10-K405 1 sii10k2000-c.txt FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 ============================================================================ 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, 2000 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 $1,720,000 based upon the last trade of the registrant's Series B Common Stock on November 15, 2000 at $0.13 per share and the closing price of the Series A Common Stock on March 27, 2001 at $0.28 per share as reported by the OTCBB. As of March 22, 2001, there were outstanding 7,466,474 shares of Series A stock and 2,035,659 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 2001 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 Stockholder Matters...................... 14 Item 6. Selected Financial Data ......................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 16 Item 8. Financial Statements and Supplementary Data...... 21 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ............. 42 PART III Item 10. Directors and Executive Officers of the Registrant 42 Item 11. Executive Compensation ......................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 42 Item 13. Certain Relationships and Related Transactions.. 42 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 42 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.) Stevens designs, manufactures, markets and services web-fed packaging and printing systems and related equipment. We sell to customers in the packaging industry and in the specialty/commercial, banknote and securities segments of the printing industry. Our technological and engineering capabilities allow us to combine the four major printing technologies in our systems. We combine 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 more than $10 million. We also manufacture auxiliary and replacement parts and provide service for our equipment, which represented 98% of net sales for 2000, 76% of net sales for 1999, and 60% of net sales for 1998. Our equipment is used by 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. We have an installed base of more than 3,000 machines in over 50 countries. We also market and manufacture high-speed image processing systems primarily for use in the banknote and securities printing industry. All of our presses are "web-fed" presses, which print on paper or other substrate that is fed continuously from a roll. This differs from traditional "sheet-fed" presses, which print on pre-cut sheets of paper or other substrate. Sheet-fed equipment is still dominant in segments of the packaging industry and the banknote and securities segment of the printing industry. We believe, however, that numerous opportunities exist to convert certain users of sheet-fed equipment to our web-fed packaging and printing systems because of efficiencies inherent in the web-fed process. Our business has changed significantly in the last several years due to fundamental changes in web-fed printing press markets, the large operating losses that we have sustained and our need to reduce indebtedness. From 1997 to 1999, we sold the assets of four of our divisions and used the proceeds to reduce indebtedness. Despite these asset sales and debt reduction, our liabilities may currently exceed the value of our assets. All our assets continue to be pledged as collateral to our lenders. Throughout our recent history, our bank lenders have maintained first liens on substantially all our assets. Beginning June 30, 1998, we granted liens on all our assets then existing and to be acquired in the future as collateral for loans from Paul I. Stevens, our Chairman and Chief Executive Officer and principal lender. Additionally, as a result of our inability to pay pension plan contributions since September 1999, the Pension Benefit Guaranty Corporation, on behalf of Stevens International's pension plan for bargaining unit employees, and the Internal Revenue Service have filed liens on our assets. Possible Combination With Graphic Systems Services On April 16, 2001 Graphic Systems Services notified us that merger negotiations have been terminated due to their inability to finance the transaction. The possible combination of GSS with the Company has been under discussion since September, 2000. Court Ordered $1.25 Million Judgment on Twelve Year old Commission Dispute On April 9, 2001, a Waukesha, Wisconsin County Circuit Court, awarded a $1.25 million order for judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union. There would be no assets available to collect on this judgment due to prior lien holder claims, including our senior bank lender, Paul I. Stevens, the Pension Benefit Guaranty Corporation and the Internal Revenue Service. Although there can be no certainty as to the outcome of negotiations, we are attempting to settle this judgment on a basis more favorable to the Company. 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") due March 31, 2003. Net proceeds of the Notes were used for working capital. The Notes were issued in increments of $50,000. In September 2000, we elected to increase the notes by $50,000 in lieu of paying the interest for the first six months in cash. The $1,050,000 Notes are convertible into 2,100,000 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 2.1 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 conversion feature necessitated a first quarter of 2000 charge for interest expense of $1 million with a corresponding $1 million increase in "Paid in Capital in Excess of Par Value." New Preferred Stock May Be Issued The Certificate of Incorporation of Stevens International authorizes the issuance of two million shares of "blank check" preferred stock with designations, rights and preferences as may be determined in the future by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. Although we have no present intention to issue any shares of preferred stock, we may do so in the future. FORWARD-LOOKING STATEMENTS Certain statements contained in this Report on Form 10-K in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in the Form 10-K, are "forward-looking statements" and are therefore prospective. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as "anticipates," "believes," "expects," "intends," "plans," "projects" and other similar expressions. Forward- looking statements in this prospectus include, among others, statements regarding our future business and development plans and future expectation of revenues, expenses and cash flows. These forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. The most significant of those risks, uncertainties and other factors are discussed under "Factors That Could Affect Future Performance". Overview of 2000 and 1999 We continued to experience a decrease in sales during 2000 and 1999, 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 2000 ($4.4 million) decreased 60% over the previous year. The decrease occurred in packaging and specialty web products ($4.7 million), SSMI ($3.0 million) due to its sale in January 2000, offset by an increase in banknote and currency of $1 million. In response to the low volume of orders, the Company continued 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 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 for the year ended December 31, 1999, 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. Industry Overview Stevens markets its systems to its customers in two distinct worldwide industriesCthe 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 Company does not participate in the newspapers, periodicals and book publishing segments of the printing industry. 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 practicesCincluding greater market segmentationCand increasing environmental regulation. In addition the industry is experiencing a considerable consolidation process with numerous customer and manufacturer 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 Facing severe financial difficulties and a difficult printing press marketing environment, we believe some or all of the following to be necessary to raise cash, to return to profitability, and to reduce our dependence on loans from Paul I. Stevens and our senior bank lender. We are considering the sale of our traditional web printing press and parts and service business, mortgaging our Texas manufacturing and office facility on a long-term basis, converting vendor and other debt to equity, continued reduction of personnel, and obtaining of significant new orders for our high-speed image processing systems used primarily in the banknote and security printing industry in Europe and the Middle East. 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. All four major printing processes are offered on a worldwide basis for our web-fed packaging and printing systems including flexographic, offset lithographic, rotogravure and intaglio printing alone 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 our 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. We believe that we offer, 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. We manufacture auxiliary equipment and replacement parts and provide service for our presses and collators, which represented 98% of our net sales for 2000, 76% of net sales for 1999, and 60% of net sales for 1998. 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. We provide 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 often be delivered the same day or overnight in North America, and within 24-48 hours worldwide. Many replacement parts have much longer delivery times. Product services and support programs also are designed to promote the sale of auxiliary equipment. Marketing We primarily market our products domestically through direct sales engineers and managers and internationally through our agent network. Our traditional marketing efforts include advertising, participating in major domestic and international trade shows and customer symposiums, and conducting periodic product maintenance seminars. We also conduct limited market research and analyzes to reveal and study trends in addition to participating in various trade associations. Customers Our customers include packaging companies, printing companies, paper companies, check printers, business forms companies and central bank and private banknote and securities printers. Competition We encounter substantial competition in marketing our products from manufacturers of both sheet-fed and web-fed presses and related equipment. We believe that in our selected segments of the packaging and printing industries our competitors are primarily manufacturers of web-fed equipment. Our principal web-fed competitors are Bobst, S.A., Komori- Chambon and Goebel. We believe 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. Competition for our products is based primarily on product performance, web-fed versus sheet-fed technology, reliability, customer service, price and delivery. Research and Development Our 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, 2001, the Company had approximately 24 employees. With the closing of the Hamilton plant in 1998, we no longer employ any collective bargaining employees. Backlog and Orders The backlog 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 we experience an average six to nine month period between the booking of the order and its final shipment. Our backlog of unfilled orders as of December 31, 2000 was approximately $1.7 million compared to $2.5 million at December 31, 1999. Executive Officers The executive officers of the Company are as follows: Name Age Principal Position with the Company ------------------------ --- ----------------------------------- Paul I. Stevens......... 86 Chairman of the Board, Chief Executive Officer and Director Richard I. Stevens...... 62 President, Chief Operating Officer and Director Constance I. Stevens.... 57 Vice President - Administration, Assistant Secretary and Director George A. Wiederaenders. 59 Vice President, Treasurer and Chief Accounting Officer Paul I. Stevens founded the Company in 1965. He has served the Company as Chairman of the Board and Chief Executive Officer since its inception. In 1974, Mr. Stevens founded Stevens Industries, Inc., a family-owned holding company that is an affiliate of the Company and of which he is the controlling stockholder. Mr. Stevens is the father of Richard I. Stevens and Constance I. Stevens. 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, Publishing and Converting 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. We have had operating losses in each of the last five years, with net sales declining substantially each year since 1995. Since 1997, cash flow from operations has been insufficient to meet our cash requirements. We have been regularly relying on loans from Paul I. Stevens, the Chairman and Chief Executive Officer of Stevens International, Inc., to provide necessary funds for working capital. Unless we obtain substantial orders for printing equipment in the near future, we may be forced to file for bankruptcy. Our liabilities may currently exceed the value of our assets. Stevens International Has Incurred Substantial Indebtedness Which Could Be Accelerated We have substantial debt and may incur more. As of March 1, 2001, we had short-term and long-term debt totaling $11.4 million. Loans to Stevens International by Paul I. Stevens in the amount of $7.7 million become due June 30, 2002. Under current conditions we do not foresee the ability to repay the loans from Mr. Stevens when they become due. If Mr. Stevens does not then extend the maturity of these loans, we do not expect that we could find a replacement lender and would be unable to pay that debt. Outstanding loans under our bank line of credit in the amount of $2.23 million become due June 30, 2001. We currently are not in compliance with some of the covenants under the bank line of credit loan agreement. Although the bank can declare the full amount of the loan immediately payable at any time, it has not done so. If the bank lender should accelerate the maturity of the bank loan and demand repayment of the debt, we do not expect that we could find a replacement lender for these funds and would be unable to meet that obligation. As the holder of liens on substantially all of our assets, the bank could initiate a foreclosure sale of assets necessary to repay the outstanding loan amount. An Economic Downturn Could Have an Adverse Effect on Stevens International Sales of our packaging and printing products may be adversely affected by general economic and industry conditions and downturns and commodity prices. Our business and results of operations may be adversely affected by higher inflation, interest rates, unemployment and paper and paperboard prices. It may also be adversely affected by general economic conditions that reflect a downturn in the economy which cause customers to reduce or delay capital expenditure decisions. For example, we have incurred substantial losses since 1995. These losses were caused by many factors, including: * a slowdown in customers' capital spending that surfaced in the fourth quarter of 1995; * changing printing technology that affected demand for our business forms printing systems, which prior to 1990 represented a substantial portion of our revenues; and * a general economic downturn which reduced or delayed capital expenditure decisions by our 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. The Trading Market for the Series A Common Stock May Be Small The Series A Common Stock is not listed on any national securities exchange or quoted on the NASDAQ system. The Series A Common Stock is quoted on the Over-the-Counter Bulletin Board. Generally, the market for securities quoted on the Bulletin Board is smaller than securities listed on national exchanges and NASDAQ. The Series A Common Stock Price Is Volatile The Series A Common Stock has experienced a high level of price and volume volatility. The 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 our common stock is likely to continue to be highly volatile and subject to wide fluctuations. The stock price may be affected by announcements of financial results, new product introductions, new orders or order cancellations by us or our competitors, or other matters related to our business. In addition, the stock price may fluctuate due to changes in general economic and stock market conditions, investor perceptions, levels of interest rates and the value of the U.S. dollar. International Operations of Stevens International Present Greater Risks to its Business International sales represented 10% of net sales in 2000, 38% in 1999 and 35% in 1998. We expect that international sales will continue to represent a significant portion of our total sales. International operations are subject to various risks, including: * exposure to currency fluctuations; * political and economic conditions and trends in other countries; * trade and business laws in other countries; * unexpected changes in export and import regulations and duties of the United States and other countries; * 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 currency exchange rates are unpredictable and may be substantial. Since many of our competitors are foreign, fluctuations in exchange rates may also affect our competitive position in the United States market. Any event causing a sudden disruption of international sales could have a material adverse effect on our operations. The Industry Is Highly Competitive The packaging and printing equipment industry is highly competitive and is characterized by technological advances and new product introductions and improvements. Most of the companies marketing competitive products or with the potential to do so are well-established, have substantially greater financial and other resources and have established reputations for success in the development, sale and service of these products. We face substantial competition in marketing our products from manufacturers of both sheet-fed and web-fed presses and related equipment. Our ability to compete successfully will depend on our ability to design and build products which achieve general market acceptance. This requires maintaining a technically competent research and development staff and staying ahead of technological changes and advances in the industry. We may encounter many difficulties and delays in the development of new technologies and related products. We may be unable to keep pace with the competitive demands of the marketplace. We may be unable to create new products that establish long-term life cycles or assure long-term field use. Moreover, our new products or improved versions of current products may not be commercially viable. Current competitors or new market entrants could introduce new or enhanced products with features which render our technology, or products incorporating our technology, obsolete or less marketable. 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. Product Quality Must Be High Any quality, durability or reliability problems with existing or new products, or any other actual or perceived problems with our products, could have a material adverse effect on market acceptance of our products. Any quality problems with components could result in product repair or improvements that would likely have an adverse effect on our financial results and future sales potential. Stevens International Is Dependent on its Management and Key Personnel Our success largely depends on the personal efforts of Paul I. Stevens, Chairman of the Board and Chief Executive Officer, Richard I. Stevens, President and Chief Operating Officer, and on other members of senior management. The loss or interruption of the services of these individuals could have a material adverse effect on our business and prospects. Our success also depends on our ability to hire and retain additional qualified sales, marketing and other personnel. Competition for qualified personnel in the industry is intense. We may be unable to hire or retain additional qualified personnel, which is more difficult because of our past weak financial performance. Stevens International Is Controlled by the Stevens Family As of March 1, 2001, Paul I. Stevens and persons and entities related to him beneficially owned approximately 12% of the outstanding Series A Common Stock and 92% of the outstanding Series B Common Stock of Stevens International. This ownership represents approximately 71% of the combined voting power and permits the Stevens' to elect a majority of the Board of Directors and control the outcome of issues voted on by stockholders unless approval requires a separate vote of holders of the Series A Common Stock. In addition, this large ownership of stock may have the effect of reducing liquidity of the trading market for the stock. New Litigation Would Adversely Impact Stevens International We are engaged in various actions related to product liability claims and ordinary routine litigation incidental to our business. In addition we have suppliers' claims resulting from our continuous liquidity problem and corresponding inability to pay vendors on a timely basis. To date, most of these claims have been settled. Each matter is subject to some degree of uncertainty and there can be no assurance that all current or future claims can be settled or successfully defended. A negative outcome in excess of insurance coverage could have a material adverse effect on our operating results and financial condition. Additionally, significant litigation may result in a distraction or diversion of management's attention and adversely affect operations. New Environmental Claims Could Arise and Adversely Affect Stevens International Our production facilities and operations are subject to local and federal laws and regulations. We believe that we are currently in compliance with all these laws and regulations. The Environmental Protection Agency issued a notice of potential liability and request for participation in cleanup activities in 1990 to approximately 60 parties including one of our former subsidiaries. The claim involved the disposition of substances that could be characterized as "hazardous wastes" which were purportedly taken to Coakley Landfill Site in North Hampton, New Hampshire prior to 1982. Although the claim has been settled, there can be no assurance that we will not be subject to further claims relating to the Coakley site or sites affected by contamination from the Coakley site. Furthermore, there could be some accidental contamination, disposal or injury from the use, storage or disposition of materials used in our operations for which we could be held liable for resulting damages. We could be required to comply with environmental laws, regulations or claims in the future which could result in significant additional costs. 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 ample 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. 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 67% decrease in 2000. 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 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. Following is the location 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. Location Use Approx. Owned or Sq. Ft. 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 OperationsCLiquidity 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 April 9, 2001, a Waukesha, Wisconsin County Circuit Court, awarded a $1.25 million order for judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union. There would be no assets available to collect on this judgment due to prior lien holder claims, including our senior bank lender, Paul I. Stevens, the Pension Benefit Guaranty Corporation and the Internal Revenue Service. Although there can be no certainty as to the outcome of negotiations, we are attempting to settle this judgment on a basis more favorable to the Company. 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 1999 filing for distress termination of the plans began a series of negotiations with the PBGC regarding funding of the pension benefits of employees. The PBGC determined that the Company will be unable to pay benefits when due and that the plans must be terminated in order to protect the interests of the plan participants. The PBGC became statutory trustee at November 15, 1999, the effective date of the termination of the plans. 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 were also taken over by the PBGC. The Company and the PBGC are negotiating terms of a financial settlement for installment payments to be made by the Company to the PBGC over the next 7-8 years. 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 former 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, 2000. 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 Over-The-Counter Bulletin Board (OTCBB) 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, 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, 1999 .... First Quarter .................... $1 1/4 $ 5/16 $ 13/16 $ 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 Year Ending December 31, 2000: First Quarter .................... $2 1/4 1/4 $ 2 $ 1/16 Second Quarter ................... 1 5/8 3/4 5/16 5/16 Third Quarter .................... 1 1/8 1/2 5/16 5/16 Fourth Quarter ................... 3/4 1/2 5/16 1/8 First Quarter 2001 (through March 27, 2001) $ 1/2 $ 3/16 $ 1/8 $ 1/8
As of March 27, 2001, 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 OperationsCLiquidity and Capital Resources.'' Recent Sales of Unregistered Securities On March 31, 2000, the Company received the net proceeds 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). These 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, ------------------------------------------------ 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Net sales $ 3,620 $11,137 $22,207 $35,151 $65,659 Cost of sales 3,420 7,813 17,877 34,011 74,243 ------ ------ ------ ------ ------ Gross profit (loss) (1) 200 3,324 4,330 1,140 (8,584) Selling, general and administrative expense 2,913 4,909 7,379 9,837 22,485 Restructuring charge (3) - - - - 1,300 Loss on impairment of assets 700 200 573 6,347 - Loss on sale of assets - - - - 3,472 ------ ------ ------ ------ ------ Operating income (loss) (3,413) (1,785) (3,622) (15,044) (35,841) Gain (loss) on sale of assets (4) (273) (1,682) 2,203 - - Court ordered judgment - prior year commission(6) (1,250) - - - - Other income (expense) (5) (1,699) (817) (1,956) (4,396) (5,379) ------ ------ ------ ------ ------ Income (loss) before income taxes and extraordinary item (6,635) (4,284) (3,375) (19,440) (41,220) Income tax (expense) benefit - - (75) 213 7,000 ------ ------ ------ ------ ------ Income (loss) before extraordinary item (6,635) (4,284) (3,450) (19,227) (34,220) Extraordinary item (2) - - 11,221 - - ------ ------ ------ ------ ------ Net income (loss) $(6,635) ($4,284) $ 7,771 $(19,227) $(34,220) ====== ====== ====== ======= ====== Per Common Share - Basic: Income (loss) before extraordinary item $(0.70) $(0.45) $(0.36) $(2.03) $(3.62) Extraordinary item (2) - - 1.18 - - ------ ------ ------ ------ ------ Net income (loss) - basic $(0.70) $(0.45) $0.82 $(2.03) $(3.62) ====== ====== ====== ======= ====== Per Common Share - Diluted: Income (loss) before extraordinary item $(0.70) $(0.45) $(0.36) $(2.03) $(3.62) Extraordinary item (2) - - 1.18 - - ------ ------ ------ ------ ------ Net income (loss) - diluted. $(0.70) $(0.45) $0.82 $(2.03) $(3.62) ====== ====== ====== ======= ====== Weighted average shares outstanding - basic 9,502 9,502 9,492 9,457 9,451 ====== ====== ====== ======= ====== Weighted average shares outstanding - diluted 9,502 9,502 9,492 9,457 9,451 ====== ====== ====== ======= ====== BALANCE SHEET DATA (In thousands) Year Ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Cash and temporary investments $ 264 $ 6 $ 164 $ 211 $ 3,338 Working capital (deficit) (1,346) 1,178 1,965 (10,894) (11,476) Total assets 7,120 10,262 14,651 31,890 77,417 Long-term debt 8,702 6,158 5,244 55 113 Total stockholders' equity (deficit) $(8,724) $(5,396) $(2,955) $(9,611) $10,896 ________________________ (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 a fourth quarter 1999 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". (5) Includes a first quarter 2000 charge for interest expense of $1 million necessitated by the conversion feature of the $1 million of convertible subordinated notes payable. (6) The April 2001 court ordered judgment related to a twelve year old dispute over an alleged commission on a 1989 project involving the former Soviet Union, was recorded in the fourth quarter of 2000.
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. Recent Developments Stevens International, Inc. is continuing to experience month to month losses and cash flow difficulties. The Company is exploring various alternatives to solve these problems, including raising of additional capital, spin off or sale of assets, recapitalization, mergers, and aggressive pursuit of all available currency and printing equipment prospects. There can be no assurance that any of these initiatives will be successful. In September, 2000, the Company entered into discussions for a possible combination with Graphic Systems Services, Inc., a privately held printing equipment manufacturer located in Springboro, Ohio. On April 16, 2001 Graphics Systems Services notified us that merger negotiations have been terminated due to their inability to finance the transaction. 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 $3.6 million in 2000. The Company continued to experience a decrease in sales during 2000 and 1999, 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 2000 of $4.4 million decreased 60% from the previous year. The decrease occurred in packaging and specialty web products ($4.7 million), SSMI ($3.0 million), offset by an increase in banknote and currency of $1 million. 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. Fourth Quarter 2000 We attribute the operating and net loss for the fourth quarter of 2000 to (1) a continuing decline in sales volume, (2) a $1.25 million accrual for an April 2001 court ordered judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union, (3) an impairment of asset value write-down of inventory of $0.7 million, and (4) a $0.07 million accrual for an Internal Revenue Service excise tax assessment related to a 1998 failure to make a pension fund payment. 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, ----------------------- 2000 1999 1998 ----- ----- ----- Net sales ....................... 100.0% 100.0% 100.0% Cost of sales ................... 94.5% 70.2% 80.5% ----- ----- ----- Gross profit (loss) ............. 5.5% 29.8% 19.5% Selling, general and administrative expenses 80.5% 44.1% 33.2% Loss on impairment of asset value 19.3% 1.8% 2.6% ----- ----- ----- Operating income (loss) ......... (94.3%) (16.1%) (16.3%) Other income (expense): Gain (loss) on sale of assets (7.5%) (15.1%) 9.9% Interest, net .............. (49.5%) (6.6%) ( 7.1%) Court ordered judgment - prior year commission ................. (34.5%) - - Other, net ................. 2.6% (0.7%) ( 1.7%) ----- ----- ----- Loss before income taxes and extraordinary items ...................... (183.3%) (38.5%) (15.2%)
Comparison of Years Ended December 31, 2000 and 1999 Sales. The Company's sales for the year ended December 31, 2000 decreased by $7.5 million (or 67.5%) compared to sales in the same period in 1999 due primarily to decreases in packaging system products ($4.5 million) and French service and repair sales ($3.0 million). Gross Profit. The Company's gross profit for the year ended December 31, 2000 decreased by $3.1 million compared to gross profit in the same period in 1999. The gross profit margin decreased to 5.5% of sales as compared to 29.8% in the comparable period in 1999 due to continuing high costs of idle plant and underutilized personnel due to low production volume in 2000. The margin in 1999 was due, (1) to product mix, shipment of products at near normal margins, and reduced depreciation and product development costs; 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 1999 LIFO reserve calculation and, accordingly, increased the gross profit by $1.3 million (or $0.14 per share) for the year ended December 31, 1999. Selling, General and Administrative Expenses. The Company's selling, general, and administrative expenses decreased by $2.0 million (or 40.7%) for the year ended December 31, 2000 compared to the same period in 1999 due to cost reduction efforts at corporate headquarters and the manufacturing location in connection with the reduced volume of sales. Selling, general and administrative expenses for the year ended December 31, 2000 were 80.5% of sales compared to 44.1% of sales for the same period in 1999 due to the substantial reduction in sales in 2000. The reduction in expenses was not proportionate to the reduction in sales discussed above. Loss on Impairment of Asset Value. A fourth quarter 2000 loss of $0.7 million was recorded to recognize an impairment of inventory value on slow- moving or obsolete inventory. An inventory value impairment loss of $0.2 million was recorded in the third quarter of 1999. Court Ordered $1.25 Million Judgment on Twelve Year Old Commission Dispute. On April 9th, 2001 a Waukesha, Wisconsin County Circuit Court, awarded a $1.25 million order for judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union. Other Income (Expense). The Company's interest expense increased by $1.1 million for the year ended December 31, 2000 compared to the same period in 1999 due to the $1.0 million in imputed interest recorded on the issuance of the 10% convertible subordinated notes on March 31, 2000 (see Note J) and the interest on the 10% convertible subordinated notes through December 31, 2000. Interest income was negligible for the year ended December 31, 2000 and 1999. Other income in 2000 resulted primarily from the termination of the Company's two pension plans and a corresponding reduction in plan liabilities. The loss on sale of assets of $0.27 million in 2000 was a result of the sale of certain assets and the settlement of certain obligations retained in the sale of Zerand Division in 1998. 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. Tax Matters The Company's effective state and federal income tax rate (''effective tax rate'') was 0% for 2000, 0% for 1999, and 0.3% for 1998. 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, 2000, and 1999. Three Months Ended ---------------------------------------------- March 31, June 30, Sept.30, December 31, ------- ------- ------- ------- (In thousands, except per share data) 2000: Net sales ................... $ 821 $ 1,200 $ 1,008 $ 591 Operating (loss) ............ $ (886) $ (987) $ (455) $ ( 1,085) Net (loss) .................. $ (2,141) $ (1,513) $ (364) $ (2,617) Net (loss) per common share - basic and diluted ......... $ (0.22) $ (0.16) $ (0.04) $ (0.28) 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)
We attribute the operating and net loss for the fourth quarter of 2000 to (1) a continuing decline in sales volume, (2) a $1.25 million accrual for an April 2001 court ordered judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union, (3) an impairment of asset value write-down of inventory of $0.7 million, and (4) a $0.07 million accrual for an Internal Revenue Service excise tax assessment related to a 1998 failure to make a pension fund payment. We attribute 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 has taken certain continuing cost reduction actions to adjust its expected 2001 production to the order flow in 2000. 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 $(2.8 ) million in 2000, $(1.6) million in 1999, and $(5.9) million in 1998. Net cash provided by (used in) operating activities (before working capital requirements) was $(3.1) million in 2000, (1.9) million in 1999, and $(4.5) million in 1998. Working capital provided (used) cash of $0.3 million in 2000, $0.3 million in 1999, and $(1.4) million in 1998. 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") due March 31, 2003. Net proceeds of the Notes were used for working capital. The Notes were issued in increments of $50,000. In September 2000, we elected to increase the Note by $50,000 in lieu of paying the interest for the first six months in cash. The $1,050,000 Notes are convertible into 2,100,000 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 $0.01 million in 2000, $0.1 million in 1999, and $0.2 million in 1998 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 note holders, 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 1 1/4% 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, 2000 there were $2.22 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, 2000. 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 $7.65 million at December 31, 2000 have first liens on certain assets of the Company, principally 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 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 1999 filing for distress termination of the plans began a series of negotiations with the PBGC regarding funding of the pension benefits of employees. The PBGC determined that the Company will be unable to pay benefits when due and that the plans must be terminated in order to protect the interests of the plan participants. The PBGC became statutory trustee at November 15, 1999, the effective date of the termination of the plans. 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 were also taken over by the PBGC. The Company and the PBGC are negotiating terms of a financial settlement for installment payments to be made by the Company to the PBGC over the next 7-8 years. The estimated present value of the anticipated payments to the PBGC has been recorded at December 31, 2000 in the amount of $0.63 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, 2000, the Company's Chairman and Chief Executive Officer has loaned the Company $7.65 million for its short-term cash requirements. As of December 31, 2000, 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......................................... 21 Report of Independent Certified Public Accountants .......... 22 Consolidated Balance Sheets -- December 31, 2000 and 1999 ... 23 Consolidated Statements of Operations -- Years Ended December 31, 2000, 1999, and 1998.................................. 24 Consolidated Statement of Stockholders' Equity -- Years Ended December 31, 2000, 1999, and 1998 ........................ 25 Consolidated Statements of Cash Flows -- Years Ended December 31, 2000, 1999, and 1998 .................................. 26 Notes to Consolidated Financial Statements .................. 27 Schedule II - Valuation and Qualifying Accounts - Years Ended December 31, 2000, 1999, and 1998......................... 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial consolidated statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II for each of the three years in the period ended December 31, 2000. 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, and is in violation of certain debt covenants 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 26, 2001 (except for Note L as to which the date is April 9, 2001) STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) December 31, ---------------------- 2000 1999 ------- ------- ASSETS Current assets: Cash $ 264 $ 6 Trade accounts receivable, less allowance for losses of $101 and $70 in 2000 and 1999, respectively 393 936 Costs and estimated earnings in excess - 109 of billings on long-term contracts Inventories 4,147 6,303 Other current assets 360 93 Assets held for sale - 363 ------- ------- Total current assets 5,164 7,810 Property, plant and equipment, net 1,463 1,795 Other assets, net 493 657 ------- ------- $ 7,120 $ 10,262 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 1,391 $ 2,120 Other current liabilities 2,301 1,691 Income taxes payable 110 110 Customer deposits 486 641 Current portion of long-term debt 2,222 2,070 ------- ------- Total current liabilities 6,510 6,632 Long-term debt 1,050 --- Note payable - stockholder 7,652 6,158 Accrued pension costs 632 3,110 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, 7,466,000 and 7,459,000 issued and outstanding at December 31, 2000 and 1999, respectively 746 745 Series B Common Stock, $0.10 par value, 6,000,000 shares authorized, 2,037,000 and 2,042,000 shares issued and outstanding 204 205 at December 31, 2000 and 1999, respectively Additional paid-in capital 40,961 39,961 Accumulated other comprehensive (loss) - (2,549) Retained deficit (50,635) (44,000) ------- ------- Total stockholders' equity (deficit) (8,724) (5,638) ------- ------- $ 7,120 $ 10,262 ======= ======= 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, ------------------------------- 2000 1999 1998 ------ ------ ------ Net sales $ 3,620 $11,137 $22,207 Cost of sales 3,420 7,813 17,877 ------ ------ ------ Gross profit 200 3,324 4,330 Selling, general and administrative expenses 2,913 4,909 7,379 Loss on impairment of assets 700 200 573 ------ ------ ------ Operating (loss) (3,413) (1,785) (3,622) Other income (expense): Gain (loss) on sale of assets (273) (1,682) 2,203 Interest income 6 31 13 Interest expense (1,798) (769) (1,580) Court ordered judgment - prior year commission (1,250) - - Other, net 93 (79) (389) ------ ------ ------ (3,222) (2,499) 247 ------ ------ ------ (Loss) before taxes and extraordinary item (6,635) (4,284) (3,375) Income tax benefit (expense) - - (75) ------ ------ ------ (Loss) before extraordinary item (6,635) (4,284) (3,450) Extraordinary gain on debt extinguishment - - 11,221 ------ ------ ------ Net income (loss) $(6,635) $(4,284) $ 7,771 ====== ====== ====== Net income (loss) per common share Income (loss) before extraordinary gain $ (0.70) $(0.45) $ (0.36) Extraordinary gain - - 1.18 ------ ------ ------ Net income (loss) - basic and diluted $ (0.70) $(0.45) $ 0.82 ====== ====== ====== Weighted average number of shares of common and common stock equivalents outstanding during the periods - basic and diluted 9,502 9,502 9,492 ====== ====== ====== 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, 1998 7,391 739 2,098 210 39,941 (47,487) (3,014) (9,611) Net income - - - - - 7,771 - 7,771 Foreign currency translation adjustment - - - - - - (295) (295) Excess pension liability adjustment - - - - - - (841) (841) ------ Comprehensive income 6,635 ------ Exercise of stock options 14 1 - - 20 - - 21 Conversion of Series B stock to Series A stock 13 1 (13) (1) - - - - ----- ----- ----- ----- ------- ------ ------ ------ Balance, December 31, 1998 7,418 741 2,085 209 39,961 (39,716) (4,150) (2,955) 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 stock 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) Net loss - - - - - (6,635) - (6,635) Termination of Pension Plans - - - - - - 2,549 2,549 ------ Comprehensive loss (4,086) ------ Beneficial conversion feature on convertible subordinated notes - - - - 1,000 - - 1,000 Conversion of Series B stock to Series A stock 7 1 (7) (1) - - - - ----- ----- ----- ----- ------- ------ ------ ------ Balance, December 31, 2000 7,466 $ 746 2,037 $ 204 $ 40,961 $(50,635) - $(8,724) ===== ===== ===== ===== ======= ======= ====== ====== See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December, ----------------------------- 2000 1999 1998 ------- ------- ------- Cash provided by operations: Net income (loss) $(6,635) $(4,284) $ 7,771 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 476 906 934 Extraordinary gain on debt extinguishment - - (11,221) Interest imputed on 10% convertible notes 1,000 - - Court ordered judgment - prior year commission 1,250 - - Accrued pension costs - 71 (134) Loss on impairment of assets 700 200 573 (Gain) loss on sale of assets - 1,682 (2,203) Other 71 (521) (294) Changes in operating assets and liabilities: Trade accounts receivable 543 775 1,446 Contract costs in excess of billings 109 555 1,411 Inventories 1,456 (157) 464 Refundable income taxes - 48 (48) Other assets (244) 978 (36) Trade accounts payable (729) (915) 344 Other liabilities (795) (913) (4,934) ------- ------- ------- Total cash provided by (used in) operating activities (2,798) (1,575) (5,927) Cash provided by (used in) investing activities: Additions to property, plant and equipment (9) (117) (232) Deposits and other - - 16 Disposal of the net assets of divisions 369 945 14,733 ------- ------- ------- Total cash provided by (used in) investing activities 360 828 14,517 ------- ------- ------- Cash provided by (used in) financing activities: Increase (decrease) in current portion of long-term debt 900 (15) (13,848) Net increase (decrease) in long-term debt 1,796 604 5,190 Sale of stock and exercise of stock options - - 21 ------- ------- ------- Total cash provided by (used in) financing activities 2,696 589 (8,637) ------- ------- ------- Increase (decrease) in cash 258 (158) (47) Cash at beginning of year 6 164 211 ------- ------- ------- Cash at end of year $ 264 $ 6 $ 164 ======= ======= ======= Supplemental disclosure of cash flow information: Interest $ 235 $ 258 $ 614 Income taxes - - - See notes to consolidated financial statements.
STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2000, 1999, and 1998 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. Amounts billed to a customer related to shipping and handling are part of the revenue earned for the goods provided and are classified as revenue. Shipping and handling costs are included in cost of sales. Inventory Approximately 80 % of inventory at December 31, 2000 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 53% of the inventory at December 31, 1999. 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 comprehensive income. 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 and losses from operation due to a declining market for the Company's products and competitive pressures. As a result, violations of certain bank financial covenants are continuing. The Company has continued to implement a significant restructuring plan, which included large work force and cost reductions and the sale of certain product lines 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 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 a 1999 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. 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 hold back 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. The Company realized an approximate $3.6 million gain on the sale of Zerand assets. D. 2000, 1999 and 1998 Loss on Impairment of Asset Values In December 2000 and September 1999 certain inventory assets were determined to be worthless. A fourth quarter 2000 non-cash charge of $0.7 million and 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. There were no uncompleted long-term contracts at December 31, 2000. A summary of all costs and related progress billings at December 31, 1999 follows: December 31, 1999 (Amounts in thousands) -------------------- Cost incurred on uncompleted contracts $205 Estimated earnings 106 --- Revenue from long-term contracts 311 Less: Billings to date 202 --- $109 === The $109,000 net difference is included in the accompanying 1999 balance sheet under the caption "Cost and estimated earnings in excess of billings on long-term contracts." F. Inventories Inventories consist of the following: December 31, --------------- 2000 1999 ----- ----- (Amounts in thousands) Finished product $ 459 $1,396 Work in progress 107 349 Raw material and purchased parts 3,581 4,558 ----- ----- $4,147 $6,303 ===== ===== Replacement cost exceeds financial accounting LIFO cost by approximately $700,000 at December 31, 2000 and $696,000 at December 31, 1999. G. Property, Plant and Equipment Property, plant and equipment consists of: Range of December 31, Estimated Useful 2000 1999 Lives ----------- ------ ------ (Amounts in thousands) Land N/A $ 416 $ 416 Building and improvements 15-40 years 1,442 1,436 Machinery and equipment 5-18 years 931 1,515 Furniture and fixtures 3-10 years 6,516 5,968 ------ ------ 9,305 9,335 Less: accumulated depreciation and amortization 7,842 7,540 ------ ------ $ 1,463 $ 1,795 ====== ====== H. Other Assets Other assets consist of: December 31, ------------- 2000 1999 ---- ---- (Amounts in thousands) Goodwill, net of amortization of $161 and $147 206 $235 Patents, net of amortization of $291 and $286 57 58 Banknote and securities technology intangible asset 206 287 Other 24 77 --- --- $493 $657 === === I. Other Current Liabilities Other current liabilities consist of: December 31, ---------------- 2000 1999 ------ ------ (Amounts in thousands) Salaries and wages ....................... $ 152 $ 205 Taxes other than income taxes ............ 278 119 Employee benefits ........................ 109 289 Accrued interest ......................... 46 24 Contract reserves ........................ 51 674 Warranty reserve ......................... 243 150 Court ordered judgment - prior year commission ............................... 1,250 - Other accrued expenses ................... 172 230 ------ ------ $ 2,301 $ 1,691 ====== ====== J. Long-Term Debt Long-term debt consists of the following: December 31, -------------- 2000 1999 ----- ----- (Amounts in thousands) Paul I. Stevens, interest at prime rate plus 2% $ 7,652 $ 6,158 Notes payable to banks, interest at prime rate plus 1 1/4% at December 31, 2000 (Net of unamortized origination fees of $16 and $52), due June 30, 2001 2,222 2,070 10% Convertible Subordinated Notes 1,050 -- ----- ----- 10,924 8,228 Less: current portion 2,222 2,070 ----- ----- $ 8,702 $ 6,158 ===== ===== The interest rate on direct borrowings under the Company's Bank Credit Facility at December 31, 2000 is at the lender's prime rate (8.25%) plus 1 1/4% (or 9.50%). 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, 2000 there was $2.22 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, 1999, $2.07 million of the Company's borrowings were at the lender's prime rate of interest (8.5%) plus 1 1/4%. 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 $2.2 million. The principal default involved the failure to make the required pension plan payments in 1999, 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, 2000. In April 2000, the Company completed a private placement of $1 million of 10% convertible subordinated notes ("the Notes") due March 31, 2003. Net proceeds of the Notes were used for working capital. The Notes were issued in increments of $50,000. In September 2000, we elected to increase the Note by $50,000 in lieu of paying the interest for the first six months in cash. The $1,050,000 Notes are convertible into 2,100,000 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. 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 note holders, 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 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 $7.65 million at December 31, 2000 have first liens on certain assets of the Company, principally 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 secured loans from Paul I. Stevens are due June 30, 2002 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, 2000, are as follows (Amounts in thousands): Year ending December 31, 2001 $ 2,222 Year ending December 31, 2002 7,652 Year ending December 31, 2003 1,050 ------ $10,924 ====== K. Income Taxes The Company and its domestic subsidiaries file consolidated income tax returns. At December 31, 2000, 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, $4,283,000 expiring in 2019 and $3,847,000 expiring in 2020 $19,581,000 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 carry forwards. The tax effects of significant items comprising the Company's net deferred tax assets as of December 31, 2000 and 1999 are as follows: December 31, -------------- 2000 1999 ------ ------ (Amounts in thousands) Deferred tax assets: Difference between book and tax basis of property $ 793 $ 345 Difference between book and tax basis of intangibles - 1 Difference between book and tax basis of pension liability 306 557 Reserves not currently deductible 2,855 2,924 Net operating loss, credit and other carry forwards 9,053 7,745 Other 97 60 ------ ------ 13,104 11,632 ------ ------ Deferred tax liabilities: Excess of tax over book pension cost - 124 Differences between book and tax LIFO inventory reserves 1,862 1,839 ------ ------ 1,862 1,963 ------ ------ Net deferred tax assets 11,242 9,669 Less valuation allowance (11,242) (9,669) ------ ------ Net deferred tax assets $ -0- $ -0- ====== ====== The provisions for income taxes consists of the following: Year Ended December 31, -------------------------- 2000 1999 1998 ---- ---- ---- (Amounts in thousands) Current provision (benefit) for income taxes $ - $ - $ 75 Deferred provision (benefit) for income taxes - - - ---- ---- ---- $ - $ - $ 75 ==== ==== ==== The Company's effective tax rate varies from the statutory federal income tax rate for the following reasons: Year Ended December 31, -------------------------- 2000 1999 1998 ---- ---- ---- (Amounts in thousands) Tax expense (benefit), at statutory rate $(2,256) $(1,456) $ 2,642 Goodwill expense - 5 1,483 Nondeductible interest 340 - - Realized foreign currency translation loss 571 - - Other, net (228) 206 (5) State and local taxes - 65 - Valuation allowance 1,573 1,180 (4,045) ----- ----- ----- Actual tax expense (benefit) $ - $ - $ 75 ===== ===== ===== 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 $126,000 for the year ended December 31, 2000, $223,000 for the year ended December 31, 1999, and $246,000 for the year ended December 31, 1998. 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, 2000: Operating --------- (Amounts in thousands) Year ending December 31, 2001 $ 7 2002 7 2003 7 2004 7 2005 and thereafter - --- Total minimum lease payments. $ 28 === At December 31, 2000, the Company had no capital equipment leases and no outstanding capital expenditure purchase commitments. On April 9, 2001, a Waukesha, Wisconsin County Circuit Court, awarded a $1.25 million order for judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union. There would be no assets available to collect on this judgment due to prior lien holder claims, including our senior bank lender, Paul I. Stevens, the Pension Benefit Guaranty Corporation and the Internal Revenue Service. Although there can be no certainty as to the outcome of negotiations, the Company is attempting to settle this judgment on a more favorable basis. The Company is contingently liable for approximately $0.2 million at December 31, 2000, 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 ($10,500 in 2000 and $10,000 in 1999) and a discretionary matching contribution by the Company for non-union employees. Company matching contributions were $-0- in 2000, 1999, and 1998. The Company had 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 1999 filing for distress termination of the plans began a series of negotiations with the PBGC regarding funding of the pension benefits of employees. The PBGC determined that the Company will be unable to pay benefits when due and that the plans must be terminated in order to protect the interests of the plan participants. The PBGC became statutory trustee at November 15, 1999, the effective date of the termination of the plans. 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 were also taken over by the PBGC. The Company and the PBGC are negotiating terms of a financial settlement for installment payments to be made by the Company to the PBGC over the next 7-8 years. The estimated present value of the anticipated payments to the PBGC has been recorded at December 31, 2000 in the amount of $0.63 million. Pension expense was $0 in 2000, $259,000 in 1999, and $395,000 in 1998. 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 recorded a December 31, 1999 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 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 2000 and 1999. Status of Plans --------------- 2000 1999 ----- ----- (Amounts in thousands) Actuarial present value of benefit obligations: Vested - $5,219 Non-vested - - ----- ----- Accumulated benefit obligation - $5,219 ===== ===== Plan assets at fair value - $2,080 Projected benefit obligation - 5,219 ----- ----- Present value of anticipated payments to the PBGC $ 632 - Projected benefit obligation in excess of plan assets - 3,139 Unrecognized prior service cost. - - Unrecognized net gain (loss) - (2,549) Adjustment required to recognize minimum liability - 2,549 ----- ----- Pension liability recognized in balance sheet $ 632 $3,139 ===== ===== Net periodic pension cost was composed of the following elements: Year Ended December 31, -------------------------- 2000 1999 1998 ---- ---- ---- (Amounts in thousands) Service cost - $ - $ 37 Interest cost - 388 408 Prior service cost adjustment - - - Curtailment gain - - - Actual return on plan assets: Loss (gain) - (217) (239) Net amortization and deferral - 88 144 ---- ---- ---- Net periodic pension cost - $ 259 $ 395 ==== ==== ==== December 31, -------------------------- 2000 1999 1998 ---- ---- ---- Major assumptions used: Discount rate - 6.5% 6.5% Expected long-term rate of return on assets - 8.5% 8.5% Rate of increase in compensation levels - 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 2000, 1999, and 1998. 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 Post-retirement 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 $507,000 on these agreements in 2000, $328,000 in 1999, and $856,000 in 1998. 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. Through December 31, 2000, Paul I. Stevens, the Company's Chairman and Chief Executive Officer, has loaned the Company $7.65 million on a long-term arrangement. (See Note J of Notes to Consolidated Financial Statements.) As of December 31, 2000, 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 $25,000 in 2000, $125,000, in 1999, and $172,000 in 1998. Net sales to customers outside of the United States were approximately $375,000 in 2000, $3,940,000 in 1999, and $7,851,000 in 1998. Shipments to one customer in 1999, Bell Paper Box, exceeded 10% of the sales. Shipments to one customer in 1998, Field Packaging Co. LLP, 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 non-qualified 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, 1998 395,000 $2.18 Granted 285,000 1.50 Exercised (14,100) 1.50 Canceled (70,900) 5.27 ------- ---- Balance at December 31, 1998 595,000 $1.50 Canceled (105,000) 1.50 ------- ---- Balance at December 31, 1999 and 2000 490,000 $1.50 ======= ==== Series A Weighted Average Stock Option Exercise Price ------------ -------------- Directors and Others: Balance at January 1, 1998 110,000 $3.97 Granted 25,000 2.25 ------- ---- Balance at December 31, 1998 and 1999 135,000 $3.65 Granted 10,000 1.00 Canceled (75,000) 3.78 ------- ---- Balance at December 31, 2000 70,000 $3.23 ======= ==== Stock Options outstanding as of December 31, 2000 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 1.35 $1.50 490,000 $1.50 $5.50 - $7.19 20,000 4.60 $6.50 70,000 $3.23 $1.00 - $3.00 50,000 6.92 $1.92 ------- ------- $1.00 - $7.19 560,000 560,000 ======= =======
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 2000, $0 million in 1999, and $0.3 million in 1998. Earnings (loss) per share would have been reduced by $0 per share in 2000, $0 per share in 1999, and $0.03 per share in 1998. Weighted average grant-date fair value of options in 2000 $(0), 1999 $(0), and 1998 $(1.05) were calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: 2000 1999 1998 ---- ---- ---- 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, 2000 and 1999. 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) 2000: Net sales $ 821 $ 1,200 $ 1,008 $ 591 Operating (loss) $ (886) $ (987) $ (455) $( 1,085) Net (loss) $ (2,141) $ (1,513) $ (364) $ (2,617) Net (loss) per common share - basic and diluted $ (0.22) $ (0.16) $ (0.04) $ (0.28) 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)
We attribute the operating and net loss for the fourth quarter of 2000 to (1) a continuing decline in sales volume, (2) a $1.25 million accrual for an April 2001 court ordered judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union, (3) an impairment of asset value write-down of inventory of $0.7 million, and (4) a $0.07 million accrual for an Internal Revenue Service excise tax assessment related to a 1998 failure to make a pension fund payment. We attribute 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". 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-sold in January, 2000), and Zerand Platen Cutter Equipment (cutter-creaser equipment for packaging-sold in 1998). Total Revenue Deprec. Income(loss) Unusual Assets & Amort From Oper. Items ------ ------- ------- ------- ------- Segment in 2000 --------------- Banknote Inspection, Printing $ 7,120 $ 3,620 $ 476 $ (6,635) $(3,018)(1) & Packaging Equipment Segments in 1999 ---------------- Banknote Inspection, Printing & Packaging Equipment $ 8,958 $ 8,123 $ 860 $ (4,153) $(1,600)(2) French Repair & Service Company-Sold in January 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)(3) 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 Notes: (1) Includes (a)a $1.0 million charge for interest expense necessitated by the conversion feature of the $1.0 million of convertible notes payable, (b) a $1.25 million accrual for an April 2001 court ordered judgment against the Company and its former subsidiary, Zerand Corporation, related to a dispute over an alleged commission due to a European agent on a 1989 project for the former Soviet Union, (c) an impairment of asset value write-down of inventory of $0.7 million, and (d) a $0.07 million accrual for an Internal Revenue Service excise tax assessment related to a 1998 failure to make a pension fund payment. (2) 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". (3) Represents Loss on Impairment of Asset Values (-$573) and Loss on Sale of Hamilton Machining Center (-$1,400). (4) Represents Gain on Sale of Zerand Division Assets ($3,600). Sales by geographic area were as follows: Year ended December 31, ------------------------------- 2000 1999 1998 ------ ------ ------- United States $ 3,263 $ 7,064 $ 14,355 Europe 301 3,839 6,178 Asia 10 21 898 Other 46 213 776 ------ ------ ------- Total revenues $ 3,620 $11,137 $ 22,207 ====== ====== =======
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, 2000, the Company had no significant concentrations of credit risk. The carrying amounts and fair values of the Company's financial instruments at December 31, 2000 are as follows: Carrying Amount Fair Value --------------- ---------- (Amounts in thousands) Cash and temporary investments $ 264 $ 264 Long-term debt $ 8,702 $ 8,702 Off-Balance Sheet Financial Instruments: Letters of credit $ -0- $ -0- T.Accumulated Other Comprehensive Income (Loss) Minimum Accumulated Foreign Pension Other Currency Liability Comprehensive (Amounts in 000's) Items Adjustment Income ------- ------- ------- Balance January 1, 1998 (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) Current period change - 2,549 2,549 ------- ------- ------- Balance December 31, 2000 $ 0 $ 0 $ 0 ======= ======= ======= Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None PART III Item 10. Directors and Executive Officers of the Registrant. The information concerning the directors of the Company is set forth in the Proxy Statement to be delivered to stockholders in connection with the Company's Annual Meeting of Stockholders to be held during 2001 (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 2000 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.(*) ________ * 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 24, 2001 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 24, 2001 Paul I. Stevens Chief Executive Officer /s/ RICHARD I. STEVENS President, Chief Operating April 24, 2001 Richard I. Stevens Officer and Director /s/ CONSTANCE I. STEVENS Vice President, Secretary April 24, 2001 Constance I. Stevens and Director /s/ JAMES D. CAVANAUGH Director April 24, 2001 James D. Cavanaugh /s/ EDGAR H. SCHOLLMAIER Director April 24, 2001 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, 2000 Allowance for doubtful accounts $ 70,000 $ 44,000 $ ( - ) $ ( 13,000)(1) $ 101,000 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 ____________ (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 (*). 47 23.1 Consent of Grant Thornton LLP.(*) 48 -------------- *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.