ----- Revenue from long-term contracts 311 5,155 Less: Billings to date 202 4,490 ----- ----- $ 109 $ 665 ===== =====
The $109,000 and $665,000 net differences are included in the accompanying balance sheets under the caption "Cost and estimated earnings in excess of billings on long-term contracts." F. Inventories Inventories consist of the following: December 31, ------------------ 1999 1998 ----- ----- (Amounts in thousands) Finished product $1,396 $ 630 Work in progress 349 1,458 Raw material and purchased parts 4,558 4,058 ----- ----- $6,303 $6,146 ===== =====
Replacement cost exceeds financial accounting LIFO cost by approximately $696,000 at December 31, 1999 and $1,938,000 at December 31, 1998. G. Property, Plant and Equipment Property, plant and equipment consists of: December 31, Range of ------------------- Estimated Useful 1999 1998 Lives (Amounts in thousands) ----------- ------ ------ Land ........................ N/A $ 416 $ 477 Building and improvements ... 15-40 years 1,436 1,867 Machinery and equipment ..... 5-18 years 1,515 1,001 Furniture and fixtures ...... 3-10 years 5,968 3,227 Leasehold improvements ...... 8-20 years - 295 ------ ------ 9,335 6,867 Less: accumulated depreciation and amortization 7,540 4,267 ------ ------ $ 1,795 $ 2,600 ====== ======
H. Other Assets Other assets consist of: December 31, -------------- 1999 1998 ----- ----- (Amounts in thousands) Goodwill, net of amortization of $147 and $133 $ 235 $ 251 Patents, net of amortization of $286 and $282 58 62 Intangible pension asset ..................... - 166 Banknote and securities technology intangible 287 752 asset ...................................... Other ........................................ 77 70 ----- ----- $ 657 $1,301 ===== =====
I. Other Current Liabilities Other current liabilities consist of: December 31, ------------------- 1999 1998 ----- ----- (Amounts in thousands) Salaries and wages ....................... $ 205 $ 190 Taxes other than income taxes ............ 119 760 Employee benefits ........................ 289 827 Accrued interest ......................... 24 406 Contract reserves ........................ 674 533 Warranty reserve ......................... 150 544 Other accrued expenses ................... 230 445 ----- ----- $1,691 $3,705
J. Long-Term Debt Long-term debt consists of the following: December 31, 1999 1998 ----- ----- (Amounts in thousands) Paul I. Stevens, interest at prime rate plus 2% $6,158 $2,950 Notes payable to banks, interest at prime rate plus 13% at December 31, 1999 (Net of unamortized origination fees of $52 and $88) ........... 2,070 2,291 Other ...................................... -- 18 ----- ----- 8,228 5,259 Less: current portion ...................... 2,070 15 ----- ----- $6,158 $5,244 ===== =====
The interest rate on direct borrowings under the Company's Bank Credit Facility at December 31, 1999 is at the lender's prime rate (8.5%) plus 13% (or 9.75%). Under its credit facility, the Company may borrow up to $4.0 million in the form of direct borrowings and letters of credit. As of December 31, 1999 there was $2.07 million in direct borrowings and $0 in standby letters of credit outstanding, with approximately $0.2 million additional availability for such borrowings. At December 31, 1998, $2.38 million of the Company's borrowings were at the lender's prime rate of interest (8.0%) plus 13%. The Company is not in compliance with some of the covenants of its senior bank line of credit loan agreement under which the Company has outstanding debt of approximately $2 million. The principal default involved the failure to make the required pension plan payments in 1999 and 2000, which necessitated the filing of a distress termination request with the PBGC (see Note M). The Company's senior lender has declined to grant waivers of the defaults. Although the bank can declare the full amount of the loan immediately payable at any time, it has not done so. The senior bank debt is classified as a current obligation at December 31, 1999. 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. 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 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 $6.1 million at December 31, 1999 have first liens on certain assets of the Company, principally a $0.5 million platen cutter relating to the holdback on the sale of Zerand, the assets of a foreign subsidiary, and certain accounts receivable for new customer equipment. Mr. Stevens has second liens on all other assets of the Company. 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 collateralized certain P. I. Stevens advances, the $500,000 was paid to him to reduce his secured loans to the Company. The secured loans from Paul I. Stevens are due June 30, 2001 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, 1999, are as follows (Amounts in thousands): Year ending December 31, 2001. . . . . . . . . . $ 6,210 Less unamortized loan origination fees . . . . . 52 ------ $ 6,158 ====== K. Income Taxes The Company and its domestic subsidiaries file consolidated income tax returns. At December 31, 1999, the Company had the following losses and credits available for carryforward for federal income tax purposes: Net operating loss - $11,451,000 expiring in 2011 and 2012 and $4,283,000 expiring in 2019 $15,734,000 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 was not includible in taxable income; however, it reduced the Company's net operating loss carryforward as of January 1, 1999. The 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 assets as of December 31, 1999 and 1998 are as follows: December 31, 1999 1998 ------ ------ (Amounts in thousands) Deferred tax assets: Difference between book and tax basis of property $ 345 $ 1,055 Difference between book and tax basis of intangibles 1 1 Difference between book and tax basis of pension liability ................................ 557 557 Reserves not currently deductible ........ 2,924 3,626 Net operating loss, credit and other carryforwards 7,745 5,993 Other .................................... 60 91 ------ ------ 11,632 11,323 ------ ------ Deferred tax liabilities: Excess of tax over book pension cost ..... 124 380 Differences between book and tax LIFO inventory 1,839 1,916 reserves ................................. ------ ------ 1,963 2,296 ------ ------ Net deferred tax assets ................. 9,669 9,027 Less valuation allowance ................. (9,669) (9,027) ------ ------ Net deferred tax assets .................. $ -0- $ -0- ====== ======
The provisions for income taxes consists of the following: Year Ended December 31, ------------------------- 1999 1998 1997 ---- ---- ---- (Amounts in thousands) Current provision (benefit) for income taxes ....................... $ -- $ 75 $(213) Deferred provision (benefit) for income taxes ....................... -- -- -- ---- ---- ---- $ -- $ 75 $(213) ==== ==== ==== The Company's effective tax rate varies from the statutory federal income tax rate for the following reasons: December 31, ------------------------------- 1999 1998 1997 ------- ------ ------- (Amounts in thousands) Tax expense (benefit), at statutory rate ................ $ (1,456) $ 2,642 $ (6,732) Goodwill expense ............... 5 1,483 73 Other, net ..................... 206 (5) (258) State and local taxes .......... 65 -- (213) Valuation allowance ............ 1,180 (4,045) 6,917 ------- ------ ------- Actual tax expense (benefit) ... $ --- $ 75 $ (213) ======= ====== =======
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 was $223,000 for the year ended December 31, 1999, $246,000 in 1998, and $293,000 in 1997. 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, 1999: Operating (Amounts in thousands) ---- Year ending December 31, 2000 ... $ 66 2001 7 2002 7 2003 7 2004 and thereafter ........ - ---- Total minimum lease payments... $ 87 ==== At December 31, 1999, 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, 1999, under terms of customer financing arrangements. These arrangements provide for a loss sharing formula whereby the Company generally is responsible for 15% of the ultimate net loss, if any, in the event of default by the customers on their financing agreements. Management believes the likelihood of materially adverse effects on the financial position, cash flows or results of operations of the Company as a result of these agreements is remote. The Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. In management's opinion, the Company has adequate legal defense and/or insurance coverage regarding each of these actions and does not believe that such actions, if they occur either individually or in the aggregate, will materially affect the Company's operations or financial position. M. Employee Benefit Plan Effective January 1, 1992, the Company adopted a profit sharing and 401(k) savings retirement plan to cover all non-union employees of the Company. In 1994, union employees of the Company were covered under this plan. The 401(k) plan provides for a tax deferred employee elective contribution up to 15% of annual compensation or the maximum amount allowed as determined by the Internal Revenue Code ($10,000 in 1999 and $10,000 in 1998) and a discretionary matching contribution by the Company for non-union employees. Company matching contributions were $-0- in 1999, 1998, and 1997. The Company has sponsored defined benefit pension plans covering its employees. The two plans provided for monthly benefits, normally at age 65, after completion of continuous service requirements. The Company was unable to pay certain pension plan minimum payments due on September 15, 1999. Accordingly, the Company filed the necessary forms with the Pension Benefit Guaranty Corporation ("PBGC") to initiate distress terminations of the Company's two defined benefit pension plans. The PBGC is a federal agency that insures and protects pension benefits in certain pension plans when the sponsoring company cannot make the required contributions to fund projected benefit obligations of the plans. The Company's low volume of printing press sales has resulted in extensive lay-offs, plant closings and sales of certain operating divisions over the past three years. The reduction in employment has, in turn, created a higher than normal demand for pension benefits necessitating the Company's decision to file for distress termination of the plans. The filings have begun a series of negotiations with the PBGC regarding funding of the pension benefits of employees. The PBGC, on behalf of the Company's pension plan for bargaining unit employees, has filed liens against all property and rights to property of the Company in the aggregate amount of $1.6 million. The assets of the pension plans are maintained in trusts and consist primarily of equity and fixed income securities. Pension expense was $259,000 in 1999, $395,000 in 1998, and $145,000 in 1997. Beginning January 1, 1989, the Company was required to recognize a liability in the amount of the Company's unfunded accumulated benefit obligation, with an equal amount to be recognized as either an intangible asset or a reduction of equity, net of applicable deferred income taxes. Based upon actuarial and plan asset information as of December 31, 1998, the Company has recorded a pension liability of $4.0 million and a corresponding intangible asset of $0.16 million, and a reduction of equity of $3.1 million. Benefits under the salaried retirement plan were frozen as of April 30, 1997, which eliminated future benefit accruals for participants in the salaried retirement plan. The impact of this plan amendment was to reduce pension expense by $360,000 in 1997. The following table summarizes the funded status of the Company's defined benefit pension plans and the related amounts recognized in the Company's consolidated financial statements for 1999 and 1998. Status of Plans 1999 1998 ----- ----- (Amounts in thousands) Actuarial present value of benefit obligations: Vested ....................... $5,219 $6,662 Non-vested ................... -- -- ----- ----- Accumulated benefit obligation . $5,219 $6,662 ===== ===== Plan assets at fair value ...... $2,080 $2,637 Projected benefit obligation ... 5,219 6,662 ----- ----- Projected benefit obligation in excess of plan assets .......... 3,139 4,025 Unrecognized prior service cost -- (358) Unrecognized net gain (loss) ... (2,549) (3,279) Adjustment required to recognize minimum liability. ............. 2,549 3,637 ----- ----- Pension liability recognized in balance sheet .................. $3,139 $4,025 ===== =====
Net periodic pension cost was composed of the following elements: December 31, --------------------------- 1999 1998 1997 ------ ------ ------ (Amounts in thousands) Service cost ................... $ -- $ 37 $ 268 Interest cost .................. 388 408 420 Prior service cost adjustment .. -- -- -- Curtailment gain .............. -- -- (360) Actual return on plan assets: Loss (gain) ................. (217) (239) (175) Net amortization and deferral .. 88 144 (8) ------ ------ ------ Net periodic pension cost ... $ 259 $ 395 $ 145 ====== ====== ====== December 31, -------------------- 1999 1998 1997 ---- ---- ---- Major assumptions used: Discount rate ................ 6.5% 6.5% 6.5% Expected long-term rate of return on assets ....................... 8.5% 8.5% 8.5% Rate of increase in compensation levels 0.0% 0.0% 0.0%
The Company has executive incentive plans which provide additional compensation for officers and key employees based upon income and attainment of other predetermined goals and objectives. Such incentives aggregated $-0- in 1999, 1998 and 1997. 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 various agreements for Xytec to provide software and computer related services and equipment as a subcontractor on certain major contracts. Xytec was paid $328,000 on these agreements in 1999, $856,000 in 1998, and $594,000 in 1997. 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. Through December 31, 1999, Paul I. Stevens, the Company's Chairman and Chief Executive Officer has loaned the Company $6.16 million on a long-term arrangement. (See Note J of Notes to Financial Statement.) As of December 31, 1999, this amount has not been repaid. O. Research and Development, Sales to Major Customers and Foreign Sales The Company incurred gross company funded research and development expenses of approximately $125,000, for the year ended December 31, 1999, $172,000 in 1998, and $44,000 in 1997. Net sales to customers outside of the United States were approximately $3,940,000 in 1999 , $7,851,000 in 1998, and $8,796,000 in 1997. Shipments to one customer in 1999, Bell Paper Box, exceeded 10% of the sales. Shipments to one customer in 1998, Field Packaging Co. LLP and one customer in 1997, Universal Packaging Company, exceeded 10% of total sales. The Company has no foreign exchange contracts. P. Stock Transactions and Voting Rights The Series A and Series B stock differ only as to voting and conversion rights. As to matters other than the election of directors, the holders of Series A stock and Series B stock vote together as a class, with each holder of Series A stock having one-tenth of one vote for each share of Series A held and each holder of Series B stock having one vote for each share of Series B stock held. Holders of Series A stock, voting separately as a class, are entitled to elect 25% of the total membership of the board of directors. Holders of Series B stock, voting separately as a class, are entitled to elect the remaining directors. The shares of Series B stock are convertible, share-for-share, into shares of Series A stock at the election of the holder thereof at any time. Once a share of Series B stock is converted into a share of Series A stock, such share of Series A stock may not be converted into any other security. The Company's certificate of incorporation further provides that the Company may not engage in a merger or consolidation with any other corporation unless each holder of Series A stock and each holder of Series B stock receives identical consideration per share in the merger or consolidation. If a dividend other than a stock dividend is to be paid, it will be paid equally to holders of both series of common stock, share-for-share. If a stock dividend is to be paid to holders of common stock, it must be paid proportionately to the holders of both series of common stock either (a) in Series A stock to holders of both Series A and Series B stock or (b) in Series A stock to holders of Series A stock and in Series B stock to holders of Series B stock. In 1987, the Company adopted a stock option plan in which incentive and nonqualified stock options may be granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant for each incentive option and at not less than 85% of the fair market value at the date of the grant for each nonqualified option. The aggregate number of common shares for which options may be granted is 795,000, subject to adjustment for stock splits and other capital adjustments. The plan permits the grant of options for a term of up to ten years. Outstanding options are generally exercisable either immediately or in two installments beginning one year after the date of grant and expire five to seven years after the date of grant. Options to purchase shares of common stock have also been granted to directors and others who are not eligible to participate in the 1987 employee plan. A summary of stock option activity for the last three years follows: Series A Weighted Average Stock Option Exercise Price ------- ---- Stock Option Plan: Balance at January 1, 1997 ........ 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 Cancelled ......................... (105,000) 1.50 ------- ---- Balance at December 31, 1999 ..... 490,000 $1.50 ======= ==== Series A Weighted Average Stock Option Exercise Price ------- ---- Directors and Others: 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 and 1999 135,000 $3.65 Stock Options outstanding as of December 31, 1999 are as follows: Options Outstanding Options Exercisable ----------------- ------------------------------ Range of Exercise Number Weighted Weighted Number Weighted Prices Average Average Average Years to Exercise Exercise Expiration Price Price ------------- ------- ---- ---- ------- ---- $1.50 ...... 490,000 2.35 $1.50 490,000 $1.50 $5.50 - $7.19 50,000 5.30 $3.65 135,000 $3.65 $1.50 - $3.00 85,000 5.30 ------- ------- $1.50 - $7.19 625,000 625,000
The Company applies the intrinsic value method in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan, as described above, the Company's net income would have been reduced by $0 million in 1999, $0.3 million in 1998, and $0.03 million in 1997. Earnings (loss) per share would have been reduced by $0 per share in 1999, $0.03 per share in 1998, and $0.03 per share in 1997. Weighted average grant-date fair value of options in 1999 $(0), 1998 $(1.05), and 1997 $(0.83) were calculated in accordance with the Black- Scholes option pricing model, using the following assumptions: 1999 1998 1997 ---- ---- ---- Expected volatility ........ 60% 60% 60% Expected dividend yield .... 0 0 0 Expected option term ....... 5 years 5 years 5 years Risk-free rate of return ... 5.5% 5.5% 7.5% Q. Quarterly Results (Unaudited) The following table summarizes results for each of the four quarters for the years ended December 31, 1999 and 1998. Income per share for each year does not necessarily equal the sum of the four quarters due to the impact of common stock equivalents (stock options). Three Months Ended ------------------------------------------------------- March 31, June 30, September 30, December 31, ------- ------- ------- ------- (Amounts in thousands except per share data) 1999: Net sales .................. $ 3,314 $ 2,575 $ 2,415 $ 2,833 Operating income (loss) .... $ 270 $ 297 $ (830) $ (1,522) Net income (loss) .......... $ 43 $ 5 $ (994) $( 3,338) Net income (loss) per common share - basic and diluted .. $ 0.005 $ 0.00 $ (0.10) $ (0.35) 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 - dluted $ (0.04) $ 1.13 $ (0.19) $ (0.17)
The Company attributes the operating and net loss for the fourth quarter of 1999 to (1) continuing decline in sales volume, (2) accrual for losses on certain major contracts and LIFO inventory, and (3) unabsorbed overhead costs due to the low shipment volume in the quarters, and (4) loss on January 2000 sale of SSMI of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million previously reported as a charge against stockholders equity in "accumulated other comprehensive loss." 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. R. Business Segment Data (Amounts in 000's) The Company has three business segments: Banknote Inspection, Printing & Packaging Equipment (web-fed printing presses and related parts and service), French Repair & Service Company (repair, moving and servicing presses in Europe), and Zerand Platen Cutter Equipment (cutter-creaser equipment for packaging-sold in 1998). Total Revenue Deprec. Income(loss) Unusual Assets & Amort From Oper. Items ------ ------- ------- ------- ------- Segments in 1999 ---------------- Banknote Inspection, Printing & Packaging Equipment $ 8,958 $ 8,123 $ 860 $ (4,153) $ (1,600) (1) French Repair & Service Company - Sold in 2000 ... 1,304 3,014 46 (131) - ------ ------- ------- ------- ------- Totals ................... $ 10,262 $ 11,137 $ 906 $ (4,284) $ (1,600) Segments in 1998 ---------------- Banknote Inspection, Printing & Packaging Equipment $ 12,920 $ 13,590 $ 807 $ (4,453) $ (1,973) (2) French Repair & Service Company .................. 1,731 4,312 33 133 - Zerand Platen Cutter Equipment - Sold in 1998 . - 4,305 94 698 3,600 (3) ------ ------- ------- ------- ------- Totals ................... $ 14,651 $ 22,207 $ 934 $ (3,622) $ 1,627 Segments in 1997 ---------------- Banknote Inspection, 15,153 18,965 2,775 (17,220) (6,347) (4) Printing & Packaging Equipment French Repair & Service Company .................. 1,928 4,592 38 371 - Zerand Platen Cutter Equipment ................ 14,809 11,594 537 1,805 - ------ ------- ------- ------- ------- Totals ................... $ 31,890 $ 35,151 $ 3,350 $(15,044) $(6,347) Notes: (1) Represents loss on January 2000 sale of SSMI of $0.05 million and a related non-cash foreign currency adjustment of $1.6 million which had been previously reported as a charge against stockholders equity in "accumulated other comprehensive loss". (2) Represents Loss on Impairment of Asset Values - (-$573) and Loss on Sale of Hamilton Machining Center (-$1,400). (3) Represents Gain on Sale of Zerand Division Assets ($3,600). (4) Represents Loss on Impairment of Asset Values at Hamilton, Ohio Facilities (-$6,347).
(b) Sales by geographic area were as follows: Year ended December 31, -------------------------------- 1999 1998 1997 ------- -------- ------- United States $ 7,064 $ 14,355 $ 24,132 Europe 3,839 6,178 6,714 Asia 21 898 3,200 Other 213 776 1,105 ------- -------- ------- Total revenues $ 11,137 $ 22,207 $ 35,151 ======= ======== =======
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. 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, 1999, the Company had no significant concentrations of credit risk. The carrying amounts and fair values of the Company's financial instruments at December 31, 1999 are as follows: Carrying Amount Fair Value --------------- ---------- (Amounts in thousands) Cash and temporary investments .. $ 6 $ 6 Long-term debt .................. $6,158 $6,158 Off-Balance Sheet Financial Instruments: Letters of credit .. $ -0- $ -0- T. Accumulated Other Comprehensive Income Minimum Accumulated Foreign Pension Other Currency Liability Comprehensive (Amounts in 000's) Items Adjustment Income ------------------------- ------- -------- -------- Balance January 1, 1997 $ (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) Current period change 1,064 537 1,601 ------- -------- -------- Balance December 31, 1999 $ 0 $ (2,549) $ (2,549) ======= ======== ========
U. Subsequent Event - Private Placement of $1 Million 10% Convertible Subordinated Notes Payable Due March 31, 2003 In April 2000, the Company completed a private placement of $1 million of 10% convertible subordinated notes ("the Notes"). Net proceeds of the Notes will be used for working capital. The Notes were issued in increments of $50,000 and are convertible into 2,000,000 shares of Series A Common Stock ("SVEIA") of the Company at $0.50 per share, subject to adjustment. The conversion of the Notes is at the holder's option anytime on or after the fifteenth day following the original issue date of the Notes and prior to the close of business on their maturity date. Issue costs for the Notes aggregated approximately $151,000. The Company has committed to register the shares that would be issuable upon conversion of the Notes. Dilution to existing shareholders would occur as a result of the conversion of the Notes to 2 million shares of Series A common stock. Should all the notes be converted, these shareholders would own approximately 17% of the outstanding stock of the Company. The first quarter of 2000 will include a charge for interest expense of $1 million with a corresponding $1 million increase in "Paid in Capital in Excess of Par Value." 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 1996 and 1997 fiscal years and for the period through May 21, 1998, there were no disagreements between the Company and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which if not resolved to the satisfaction of Deloitte & Touche would have caused it to make reference to the subject matter(s) of the disagreement(s) in connection with its reports. A letter from Deloitte & Touche confirming the statements contained in this Item 9(a) was filed as an exhibit to Form 8-K filed on May 29, 1998. (b) On May 21, 1998, the Company retained Grant Thornton LLP to serve as the Company's principal independent accountants. During the Company's past two fiscal years and the periods following December 31, 1997, the Company did not consult Grant Thornton LLP regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements. PART III Item 10. Directors and Executive Officers of the Registrant. The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held during 2000 (the "Proxy Statement") under the heading "Election of Directors", which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under "Executive Officers of the Registrant" in Item 1 of this report, which information is incorporated herein by reference. The information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Section 16 Requirements", which information is incorporated herein by reference. Item 11. Executive Compensation. The information concerning management compensation and transactions with management is set forth in the Proxy Statement under the heading "Management Compensation and Transactions", which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Principal Stockholders and Management Ownership", which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the heading "Management Compensation and Transactions", which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Financial Statements: The financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules" at Item 8. (2) Financial Statement Schedules: The financial statement schedules filed as a part of this report are listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules" at Item 8. (3) Exhibits The exhibits filed as a part of this report are listed under "Exhibits" at subsection (c) of this Item 14. (b) Reports on Form 8-K: No report of Form 8-K was filed on behalf of the Registrant during the last quarter of the Company's 1999 fiscal year. (c) Exhibits: Exhibit Number Description of Exhibit ------ ---------------------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company.(1) 3.2 Bylaws of the Company, as amended. (2) 4.1 Specimen of Series A Common Stock Certificate. (3) 4.2 Specimen of Series B Common Stock Certificate. (4) 4.3 Specimen of 10% Convertible Subordinated Note due March 31, 2003.(*) 10.11 Asset Contract to Purchase Real Estate dated February 8, 1999 by and between the Company and Production Manufacturing, Inc. (5) 21 Subsidiaries of the Company.(*) 23.1 Consent of Grant Thornton LLP.(*) 23.2 Consent of Deloitte & Touche LLP. (*) 27.1 Financial Data Schedule. (*) ________ * Filed herewith. (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-15279) and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-24486) and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's report on Form 8-A filed August 19, 1988 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. STEVENS INTERNATIONAL, INC. By: /s/ PAUL I. STEVENS ------------------- Paul I. Stevens Chairman of the Board, Chief Executive Officer, and Acting Chief Financial Officer Date: April 6, 2000 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 April 6, 2000 Paul I. Stevens Chief Executive Officer /s/ RICHARD I. STEVENS President, Chief Operating April 6, 2000 Richard I. Stevens Officer and Director /s/ CONSTANCE I. STEVENS Vice President, Secretary April 6, 2000 Constance I. Stevens and Director /s/ JAMES D. CAVANAUGH Director April 6, 2000 James D. Cavanaugh /s MICHEL A. DESTRESSE Director April 6, 2000 Michel A. Destresse /s/ EDGAR H. SCHOLLMAIER Director April 6, 2000 Edgar H. Schollmaier SCHEDULE II STEVENS INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Period Expenses Accounts Deductions Period --------- --------- ---------- --------- --------- Year Ended December 31, 1999 Allowance for doubtful accounts $ 529,000 $ (69,000) $ ( 89,000) (2) $ (301,000) (1) $ 70,000 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 ____________ (1) Write off of uncollectible accounts. (2) Reclassification of allowance for doubtful accounts to "assets held for sale".
INDEX TO EXHIBITS Exhibit Number Description of Exhibit Sequentially Numbered 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) 4.3 Specimen of 10% Convertible Subordinated Note due March 31, 2003. (*) 10.11 Asset Contract to Purchase Real Estate dated February 8, 1999 by and between the Company and Production Manufacturing, Inc. (5) 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. (5) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. EX-4.3 2 Exhibit 4.3 [Form of Note] This security and the shares of common stock issuable upon conversion of this security have not been registered under the Securities Act of 1933, as amended or any state securities laws. Neither this security, the shares of common stock issuable upon conversion of this security, nor any interest or participation herein or therein may be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of in the absence of such registration or unless such transaction is exempt from, or not subject to, registration. STEVENS INTERNATIONAL, INC. 10% CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2003 U.S. $_______________ Fort Worth, Texas March 31, 2000 FOR VALUE RECEIVED, Stevens International, Inc., a Delaware corporation (hereinafter referred to as "Obligor"), promises to pay to _____________ (hereinafter referred to as "Holder"), the principal sum of ___________ Dollars (U.S. $__________), together with interest thereon at a rate of ten percent (10%) per annum (calculated on the basis of a 360 day year comprised of twelve 30-day months). Interest shall be paid on the then outstanding principal balance on March 31 and September 30 of each year (each, an "Interest Payment Date") until maturity, commencing on September 30, 2000 and ending on March 31, 2003 (the "Maturity Date"). This Note is one of a duly authorized issue of promissory notes of Obligor in the aggregate principal amount of $1,000,000 designated as its 10% Convertible Subordinated Notes Due March 31, 2003 (the "Notes"). Obligor may elect to pay all or a portion of interest due and payable on September 30, 2000 or March 31, 2001 in cash (as described below) or by the issuance of additional notes in the principal amount of the accrued and unpaid interest at such Interest Payment Date and dated the date of such Interest Payment Date. Any such additional notes shall have the same terms and conditions as this Note. Interest payments on this Note will be paid to the person who is the Holder of record of this Note as shown on the register maintained by Obligor to record the registration and transfer of the Notes at the close of business on the March 15 or September 15 next preceding each Interest Payment Date. Interest shall accrue from the next preceding Interest Payment Date to which interest has been paid on this Note or if no interest has been paid from the date hereof. Cash payments of principal and interest will be made in the money of the United States that at the time of payment is legal tender for payment of public and private debts. Subject to the first sentence of this paragraph, all payments of principal of and interest on this Note may be made by check or wire payable in such money. Cash interest payments may be made by check and mailed to the Holder's registered address or at such other place as Holder shall notify Obligor in writing. 1. Subordination. Except as hereinafter provided, Obligor and Holder agree that the payment of the principal amount of this Note and interest thereon is subordinated to the prior payment in full of all Senior Indebtedness (as hereinafter defined) of Obligor, together with all interest and fees thereon. "Senior Indebtedness" as used in this Note means (i) the principal amount of, premium (if any) and all interest, fees and expenses (including attorneys' fees and costs of court) on all indebtedness, whether outstanding on the date of this Note or hereafter created, incurred or assumed, and however evidenced (whether by a letter of credit, loan agreement, promissory note indenture or similar instrument), for money borrowed from any and all banks and savings and loans and other depository institutions, finance companies, insurance companies, trust companies, leasing companies, government agencies and other persons or entities which regularly engage in commercial or asset-based lending and Paul I. Stevens as a lender (collectively "Senior Creditors"), for the payment of which the Obligor is or becomes directly or indirectly liable; (ii) guarantees by Obligor of indebtedness due to Senior Creditors for borrowed money incurred by subsidiaries of Obligor or subsidiaries of such subsidiaries; and (iii) the principal amount of and all interest and fees on any renewal, extension, refunding, amendment or modifications of any such Senior Indebtedness, including without limitation of the foregoing, purchase money mortgages, mortgages made, given or guaranteed by Obligor as mortgagor or guarantor, and assumed or guaranteed mortgages, upon property, but excluding any indebtedness to trade creditors or suppliers on open account for work, labor, services and materials and excluding any indebtedness which by the terms of the instrument creating or evidencing the same is stated to be not superior in right of payment to the Notes. Subject to the following paragraph, Obligor shall pay and holder shall have the right to receive and retain from Obligor principal and accrued interest owing hereon so long as Obligor is not in default in respect of any of its Senior Indebtedness. Upon the happening of an event of default which would permit Senior Creditors to declare Senior Indebtedness due and payable and upon written notice thereof given to Obligor by any one or more Senior Creditors (a "Default Notice"), then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, Obligor shall not, directly or indirectly, pay any principal or interest on, redeem or repurchase any of, the Notes; provided, however, that the foregoing provisions of this sentence shall not prevent the making of any such payment for more than 120 days after the Default Notice shall have been given unless the Senior Indebtedness in respect of which such event of default exists has been declared due and payable in its entirety, in which case no such payment may be made until the earliest to occur of (i) such declaration has been waived, rescinded or annulled, (ii) such Senior Indebtedness shall have been paid in full or (iii) payment thereof shall be duly provided for in cash or in any other manner satisfactory to such Senior Creditors. Any number of Default Notices may be given; provided, however, that not more than one Default Notice shall be given with respect to the same issue of Senior Indebtedness within a period of 360 consecutive days, and no specific event of default which existed or was continuing on the date of any Default Notice and was known to the Senior Creditors shall be made the basis for the giving of a subsequent Default Notice by the Senior Creditors. No rights of any Senior Creditor established in this Section 1 shall at any time or in any way be prejudiced or impaired by any act or failure to act on the part of Obligor or by any act or failure to act in good faith by any Senior Creditor or by any failure by Obligor to comply with the terms of this Note. This Note shall not be secured by any interest in any properties of Obligor. 2. Events of Default. Upon the occurrence and during the continuance of an Event of Default (as hereinafter defined), other than as described in Subsections (d) and (e) below, but subject to any restrictions and limitations by the Holder relating to Senior Indebtedness, the Holder of this Note shall be entitled, by written notice to Obligor, to declare this Note to be, and upon such declaration this Note shall be and become, immediately due and payable, in addition to any other rights or remedies Holder may have under the laws of the State of Texas. Upon the occurrence of an Event of Default as described in Subsections (d) and (e) below, this Note shall be and become immediately due and payable without notice or declaration by the Holder. The occurrence of any of the following events shall constitute an "Event of Default": (a) Failure to Make Payments When Due. Failure of Obligor to pay any principal, interest or other amount due under this Note when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, and the failure of Obligor to cure such default within five (5) days after the due date of any such payment; or (b) Breach of Covenants. Failure of Obligor to perform or observe any other material term, covenant or agreement on Obligor's part to be performed or observed pursuant to this Note, and the failure of Obligor to cure such default within thirty (30) days after written notice of such default by Holders owning not less than twenty-five percent (25%) of the aggregate principal amount of all Notes then outstanding; or (c) Suspension of Business; Liquidation. Suspension of the usual business activities of Obligor or the complete or partial liquidation of Obligor's business; or (d) Involuntary Bankruptcy, Etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Obligor in an involuntary case under Title 11 of the United States Code (as now and hereinafter in effect, or any successor thereto, the "Bankruptcy Code") or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Obligor under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Obligor or over all or a substantial part of its property shall have been entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Obligor for all or a substantial part of its property shall have occurred; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Obligor, and, in the case of any event described in this clause (d), such event shall have continued for sixty (60) days unless dismissed, bonded or discharged; or (e) Voluntary Bankruptcy, Etc. An order for relief shall be entered with respect to Obligor or Obligor shall commence a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property, or Obligor shall make an assignment for the benefit of creditors; or Obligor shall admit in writing its inability to pay its debts as such debts become due; or the Board of Directors of Obligor shall adopt any resolution or otherwise authorize action to approve any of the foregoing. Notwithstanding the provisions of this Section 2, if this Note is not paid on the Maturity Date or in the event that this Note becomes due and payable before the Maturity Date, the Holder shall not be entitled to seek any judgement, order, decree or other action from any court or governmental or administrative authority, including any insolvency, bankruptcy, receivership, reorganization or related case or proceeding, until the earlier of (i) 90 days after such declaration or (ii) the payment in full of all Senior Indebtedness. 3. Conversion Rights. A Holder of a Note may convert the principal amount of such Note (or any portion thereof equal to $50,000 or amounts equal to the sum of $50,000 and any integral multiple of $1,000) into shares of Series A Common Stock, par value $.10 per share, of Obligor (the "Conversion Shares") at any time after April 14, 2000 and prior to the close of business on March 28, 2003; provided, however, that if the Note is called for redemption pursuant to Section 4 hereof, the conversion right will terminate at the close of business on the business day immediately preceding the redemption date for such Note or such earlier date as the Holder presents such Note for redemption (unless Obligor shall default in making the redemption payment when due, in which case the conversion right shall terminate at the close of business on the date such default is cured and such Note is redeemed). The Holder, at Holder's option and subject to and in compliance with the provisions of this Section 3, may convert any or all of the outstanding principal on this Note at the time of such conversion (the "Conversion Rights") into a number of Conversion Shares equal to the result obtained by dividing the amount then being converted by $0.50 per share, as adjusted pursuant to this Section 3 (the "Conversion Price"). No payment or adjustment shall be made on account of accrued but unpaid interest upon conversion of this Note. (a) Registration; Conversion Price Adjustment. Pursuant to a Registration Rights Agreement of even date with this Note (the "Registration Rights Agreement"), Obligor will use its reasonable best efforts to file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 covering the resale of the Conversion Shares. If such registration statement shall not have been declared effective within 120 days after the date hereof, the Conversion Price will be reduced to $0.40 per share. If such registration statement shall not have been declared effective within 180 days after the date hereof, the Conversion Price will be further reduced to $0.25 per share and shall remain at such amount until the Maturity Date. Notwithstanding the preceding provisions of this Subsection 3(a), any Conversion Price adjustment under this Subsection 3(a) shall be subject to the Holder's having executed and delivered to Obligor the Registration Rights Agreement and performed all of the obligations thereunder required to be performed by a Noteholder. The Conversion Price as reduced by any adjustment under this Subsection 3(a) shall be subject to further adjustment under Subsection 3(e) hereof. (b) Manner of Exercising Conversion Rights. In order to exercise the Conversion Rights, the Holder shall deliver to Obligor during normal business hours at the Obligor's address as set forth in Section 8 below, (i) the original of this Note and (ii) a completed and executed conversion notice in the form attached. As soon as practicable after the date (the "Conversion Date") on which the Obligor receives the required documents in proper form but in any event no later than fifteen (15) business days thereafter, Obligor shall issue and deliver to Holder a certificate for the number of whole Conversion Shares and cash as provided in Subsection 3(c) below, in respect of any fraction of a Conversion Share. Such conversion shall be deemed to have been effected on the Conversion Date, and the Holder shall be deemed to have become the holder of record of the shares represented thereby on such date. Obligor shall not be obligated, upon exercise of the Conversion Rights by Holder, to effect the transfer of any Conversion Shares, or cause any Conversion Shares to be registered, to any persons or in any name or names other than the Holder. (c) Fraction of a Share. Obligor shall not be required to issue a fraction of a share or scrip representing fractional shares of Conversion Shares. If any fraction of a Conversion Share would, except for the provisions of this Subsection (c), be issuable on the conversion of this Note, Obligor shall pay to the Holder a cash payment equal to the equivalent fraction of the closing price on the Conversion Date. (d) Obligor to Reserve Stock. As long as the Holder's Conversion Rights are in effect, Obligor shall at all times reserve and keep available out of its authorized but unissued Series A Common Stock, for the purpose of effecting the conversion of this Note, such number of its duly authorized shares of Series A Common Stock as shall from time to time be sufficient to effect the conversion of this Note. Obligor covenants that all shares of Series A Common Stock which may be issued upon conversion of this Note will upon issue be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (e) Additional Conversion Price Adjustments. If Obligor shall (i) pay a dividend or make a distribution in shares of capital stock (whether shares of Series A Common Stock or capital stock of any other class), (ii) effect a stock split or subdivide the outstanding Series A Common Stock, (iii) effect a reverse stock split or combine the outstanding Series A Common Stock into a smaller number of shares or (iv) effect any other reclassification or recapitalization, then the number and types of shares of capital stock into which this Note is convertible and the Conversion Price in effect immediately prior thereto shall be adjusted so that upon the subsequent conversion of this Note the Holder hereof shall be entitled to receive the number and type of shares of capital stock of Obligor that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had this Note been converted immediately prior to the happening of such event. An adjustment made pursuant to this paragraph shall become effective immediately after the record date for any event requiring such adjustment or shall become effective immediately after the effective date of such event if no record date is set. 4. Redemption. (a) Optional Redemption. This Note is subject to redemption, at any time after (i) either (A) the registration statement covering the resale of the Conversion Shares shall be effective from the date of notice of redemption to the redemption date or (B) two years (or such other period as may hereafter be provided in Rule 144(k) under the Securities Act of 1933, or any successor rule) shall have elapsed since the original date of this Note and (ii) the closing market price of the Series A Common Stock shall not have been less than $3.00 per share for a period of 20 consecutive trading days prior to the date of notice of redemption. The redemption price of this Note shall be equal to 100% of the principal amount redeemed, plus interest accrued and unpaid on the amount redeemed through the date fixed for redemption (the "Redemption Date"). The redemption price, upon surrender of this Note or portion thereof, as the case may be, to Obligor at its principal office, will be paid by check or wire transfer. (b) Notice of Redemption. Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its registered address. Notes in denominations larger than $50,000 may be redeemed in part, but only in amounts equal to the sum of $50,000 and any integral multiple of $1,000. On and after the Redemption Date interest will cease to accrue on Notes or any portion of the Notes called for redemption. 5. Costs and Expenses of Collection. If this Note is collected by or through an attorney at law as a result of a failure of Obligor to pay, when due hereunder, any payment of principal of and interest on this Note, Obligor shall pay all of Holder's reasonably incurred costs of collection including, but not limited to, Holder's reasonable attorneys' fees. 6. Waivers by Obligor. The Obligor waives presentment for payment, protest, notice of dishonor and protest and consents to any extensions of time with respect to any payment due under this Note, and to the addition or release of any party or of any collateral securing this Note. No waiver of any payment under this Note shall operate as a waiver of any other payment. 7. Effect of Delay or Waiver by Holder. No delay or failure of the Holder of this Note in the exercise of any rights or remedy provided for hereunder shall be deemed a waiver of any other right or remedy which the Holder may have. 8. Notices to Obligor. Any notice or demand to Obligor shall be at the address as set forth on the signature page of this Note and to the Holder as provided to Obligor in the manner set forth herein, or to either Obligor or the Holder at any address previously furnished in writing by Obligor or Holder. Such notice shall be deemed to have been received 72 hours after its deposit, postage prepaid, with the United States Postal Service, or upon receipt in the case of personal delivery by courier or otherwise, or upon confirmation of receipt if delivered by facsimile transmission, provided that the original thereof is sent by mail, in the manner set forth above, within the next business day after the facsimile transmission is sent. 9. Governing Law; Headings. This Note is made in and shall be governed by and construed according to the laws of the State of Texas. The Section headings in this Note are for convenience of reference only and shall not be considered in, nor shall they affect, the interpretation or application of any of the provisions of this Note. 10. Transfer, Exchange. The Notes are in registered form without coupons. A Holder may register the transfer of or exchange Notes only on the books of the Obligor maintained for that purpose. The Obligor may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes or other governmental charges that may be imposed in relation thereto by law and proof of compliance with all applicable securities laws. 11. Persons Deemed Owners. The Holder of a Note may be treated as the owner of the Note for all purposes. 12. Recourse Against Others. A director, officer, employee or shareholder, as such, of Obligor shall not have any liability for any obligations of Obligor under the Notes nor for any claim based on, in respect of or by reason of such obligations or their creation. The Holder of this Note by accepting this Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Note. STEVENS INTERNATIONAL, INC. By: -------------------- George Wiederaenders Treasurer Address: 5700 East Belknap Street Fort Worth, Texas 76117 CONVERSION NOTICE To convert this Note into Series A Common Stock, check the box: To convert only part of this Note, state the principal amount to be converted (must be $50,000 or an amount equal to the sum of $50,000 and any integral multiple of $1,000): $____________. Your Signature: Date: ------------------ ------------------------------------------------ (Sign exactly as your name appears on this Note) Name: ----------------------------------------- Address: ----------------------------------------- CERTIFICATE TO BE DELIVERED UPON REGISTRATION OF TRANSFER 10% Convertible Subordinated Notes Due March 31, 2003 (the "Notes") of Stevens International, Inc. (the "Company") This certificate relates to $________________ principal amount of Notes owned by _______________________ (the "Transferor") to be transferred to ____________________________________________________________________________ ____________________________________________________________________________ ____________________________________________________________________________. (Insert Transferee's name, address and social security or tax I.D. number) The Transferor has requested the Company to register the transfer of such Notes. In connection with such request and in respect of each such Note, the Transferor does hereby certify that the Transferor is familiar with transfer restrictions relating to the Notes and the transfer of such Note is being made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") (check applicable box) or the transfer or exchange, as the case may be, of such Note does not require registration under the Securities Act because (check applicable box): Such Note is being transferred pursuant to an effective registration statement under the Securities Act. Such Note is being transferred pursuant to and in compliance with an exemption from the registration requirements under the Securities Act in accordance with Rule 144 (or any successor thereto) ("Rule 144") under the Securities Act. Such Note is being transferred pursuant to and in compliance with an exemption from the registration requirements of the Securities Act (other than pursuant to Rule 144), and if Obligor so requests, an opinion of counsel satisfactory to Obligor to the effect that the transfer is in compliance with the Securities Act. Date: ---------------------------- ------------------------------------ (Signature of Transferor) EX-21 3 Exhibit 21 Material Subsidiaries of the Company Country or State Name(s) Under Which Name of Subsidiary of Incorporation Subsidiary Does Business -------------------------- ---------------- ------------------------ 1. Stevens International, S.A. France EX-23.1 4 Exhibit 23.1 Consent of Grant Thornton LLP Consent of Independent Certified Public Accountants We have issued our report dated March 20, 2000 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, 1999. 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 April 12, 2000 EX-23.2 5 Exhibit 23.2 Consent of Deloitte & Touche LLP Independent Auditors' Consent We consent to the incorporation by reference in Registration Statements No. 33-25949, No. 33-36853 and No. 333-00319 of Stevens 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, 1999. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Fort Worth, Texas April 12, 2000 EX-27.1 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 DEC-31-1999 6 0 1,006 70 6,303 7,810 9,335 7,540 10,262 6,632 6,158 0 0 950 (6,588) 10,262 11,137 11,137 7,813 5,109 79 1,682 738 (4,284) 0 (4,284) 0 0 0 (4,284) (0.45) (0.45)
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