-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Om1qlTNbWyK5ddJz9WotAllxSbVOWYX/AVZWMsP75pcbNErhUUoZlEbphwyHCqeT o83uxL6LBdwjqAXfABm3VQ== 0000930661-97-000766.txt : 19970401 0000930661-97-000766.hdr.sgml : 19970401 ACCESSION NUMBER: 0000930661-97-000766 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEVENS INTERNATIONAL INC CENTRAL INDEX KEY: 0000817644 STANDARD INDUSTRIAL CLASSIFICATION: PRINTING TRADES MACHINERY & EQUIPMENT [3555] IRS NUMBER: 752159407 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09603 FILM NUMBER: 97570375 BUSINESS ADDRESS: STREET 1: 5500 AIRPORT FRWY CITY: FORT WORTH STATE: TX ZIP: 76117 BUSINESS PHONE: 8178313911 MAIL ADDRESS: STREET 1: PO BOX 3330 CITY: FORT WORTH STATE: TX ZIP: 76113 FORMER COMPANY: FORMER CONFORMED NAME: STEVENS GRAPHICS CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1996 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 5500 AIRPORT FREEWAY 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 ------------------- ------------------------ Series A Stock, $0.10 Par Value American Stock Exchange Series B Stock, $0.10 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to be the best of registrant'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. [_] As of March 21, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $5,300,000 based upon the closing price of the registrant's Common Stock on such date, $0.75 and $2.50 per share for Series A and Series B stock, respectively, as reported by the American Stock Exchange. As of March 21, 1997, there were outstanding 7,339,468 shares of Series A stock and 2,110,634 shares of Series B stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statements for the annual meeting of stockholders of the Company to be held during 1997 are incorporated by reference in Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- STEVENS INTERNATIONAL, INC. TABLE OF CONTENTS
FORM 10-K ITEM PAGE -------------- ---- PART I Item 1. Business................................................ 3 Item 2. Properties.............................................. 14 Item 3. Legal Proceedings....................................... 15 Item 4. Submission of Matters to Vote of Security Holders....... 15 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters................................... 16 Item 6. Selected Financial Data................................. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 19 Item 8. Financial Statements and Supplementary Data............. 25 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.................... 46 PART III Item 10. Directors and Executive Officers of the Registrants..... 46 Item 11. Executive Compensation.................................. 46 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 46 Item 13. Certain Relationships and Related Transactions.......... 46 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................... 46
2 PART I ITEM 1. BUSINESS. Stevens International, Inc. (formerly Stevens Graphics Corporation) 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.) GENERAL Stevens designs, manufactures, markets and services web-fed packaging and printing systems and related equipment for its customers in the packaging industry and in the specialty/commercial and banknote and securities segments of the printing industry. The Company's technological and engineering capabilities allow it to combine the four major printing technologies in its systems. The Company combines its various types of equipment, including printing presses, platen die cutting equipment and delivery systems, into complete integrated systems, which are capable of providing finished products in a single press pass. These systems sell for prices ranging from $1 million to over $10 million. The Company also manufactures auxiliary and replacement parts and provides service for its equipment which represented 50%, 30% and 27% of the Company's net sales for 1996, 1995 and 1994, respectively. Stevens' equipment is used by its customers to produce hundreds of end-products, including food and beverage containers, banknotes, postage stamps, lottery tickets, direct mail inserts, personal checks and business forms. The Company has an installed base of more than 5,000 machines in over 50 countries. All of the Company's presses are "web-fed" presses, which print on paper or other substrate that is fed continuously from a roll (the "web"), as distinct from traditional "sheet-fed" presses, which print on pre-cut sheets of paper or other substrate. Although sheet-fed equipment is still dominant in the segments of the packaging industry and the banknote and securities segment of the printing industry that are served by the Company, the Company believes that significant opportunities exist to convert users of sheet-fed equipment to its web-fed packaging and printing systems because of the greater efficiencies inherent in the web-fed process. OVERVIEW OF 1996 The Company experienced a severe decrease in sales during 1996, which reflected a continuation of the slowdown in orders that the Company initially experienced in the fourth quarter of 1995. Orders fell to 48% of the previous year, primarily in the packaging systems and specialty web products divisions. While the decline in orders may be attributable to general economic conditions affecting the printing and packaging industry and related industry-wide purchase delays, the Company believes the decline in orders is primarily attributable to a loss of orders to its competition due in part to certain product performance issues and in part to liquidity problems faced by the Company. In response to the continued order slowdown, the Company implemented a restructuring plan which includes significant work force and cost reductions and the consolidation of certain facilities and operating functions. As part of the restructuring plan, and in an effort to cut costs and improve cash flow, the Company intends to improve its productivity by improving or eliminating certain product lines and consolidating manufacturing and assembly at its most productive facilities. In addition, the Company expects that a significant material cost reduction should result through standardized module designs, enabling more competitive procurement. The Company believes this restructuring plan will help in its efforts to return to profitability. RESULTS OF OPERATIONS The Company experienced continuing operating losses throughout 1996, including a loss of $25.3 million or ($2.68) per share for the fourth quarter of 1996 on sales of $11.5 million; for the year the net loss was $34.2 million or ($3.62) per share on 1996 sales of $65.6 million. During the fourth quarter of 1996, the Company continued to experience a decrease in sales primarily in the packaging systems and specialty web product divisions. In addition, the Company continued to experience high product development costs related to a series of new products, including its banknote and securities operations. Further, the absorption of fixed costs over a lower volume of sales, an increased restructuring charge for continued reduction of personnel and consolidation 3 of operating functions, changes in product mix and certain increased product performance and warranty expenses together with the recognition of a $3.5 million loss at the sale of its Bernal Division--all negatively impacted the Company's results of operations. Also, as previously reported, the Company continued to respond to product performance issues with respect to certain of these newer products which have negatively impacted the Company's liquidity, the collection of accounts receivable and the booking of new orders. While the Company believes it is making significant progress in resolving the product performance issues, they have not all been resolved. DEFAULTS ON SENIOR AND SENIOR SUBORDINATED DEBT AGREEMENTS During 1996, the Company has been in default of certain covenants contained in its bank credit facility agreement and the agreement governing Stevens' Senior Subordinated Notes. The Company's liquidity difficulties and continuing losses required the Company to fully draw upon its bank credit facility and contributed to the failure to make a $3.6 million principal payment due June 30, 1996 to the holders of the Senior Subordinated Notes. In addition, the losses incurred by the Company in the third and fourth quarters of 1996 resulted in non-compliance with a debt coverage ratio in the Company's bank credit facility agreement and a net worth covenant in the agreement governing Stevens' Senior Subordinated Notes. The reduced liquidity has also impacted the Company's ability to make timely payment with respect to its accounts payable. As a result, the Company has experienced delays in its ability to obtain raw materials and inventory and has had difficulty obtaining new orders. As a result of negotiations with its bank and the holders of the Senior Subordinated Notes, the Company obtained a series of temporary default waivers through November 30, 1996. The Company modified its bank credit facility agreement in January 1997 providing for a $2 million principal payment and a bridge loan arrangement of the Company's bank indebtedness through May 1, 1997. To date, no permanent agreement has been reached with the Company's bank or the holders of the Senior Subordinated Notes. Accordingly, all of the Company's bank debt and the entire principal amount of the Senior Subordinated Notes, together with accrued and unpaid interest has been classified as a current liability at December 31, 1996. Pursuant to the terms of an intercreditor agreement entered into by the Company, the bank and the holders of the Senior Subordinated Notes, a standstill letter was issued by the bank on January 10, 1997 preventing any payments to the holders of the Senior Subordinated Notes for a 180 day period. Accordingly, the Company did not make its scheduled interest payment to the holders of the Senior Subordinated Notes due December 31, 1996. SALE OF BERNAL DIVISION In March 1997, the Company consummated the sale of substantially all of the assets of its Bernal Division including the product technology and related intangibles to Bernal International, Inc., a new company formed for the asset purchase. The sale price was approximately $20 million, which consisted of cash proceeds of approximately $15 million, and the purchaser's assumption of approximately $5 million of certain liabilities of Bernal including the accounts payable. This transaction resulted in a $12 million permanent reduction of the Company's senior debt. In 1996, Bernal contributed sales of approximately $17.8 million and approximately $0.7 million income before interest, corporate charges and taxes. Stevens experienced a loss of $3.5 million on the sale of Bernal assets which is reflected in the 1996 results of operations. This asset sale resulted in a tax charge of $1.2 million from a taxable gain due to the non-deductible Bernal goodwill expensed upon the sale of Bernal's technology. RESTRUCTURING The Company is expanding its restructuring plan, first initiated in the second quarter of 1996, which it believes will help return the Company to a stable financial base. The plan includes: . adopting a marginally profitable 1997 annual plan with a positive cash flow and emphasizing the long-term stability of the Company; 4 . aggressively reducing operating expenses to reflect reduced volume in an attempt to improve cash flow and profit margins; . the sale of the Bernal Division, (completed on March 18, 1997); . evaluating the potential sale of other operating units or asset groups; . re-examining product lines for competitiveness, to improve gross profit and to narrow corporate focus; . restructuring long-term debt to provide needed liquidity; . resolving field problems to allow collection of final amounts due; . converting inventory to cash; and . collecting money due from prior deliveries. The Company is consolidating its U.S. manufacturing operations by eliminating redundant operations at Hamilton, Ohio and elsewhere. The Company expects to lay-off 60% of the 250 employees who were employed in Ohio at December 31, 1996. The Company laid-off approximately 50% of the Company-wide work force during 1996. The Company expects the implementation of its restructuring plan to be completed during 1997 and to result in significant annual savings. The Company believes these adjustments should combine to improve its productivity, increase profit margins and help the Company to return to profitability and stability. The Company anticipates the restructuring, if successful, will help to restore its traditional competitive advantage and market position. The Company believes these fundamental requirements must be in place in order to re-build itself into a strong international business. INDUSTRY OVERVIEW Stevens markets its systems to its customers in two distinct worldwide industries--the packaging industry and the printing industry. Although both the packaging and printing industries utilize printing in the manufacturing process, the printed products have significantly different applications. In the packaging industry, the printed product functions as the container for the end product, such as medical, food and beverage containers. In the printing industry, the printed product is the end product, such as direct mail inserts, postage stamps, banknotes and personal checks. 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, and liquid packaging segments of the packaging industry. The printing industry also consists of several large segments in which the Company does not participate--including newspapers, periodicals and book publishing. The Company's products are designed to serve the commercial and specialty and banknote and securities segments of the printing industry. Economic Forecasts. The Company believes the printing and packaging industries are cyclical in nature, and that a portion of its decline in sales can be attributed to the current "softness" in the market. According to a leading industry trade association report (NPES Economic Forecast No. 37, dated November 1996) "Shipments of total printing equipment, which rose 1.8% in 1995, are expect to fall 0.7% this year, 1.1% in 1997, and 2.9% in 1998. The major factors leading to this continued decline are sluggish growth, excess capacity, and a further decline in industrial production in the printing and publishing industry." The forecast also states that "Shipments of sheet fed presses, [the Company's principal competition,] fell 2.1% last year (1995) and plunged almost 19% in the first half of 1996. This sharp decline is expected to continue in the second half, followed by a further drop of 9.6% in 1997 and a minuscule gain of 2.8% in 1998." Also, one of the major industry suppliers in reporting its 1996 third quarter net loss of $151 million on revenues of $142 million stated, "The graphic arts market continues to show continued reduction in levels of demand. This is apparently due to the consolidation now under way in the industry, and customer uncertainty stemming from rapidly changing technologies." (Yoav Chelouche, CEO, Scitex Digital Printing). 5 The Company believes that, in the industry segments which it serves, in addition to the economic considerations cited above, several major market trends exist that are influencing the development and enhancement of packaging and printing equipment systems. These trends include an increasing emphasis on productivity, changing retailing practices--including greater market segmentation--and increasing environmental regulation. 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 versatile 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 consumables, printing inks, coatings and chemicals used for platemaking and equipment maintenance which are environmentally safer. As a result, purchasers of packaging and printing equipment are increasingly seeking ecologically-friendly processes such as the use of flexographic printing with water based inks. The Company is an industry leader in advanced flexo technology. BUSINESS STRATEGY The Company's objective is to rebuild the Company into a strong international business as a manufacturer of packaging and printing systems through its strategy of providing complete systems solutions to its customers. The principal elements of this strategy include the following: Technological Leadership. The Company believes that it is a technological leader in the development of packaging and printing equipment systems. The Company demonstrates its technological leadership through its research and development efforts and new product introductions. The Company works closely with manufacturers of related consumables, i.e., printing plates, anilox rolls, inks, paper and similar products, to create new product enhancements. In 1996, 1995 and 1994, the Company's gross expenditures for research and product development (including customer funded projects) have exceeded 5% of net sales. This included the introduction of the System 2000 and 9000 series flexographic and rotogravure printing press systems and improved high-speed platen die cutting equipment. In 1996, product development costs incurred on these and other new products exceeded $15 million. 6 Also, in the banknote and securities industry during the first quarter of 1997, two lines of the Company's first production model single-note-on-web ("SNOW") banknote printing system became operational at Banque de France. SNOW is the only complete banknote printing system in the world, producing banknotes that are printed in the intaglio-offset combination on both sides, examined, sorted and banded for shipping in a single press pass. Of equal importance, the Company's Automatic Currency Examination ("ACE") System is expected to become operational at the Bank of England in the near future. The Company believes the acceptances of these state-of-the-art technologies--SNOW and ACE--should enhance its efforts to increase the penetration of these principal markets where it has received indications of interest from several central banks. Integrated Systems. The Company provides fully integrated web-fed packaging and printing systems which are capable of producing a finished product by taking paper or other substrate through one continuous, uninterrupted process. The Company works closely with its customers in the design and development of its integrated systems to meet their specific manufacturing needs. For many of its customers, the Company is a single-source supplier of their packaging and printing systems. The Company has the technological and engineering expertise to combine any of the four major printing methods (offset, flexography, rotogravure and intaglio) together with die cutters and creasers and product delivery systems into a single system. The Company believes that its ability to provide customized systems solutions provides it with an unusual competitive advantage over other packaging and printing equipment manufacturers. Conversion to Web-Fed Systems. The Company believes that, because of the increased productivity inherent in the web-fed process, significant opportunities exist to convert users of sheet-fed equipment over to web-fed systems in the segments of the packaging and printing industries that it serves. While web-fed equipment has been successfully utilized for many years in some segments of the printing industry which the Company does not serve (including newspapers and periodicals), sheet-fed equipment is predominant in the folding carton segment of the packaging industry and the banknote and securities segment of the printing industry. International Marketing. The Company plans to continue its international marketing efforts in order to capitalize on growth opportunities developing in Asia and in Eastern Europe for packaging and printing systems and to further geographically diversify its sales base. In the past several years, the Company has taken a number of initiatives to strengthen its international marketing efforts. In 1991, the Company established a European sales subsidiary and in 1995 acquired a European repair and service company (see "Marketing") to fill an important need and to better service products installed in Europe. In addition, the Company has continued to use sales agents in order to market its products internationally. PRODUCT DEVELOPMENT COSTS During 1996, the Company experienced high product development costs related to a series of new products, as well as increased product performance and warranty expenses. Continuing product development costs related to a series of new products in 1995 and 1996 resulted in an aggregate expense of approximately $15 million during 1996. Because of these high product development costs, the Company believes the development of its latest products (the System 2000 flexographic press, the System 9000 rotogravure press, the prototype Series 1500 and perfecter presses, and the Automatic Currency Examination (ACE) system for high-speed banknote inspection) represents the future of the Company and befits its vision to be a technology leader in its industry. Although some product performance issues with the Company's new machines negatively impacted collection of accounts receivable and the booking of new orders, the Company believes that significant progress is being made regarding the resolution of these issues and in solving field problems. As these field problems are resolved, the Company anticipates it will have a beneficial effect on its cash flow and potential new orders. 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 7 Company's complete systems integrate a variety of its equipment, including printing presses, die cutters and creasers and product delivery systems. The Company also sells system components independently of complete systems. The components of these systems include: Printing Presses. The Company offers all four major printing processes on a worldwide basis for its web-fed packaging and printing systems including flexographic, offset lithographic, rotogravure and intaglio printing and in combinations. Flexography, which historically was well suited for printing large areas of solid color, is typically the least expensive printing process. However, with Stevens' technological advances, certain System 2000s are capable of printing quality that rivals offset lithography, at much lower costs. Offset lithography, which is the most widely used printing process, is a process that until now has typically provided a higher quality printed product than flexography. Rotogravure, which uses etched cylinders in the printing process, is a higher quality, more expensive process than either flexography or offset lithography. Intaglio printing, which is the most technologically complex and expensive printing process, utilizes engraved plates and applies ink under extreme pressure to print banknotes and other security documents. Die Cutters and Creasers. The Company manufactures and markets platen die cutters and creasers that it believes perform faster and more reliably than other similar systems. The Company believes that it also offers, through a preferential OEM agreement, the broadest array of rotary cutting products and technology in the packaging and printing industries, which are now the preferred cutting and creasing system for several of the largest liquid packaging producers. Product Delivery Systems. The Company manufactures a number of high-speed product delivery systems such as stackers, collators, strippers, belt askews and delivery tables. These product delivery systems perform a number of automated tasks as the final product exits the printing press. With certain of the Company's competitors, the speed of the product delivery system can limit the throughput and productivity of packaging and printing equipment systems. Auxiliary Equipment, Parts and Customer Service. The Company manufactures auxiliary equipment and replacement parts and provides service for its presses, collators and die cutters. During 1996, 1995 and 1994, 50%, 30% and 27%, respectively, of the Company's net sales, were attributable to auxiliary equipment, parts and service. Generally, auxiliary equipment allows the customer to expand the capabilities of its existing equipment by increasing production capacity or by providing such additional features as forward numbering, batch delivery and special types of finishing, such as punching, perforating and folding. Auxiliary equipment also includes print towers to add additional colors and additional collating stations. Customer Service. The Company provides a customer service program including product services and support through trained Company and dealer service representatives. Product services include installation, field repairs, routine maintenance, replacement and repair parts, operator training and technical consulting services. Parts can be delivered the same day or overnight in North America, and within 24-48 hours worldwide. Product services and support programs also are designed to promote the sale of auxiliary equipment. MARKETING The Company primarily markets its products domestically through direct sales engineers and managers and internationally through its agent network. In 1990, the Company opened a sales and service office in France to better serve its European customers. In 1995, the Company formed Societe Specialisee dans le Materiel d'Imprimerie ("SSMI"), to acquire a European printing press repair and service company. SSMI not only enables the Company to provide better service to its European customers, but it also operates as an on-going business. The Company's traditional marketing efforts include advertising, participating in major domestic and international trade shows and customer symposiums, and conducting periodic product maintenance seminars. The Company also conducts market research and analyses to reveal and study trends in addition to actively participating in various trade associations. 8 CUSTOMERS The Company's customers include packaging companies, printing companies, paper companies, check printers, business forms companies and central bank and private banknote and securities printers. COMPETITION The Company encounters substantial competition in marketing its products from manufacturers of both sheet-fed and web-fed presses and related equipment. The Company believes that in its selected segments of the packaging and printing industries its competitors are primarily manufacturers of web-fed equipment. The Company's principal web-fed competitors are Bobst, S.A., Komori-Chambon, Goebel and Cerutti. The Company believes that the packaging industry is also served by manufacturers of offset sheet-fed equipment such as Koening and Bauer-Albert Frankenthal (KBA)-Planeta, Heidelberg, M.A.N. Roland and Komori. The banknote and securities markets are predominately served by sheet-fed equipment made by Koenig and Bauer-Albert Frankenthal (KBA) and marketed by De La Rue Giori. The Company believes that competition for its products is based primarily on product performance, web-fed versus sheet-fed technology, reliability, customer service, price and delivery. RESEARCH AND DEVELOPMENT In addition to Company sponsored development programs, projects are funded in varying amounts by customers who are in need of specialized equipment or processes. Research and product 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 21, 1997, the Company had approximately 290 employees. Approximately 38% of the Company's employees are covered by a separate collective bargaining agreement that expires in December 1997. The Company believes that its employee relations have suffered because of the mass lay- offs that have occurred in 1996 and 1997. The Company has not experienced any strike or material work stoppage since a seven-week strike at its Hamilton, Ohio facilities in the fourth quarter of 1990. BACKLOG AND ORDERS The backlog of the Company consists of orders that have met strict criteria, including having a signed contract with appropriate down payments received. Further, to be included in backlog, these orders must also have a reasonable expectation of being manufactured, shipped and paid for within contract terms. Additionally, the backlog does not generally include service and parts orders, which have historically been in excess of 20% of the Company's sales volume. The absolute value of the backlog varies with the amount of percentage of completion revenue recognized in any one period. This value can fluctuate since the Company experiences an average six to nine month period between the booking of the order and its final shipment. The Company's backlog of unfilled orders as of December 31, 1996 was approximately $20.7 million (excluding the Bernal Division) compared to $32.6 million at December 31, 1995 (excluding the Bernal Division), a decrease of 36.5%. The backlog included a decrease of $9.3 million in packaging, a decrease of $1.6 million in banknote and security related equipment and $1.1 million in specialty/commercial orders. The current decline in backlog is the result of a significant decline in orders. While this decline may be attributable to general economic conditions affecting the printing and packaging industry and related industry-wide purchase delays, the Company believes the decline in orders is primarily attributable to a loss of orders to its competition due in part to certain product performance issues and in part to liquidity problems faced by the Company. Although the Company believes that it is making significant progress in resolving these performance issues, they have not all been resolved. 9 EXECUTIVE OFFICERS The executive officers of the Company are as follows:
NAME AGE PRINCIPAL POSITION WITH THE COMPANY - ---- --- ----------------------------------- Paul I. Stevens......... 82 Chairman of the Board, Chief Executive Officer and Director Richard I. Stevens...... 58 President, Chief Operating Officer and Director Hans W. Kossler......... 56 Senior Vice President, Operations Constance I. Stevens.... 53 Vice President--Administration, Assistant Secretary and Director William A. Kist......... 50 Vice President and Corporate Controller George A. Wiederaenders.......... 55 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 and Publishing Technologies (NPES) since 1982. In October 1995, Mr. Stevens was elected Chairman of the Board of NPES for a two-year term. Mr. Stevens is the son of Paul I. Stevens. Hans W. Kossler has served the Company as Senior Vice President--Operations since May 1996. From December 1995 to May 1996 he served the Company as Vice President--Manufacturing after joining the Company in October 1995 as Manufacturing Assistant to the President. From January 1994 to October 1995, Mr. Kossler served North American Consulting as a Managing Partner. From August 1989 to January 1994, he served Gemini Consulting, Inc. as a Senior Consultant. Prior to this, from August 1979 to August 1989, Mr. Kossler served Bell Helicopter-Textron in several capacities, including Production Manager for the V-22 Osprey Project. Constance I. Stevens has served as a director of the Company since April 1987. Ms. Stevens has served as Vice President--Administration and Assistant Secretary to the Company since July 1995. From July 1989 to July 1995, Ms. Stevens served as the President of a project management consulting firm in Carmel, California. From May 1980 until July 1989, Ms. Stevens served as the managing partner of Merritt Associates of Carmel, California, an architectural design and real estate development firm. Ms. Stevens is the daughter of Paul I. Stevens. William A. Kist has served the Company as its Vice President and Corporate Controller since May 1996. He has been a Vice President of the Company since July 1993 and served as Controller from August 1989 to July 1993. Mr. Kist joined Hamilton in 1975. In April 1977, he became the Controller and Chief Financial Officer of Hamilton, and in April 1985, he became its Vice President--Finance. He has also served as Hamilton's Assistant Treasurer from 1987 to 1990. From 1969 to 1975, Mr. Kist was employed by Arthur Young & Company in Cincinnati, Ohio in the auditing and business consulting areas. 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 & 10 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. Liquidity Concerns. The Company's viability as a going concern is dependent upon the restructuring of its operations and its obligations to the senior and senior subordinated lenders, and, ultimately, a return to profitability. There is a negative working capital of $11.5 million at December 31, 1996, and negative cash flows from operating activities (before working capital changes) of $31.1 million for 1996. Negative cash flows from operating activities and other commitments are anticipated to continue in the first half of 1997. The Company was successful in its sale of substantially all assets of its Bernal Division in March 1997 (see Note C of Notes to the Consolidated Financial Statements). The cash generated from this sale enabled a $12 million permanent reduction in the Company's bank credit facility. In addition, the Company is contemplating additional asset sales to further reduce its indebtedness. There can be no assurance that the Company's restructuring efforts will be successful, or that the Company's bank or the holders of the Senior Subordinated Notes, who hold first and second liens on all assets of the Company, will agree to restructured obligations consistent with the Company's anticipated cash availability. Even if such agreement is reached, it may require agreements of other creditors and shareholders of the Company, none of which is assured. Furthermore, there can be no assurance that future sales of assets, if any, can be successfully accomplished on terms acceptable to the Company. Under current circumstances, the Company's ability to continue as a going concern depends upon the successful restructuring of its agreement with its bank and the agreement with the holders of its Senior Subordinated Notes, the further redeployment of assets, and a return to profitable operations. If the Company is unsuccessful it its efforts, it may continue to be unable to meet its obligations or fulfill the covenants in its debt agreements, as well as other obligations, making it necessary to undertake such other actions as may be appropriate to preserve asset values. Competition. The packaging and printing equipment industry is highly competitive, and many of the industry participants possess greater management, financial and other resources than those possessed by the Company. The Company encounters substantial competition in marketing its products from manufacturers of both sheet-fed and web-fed presses and related equipment. The Company believes that in selected segments of the packaging and printing industries its competitors are primarily manufacturers of web-fed equipment. The Company's principal web-fed competitors are Bobst S.A., Komori-Chambon, Goebel and Cerutti. 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 security and banknote 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. The Company has recently experienced difficulties in meeting customers specifications in manufacturing certain new products, including certain System 2000 presses. The Company believes these difficulties have hampered its marketing and accounts receivable collection efforts. The Company is working diligently to satisfy customer expectations as soon as practicable. Economic Downturn. Sales of the Company's packaging and printing products may be adversely affected by general economic and industry conditions and downturns, and particularly by the price of paper and paperboard. The Company's business and results of operations may be adversely affected by inflation, interest rates, unemployment, paper prices, and other general economic conditions reflecting a downturn in the economy, 11 which may cause customers to defer or delay capital expenditure decisions. The Company incurred significant losses in 1996 of $34.2 million and in 1990 and 1991 of $7.8 and $13.5 million, respectively; these losses were caused by many factors, including a continuation of the slowdown in its customers' orders that the Company initially experienced in the fourth quarter of 1995; changing printing technology that affected demand for the Company's business forms printing systems, which prior to 1990 represented a substantial portion of the Company's revenues, and by a general economic downturn which impacted or delayed capital expenditure decisions by its customers. Sales of business forms and specialty web printing press systems have historically been subject to cyclical variation based upon specific and general economic conditions, and there can be no assurance that the Company will maintain profitability during downturns. Technological Advances in the Printing Industry. The packaging and printing industry has experienced many technological advances over the last decade, and the Company expects such advances to continue. Packaging and printing companies generally want more efficient packaging and printing press systems in order to reduce inventories, "in process" production time, waste and labor costs. These technological advancements could result in the development of additional competition for all or a portion of the Company's products and could adversely affect the competitive position of the Company's products. Although the Company has rights in a significant number of issued patents in the United States and elsewhere, management believes that patent protection is less significant to the Company's competitive position than certain other factors. These factors include the Company's in-depth knowledge of the industry and the skills, know-how and technological expertise of the Company's personnel. Dependence Upon New Technologies and Product Development. Technological leadership, enhanced by the introduction and development of new products, is an important objective of the Company's business strategy. In accordance with this business strategy, the Company's newly developed products were a significant factor in the Company's growth in 1994 and 1995. In the last three fiscal years, the Company's gross expenditures for research and product development exceeded 5% of net sales. The Company believes that its continued success will be dependent, in part, upon its ability to develop, introduce and market new products and enhancements. Many difficulties and delays are encountered in connection with the development of new technologies and related products. The Company experienced some product performance issues related to new products in 1995 and 1996 which contributed to the slowness in orders experienced in the fourth quarter of 1995 and in 1996. There can be no assurance, therefore, that the Company will be able to continue to design, develop and introduce new products that will meet with market acceptance. International Business Risks. In 1996 and 1995, international sales represented 34.5% and 26.2% of net sales, respectively. The Company expects that international sales will continue to represent a significant portion of its total sales. Sales to customers outside the United States are subject to risks, including the imposition of governmental controls, the need to comply with a wide variety of foreign and United States export laws, political and economic instability, trade restrictions, changes in tariffs and taxes, longer payment cycles typically associated with international sales, and the greater difficulty of administering business overseas as well as general economic conditions. Although substantially all of the Company's international orders are denominated in United States dollars, some orders are denominated in foreign currencies and, accordingly, the Company's business and results of operations may be affected by fluctuations in interest and currency exchange rates. Fluctuations in foreign currencies may also affect the Company's foreign sales, and, since many of the Company's competitors are foreign, fluctuations in foreign currencies may also affect the Company's competitive position in the United States markets. The Company periodically enters into foreign exchange contracts to hedge the risk that eventual net cash flows will be adversely affected by changes in exchange rates. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as do the laws of the United States. Manufacturing Risks and Availability of Raw Materials. Disruption of operations at any of the Company's primary manufacturing facilities 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 12 on favorable terms or on a timely basis. The principal raw materials used in the manufacturing of printing press systems are high grade steel and alloys used in the making of gears, rollers and side frames. Steel is in very available supply throughout the world. Impact of Accounting Methods and Estimates Upon Quarterly Earnings. The Company derives the majority of its revenues from the sale of packaging and printing press systems, with prices for each system and most orders ranging from $1 million to over $10 million. The Company's policy is to record revenues and earnings for orders in excess of $1 million on the percentage of completion basis of accounting, while revenues for orders of less than $1 million are recognized upon shipment or when completed units are accepted by the customer. The percentage of completion method of accounting recognizes revenues and earnings over the build cycle of the press system as work is being performed based upon the cost incurred to date versus total estimated contract cost and management's estimate of the overall profit in each order. In the event that the Company determines it will experience a loss on an order, the entire amount of the loss is charged to operations in the period that the loss is identified. The Company believes that the percentage of completion method of accounting properly reflects the earnings process for major orders. The informed management judgments inherent in this accounting method may cause fluctuations within a given accounting period, which could be significant. During each accounting period, other management assessments include estimates of warranty expense, allowances for losses on trade receivables and many other similar informed judgments. Litigation. The Company, its officers and directors liability insurance carrier and the plaintiff of a class action lawsuit negotiated a written settlement of the dispute which was approved by the court by order dated June 18, 1996. The settlement resulted in the dismissal of the litigation and the issuance to the class and the plaintiff's counsel of warrants to purchase Series A Common Stock of the Company. Also, as a result of the Company's continuous liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of the actions can be settled, or if named a defendant in such actions in the future, the Company will be able to settle such claims in the future. In addition, the Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. See "Legal Proceedings." Environmental Costs, Liabilities and Related Matters. The Company's production facilities and operations are subject to a variety of federal, state, local and foreign environmental, health and job safety laws and regulations. The Company is not aware of any conditions or circumstances that, under applicable environmental, health or safety regulations or requirements, will require expenditures by the Company that management believes would have a material adverse effect on its businesses. However, environmental liabilities (especially those relating to discontinued production or waste disposal practices) are very difficult to quantify, and it is possible that environmental litigation or regulatory action may require significant unanticipated expenditures or otherwise adversely affect the Company. See "Legal Proceedings." Control by Principal Stockholders. As of March 21, 1997, Paul I. Stevens, Stevens Industries, Inc. and members of the immediate family of Paul I. Stevens beneficially own approximately 14% and 89% of the outstanding Series A and Series B Common Stock of the Company, respectively, representing 69.7% of the combined voting power. As a result, the Stevens family alone is able to elect a majority of the Board of Directors and otherwise continue to influence the direction and policies of the Company and the outcome of any other matter requiring shareholder approval, including mergers, consolidations and the sale of all or substantially all of the assets of the Company, and, together with others, to prevent or cause a change in control of the Company. Volatility of Stock Price. The Company's Series A Common Stock market price has ranged from a high of $19 5/8 per share in the first quarter of 1990 to a low of $ 9/16 per share in the first quarter of 1997. The market price of the Company's Series A Common Stock may be subject to substantial fluctuations related to the 13 announcement of financial results, new product introductions, new orders or order cancellations by the Company or by its competitors or by announcements of other matters related to the Company's business. In addition, there can be no assurance that the price of the Series A Common Stock will not fluctuate in the future due to a multiplicity of factors outside of the Company's control. These factors include general economic and stock market conditions, investor perceptions and mood swings, levels of interest rates and the value of the dollar. Dependence On Key Personnel. The Company's success depends, to a significant extent, on the Company's Chairman of the Board and Chief Executive Officer, Paul I. Stevens, on its President and Chief Operating Officer, Richard I. Stevens and on other members of its senior management. The loss of the services of Paul or Richard Stevens, or any of its other key employees, could have a material adverse effect on the Company. The Company maintains a key man life insurance policy on Paul I. Stevens in the amount of $2,000,000. The Company's future success will also depend in part upon its ability to attract and retain highly qualified personnel. There can be no assurance that the Company will be successful in attracting and retaining such personnel. Rapid Growth and Decline of Revenues. The Company's annual revenue growth rate which was 19.5% in fiscal 1994 (exclusive of the discontinued Post operations), accelerated to 30.4% in fiscal 1995 and decreased by 52.5% in fiscal 1996. The growth was largely attributable to the development and sale of new products. In light of this growth, the Company increased the amount of expenditures on its research and development programs, particularly in conjunction with the development of these new products. The Company continued to incur substantial expenditures in 1996 which has been due, in large part, to certain product performance issues related to the new products. These performance issues also severely impacted the Company's liquidity, necessitating large lay offs of personnel, a restructuring of operations to lower operating levels, and consolidation of functions and facilities. In addition, the Company has reduced capital expenditures and implemented certain other cost reduction measures. ITEM 2. PROPERTIES. The following are the locations of the Company's executive and principal manufacturing and research facilities. In addition, the Company leases a small sales office in Europe on a month-to-month basis. The Company believes its facilities are adequate for its present needs.
APPROX. OWNED OR LOCATION USE SQ. FT. LEASED - -------- --- ------- -------- Fort Worth, Texas....... Executive Offices 12,400 Leased Hamilton, Ohio.......... Research facilities and manufacturing of 252,000 Owned printing presses and collators, administration offices and sales facilities New Berlin, Wisconsin... Research facilities and manufacturing of 67,000 Owned printing presses and reciprocating cutter- creasers, administration offices and sales facilities Fort Worth, Texas....... Manufacturing facility and administration 74,000 Owned offices Villers sous St. Leu, France................. Repair and service facility and 13,000 Owned administration offices
See notes F, K and M of the notes to consolidated financial statements of the Company for information relating to property, plant and equipment and leases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." ITEM 3. LEGAL PROCEEDINGS. In 1997, the Company filed a suit seeking damages and injunctive relief against Paul W. Bergland, a former vice-president, for, among other things, theft of trade secrets, fraud, breach of contract, and breach of a confidential relationship. Discovery is ongoing. On March 3, 1997, Bergland filed his original answer and a 14 counterclaim. ConverTek, Inc., a corporation in which Bergland claims an ownership interest, has joined the suit as a counterclaimant against the Company. The counterclaim alleges claims for defamation, tortious interference with prospective business relationships and breach of contract. It also seeks a declaratory judgment declaring that the confidential information agreement and agreement not to compete signed by Bergland are unenforceable. The Company denies all liability and intends to prosecute its claims and defend the counterclaims vigorously. In addition, as a result of the Company's continuing liquidity problems, the Company has been the subject of lawsuits, from time to time, with respect to the Company's inability to pay certain vendors on a timely basis. To date, most of such actions have been settled, but there can be no assurance that all of these actions can be settled or that the Company, if named a defendant in such actions in the future, will be able to settle such claims in the future. In February 1990, the Environmental Protection Agency ("EPA") issued a Notice of Potential Liability and Request for Participation in Cleanup Activities to approximately 60 parties, including Post Machinery Company, Inc., a subsidiary of the Company, in relation to the disposition of certain substances that could be characterized as "hazardous wastes" which purportedly were taken to the Coakley Landfill Site ("Coakley Site") in North Hampton, New Hampshire prior to 1982. A committee representing the potentially responsible parties ("PRPs") negotiated a settlement in the form of consent decrees (the "Consent Decrees") with EPA and the State of New Hampshire covering the closure and capping of the Coakley Site. The PRPs also agreed that certain of the PRPs, including Post, would no longer be obligated to participate in the cleanup at the Coakley Site in return for a contribution of a fixed amount into escrow, and such PRPs would be indemnified by certain of the remaining PRPs from further liability under the EPA's current action. Post contributed $86,719 under this agreement. EPA is currently conducting an investigation of ground water conditions under a wetlands area adjacent to the site. EPA has not given notice to any parties of potential liability for ground water under the wetlands. There can be no assurances that no further claims will be brought related to the Coakley Site, or sites affected by contamination from the Coakley Site, or that any claims which might be brought would be covered by the Consent Decrees or the agreement described above. In connection with the aforementioned environmental claim, the Company was indemnified and reimbursed by Post's predecessor, PXL Holdings Corporation, for its costs in connection with the Coakley matter. No assurance can be given regarding the outcome of any pending case; however, a negative outcome in excess of insurance coverage could have a material adverse effect on the Company's business, operating results and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1996. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Series A Common Stock and Series B Common Stock are traded on the American Stock Exchange under the symbols SVGA and SVGB, respectively. The following table sets forth for the periods indicated the range of the high and the low closing sale prices per share for the Series A Common Stock and the Series B Common Stock, all as reported on the Composite Tape of the American Stock Exchange Listed Issues.
SERIES A SERIES B COMMON STOCK COMMON STOCK ----------------- -------------- HIGH LOW HIGH LOW -------- -------- ------- ------ Year Ended December 31, 1995: First Quarter............................... $8 1/8 $6 3/4 $8 3/8 $7 1/2 Second Quarter.............................. 7 13/16 6 8 6 5/8 Third Quarter............................... 8 1/8 6 8 1/16 7 Fourth Quarter.............................. 8 3 15/16 7 7/8 4 1/8 Year Ending December 31, 1996: First Quarter............................... $4 3/8 $2 7/8 $4 1/4 $3 1/4 Second Quarter.............................. 2 15/16 2 1/4 3 1/4 2 1/8 Third Quarter............................... 2 1/2 1 1/2 3 2 Fourth Quarter.............................. 2 3/4 1 1/4 3 3/8 2 1/2 First Quarter 1997 (through March 21, 1997)... 1 3/4 9/16 2 7/8 1 3/4
As of March 21, 1997, approximately 7,339,000 shares of the Series A Common Stock were outstanding and held by approximately 201 holders of record, and 2,110,600 shares of the Series B Common Stock were outstanding and held by approximately 69 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 Note P of notes to the consolidated financial statements. In addition, the Company's current credit facility restricts the Company's ability to pay dividends. For a discussion of restrictions of the Company's ability to pay dividends, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA. The following tables set forth selected historical financial information for the indicated periods for the Company. The historical information is derived from the Consolidated Financial Statements of the Company. The Company's twelve-month pre-tax loss of $41.2 million was primarily due to the changes in operations necessitated from the $73.5 million (or 52.8%) decrease in sales from 1995 to 1996. In addition, this drop in sales was combined with the following factors, all of which materially impacted the 1996 operating results: product development costs charged to cost of sales of $15.1 million; warranty costs incurred of $5.5 million; provision for bad debts of $4.0 million; loss on sale of Bernal Division net assets of $3.5 million; a restructuring charge of $1.3 million; Lasker warrants expense of $0.7 million; pension expense of $1.2 million; and the reduction of other selling, general and administrative costs by $2 million. In March 1997, the Company consummated the sale of substantially all of the assets of its Bernal Division including the product technology and related intangibles to Bernal International, Inc., a new company formed for the asset purchase. The sale price was approximately $20 million, which consisted of cash proceeds of 16 approximately $15 million, and the purchaser's assumption of approximately $5 million of certain liabilities of Bernal including the accounts payable. This transaction resulted in a $12 million permanent reduction of the Company's senior debt. In 1996, Bernal contributed sales of approximately $17.8 million and approximately $0.7 million income before interest, corporate charges and taxes. Stevens experienced a loss of $3.5 million on the sale of Bernal assets which is reflected in the 1996 results of operations. This asset sale resulted in a tax charge of $1.2 million from a taxable gain due to the non-deductible Bernal goodwill expensed upon the sale of Bernal's technology. 17 SELECTED FINANCIAL INFORMATION STATEMENT OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- Net sales..................... $ 65,659 $139,181 $106,694 $103,762 $84,160 Cost of sales................. 74,243 108,307 81,009 79,476 67,131 -------- -------- -------- -------- ------- Gross profit (loss)........... (8,584) 30,874 25,685 24,286 17,029 Selling, general and administrative expense....... 22,485 21,437 17,211 17,477 16,089 Restructuring Charge(3)....... 1,300 -- -- -- -- Loss on sale of Bernal assets....................... 3,472 -- -- -- -- -------- -------- -------- -------- ------- Operating income (loss)....... (35,841) 9,437 8,474 6,809 940 Other income (expense)........ (5,379) (3,478) (4,139) (3,940) (5,647) -------- -------- -------- -------- ------- Income (loss) before income taxes, extraordinary items and cumulative effect of accounting change.......... (41,220) 5,959 4,335 2,869 (4,707) Income tax (expense) benefit.. 7,000 (1,660) (1,908) (2,098) 1,525 -------- -------- -------- -------- ------- Income (loss) before extraordinary items and cumulative effect of accounting change.......... (34,220) 4,299 2,427 771 (3,182) Extraordinary items(2)........ -- -- (85) -- 4,033 Cumulative effect of change in method of accounting for income taxes(1).............. -- -- -- 412 -- -------- -------- -------- -------- ------- Net income (loss)......... $(34,220) $ 4,299 $ 2,342 $ 1,183 $ 851 ======== ======== ======== ======== ======= Income (loss) per common share before extraordinary items and cumulative effect of accounting change............ $ (3.62) $ 0.45 $ 0.26 $ 0.08 $ (0.36) Extraordinary items per common share(2)..................... -- -- (0.01) -- 0.45 Cumulative effect of accounting change per common share(1)..................... -- -- -- 0.05 -- -------- -------- -------- -------- ------- Net income (loss) per common share............. $ (3.62) $ 0.45 $ 0.25 $ 0.13 $ 0.09 ======== ======== ======== ======== ======= Weighted average shares outstanding.................. 9,451 9,553 9,256 9,129 9,017 ======== ======== ======== ======== =======
BALANCE SHEET DATA (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- ------- -------- -------- Cash and temporary investments.... $ 3,338 $ 814 $ 1,473 $ 3,768 $ 10,507 Working capital (deficit)......... (11,476) 38,127 16,692 16,737 25,546 Total assets...................... 77,417 117,647 94,041 106,147 108,548 Long-term debt.................... 113 33,470 15,308 21,567 41,759 Total stockholders' equity........ 10,896 45,372 40,965 36,520 35,782
- -------- (1) Beginning January 1, 1993, income taxes were determined in accordance with SFAS No. 109. Accordingly, the cumulative effect of this accounting change in 1993 was a benefit of $412,000. (2) Gain on involuntary conversion of assets in the 1992 Bernal fire and resulting benefit of utilization of a net operating loss for income taxes. Debt extinguishment costs incurred in 1994 related to the refinancing of long-term debt. See Note I of Notes to the Consolidated Financial Statements of the Company. (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. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Stevens 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 $65.7 million in 1996. The Company experienced a severe decrease in sales during 1996, which reflected a continuation of the slowdown in its customers' orders that the Company initially experienced in the fourth quarter of 1995. Orders fell to 48% of the previous year, primarily in the packaging systems and specialty web products divisions. While the decline in orders may be attributable to general economic conditions affecting the printing and packaging industry and related industry-wide purchase delays, the Company believes the decline in orders is primarily attributable to a loss of orders to its competition due in part to product performance issues and in part to liquidity problems faced by the Company. In response to the continued order slowdown, the Company implemented significant work force and cost reductions and consolidated certain facilities and operating functions, which necessitated $1.3 million in restructuring charges. The Company experienced continuing operating losses throughout 1996, including a loss of $25.3 million or ($2.68) per share for the fourth quarter of 1996 on sales of $11.5 million; for the year the net loss was $34.2 million or ($3.62) per share on 1996 sales of $65.6 million. During the fourth quarter of 1996, the Company evaluated its operations and ability to realize asset values in light of its liquidity difficulties, the expiration of waivers from its bank and the holders of its Senior Subordinated Notes on November 30, 1996, and its deficit in working capital. The Company continued to experience a decrease in sales primarily in the packaging systems and specialty web product divisions. In addition, the Company continued to experience high product development costs related to a series of new products, including its banknote and securities operations. The absorption of fixed costs over a lower volume of sales, an increased restructuring charge for continued reduction of personnel and consolidation of operating functions, changes in product mix and certain increased product performance and warranty expenses and the recognition of a $3.5 million loss on the sale of its Bernal Division all negatively impacted the Company's results of operations. The Company continued to respond to product performance issues with respect to certain of these newer products which have negatively impacted the Company's liquidity, the collection of accounts receivable and the booking of new orders. Although the Company believes it is making significant progress in resolving the product performance issues, they have not all been resolved. The Company's viability as a going concern is dependent upon the restructuring of its operations and its obligations to the senior and senior subordinated lenders, and, ultimately, a return to profitability. There is a negative working capital of $11.5 million at December 31, 1996, and negative cash flows from operating activities (before working capital changes) of $31.1 million for 1996. Negative cash flows from operating activities and other commitments are anticipated to continue in the first half of 1997. The Company was successful in its sale of substantially all assets of its Bernal Division in March 1997 (see Note C of Notes to the Consolidated Financial Statements). The cash generated from this sale enabled a $12 million permanent reduction in the Company's bank credit facility. In addition, the Company is contemplating additional asset sales to further reduce its indebtedness. In August 1993, the Company sold a part of its packaging products business. Specific assets of Post, including the product technology and related intangibles were sold to Bobst Group, Inc., the U.S. operating unit of Bobst, S.A. of Switzerland. The agreement provided for the transfer of manufacturing operations over a four month transition period. Post retained its accounts receivable (approximately $1.2 million), its work-in-process and finished goods inventories (approximately $1.1 million) and its existing backlog of orders (approximately $5.9 million). Post also retained substantially all of its liabilities (approximately $2.5 million). The cash proceeds were approximately $7.3 million, of which $6 million was used to permanently reduce senior debt. Post contributed sales of approximately $13.5 million and income before interest, corporate charges and taxes of approximately $4.6 million for 1993, including a gain of $1.3 million on the sale of assets to Bobst Group, Inc. 19 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, ------------------------------ 1996 1995 1994 1993 ------ ------ ------ ------ Net sales...................................... 100.0% 100.0% 100.0% 100.0% Cost of sales.................................. 113.1% 77.8% 75.9% 76.6% ------ ------ ------ ------ Gross profit (loss)............................ (13.1%) 22.2% 24.1% 23.4% Selling, general and administrative expenses... 34.2% 15.4% 16.1% 16.8% Restructuring charge........................... 2.0% -- -- -- Loss on sale of Bernal assets.................. 5.3% -- -- -- ------ ------ ------ ------ Operating income (loss)........................ (54.6%) 6.8% 7.9% 6.6% Other income (expense): Interest, net................................ (6.0%) (2.3%) (3.0%) (4.2%) Other, net................................... (2.2%) (0.2%) (0.9%) 0.4% ------ ------ ------ ------ Income (loss) before income taxes, extraordinary items and cumulative effect of accounting change............................. (62.8%) 4.3% 4.1% 2.8%
Comparison of Years Ended December 31, 1996 and 1995 Net Sales. The Company's net sales for the year ended December 31, 1996 decreased by $73.5 million, or 52.8%, compared to net sales in the same period in 1995, due primarily to decreased sales of packaging products. Packaging product sales decreased $50.0 million, or 56.7%, primarily due to a lack of sales of the System 2000 flexographic printing system, and reduced sales of the new System 9000 rotogravure printing system into China. Specialty/commercial product sales decreased by $20.9 million, due to decreased sales of specialty printing offset systems and business forms equipment. Security and banknote product sales decreased by $5.4 million, reflecting reduced revenues under the contract with Banque de France for the single note on web ("SNOW") currency printing system completed in 1996 and decreased revenues under the contract with The Bank of England for development of the Automated Currency Examination ("ACE") system. Societe Specialisee dans le Materiel d'Imprimerie ("SSMI"), a full service repair and maintenance facility in Europe, contributed $6.0 million in sales for 1996, an increase of $2.8 million over 1995 sales. On a geographic basis, net sales to international customers for the year ended December 31, 1996, were $22.6 million and comprised 34.4% of net sales as compared to $36.5 million, or 26.2%, of net sales for 1995, due primarily to the decrease in System 9000 shipments to China. Gross Profit. The Company's gross profit for the year ended December 31, 1996 decreased by $39.4 million, or 127.8%, compared to gross profit for the same period in 1995, primarily due to decreased sales volume for packaging systems products and product development and warranty costs for various new press systems. Gross margin loss for 1996 was (13.1%) of net sales as compared to gross profit of 22.2% of net sales for the same period in 1995. The decrease in gross profit margin was primarily due to unexpected development, warranty and start-up costs on the System 2000, the new System 9000 introduced into China, and certain specialty printing systems, and higher costs associated with the installation component of sales. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses increased by $1.0 million, or 4.9%, for the year ended December 31, 1996 compared to the same period in 1995. This was due primarily to a $3.8 million increase in bad debt expenses, and a reduction of $2.0 million in advertising, personnel and related costs at operating divisions, and certain reduced corporate administrative and legal costs. Selling, general and administrative expenses for 1996 were 34.2% of net sales compared to 15.4% for 1995, due to the $73.5 million decrease in sales without corresponding expense level decreases. 20 Other Income (Expense). The Company's gross interest expense increased by $0.6 million, or 16.5%, for 1996 compared to 1995. This was due to borrowings by the Company resulting from the liquidity difficulties experienced in 1996. Interest income decreased by $0.1 million for 1996 compared to 1995, due to the use of cash to minimize the amount borrowed under the Company's credit facility. Comparison of Years Ended December 31, 1995 and 1994 Net Sales. The Company's net sales for the year ended December 31, 1995 increased by $32.5 million, or 30.4%, compared to net sales in the same period in 1994, due to increased sales of packaging products. Packaging product sales increased $27.7 million, or 48%, primarily due to increased sales of the System 2000 flexographic printing system, sales of the new System 9000 rotogravure printing system into China and sales of both platen and rotary die cutters. Specialty/commercial product sales increased by $1.9 million, due to increased sales of specialty printing offset systems and business forms equipment. Security and banknote product sales decreased by $0.3 million, reflecting reduced revenues under the contract with Banque de France for the single note on web ("SNOW") currency printing system as the project neared completion. This decrease was offset to some degree by increased revenues under the contract with The Bank of England for development of the Automated Currency Examination ("ACE") system. In January 1995, the Company formed Societe Specialisee dans le Materiel d'Imprimerie ("SSMI") and acquired a full service repair and maintenance facility in France, which provides service and support for the Company's European customer base. SSMI contributed $3.2 million in sales for 1995. On a geographic basis, net sales to international customers for the year ended December 31, 1995, were $36.5 million and comprised 26.2% of net sales as compared to $15.0 million, or 14%, of net sales for 1994, due primarily to the System 9000 shipments to China. Gross Profit. The Company's gross profit for the year ended December 31, 1995 increased by $5.2 million, or 20.2%, compared to gross profit for the same period in 1994, primarily due to increased sales volume for packaging systems products. Gross profit margin for 1995 decreased to 22.2% of net sales as compared to 24.1% of net sales for the same period in 1994. The decrease in gross profit margin was primarily due to higher costs associated with the installation component of sales and lower than average margins on the new System 9000 introduced into China during 1995, and unexpected start-up costs on the System 2000 and certain specialty printing systems. Selling, General and Administrative Expenses. The Company's selling, general and administrative expenses increased by $4.2 million, or 24.6%, for the year ended December 31, 1995 compared to the same period in 1994. This was due to increased advertising, personnel and related costs at operating divisions, and certain corporate administrative and legal costs. Selling, general and administrative expenses for 1995 were 15.4% of net sales compared to 16.1% for 1994, due to the $32.5 million increase in sales without corresponding expense level increases. Other Income (Expense). The Company's gross interest expense decreased by $0.4 million, or 10.1%, for 1995 compared to 1994. This was due to reduced borrowings by the Company as a result of debt reductions in 1994, accomplished in part through a private placement of stock in September 1994 and the refinancing of existing debt at a lower interest rate. Interest income decreased by $0.4 million for 1995 compared to 1994, due to the use of cash to minimize the amount borrowed under the Company's credit facility. TAX MATTERS The Company's effective state and federal income tax rate ("effective tax rate") was 17% and 27.9% for the year ended December 31, 1996 and 1995, respectively. This decrease in the effective tax rate was due to the uncertainty of future tax benefits from future operations. Certain research and experimental expenditure tax credits of $0.8 million were recorded in 1995 and resulted in a lower than expected effective tax rate. 21 QUARTERLY RESULTS (UNAUDITED) The following table summarizes results for each of the four quarters for the years ended December 31, 1996, 1995 and 1994. 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, SEPT. 30, DECEMBER 31, --------- -------- --------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996: Net sales.......................... $22,613 $18,732 $12,770 $ 11,544 Operating income (loss)............ $(1,026) $(3,394) $(5,663) $(25,758) Net income (loss).................. $(1,085) $(3,741) $(4,067) $(25,327) Net income (loss) per common share............................. $ (0.11) $ (0.40) $ (0.43) $ (2.68) 1995: Net sales.......................... $33,042 $37,474 $33,962 $ 34,703 Operating income (loss)............ $ 3,294 $ 3,648 $ 3,778 $ (1,283) Net income (loss).................. $ 1,448 $ 1,552 $ 1,781 $ (482) Net income (loss) per common share............................. $ 0.15 $ 0.16 $ 0.19 $ (0.05) 1994: Net sales.......................... $20,930 $21,281 $29,085 $ 35,398 Operating income................... $ 1,362 $ 1,303 $ 2,621 $ 3,188 Income before extraordinary item... $ 72 $ 163 $ 954 $ 1,238 Income per common share before extraordinary item per share...... $ 0.01 $ 0.02 $ 0.10 $ 0.13
The Company attributes the operating and net loss for the fourth quarter of 1996 to (1) a continuing decline in orders ($25.1 million versus $45.5 million for the last six months of 1996 and 1995, respectively); (2) greater than expected manufacturing costs, including unexpected warranty costs and development costs associated with some of the Company's new products; (3) the loss on the sale of the assets of the Bernal Division; (4) provision for bad debt expense of $4 million; and (5) unabsorbed overhead costs due to the low shipment volume in the quarter. The Company has taken certain continuing restructuring actions to adjust its expected 1997 production to the reduced order flow in 1996. 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. During the latter part of 1995 and during 1996, the Company has experienced an increased need for working capital resulting in continued high levels of borrowings under its bank credit facility. The working capital needs are directly related to the slowness in orders in late 1995 and 1996 and certain product performance issues which have delayed deliveries, increased costs and delayed cash collections. Also, the growing international mix of the Company's new orders which typically have less favorable cash flow terms than domestic orders, and the introduction of new products have resulted in increased borrowings. Net cash provided by (used in) operating activities (before working capital changes) was ($31.1) million in 1996 while in 1994 and 1995 it was $9.4 million and $9.3 million, respectively. Working capital provided (used) cash of $33.7 million in 1996, ($26.0) million in 1995 and ($7.9) million during 1994. The Company's working capital needs increase during periods of sales growth because of a number of factors, including the duration of 22 the manufacturing process and the relatively large size of most orders. During periods of sales decline such as 1996, the Company's working capital provides cash as receivables are collected and inventory is utilized. The large increase in working capital requirements during 1995 reflected increasing sales, particularly a growing proportion of international orders, which typically have less favorable cash flow terms, and the introduction of new products. Working capital usage also increased during 1995 as a result of more competitive new domestic order terms made necessary by foreign competition, slowing orders and related lower customer deposits during the latter part of the year, and receivables collection delays resulting from new product warranty issues. Capital expenditures for additions to property, plant and equipment for 1994 and 1995 totaled $7.7 million. These expenditures were used principally to rebuild the Company's rotary die manufacturing facility that was destroyed by a fire in 1992, to modernize equipment at all locations and to expand capacity, including the reopening of the Fort Worth, Texas facility which occurred during 1995. In addition, the Company received $4.6 million in 1994 from the sale of an idle facility located in Grapevine, Texas. The Company's capital expenditures for 1996 were $0.5 million, and were used primarily for certain machinery and equipment modernization. Positive cash flow from operations, as well as asset sales in 1993 and 1994 and a private placement of Series A Common Stock in 1994, enabled the Company to reduce its long-term debt by $54.8 million during the period from 1992 to 1994. Increases in the Company's net sales necessitated $21.0 million in working capital borrowings in 1995. The Company continues to experience performance issues with respect to certain of its newer products which has negatively impacted collection of accounts receivable and the booking of new orders. The Company believes, however, that significant progress is being made regarding resolving performance issues. The reduced liquidity resulting from the order slowdown and collection delays required the Company to fully draw upon its bank credit facility and contributed to the Company's failure to make the payment of a $3.6 million principal payment due June 30, 1996 to its Senior Subordinated Note holders. In addition, the losses incurred by the Company in the three and nine months ended September 30, 1996 and for the year-ended December 31, 1996 resulted in non-compliance with a debt coverage ratio in the Company's bank credit facility agreement and a net worth covenant in the agreement governing the Senior Subordinated Notes. The reduced liquidity has also impacted the Company's ability to make timely payment with respect to its accounts payable. As a result, the Company has experienced delays in its ability to obtain raw materials and inventory. As a result of negotiations with its bank and the holders of its Senior Subordinated Notes, the Company has obtained a series of temporary default waivers through November 30, 1996. The Company modified its bank credit facility agreement in January 1997 providing for a bridge loan arrangement of the Company's bank indebtedness through May 1, 1997. To date, no permanent agreement has been reached with the Company's bank or the holders of the Senior Subordinated Notes. Accordingly, all of the Company's bank debt and the entire principal amount of the Senior Subordinated Notes, together with accrued and unpaid interest has been classified as a current liability at December 31, 1996. Pursuant to the terms of an intercreditor agreement entered into by the Company, the bank and the holders of the Senior Subordinated Notes, a standstill letter was issued by the bank on January 10, 1997 preventing any payments to the holders of the Senior Subordinated Notes for a 180 day period. Accordingly, the Company did not make its scheduled interest payment to the holders of the Senior Subordinated Notes at December 31, 1996. The Company retained Rauscher Pierce Refsnes, Inc. in 1996 to advise the board of directors on strategic and financial alternatives available to the Company. Possible strategies considered included the addition of capital through a merger or business combination with other companies, raising additional equity, or possible sales of key assets of the Company, all in an effort to maximize shareholder value. In March 1997, the Company sold the assets, operations and certain liabilities of the Bernal Division (see Note C of Notes to the Consolidated Financial Statements). At December 31, 1996, the Company's indebtedness was comprised primarily of a bank credit facility and the Company's Senior Subordinated Notes due September 30, 2000. In addition, the Company's Chairman has 23 loaned the Company $950,000 as described below. As of December 31, 1996, there was outstanding $15.3 million in Senior Subordinated Notes, bearing interest at the rate of 10.5% per annum, with principal payments of $3.6 million being due on June 30, 1996 and each June 30 thereafter, and a final payment of $0.86 million at maturity. As previously stated, the June 30, 1996 principal payment was not made. Under its credit facility at December 31, 1996, the Company could borrow up to $27 million in the form of direct borrowings and letters of credit. After the sale of the Bernal Division in March 1997, the maximum allowed borrowings were reduced to $15 million. As of December 31, 1996 there was $23.1 million in direct borrowings and $2.7 million in standby letters of credit outstanding under the credit facility. At December 31, 1996, $23.1 million of the Company's borrowings were at the lender's prime rate of interest (8.25%). The amounts borrowed under the credit facility have been used for working capital. Both the agreement concerning the credit facility and the agreement with the holders of the Senior Subordinated Notes provide for joint and several guaranties by the domestic operating subsidiaries of the Company. To secure the indebtedness and the guaranties, a first lien was granted to the lender, and a second lien was granted to the holders of the Senior Subordinated Notes, on substantially all the assets of the Company and its domestic divisions. The borrowings under the credit facility and Senior Subordinated Notes agreement are subject to various restrictive covenants related to financial ratios as well as limitations on capital expenditures and additional indebtedness. The credit facility permits the Company to borrow up to $5 million for domestic acquisitions without lender consent. The Company is not allowed to pay dividends. With the sale of the Bernal Division and assuming that the contemplated restructuring of its indebtedness is completed, and that one of several strategic, financial alternatives, principally the additional sale of assets, among others presently being pursued by the Company is consummated, management believes that cash flow from operations will be adequate to fund its existing operations and repay scheduled indebtedness over the next 12 months. There can be no assurance that the Company's restructuring efforts will be successful, or that the Company's bank or the holders of the Senior Subordinated Notes, who hold first and second liens on all assets of the Company, will agree to restructured obligations consistent with the Company's anticipated cash availability. Even if such agreement is reached, it may require agreements of other creditors and shareholders of the Company, none of which is assured. Furthermore, there can be no assurance that future sales of assets, if any, can be successfully accomplished on terms acceptable to the Company. Under current circumstances, the Company's ability to continue as a going concern depends upon the successful restructuring of its agreement with its bank and the agreement with the holders of its Senior Subordinated Notes, the further redeployment of assets, and a return to profitable operations. If the Company is unsuccessful it its efforts, it may continue to be unable to meet its obligations or fulfill the covenants in its debt agreements, as well as other obligations, making it necessary to undertake such other actions as may be appropriate to preserve asset values. In addition, the Company may incur, from time to time, additional short- and long-term bank indebtedness (under its 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, 1996, the Company's Chairman and Chief Executive Officer has loaned the Company $950,000 for its short-term cash requirements which is to be mandatorily repaid from proceeds of the Banque de France receivable (approximately $1.7 million). As of December 31, 1996, this amount has not been repaid. 24 The success of the Company's plans will continue to be impacted by its ability to achieve a satisfactory resolution of the product performance and warranty issues, timely deliveries, acceptance of the ACE system by the Bank of England, the degree of international orders (which generally have less favorable cash flow terms and require letters of credit that reduce credit availability), improved terms of domestic orders, and timely implementation of cost reduction measures. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER ------ Report of Management................................................... 25 Independent Auditors' Report........................................... 26 Consolidated Balance Sheets--December 31, 1996 and 1995................ 27 Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994......................................................... 28 Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, 1995 and 1994............................................... 29 Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994......................................................... 30 Notes to Consolidated Financial Statements............................. 31 Schedule II--Valuation and Qualifying Accounts--Years Ended December 31, 1996, 1995 and 1994............................................... 50
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 Deloitte & Touche LLP, the Company's independent auditors, whose report follows. The management of the Company is responsible for the financial information and representations contained in the financial statements and other sections of the annual report. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances to reflect, in all material respects, the substance of events and transactions that should be included. In preparing the financial statements, it is necessary that management make informed estimates and judgments based upon currently available information of the effects of certain events and transactions. In meeting its responsibility for the reliability of the financial statements, management depends on the Company's system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and are properly recorded. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors pursues its oversight role for the accompanying financial statements through its Audit Committee, which is composed solely of directors who are not officers or employees of the Company. The Committee also meets with the independent auditors, without management present, to discuss internal accounting control, auditing, and financial reporting matters. 25 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Stevens International, Inc. We have audited the accompanying consolidated balance sheets of Stevens International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stevens International, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the consolidated financial statements, the Company has sustained large losses from operations and has negative working capital at December 31, 1996. In addition, as discussed in Note J to the consolidated financial statements, at December 31, 1996, the Company would not have been in compliance with certain covenants of its long-term debt agreements had the lenders not temporarily waived the covenants. The Company is attempting to renegotiate the terms and covenants of the debt agreement. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters are also described in Note B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Fort Worth, Texas March 24, 1997 26 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------ 1996 1995 -------- -------- ASSETS Current assets: Cash..................................................... $ 3,338 $ 712 Temporary investments (Note D)........................... -- 102 Trade accounts receivable, less allowance for losses of $4,225 and $655 in 1996 and 1995, respectively.......... 11,777 26,079 Costs and estimated earnings in excess of billings on long-term contracts (Note E)............................ 4,263 18,341 Inventory (Note F)....................................... 14,169 23,300 Refundable income taxes (Note K)......................... 2,464 832 Other current assets..................................... 2,095 666 Assets held for sale (Note B)............................ 14,250 -- -------- -------- Total current assets................................... 52,356 70,032 Property, plant and equipment, net (Note G)................ 17,957 32,017 Other assets, net (Note H)................................. 7,104 15,598 -------- -------- $ 77,417 $117,647 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable................................... $ 9,834 $ 15,117 Billings in excess of costs and estimated earnings on long-term contracts (Note E)............................ 1,544 219 Other current liabilities (Note I)....................... 11,697 9,019 Customer deposits........................................ 2,064 3,851 Advances from affiliates (Notes J and N)................. 950 -- Current portion of long-term debt (Note J) 37,743 3,699 -------- -------- Total current liabilities.............................. 63,832 31,905 Long-term debt (Note J).................................... 113 33,470 Deferred income taxes (Note K)............................. -- 4,536 Deferred pension costs (Note M)............................ 2,576 2,364 Commitments and contingencies (Note L) Stockholders' equity (Note P): 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, 7,340,000 and 7,312,000 issued and outstanding at December 31, 1996 and 1995, respectively............................................ 734 731 Series B Common Stock, $0.10 par value, 6,000,000 shares authorized, 2,111,000 and 2,139,000 shares issued and outstanding at December 31, 1996 and 1995, respectively............................................ 211 214 Additional paid-in capital............................... 39,844 39,144 Foreign currency translation adjustment.................. (167) 359 Excess pension liability adjustment...................... (1,466) (1,036) Retained earnings (deficit).............................. (28,260) 5,960 -------- -------- Total stockholders' equity............................. 10,896 45,372 -------- -------- $ 77,417 $117,647 ======== ========
See notes to consolidated financial statements. 27 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Net sales........................................ $ 65,659 $139,181 $106,694 Cost of sales.................................... 74,243 108,307 81,009 -------- -------- -------- Gross profit (loss).............................. (8,584) 30,874 25,685 Selling, general and administrative expenses..... 22,485 21,437 17,211 Restructuring charge (Note B).................... (1,300) -- -- Loss on sale of assets (Note C).................. (3,472) -- -- -------- -------- -------- Operating income (loss).......................... (35,841) 9,437 8,474 Other income (expense): Interest income................................ 63 207 647 Interest expense............................... (3,984) (3,421) (3,807) Lawsuit settlement expense (Note P)............ (700) -- -- Other, net..................................... (758) (264) (979) -------- -------- -------- (5,379) (3,478) (4,139) -------- -------- -------- Income (loss) before taxes and extraordinary item............................................ (41,220) 5,959 4,335 Income tax benefit (expense) (Note J)............ 7,000 (1,660) (1,908) -------- -------- -------- Income (loss) before extraordinary item.......... (34,220) 4,299 2,427 Extraordinary item, net of tax (Note I).......... -- -- (85) -------- -------- -------- Net income (loss)............................ $(34,220) $ 4,299 $ 2,342 ======== ======== ======== Income (loss) per common share: Income (loss) before extraordinary item.......... $ (3.62) $ 0.45 $ 0.26 Extraordinary item (Note J)...................... -- -- (0.01) -------- -------- -------- Net income (loss)............................ $ (3.62) $ 0.45 $ 0.25 ======== ======== ======== Weighted average number of shares of common and common stock equivalents outstanding during the periods (Note O)................................ 9,451 9,553 9,256 ======== ======== ========
See notes to consolidated financial statements. 28 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
FOREIGN EXCESS SERIES A STOCK SERIES B STOCK ADDITIONAL CURRENCY PENSION RETAINED ---------------- ----------------- PAID-IN TRANSLATION LIABILITY EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT ADJUSTMENT (DEFICIT) TOTAL ------- ------- ------- ------- ---------- ----------- ---------- --------- -------- Balance as of January 1, 1994................... 6,787 $ 679 2,236 $ 224 $37,015 $ (53) $ (664) $ (681) $ 36,520 Sale of stock.......... 300 30 -- -- 1,516 -- -- -- 1,546 Foreign currency translation adjustment............ -- -- -- -- -- 121 -- -- 121 Excess pension liability adjustment.. -- -- -- -- -- -- 226 -- 226 Exercise of stock op- tions................. 43 4 -- -- 206 -- -- -- 210 Net income............. -- -- -- -- -- -- -- 2,342 2,342 ------- ------ ------- ------ ------- ----- ------- -------- -------- Balance, December 31, 1994................... 7,130 713 2,236 224 38,737 68 (438) 1,661 40,965 Foreign currency translation adjustment............ -- -- -- -- -- 291 -- -- 291 Excess pension liability adjustment.. -- -- -- -- -- -- (598) -- (598) Conversion of Series B stock to Series A stock................. 97 10 (97) (10) -- -- -- -- -- Exercise of stock op- tions................. 85 8 -- -- 407 -- -- -- 415 Net income............. -- -- -- -- -- -- 4,299 4,299 ------- ------ ------- ------ ------- ----- ------- -------- -------- Balance, December 31, 1995................... 7,312 731 2,139 214 39,144 359 (1,036) 5,960 45,372 Foreign currency translation adjustment............ -- -- -- -- -- (526) -- -- (526) Excess pension liability adjustment.. -- -- -- -- -- -- (430) -- (430) Conversion of Series B stock to Series A stock................. 28 3 (28) (3) -- -- -- -- 0 Lawsuit settlement..... -- -- -- -- 700 -- -- -- 700 Net loss............... -- -- -- -- -- -- -- (34,220) (34,220) ------- ------ ------- ------ ------- ----- ------- -------- -------- Balance, December 31, 1996................... 7,340 $ 734 2,111 $ 211 $39,844 $(167) $(1,466) $(28,260) $ 10,896 ======= ====== ======= ====== ======= ===== ======= ======== ========
See notes to consolidated financial statements. 29 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER, ---------------------------- 1996 1995 1994 -------- -------- -------- Cash provided by operations: Net income (loss)............................... $(34,220) $ 4,299 $ 2,342 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................. 4,188 5,215 4,944 Deferred income taxes......................... (4,536) (892) 525 Deferred pension costs........................ 212 1,029 675 Lawsuit settlement expense.................... 700 -- -- Other......................................... (957) (308) 956 Loss on sale of assets........................ 3,472 -- -- Changes in operating assets and liabilities net of effects from purchase of subsidiary in 1995: Trade accounts receivable..................... 12,525 (13,029) 2,309 Contract costs in excess of billings.......... 15,402 (9,034) (2,466) Inventory..................................... 5,781 (3,102) 4,105 Refundable income taxes....................... (1,630) (832) -- Other assets.................................. (541) (615) (541) Trade accounts payable........................ (2,527) 3,744 1,696 Other......................................... 4,687 (3,211) 2,844 -------- -------- -------- Total cash provided by (used in) operating activities................................. 2,556 (16,736) 17,389 -------- -------- -------- Cash provided by (used in) investing activities: Additions to property, plant and equipment...... (470) (5,303) (2,356) Proceeds from insurance and sale of assets...... -- (212) 4,630 Deposits and other.............................. 294 129 (284) -------- -------- -------- Total cash provided by (used in) investing activities................................. (176) (5,386) 1,990 -------- -------- -------- Cash provided by (used in) financing activities: Increase in current portion of long-term debt... 34,059 -- -- Net increase in (decrease in) long-term debt.... (33,915) 21,048 (23,430) Sale of stock and exercise of stock options..... -- 415 1,756 -------- -------- -------- Total cash provided by (used in) financing activities................................. 144 21,463 (21,674) -------- -------- -------- Increase (decrease) in cash and temporary investments...................................... 2,524 (659) (2,295) Cash and temporary investments at beginning of year............................................. 814 1,473 3,768 -------- -------- -------- Cash and temporary investments at end of year..... $ 3,338 $ 814 $ 1,473 ======== ======== ======== Supplemental disclosure of cash flow information: Interest........................................ $ 3,544 $ 2,622 $ 3,580 Income taxes.................................... (969) 3,261 1,243
See notes to consolidated financial statements. 30 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Stevens International, Inc. and all of its wholly owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes revenue on the sale of equipment and parts when units are shipped or when completed units are accepted by the customer. Revenue and cost on certain long-term contracts are recognized as work is performed, based upon the percentage that incurred costs bear to estimated total contract costs (percentage of completion method). In the event of an anticipated loss under the percentage of completion method, the entire amount of the loss is charged to operations during the accounting period in which the amount of the anticipated loss is determined. Inventory Approximately 73% and 49% of inventory at December 31, 1996 and 1995, respectively, is valued at the lower of cost, using the last-in, first-out (LIFO) method, or market with the remainder valued using the first-in, first- out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the estimated useful lives of three to forty years for the related assets. Other Assets Included in other assets are patent costs and goodwill. These are amortized over the remaining life of the patents, and thirty years, respectively. Income Taxes SFAS 109 required income taxes to be accounted for under the liability method rather than in accordance with the deferred method as previously required by Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes" (APB No. 11). SFAS 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Income Per Common Share Income per common share is based on the weighted average number of shares of common and common stock equivalents (stock options and warrants, when dilutive) outstanding. 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. 31 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. Recently Issued Accounting Standards The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has adopted Statement of Position 96-1, "Environmental Remediation Liabilities," which provides guidance on the recognition, measurement, display and disclosure of environmental remediation liabilities. The Statement is effective for the Company's 1997 fiscal year. Management has evaluated such statement and believes that it will not have a material effect on the financial condition, cash flows or results of operations of the Company. B. LIQUIDITY CONCERNS The Company's viability as a going concern is dependent upon the restructuring of its operations and its obligations to the senior and senior subordinated lenders, additional asset sales to further reduce indebtedness, and, ultimately, a return to profitability. There is a negative working capital of $11.5 million at December 31, 1996, and negative cash flows from operating activities (before working capital changes) of $31.1 million for 1996. Negative cash flows from operating activities and other commitments are anticipated to continue in 1997. The Company was successful in its sale of substantially all assets of the Bernal Division in March 1997 (see Note C of Notes to the Consolidated Financial Statements). The cash generated from this sale resulted in a $12 million permanent reduction in the Company's senior bank credit facility. In addition, the Company is contemplating additional asset sales to further reduce its indebtedness. There can be no assurance that the Company's restructuring efforts will be successful, or that the senior and senior subordinated lenders, who hold first and second liens on all assets of the Company, will agree to restructured obligations consistent with the Company's anticipated cash availability. Even if such agreement is reached, it may require agreements of other creditors and shareholders of the Company, none of which is assured. Furthermore, there can be no assurance that future sales of assets, if any, can be successfully accomplished on terms acceptable to the Company. Under current circumstances, the Company's ability to continue as a going concern depends upon the successful restructuring of its senior and senior subordinated obligations, the further redeployment of assets, and a return to profitable operations. If the Company is unsuccessful it its efforts, it may continue to be unable to meet its obligations and covenants on its senior and senior subordinated debt, as well as other obligations, making it necessary to undertake such other actions as may be appropriate to preserve asset values. 32 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) C. SALE OF BERNAL DIVISION AND FORMATION OF SSMI In March 1997, the Company sold substantially all the assets of its Bernal Division including the product technology and related intangibles to Bernal International, Inc., a new company formed for the asset purchase. The cash proceeds were approximately $15 million, and in addition, the purchaser assumed certain liabilities of Bernal, including the accounts payable. This transaction resulted in a $12 million permanent reduction of the Company's senior debt. In 1996, Bernal contributed sales of approximately $17.8 million and approximately $0.7 million income before interest, corporate charges and taxes. The loss on the sale of Bernal net assets of approximately $3.5 million is reflected in the 1996 results of operations. This asset sale resulted in a tax charge of $1.2 million from a taxable gain due to the non-deductible Bernal goodwill expensed upon the sale of Bernal's technology. In January 1995, the Company formed Societe Specialisee dans le Materiel d'Imprimerie ("SSMI"), a French company, and acquired the assets of its predecessor, Societe Specialisee dans le Materiel d'Imprimerie Offset ("SSMIO") for approximately FF1.8 million ($368,000). SSMI is a company engaged in the service and repair of printing presses. Assets acquired were recorded at fair market values; there were no costs in excess of net assets acquired. D. TEMPORARY INVESTMENTS Temporary investments (stated at cost, which approximates market) at December 31, 1995 consisted of short term investments in commercial paper, with original maturities within ninety days, and money management accounts. E. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED LONG-TERM CONTRACTS Unbilled costs and estimated earnings on uncompleted contracts represent revenue earned but not billable under terms of the related contracts being accounted for using the percentage of completion revenue recognition method. A summary of all costs and related progress billings at December 31, 1996 and 1995 follows:
DECEMBER 31, ---------------------- 1996 1995 ---------------------- (AMOUNTS IN THOUSANDS) Cost incurred on uncompleted contracts............... $ 8,430 $ 28,828 Estimated earnings................................... 917 10,861 ---------- ----------- Revenue from long-term contracts..................... 9,347 39,689 Less: Billings to date............................... 6,628 21,567 ---------- ----------- $ 2,719 $ 18,122 ========== ===========
The $2,719,000 and $18,122,000 net differences are included in the accompanying balance sheets under the following captions:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) Cost and estimated earnings in excess of billings on long-term contracts.......................... $ 4,263 $ 18,341 Billings in excess of costs and estimated earnings on long-term contracts................. (1,544) (219) ----------- ----------- $ 2,719 $ 18,122 =========== ===========
33 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) F. INVENTORIES Inventories consist of the following:
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) Finished product..................................... $ 5,205 $ 7,204 Work in progress..................................... 4,026 9,231 Raw material......................................... 4,938 6,865 ----------- ----------- $ 14,169 $ 23,300 =========== ===========
Replacement cost exceeds financial accounting LIFO cost by approximately $3,087,000 and $3,457,000 at December 31, 1996 and 1995, respectively. G. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
RANGE OF DECEMBER 31, ESTIMATED USEFUL ----------------------- LIVES 1996 1995 ---------------- ----------- ----------- (AMOUNTS IN THOUSANDS) Land.............................. N/A $ 1,985 $ 1,985 Building and improvements......... 15-40 years 11,346 11,308 Machinery and equipment........... 5-18 years 17,220 30,105 Furniture and fixtures............ 3-10 years 8,911 10,355 Leasehold improvements............ 8-20 years 324 1,703 ----------- ----------- $ 39,786 55,456 Less: accumulated depreciation and amortization..................... 21,829 23,439 ----------- ----------- $ 17,957 $ 32,017 =========== ===========
H. OTHER ASSETS Other assets consist of:
DECEMBER 31, ---------------------- 1996 1995 ---------------------- (AMOUNTS IN THOUSANDS) Goodwill, net of amortization of $2,361 and $3,513, respectively...................................... $ 4,844 $ 9,493 Patents, net of amortization of $293 and $2,132, respectively...................................... 167 1,760 Performance bond deposits.......................... -- 1,504 Intangible pension asset........................... 782 941 Other.............................................. 1,311 1,900 ---------- ----------- $ 7,104 $ 15,598 ========== ===========
34 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) I. OTHER CURRENT LIABILITIES Other current liabilities consist of:
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) Salaries and wages................................... $ 1,180 $ 1,602 Taxes other than income taxes........................ 1,021 979 Employee benefits.................................... 1,918 1,512 Accrued interest..................................... 457 416 Restructuring reserve................................ 459 -- Warranty reserve..................................... 2,120 -- Other accrued expenses............................... 4,542 4,510 ----------- ---------- $ 11,697 $ 9,019 =========== ==========
J. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) Senior subordinated notes, interest at 10.5% (Net of unamortized origination fees of $417 and $780)..... $ 14,844 $ 14,481 Notes payable to banks, interest at prime rate at December 31, 1996 (Net of unamortized origination fees of $262 and $469)............................. 22,874 22,531 Capital lease obligations due in varying installments....................................... 108 Other............................................... 138 49 ----------- ----------- 37,856 37,169 Less: current portion............................... 37,743 3,699 ----------- ----------- $ 113 $ 33,470 =========== ===========
The interest rate on direct borrowings under the Company's Bank Credit Facility at December 31, 1996 is at the lender's prime rate (8.25%). At December 31, 1995, $11.0 million of the Company's borrowings were at the lender's prime rate of interest (8.5%) and $12.0 million of the borrowings were at an offshore rate plus 1.5% (7.44%). The Company's reduced liquidity resulting from the order slowdown and collection delays required the Company to fully draw upon its bank credit facility and did not allow for the payment of a $3.6 million principal payment due June 30, 1996 to its Senior Subordinated Note holders. In addition, the losses incurred by the Company in the three and nine months ended September 30, 1996 and for the year-ended December 31, 1996 resulted in non-compliance with a debt coverage ratio in the Company's bank credit facility and a net worth covenant in the senior subordinated debt agreement. As a result of negotiations with its bank and holders of its Senior Subordinated Notes, the Company had obtained a series of temporary default waivers through November 30, 1996. The Company modified its bank credit facility in January 1997 providing for a $2 million principal payment, and a bridge loan arrangement of the Company's bank indebtedness through May 1, 1997; with interest at 1.75% over prime rate. To date, no 35 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) permanent agreement has been reached with the bank or holders of the Senior Subordinated Notes. Accordingly, all of the Company's bank debt and Senior Subordinated Notes debt have been classified as a current liability at December 31, 1996. A standstill letter was issued by the senior lender on January 10, 1997 preventing any payments to the senior subordinated lenders for a 180 day period. Accordingly, the Company did not make its scheduled interest payment to the senior subordinated lenders at December 31, 1996. At December 31, 1996, the Company's indebtedness was comprised primarily of a bank credit facility and the Company's Senior Subordinated Notes due September 30, 2000. As of December 31, 1996, there was outstanding $15.3 million in Senior Subordinated Notes, bearing interest at the rate of 10.5% per annum, with principal payments of $3.6 million being due on June 30, 1996 and each June 30 thereafter, and a final payment of $0.86 million at maturity. As previously stated, the June 30, 1996 principal payment and the December 31, 1996 interest payment were not made. Under its credit facility, the Company may borrow up to $27 million in the form of direct borrowings and letters of credit. After the sale of its Bernal Division in March 1997, the maximum allowed borrowings were reduced to $15 million. As of December 31, 1996 there was $23.1 million in direct borrowings and $2.7 million in standby letters of credit outstanding under the credit facility. In September 1994, the Company redeemed $2.5 million of the Subordinated Notes (without premium or penalty). Sources for this reduction were the net proceeds from a private placement of 300,000 shares of Series A common stock and bank borrowings. See Note O. Pursuant to the amended subordinated note agreement, this principal payment resulted in a reduction in the interest rate to the minimum defined interest rate of 10.5%. The early extinguishment of debt in September 1994 resulted in an extraordinary loss of $85,000 (or $0.01 per share), net of income tax benefit of $67,000, as a result of the write-off of loan origination costs which were being amortized over the life of the indebtedness. Principal maturities of the outstanding long-term debt at December 31, 1996, are as follows (Amounts in thousands): Year ending December 31, 1997....................................... $38,422 1998................................................................ 25 1999................................................................ 25 2000................................................................ 25 2001................................................................ 23 2002 and thereafter................................................. 15 ------- 38,535 Less unamortized loan origination fees............................ 679 ------- $37,856 =======
Both the agreement concerning the credit facility and the agreement with the holders of the Senior Subordinated Notes provide for joint and several guaranties by the domestic operating subsidiaries of the Company. To secure the indebtedness and the guaranties, the first lien was granted to the lender, and a second lien was granted to the holders of the Senior Subordinated Notes, on substantially all the assets of the Company and its domestic subsidiaries. The Company's domestic operating subsidiaries were merged into the Company effective January 1, 1996. The borrowings under the credit facility and Senior Subordinated Notes agreement are subject to various restrictive covenants related to financial ratios as well as limitations on capital expenditures and additional indebtedness. The credit facility permits the Company to borrow up to $5 million for domestic acquisitions without lender consent. The Company is not allowed to pay dividends. 36 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Through December 31, 1996, the Company's Chairman and Chief Executive Officer has loaned the Company $950,000 for its short-term cash requirements which is to be mandatorily repaid from proceeds of the Banque de France project. As of December 31, 1996, this amount has not been repaid. K. INCOME TAXES The Company and its domestic subsidiaries file consolidated income tax returns. At December 31, 1996, the Company had the following losses and credits available for carryforward for federal income tax purposes: Net operating loss--expiring in 2011............................ $18,703,000 General business credit--expiring in 2005, 2009 and 2010........ $ 1,555,000 Minimum tax credit--not subject to expiration................... $ 798,000
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1996 and 1995 are as follows:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (AMOUNTS IN THOUSANDS) Deferred tax liabilities: Difference between book and tax basis of property....................................... $ 5,671 $ 6,097 Difference between book and tax basis of intangibles.................................... 594 674 Excess of tax over book pension cost............ 251 270 Differences between book and tax LIFO inventory reserves....................................... 2,722 2,723 Other........................................... 322 241 ----------- ----------- 9,560 10,005 ----------- ----------- Deferred tax assets: Difference between book and tax basis of pension liability...................................... 557 557 Reserves not currently deductible............... 6,445 2,403 Net operating loss, credit and other carryforwards.................................. 8,713 2,509 ----------- ----------- 15,715 5,469 Valuation allowance............................... (6,155) -- ----------- ----------- 9,560 5,469 =========== =========== Net deferred tax liability........................ $ -0- $ 4,536 =========== ===========
The provisions for income taxes consists of the following:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (AMOUNTS IN THOUSANDS) Current provision for income taxes............... $(2,464) $ 1,995 $ 1,383 Deferred provision for income taxes.............. (4,536) (335) 525 -------- ------- ------- $(7,000) $ 1,660 $ 1,908 ======== ======= =======
Deferred tax expense (benefit) results from differences in the basis of assets and liabilities between income tax and financial reporting purposes. The sources of these differences and the tax effect of each were as follows: 37 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 1994 --------- ------- ------- (AMOUNTS IN THOUSANDS) Excess of depreciation/amortization (book over tax).......................................... $ (348) $ (129) $ 95 Excess of pension cost (book over tax)......... 47 (145) (20) Bad debt, warranty cost and inventory reserves charged to expense on books, but not deductible until paid for tax purposes (book over tax)..................................... (3,031) (229) 191 Employee benefits accrued but not paid currently (book over tax)..................... 190 14 (112) Restructuring charge........................... (158) 8 103 Accrued loss on long term contracts............ (641) -- -- Excess of book over tax loss on sale of intangible and fixed assets................... (122) (37) (261) Utilization of tax loss carryforward and other......................................... (473) 183 529 --------- ------- ------- $(4,536) $(335) $ 525 ========= ======= =======
The Company's effective tax rate varies from the statutory federal income tax rate for the following reasons:
DECEMBER 31, ------------------------ 1996 1995 1994 -------- ------ ------ (AMOUNTS IN THOUSANDS) Tax expense (benefit), at statutory rate ........ $(14,015) $2,026 $1,474* Foreign sales corporation earnings............... -- (384) (174) Goodwill expense, not deductible for tax purposes........................................ 1,576 140 140 Other, net....................................... (357) 189 196 State and local taxes............................ (359) 338 257 Foreign taxes.................................... -- 13 15 General business credit.......................... -- (662) -- Valuation allowance.............................. 6,155 -- -- -------- ------ ------ Actual tax expense (benefit)..................... $ (7,000) $1,660 $1,908 ======== ====== ======
- -------- * Calculated from income (loss) before income tax excluding extraordinary item. L. COMMITMENTS AND CONTINGENCIES The Company leases equipment and office facilities under operating leases. These leases in some instances include renewal provisions at the option of the Company. Rent expense for the years ended December 31, 1996, 1995, and 1994 was approximately $865,000, 703,000, and $520,000, respectively. The following is a schedule by year of minimum rental payments due under non-cancelable leases with initial or remaining minimum lease terms in excess of one year as of December 31, 1996:
OPERATING ---------------------- (AMOUNTS IN THOUSANDS) Year ending December 31, 1997......................... $143 1998.................................................. -0- 1999.................................................. -0- 2000.................................................. -0- 2001 and thereafter................................... -0- ---- Total minimum lease payments........................ $143 ====
38 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, the Company had no major capital equipment leases and no outstanding capital expenditure purchase commitments. The Company is contingently liable for approximately $0.7 million at December 31, 1996, 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, its officers' and directors' liability insurance carrier and the plaintiff of a class action lawsuit negotiated a written settlement of the dispute which was approved by the court by order dated June 18, 1996. The settlement resulted in the dismissal of the litigation and the issuance to the class and the plaintiff's counsel of warrants to purchase Series A Common Stock of the Company (see Note P of Notes to the Consolidated Financial Statements). Also, 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 the Company, if named a defendant in such actions in the future, will be able to settle such claims in the future. In addition, the Company is subject to various claims, including product liability claims, which arise in the ordinary course of business, and is a party to various legal proceedings that constitute ordinary routine litigation incidental to the Company's business. A successful product liability claim brought against the Company in excess of its product liability coverage could have a material adverse effect upon the Company's business, operating results and financial condition. In management's opinion, the Company has adequate legal defense and/or insurance coverage regarding each of these actions and does not believe that such actions, either individually or in the aggregate, will materially affect the Company's operations or financial position. 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 ($9,500 in 1996 and $9,240 in 1995) and a discretionary matching contribution by the Company for non-union employees. In 1995 and 1994, the Company agreed to match 25% of non-union employee elective contributions up to 4% of employee 1995 and 1994 annual compensation. Company matching contributions were $-0- in 1996, $104,000 in 1995 and $106,000 in 1994. The Company also sponsors defined benefit pension plans covering its employees. The two plans provide for monthly benefits, normally at age 65, after completion of continuous service requirements. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Due to significant reductions of employees covered under the union plan, the union plan experienced substantial disbursements during 1996 for lump sum distributions upon participants termination of employment. The magnitude of these disbursements during 1996 has reduced the funded liability of the plan at December 31, 1996 to a level which required a special liquidity shortfall contribution to the plan as of January 15, 1997 of approximately $600,000. The Company has not made this special liquidity shortfall contribution which has, by Federal law, resulted in suspension of lump sum payments to plan participants and has subjected the Company to a 10% excise tax penalty on January 15, 1997 and further penalties if steps are not taken to remedy the shortfall. The assets of the pension plans are maintained in trusts and consist primarily of equity and fixed income securities. Pension expense was $1,183,000 in 1996, $607,000 in 1995, and $630,000 in 1994. 39 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Beginning January 1, 1989, the Company was required to recognize a liability in the amount of the Company's unfunded accumulated benefit obligation, with an equal amount to be recognized as either an intangible asset or a reduction of equity, net of applicable deferred income taxes. Based upon actuarial and plan asset information as of December 31, 1996, the Company has recorded a pension liability of $3.45 million and a corresponding intangible asset of $782,000. 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 1996 and 1995.
STATUS OF PLANS ----------------------- 1996 1995 ----------- ----------- PLANS WHERE PLANS WHERE BENEFITS BENEFITS EXCEED EXCEED ASSETS ASSETS ----------- ----------- (AMOUNTS IN THOUSANDS) Actuarial present value of benefit obligations: Vested........................................... $ 5,623 $ 6,425 Non-vested....................................... 744 505 ------- ------- Accumulated benefit obligation..................... $ 6,367 $ 6,930 ======= ======= Plan assets at fair value.......................... $ 2,915 $ 4,194 Projected benefit obligation....................... 7,937 7,933 ------- ------- Projected benefit obligation in excess of plan assets............................................ 5,022 3,739 Unrecognized prior service cost.................... 41 28 Unrecognized net gain (loss)....................... (3,693) (2,960) Unrecognized net asset (liability) at January 1, 1987.............................................. (301) (343) Adjustment required to recognize minimum liability......................................... 2,383 2,456 ------- ------- Pension liability recognized in balance sheet...... $ 3,452 $ 2,920 ======= =======
Net periodic pension cost was composed of the following elements:
DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- (AMOUNTS IN THOUSANDS) Service cost.................................... $ 605 $ 388 $490 Interest cost................................... 624 496 494 Prior service cost adjustment................... 90 -- -- Actual return on plan assets: Loss (gain)................................... (284) (720) 157 Deferred (loss) gain.......................... -- -- (611) Net amortization and deferral................... 148 443 100 -------- ------- ------- Net periodic pension cost..................... $ 1,183 $ 607 $ 630 ======== ======= ======= DECEMBER 31, -------------------------- 1996 1995 1994 -------- ------- ------- Major assumptions used: Discount rate................................. 7.46% 6.95% 8.60% Expected long-term rate of return on assets... 8.50% 8.50% 8.50% Rate of increase in compensation levels....... 0.00% 4.00% 4.00%
40 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has executive incentive plans which provide additional compensation for officers and key employees based upon income and attainment of other predetermined goals and objectives. Such incentives aggregated $10,000, $497,000, and $723,000 in 1996, 1995, and 1994, respectively. In addition to providing certain retirement benefits, the Company has insurance coverage available for certain health care and life insurance benefits for retired personnel on a fully reimbursable basis. Since the cost of these programs is paid for by retired employees, no expenses are recorded in accordance with guidelines in Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." N. RELATED PARTY TRANSACTIONS The Company and Xytec, a subsidiary of Stevens Industries, Inc. one of the principal shareholders of the Company, entered into an agreement during 1994 for Xytec to provide software and computer related services and equipment as a subcontractor on a major contract. During 1996, 1995 and 1994, the Company paid approximately $671,000, $784,000, and $287,000, respectively, to Xytec on this contract. Two company directors and officers are partners in a venture that leases office facilities to the Company. Amounts paid to the partnership as rent and maintenance were approximately $111,000 in 1996, 1995 and 1994, respectively. Through December 31, 1996, Paul I. Stevens, the Company's Chairman and Chief Executive Officer has loaned the Company $950,000 for its short-term cash requirements which is to be mandatorily repaid from proceeds of the Banque de France project. As of December 31, 1996, this amount has not been repaid. In January and February 1994, Stevens Industries, Inc. advanced an aggregate of $900,000 to Stevens Security Systems, S.A. in exchange for a Stevens Security Systems, S.A. 6% note due February 1995. These advances were repaid in full in February 1995. O. RESEARCH AND DEVELOPMENT, SALES TO MAJOR CUSTOMERS AND FOREIGN SALES For the years ended December 31, 1996, 1995 and 1994, the Company incurred research and development expenses (excluding customer funded projects) of approximately $624,000, $1,976,000, and $2,162,000, respectively. Net sales to customers outside of the United States in 1996, 1995 and 1994 were approximately $22,659,000, $36,479,000, and $14,957,000, respectively. In 1996, 1995 and 1994, no single customer accounted for more than 10% of total sales in one year. The Company has no foreign exchange contracts. P. STOCK TRANSACTIONS AND VOTING RIGHTS In June 1996, resolution of the Company's class action lawsuit, which had been in litigation for five years, resulted in a one-time $700,000, ($0.07) per share charge to second quarter operations. In this settlement, the Company paid no cash, but agreed to issue warrants valued at $700,000 to purchase the Company's Series A stock. The warrants are exercisable over a one-year period from October 31, 1996 and represent the right to purchase up to 737,619 shares of Series A stock from the Company at an exercise price of $2.672 per share. If exercised, the warrants would result in $1,970,918 of additional equity to the Company. In September 1994, the Company sold 300,000 shares of Series A common stock at $5.50 per share in a private placement. Net proceeds of $1,546,000 after related expenses of $104,000 were used to extinguish Senior 41 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Subordinated debt. The sale of stock and bank borrowings enabled the reduction of $2,500,000 of Senior Subordinated debt and reduced the interest rate on this indebtedness from 11.25% to 10.5%. The Series A and Series B stock differ only as to voting and conversion rights. As to matters other than the election of directors, the holders of Series A stock and Series B stock vote together as a class, with each holder of Series A stock having one-tenth of one vote for each share of Series A held and each holder of Series B stock having one vote for each share of Series B stock held. Holders of Series A stock, voting separately as a class, are entitled to elect 25% of the total membership of the board of directors. Holders of Series B stock, voting separately as a class, are entitled to elect the remaining directors. The shares of Series B stock are convertible, share-for-share, into shares of Series A stock at the election of the holder thereof at any time. Once a share of Series B stock is converted into a share of Series A stock, such share of Series A stock may not be converted into any other security. The Company's certificate of incorporation further provides that the Company may not engage in a merger or consolidation with any other corporation unless each holder of Series A stock and each holder of Series B stock receives identical consideration per share in the merger or consolidation. If a dividend other than a stock dividend is to be paid, it will be paid equally to holders of both series of common stock, share-for-share. If a stock dividend is to be paid to holders of common stock, it must be paid proportionately to the holders of both series of common stock either (a) in Series A stock to holders of both Series A and Series B stock or (b) in Series A stock to holders of Series A stock and in Series B stock to holders of Series B stock. In 1987, the Company adopted a stock option plan in which incentive and nonqualified stock options may be granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant for each incentive option and at not less than 85% of the fair market value at the date of the grant for each nonqualifed 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 two years follows:
SERIES A WEIGHTED AVERAGE STOCK OPTION EXERCISE PRICE ------------ ---------------- Stock Option Plan: Balance, January 1, 1995..................... 612,500 $5.50 Granted...................................... 257,000 7.13 Exercised.................................... (65,600) 4.56 Cancelled.................................... (41,000) 7.13 -------- ----- Balance, December 31, 1995................... 762,900 $5.72 Cancelled.................................... (210,000) 6.00 -------- ----- Balance, December 31, 1996................... 552,900 $5.63 ======== =====
42 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SERIES A WEIGHTED AVERAGE STOCK OPTION EXERCISE PRICE ------------ ---------------- Directors and Others: Balance, January 1, 1995..................... 109,500 $ 5.65 Granted...................................... 35,000 7.19 Exercised.................................... (20,000) 5.82 Cancelled.................................... (15,000) 15.00 ------- ------ Balance, December 31, 1995................... 109,500 $ 5.98 Granted...................................... 25,000 2.62 Cancelled.................................... (20,000) 6.51 ------- ------ Balance, December 31, 1996................... 114,500 $ 5.15 ======= ======
Stock Options oustanding as of December 31, 1996 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF YEARS TO EXERCISE EXERCISE EXERCISE PRICES NUMBER EXPIRATION PRICE NUMBER PRICE --------------- ------- ---------- -------- ---------- ---------- $2.62-$7.19................ 114,500 3.35 $5.15 114,500 $ 5.15 $4.56-$7.13................ 552,900 2.51 $5.63 450,233 $ 5.63 ------- ---------- $2.62-$7.19................ 704,500 564,733 ======= ==========
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 $0.5 million in 1995 and $0.01 million in 1996. Earnings per share would have been reduced by $0.06 per share in 1995 and $0.00 in 1996. Weighted average grant-date fair value of options in 1996 ($0.93) and 1995 ($2.53) were calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: Expected volatility.................. 89.7% Expected dividend yield.............. -0- Expected option term................. 5 years Risk-free rate of return............. 4.8%
43 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Q. QUARTERLY RESULTS (UNAUDITED) The following table summarizes results for each of the four quarters for the years ended December 31, 1996 and 1995. 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) 1996: Net sales................. $22,613 $18,732 $12,770 $ 11,544 Gross profit (loss)....... $ 3,819 $ 2,052 $(1,206) $(13,249) Net income (loss)......... $(1,085) $(3,741) $(4,067) $(25,327) Net income (loss) per share.................... $ (0.11) $ (0.40) $ (0.43) $ (2.68) 1995: Net sales................. $33,042 $37,474 $33,962 $ 34,703 Gross profit.............. $ 8,149 $ 8,567 $ 9,538 $ 4,620 Net income (loss)......... $ 1,448 $ 1,552 $ 1,781 $ (482) Net income (loss) per share.................... $ 0.15 $ 0.16 $ 0.19 $ (0.05)
The Company attributes the operating and net loss for the fourth quarter of 1996 to (1) a continuing decline in orders ($25.1 million versus $45.5 million for the last six months of 1996 and 1995, respectively); (2) greater than expected manufacturing costs, including unexpected warranty costs and development costs associated with some of the Company's new products; (3) the loss on the sale of the assets of the Bernal Division; (4) provision for bad debt expense of $4 million; and (5) unabsorbed overhead costs due to the low shipment volume in the quarter. R. FINANCIAL INSTRUMENTS, MARKET AND CREDIT RISK Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosure about Fair Value of Financial Instruments", is a part of a continuing process by the FASB to improve information on financial instruments. The following methods and assumptions were used by the Company in estimating its fair value 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. Performance bond deposits The fair values for performance bond deposits are estimated using discounted cash flow analyses based upon U.S. Treasury notes due in 1997. Long-Term Debt The carrying amounts of the Company's borrowings under its revolving credit agreements approximate fair value. The fair values of the Company's other long-term debt either approximate fair value or are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 44 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Letters of Credit The Company utilizes letters of credit to back certain financing instruments and insurance policies. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place. Concentrations of Credit Risk Financial instruments which potentially subject the Company to significant concentrations of credit risk consist primarily of 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, 1996, the Company had no significant concentrations of credit risk. The carrying amounts and fair values of the Company's financial instruments at December 31, 1996 are as follows:
CARRYING AMOUNT FAIR VALUE --------------- ---------- (AMOUNTS IN THOUSANDS) Cash and temporary investments.................... $3,338 $3,338 Performance bond deposits......................... 1,504 1,490 Long-term debt.................................... 113 114 Off-Balance Sheet Financial Instruments: Letters of credit............................... -0- 2,664
45 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 1997 (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 1996 fiscal year. 46 (c) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 Second Amended and Restated Certificate of Incorporation of the Company.(1) 3.2 Bylaws of the Company, as amended.(2) 4.1 Specimen of Series A Common Stock Certificate.(3) 4.2 Specimen of Series B Common Stock Certificate.(4) 10.1 Form of Indemnity Agreement.(2) 10.2 Second Amended and Restated Stock Option Plan of the Company.(5) 10.3 Description of Stevens Graphics Incentive Plan.(3) 10.4 Description of Hamilton Life Insurance Payroll Deduction Plan.(2) 10.5 Labor Agreement, dated July 2, 1994, between Hamilton-Stevens Group, Inc. and the International Union United Automobile, Aerospace and Agricultural Implement Workers of America.(9) 10.6 Chem-Dyne Site Trust Fund Agreement, dated September 23, 1985.(2) 10.7 Lease Agreement between Space Unlimited Joint Venture #3 and the Company, dated September 11, 1981 and related lease addendum.(2) 10.8 First Extension Agreement dated January 19, 1987 between the Company and Space Unlimited Joint Venture #3.(3) 10.9 First Amended Joint Venture Agreement of Space Unlimited Joint Venture #3, dated June 26, 1980 and related Assignment of Joint Interest and Loan Modification, Assumption Agreement and Release.(2) 10.10 Second Extension Agreement between the Company and Space Unlimited Joint Venture #3.(6) 10.11 Stevens Graphics Corporation Pension Plan and Trust.(6) 10.12 Stevens Graphics Corporation Profit Sharing and 401(k) Savings Retirement Plan.(6) 10.13 Severance Agreement among the Company, Post and Robert F. Hopkins.(6) 10.14 Restated and Amended Subordinated Debt Agreement dated March 27, 1992, together with forms of Subordinated Notes and Subordinated Guaranties.(6) 10.15 Amended and Restated Intercreditor and Subordination Agreement dated April 26, 1994.(11) 10.16 Contract of Sale between the Company and Banque de France.(6) 10.17 Fourth Amendment to Amended and Restated Senior Subordinated Note Agreement dated April 29, 1994.(11) 10.18 Form of Stock Purchase Agreement dated as of September 16, 1994 between the Company and certain investors.(12) 10.19 Credit Agreement, dated May 16, 1995, between the Company and Bank of America, Texas, N.A.(13) 10.20 First Amendment to Amended and Restated Subordination and Intercreditor Agreement dated August 1995. (14) 10.21 Fifth Amendment to Amended and Restated Senior Subordinated Note Agreement dated August 1995.(14) 10.22 First Amendment to Credit Agreement effective August 15, 1995 between the Company and Bank of America Texas, N.A.(14) 10.23 Second Amended and Restated Master Note: Reference Rate Related dated August 15, 1995, executed by the Company and payable to the order of Bank of America Texas, N.A. in the original principal amount of $27 million.(14)
47
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 10.24 Agreement and Fourth Amendment to Credit Agreement, dated December 31, 1996 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America. (*) 10.25 First Amendment to Agreement and Fourth Amendment to Credit Agreement, dated February 28, 1997 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America. (*) 10.26 Second Amendment to Agreement and Fourth Amendment to Credit Agreement, dated March 17, 1997 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America. (*) 11.1 Computation of Net Income per Common Share. (*) 21.1 Subsidiaries of the Company. (*) 23.1 Consent of Deloitte & Touche LLP. (*) 24.1 Power of Attorney. (*) 27.1 Financial Data Schedule. (*)
- -------- * Filed herewith. (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-15279) and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-24486) and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's report on Form 8-A filed August 19, 1988 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-32089) and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Report on Form 10-Q for the period ended September 30, 1994 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Current Report on Form 8- K filed August 12, 1993 and incorporated herein by reference. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1994 and incorporated herein by reference. (12) Previously filed as an exhibit to the Company's Registration Statement on Form S-3 (No. 33-84246) and incorporated herein by reference. (13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995 and incorporated herein by reference. (14) Previously filed as an exhibit to the Company's Annual Report on Form 10- K for the year ended December 31, 1995 and incorporated herein by reference. 48 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. /s/ Paul I. Stevens By: _________________________________ CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER, AND ACTING CHIEF FINANCIAL OFFICER Date: March 24, 1997 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 March 24, 1997 - ------------------------------------- Board and Chief PAUL I. STEVENS Executive Officer /s/ Richard I. Stevens President, Chief March 24, 1997 - ------------------------------------- Operating Officer RICHARD I. STEVENS and Director /s/ Constance I. Stevens Vice President, March 24, 1997 - ------------------------------------- Assistant Secretary CONSTANCE I. STEVENS and Director /s/ Robert H. Brown, Jr. Director March 24, 1997 - ------------------------------------- ROBERT H. BROWN, JR. /s/ James D. Cavanaugh Director March 24, 1997 - ------------------------------------- JAMES D. CAVANAUGH /s/ Michel A. Destresse Director March 24, 1997 - ------------------------------------- MICHEL A. DESTRESSE /s/ Edgar H. Schollmaier Director March 24, 1997 - ------------------------------------- EDGAR H. SCHOLLMAIER /s/ John W. Stodder Director March 24, 1997 - ------------------------------------- JOHN W. STODDER 49 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, 1996 Allowance for doubtful accounts............. $655,000 $4,043,000 $ 181,000 $292,000(1) $4,225,000 Year Ended December 31, 1995 Allowance for doubtful accounts............. $450,000 $ 256,000 $ 105,000(2) $156,000(1) $ 655,000 Year Ended December 31, 1994 Allowance for doubtful accounts............. $625,000 $ 11,000 $(173,000) $ 13,000(1) $ 450,000
- -------- (1) Write off of uncollectible accounts. (2) Reclassification of accrued interest on customer account. 50 INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGES ------- ----------------------------- ------------ 3.1 Second Amended and Restated Certificate of Incorporation of the Company.(1)...................................... 3.2 Bylaws of the Company, as amended.(2).................... 4.1 Specimen of Series A Common Stock Certificate.(3)........ 4.2 Specimen of Series B Common Stock Certificate.(4)........ 10.1 Form of Indemnity Agreement.(2).......................... 10.2 Second Amended and Restated Stock Option Plan of the Company.(5)............................................. 10.3 Description of Stevens Graphics Incentive Plan.(3)....... 10.4 Description of Hamilton Life Insurance Payroll Deduction Plan.(2)................................................ 10.5 Labor Agreement, dated July 2, 1994, between Hamilton- Stevens Group, Inc. and the International Union United Automobile, Aerospace and Agricultural Implement Workers of America.(9).......................................... 10.6 Chem-Dyne Site Trust Fund Agreement, dated September 23, 1985.(2)................................................ 10.7 Lease Agreement between Space Unlimited Joint Venture #3 and the Company, dated September 11, 1981 and related lease addendum.(2)...................................... 10.8 First Extension Agreement dated January 19, 1987 between the Company and Space Unlimited Joint Venture #3.(3).... 10.9 First Amended Joint Venture Agreement of Space Unlimited Joint Venture #3, dated June 26, 1980 and related Assignment of Joint Interest and Loan Modification, Assumption Agreement and Release.(2).................... 10.10 Second Extension Agreement between the Company and Space Unlimited Joint Venture #3.(6).......................... 10.11 Stevens Graphics Corporation Pension Plan and Trust.(6).. 10.12 Stevens Graphics Corporation Profit Sharing and 401(k) Savings Retirement Plan.(6)............................. 10.13 Severance Agreement among the Company, Post and Robert F. Hopkins.(6)............................................. 10.14 Restated and Amended Subordinated Debt Agreement dated March 27, 1992, together with forms of Subordinated Notes and Subordinated Guaranties.(6)................... 10.15 Amended and Restated Intercreditor and Subordination Agreement dated April 26, 1994.(11)..................... 10.16 Contract of Sale between the Company and Banque de France.(6).............................................. 10.17 Fourth Amendment to Amended and Restated Senior Subordinated Note Agreement dated April 29, 1994.(11)... 10.18 Form of Stock Purchase Agreement dated as of September 16, 1994 between the Company and certain investors.(12).......................................... 10.19 Credit Agreement, dated May 16, 1995, between the Company and Bank of America, Texas, N.A.(13).................... 10.20 First Amendment to Amended and Restated Subordination and Intercreditor Agreement dated August 1995.(14).......... 10.21 Fifth Amendment to Amended and Restated Senior Subordinated Note Agreement dated August 1995.(14)......
51
SEQUENTIALLY NUMBERED EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGES ------- ----------------------------- ------------ 10.22 First Amendment to Credit Agreement effective August 15, 1995 between the Company and Bank of America Texas, N.A.(14)................................................ 10.23 Second Amended and Restated Master Note: Reference Rate Related dated August 15, 1995, executed by the Company and payable to the order of Bank of America Texas, N.A. in the original principal amount of $27 million.(14).... 10.24 Agreement and Fourth Amendment to Credit Agreement, dated December 31, 1996 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America.(*)............ 10.25 First Amendment to Agreement and Fourth Amendment to Credit Agreement, dated February 28, 1997 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America.(*)............................................. 10.26 Second Amendment to Agreement and Fourth Amendment to Credit Agreement, dated March 17, 1997 by and among the Company, PMC Liquidation, Inc., Printing and Packaging Equipment Finance Corporation, and Bank of America.(*).. 11.1 Computation of Net Income per Common Share.(*)........... 21.1 Subsidiaries of the Company(*)........................... 23.1 Consent of Deloitte & Touche LLP.(*)..................... 24.1 Power of Attorney.(*).................................... 27.1 Financial Data Schedule.(*)..............................
- -------- * Filed herewith. (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-15279) and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-24486) and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's report on Form 8-A filed August 19, 1988 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994 and incorporated herein by reference. (6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-32089) and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993 and incorporated herein by reference. (9) Previously filed as an exhibit to the Company's Report on Form 10-Q for the period ended September 30, 1994 and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Current Report on Form 8-K filed August 12, 1993 and incorporated herein by reference. (11) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1994 and incorporated herein by reference. (12) Previously filed as an exhibit to the Company's Registration Statement on Form S-3 (No. 33-84246) and incorporated herein by reference. (13) Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1995 and incorporated herein by reference. (14) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 52 EX-10.24 2 AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.24 AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT P A R T I E S: This Agreement and Fourth Amendment to Credit Agreement (this "Agreement") --------- is entered into effective as of the 31st day of December, 1996, by and among STEVENS INTERNATIONAL, INC. (the "Borrower"), PMC LIQUIDATION, INC. and PRINTING -------- AND PACKAGING EQUIPMENT FINANCE CORPORATION (individually a "Guarantor" and --------- together, the "Guarantors"), and BANK OF AMERICA TEXAS, N.A. (the "Bank"). ---------- ---- R E F E R E N C E S: Reference is made to the following: a. Credit Agreement (as amended, the "Credit Agreement") dated as of ---------------- May 16, 1995 by and between Bank and Borrower, as amended by that certain- First Amendment to Credit Agreement entered into effective as of August 15, 1995, by and between Bank and Borrower, as further amended by that certain Second Amendment to Credit Agreement entered into effective as of December 29, 1995, by and between Bank and Borrower, and as further amended by that certain Third Amendment to Credit Agreement entered into effective as of May 13, 1996; b. Second Amended and Restated Master Note: Reference Rate Related (the "Note") dated August 15, 1995, in the principal amount of ---- $27,000,000.00 made by Borrower and payable to Bank, as heretofore amended and modified, which Note was in renewal and extension of that Amended and Restated Master Note: Reference Rate Related, dated May 16, 1995 in the principal amount of $22,000,000.00, and that Revolving Credit Note dated April 26, 1994, in the original principal sum of $20,000,000.00, executed by Borrower, payable to the order of Bank One, Milwaukee, National Association; c. All other documents executed in connection with or as security for the Credit Agreement and the Note (together, and including any and all further renewals, extensions, amendments and modifications thereto, the "Loan Documents"). -------------- Capitalized terms used in this Agreement and not defined in this Agreement shall have the meanings given such terms in the Credit Agreement. R E C I T A L S: a. Defaults (the "Existing Defaults") have occurred under the Credit ----------------- Agreement and the Loan Documents by reason of the following acts or omissions: 1. Violation of Section 11.6 based upon judgments in an aggregate amount not to exceed $600,000.00. 2. Violation of Section 11.8 of the Credit Agreement based upon default under the Subordinated Debt. 3. Violation of Section 11.9 of the Credit Agreement based upon non-compliance with Section 8.3 (Other Debts) (loan from Paul Stevens). 4. Violation of Section 11.1 of the Credit Agreement based upon non-compliance with Section 7.13 (ERISA Plans). 5. Violation of Section 11.12 of the Credit Agreement, based upon non-compliance with Section 9.3 for periods ending June 30, 1996, September 30, 1996 and December 31, 1996 (Debt Coverage Ratio). 6. Violation of Section 11.13 of the Credit Agreement based upon non-compliance with Section 7.7 (Lawsuits), in an aggregate amount sought not to exceed $1,900,000.00, Section 7.10 (Other Obligations) and Section 8.20 (Payment of Debt). b. As of the date hereof, the Existing Defaults remain uncured. c. Borrower has requested that Bank forbear temporarily from accelerating the maturity of principal of the Note and that Bank forbear temporarily from exercising Bank's rights and remedies under the Loan Documents. d. Borrower has requested Bank's forbearance, as described above, in order to permit Borrower the opportunity to consummate the sale of its Bernal Division to G. R. Investment Group, or assigns. e. Bank is not willing to waive the Existing Defaults but has agreed to forebear, as requested above by Borrower, subject to the terms and conditions of this Agreement including, without limitation, the amendments to the Credit Agreement set forth herein; provided, however, Bank has exercised its rights under Section 2.2(c) of the Intercreditor Agreement and initiated the initial standstill period specified therein. A G R E E M E N T S: Now, therefore, in consideration of the premises stated above and other good and valuable consideration, the receipt and adequacy of which are acknowledged and confessed hereby, the parties agree as follows: 1. Forbearance. The Existing Defaults are not waived and shall continue ----------- to exist; however, subject to the terms and conditions set forth in this Agreement and expressly conditioned upon satisfaction and fulfillment of each of the conditions precedent set forth in Section 2 below, Bank agrees to forbear --------- from accelerating the maturity of and demanding immediate payment of the principal of the Note and other than exercising its rights under the Intercreditor Agreement to forbear from exercising Bank's rights under the Loan Documents to the extent that such rights arise solely as a result of the Existing Defaults for a period beginning on the date of this Agreement and ending on the Expiration Date (as defined below). 2. Conditions Precedent. The following are conditions precedent to Bank's -------------------- agreement as set forth in Section 1, above: --------- a. Borrower and the Guarantors shall have executed and delivered this Agreement to Bank not later than 5:00 p.m., January 20, 1997; b. Borrower shall have delivered to Bank a payment of principal in an amount of at least $2,000,000; c. Borrower shall deliver to Bank appropriate officer certificates in connection with the execution and delivery of this Agreement; d. Borrower shall not have breached any of the terms, conditions, representations, warranties, or agreements of Borrower under this Agreement; and e. No default under the Loan Agreement other than the Existing Defaults shall have occurred and be continuing. If any of the terms of this Section 2 are not satisfied and fulfilled in a --------- timely manner, then the forbearance referred to in Section 1 is void ab initio --------- --------- and shall be of no force or effect; and the parties shall be relegated to their respective positions they occupied prior to the execution of this Agreement. 3. Amendments to Credit Agreement. The Credit Agreement is hereby amended ------------------------------ as follows: a. Additional Definitions. Article 1 of the Credit Agreement is hereby ----------------------- amended by the addition of the following definitions: "Account" shall have the meaning stated in the Texas Uniform Commercial ------- Code. "Account Debtor" means a person who is obligated to Borrower under an -------------- Account of Borrower. "Bernal Division" means that certain division of Borrower which was --------------- acquired pursuant to Borrower's merger with Zerand-Bernal Group, Inc., a Delaware corporation, on December 21, 1995. "Bernal Sale Date" means that date on which Borrower sells its Bernal ---------------- Division and the Bank releases its liens upon the associated Bernal Division assets. "Borrowing Base Advance Cap" means at any time an amount equal to the -------------------------- lesser of: (i) $27,000,000.00; or (ii) the sum of: (A) 80% of the amount of Eligible Accounts; plus (B) the lesser of (A) $4,500,000.00; or (B) 25% of the amount of Eligible Inventory; plus (C) $19,000,000. "Borrowing Base Certificate" means a certificate detailing all Eligible -------------------------- Accounts and Eligible Inventory which has been or is being used in determining availability for an advance or letter of credit issuance under the Revolving Line of Credit, such report to be in form acceptable to Bank. "Collection Account" means account no. 2605900174 maintained with Bank into ------------------ which collections from Borrower's Accounts will be deposited pursuant to Section 5.11 of this Credit Agreement. "Concentration Limit" means, for each Account Debtor, at the time of any ------------------- determination thereof, an amount that is equal to 10% of all Borrower's Accounts existing at such time; provided, however, that the Concentration Limit for each of Riverwood International, James River Corp. and Universal Packaging Corp. shall be an amount that is equal to 20% of Borrower's aggregate Accounts existing at such time. "Eligible Accounts" means, at the time of any determination thereof, each ----------------- of Borrower's Accounts as to which the following requirements have been fulfilled to the satisfaction of Bank: (a) Such Account is a valid, legally enforceable obligation of the person who is obligated under such Account for goods sold and actually delivered to, and accepted by, such Account Debtor and to which Borrower has relinquished all possession and control, or for services actually performed by Borrower, each in the ordinary course of Borrower's business; (b) No significant or material conditions remain to be satisfied by Borrower before Borrower is entitled to receive payment on the Account and such Account does not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the Account Debtor may be conditional or contingent; (c) Such Account shall have excluded therefrom any portion that is subject to any dispute, offset, counterclaim or other claim or defense on the part of the Account Debtor or to any claim on the part of the Account Debtor denying liability under such Account, and to the extent that any credit balance exists in favor of such Account Debtor, the amount of such credit balance shall be deducted from such Account; (d) Such Account has been invoiced to the Account Debtor by Borrower as reflected by an invoice in the amount of the Account; (e) Borrower has lawful and absolute title to such Account, and such Account is subject to a fully perfected first priority security interest in favor of Bank pursuant to this Credit Agreement, prior to the rights of, and enforceable as such against, any other person, and such Account is not subject to any security interest or lien in favor of any person other than Permitted Liens; (f) No Account Debtor in respect of such Account is an employee, affiliate, parent or subsidiary of Borrower, or an entity which has common officers or directors with Borrower; (g) No Account Debtor with respect to such Account is the United States of America, or any political subdivision, department, agency or instrumentality thereof unless Bank approves such Account in writing and the Federal Assignment of Claims Act of 1940, as amended, has been complied with in a manner satisfactory to Bank; (h) No Account Debtor with respect to such Account is a foreign government or is a person or entity located in a foreign jurisdiction or organized under the laws of a foreign government, unless the Account is supported by a letter of credit satisfactory to Bank in its sole discretion and issued by a bank satisfactory to Bank in its sole discretion; (i) No Account Debtor with respect to such Account is any state, county, city, town or municipality or any political subdivision, department, agency or instrumentality thereof; (j) Such Account shall have excluded therefrom an amount equal to all amounts owed to such Account Debtor by Borrower for goods purchased or services performed for Borrower; to the extent the amount of the Account exceeds the amounts owed such Account Debtor by Borrower, such excess shall not be excluded; (k) Such Account is not in default. An Account shall be considered to be in default for purposes of this definition if any of the following occur: (i) Such Account has been due and payable for 90 days or more from the date of invoice; provided, however, that if the Account arises from a final billing for a purchase of machinery or equipment, then such Account shall be eligible for up to 180 days from the date of invoice; or (ii) the Account Debtor in respect of such Account (A) has suspended business, made a general assignment for the benefit of creditors or is failing to pay its debts generally as they come due; or (B) has filed, or had filed against it, a petition under any bankruptcy law or any other law or laws for the relief of debtors; (l) No Account Debtor in respect of such Account is in default (as defined in subsection (k) above) on 20% or more of its Accounts with Borrower; (m) Such Account is not evidenced by any chattel paper, promissory note or other instrument; (n) Such Account shall have excluded therefrom the amount of such Account in excess of the Account Debtor's Concentration Limit; and (o) Such Account is otherwise acceptable to Bank in its sole reasonable discretion. "Eligible Inventory" means, at the time of determination thereof, all of ------------------ Borrower's inventory, valued at the lowest of (a) Borrower's cost, (b) current market (as determined by Borrower), or (c) Bank's independent determination of the resale value of such inventory in such quantities and on such terms as Bank deems appropriate in its sole discretion, and in all instances as to which the following requirements have been fulfilled to the reasonable satisfaction of Bank: (i) The inventory is owned by Borrower free and clear of all liens in favor of third parties except for Permitted Liens; (ii) The inventory is permanently located at locations which Borrower has disclosed to Bank and which are acceptable to Bank in its sole reasonable discretion; provided, however, that inventory which is in transit in the U.S. shall be eligible if it is covered by a commercial letter of credit issued by Bank or a financial institution acceptable to Bank and the seller of such inventory is required to present shipping or title documents to Bank as a condition of obtaining payment; (iii) If the inventory is covered by a negotiable document of title (such as a warehouse receipt), such negotiable document has been delivered to Bank; (iv) The inventory is held for sale or use in the ordinary course of Borrower's business; (v) The inventory is of good and merchantable quality, and inventory which is obsolete, unsalable, damaged, defective, discontinued or slow moving or which has been returned by the buyer shall be excluded; (vi) Inventory will not include finished goods, graphite, foreign inventory, work-in-progress, demo's, cut stock or packaging and shipping materials, but may include large, single, easily identified component parts which are finished goods and are resellable or returnable at a nominal restocking charge provided that such component parts have not been included in any progress billings; (vii) Inventory arising from trade-ins may be included in an amount no greater than the discount allowance reflected on the invoice, for a period of not more than 120 days from the date of invoice; (viii) The inventory is not placed on consignment; and (ix) The inventory is otherwise acceptable to Bank in its sole discretion. "Revolving Line of Credit" means the committed line of credit for ------------------------ advances in an amount outstanding at any time not to exceed $27,000,000.00. "Revolving Line of Credit Rate" means a floating rate per annum equal ----------------------------- to the Reference Rate plus 1.75% b. The Loans. Article 2 of the Credit Agreement, Line of Credit and --------- ------------------ Letter of Credit Facility Amount and Terms, is hereby deleted in its entirety - ------------------------------------------ and replaced with the following: 2. LOANS AND TERMS. -------------------- 2.1 The Loans. The Loans are initially made to refinance and --------- restructure amounts outstanding under the Credit Agreement as of the date of this Amendment and are made upon the terms and conditions of the Credit Agreement and the following terms and conditions. From and after December 31, 1996 the Offshore Rate will no longer be available to Borrower and the Loans shall bear interest as specified below. 2.2 Revolving Line of Credit. ------------------------ (a) The term "Expiration Date" is amended to mean the earliest to --------------- occur of (i) the Bernal Sale Date (as defined below) or (ii) the date any holder of any portion of the Subordinated Debt accelerates the maturity of any principal of the Subordinated Debt or otherwise pursues any rights or remedies it may have pursuant to the documents evidencing the Subordinated Debt, or (iii) the date any Default or Potential Default other than the Existing Defaults occurs under the Loan Documents, or (iv) 5:00 p.m., February 28, 1997. In the event any of the following occur such event shall be a Default, not an Existing Default: (i) the aggregate unpaid balance of all installment payments required under Internal Revenue Code (S) 412(m), including interest, or any other payments required under IRC (S) 412 or ERISA (S) 302, including interest, under each of the Borrower's defined benefit pension plans at any time exceeds $900,000.00, (ii) the aggregate amount of judgments against the Borrower at any time exceeds $600,000.00 or any action shall be commenced to enforce any judgment by execution, attachment, garnishment, levy or other process, or (iii) the aggregate amount of damages sought in all lawsuits against the Borrower at any time exceeds $1,900,000.00. The Loans shall be evidenced by the Note, and the Loans shall be considered for all purposes to be debt and obligations created and evidenced by the Credit Agreement. During the availability period described below, the Bank will provide the Revolving Line of Credit to the Borrower. The Borrower agrees that it will use the proceeds of each advance under the Revolving Line of Credit only for working capital and other purposes permitted by Section 9.4 of the Credit Agreement. The amount of the Revolving Line of Credit (the "Commitment") is an amount of up to ---------- $27,000,000.00; provided, however, at no time shall the principal amount of the Loans plus the face amount of all outstanding letters of credit exceed the Borrowing Base Advance Cap. (b) This is a revolving line of credit for advances with a within line facility for letters of credit. During the availability period, Borrower may repay principal amounts and re-borrow them. (c) The Borrower agrees not to permit the outstanding principal balance of the Revolving Line of Credit plus the outstanding amounts of all letters of credit, including amounts drawn on letters of credit and not yet reimbursed, to exceed the Borrowing Base Advance Cap. If such amounts outstanding exceed the Borrowing Base Advance Cap, the Borrower will immediately pay the excess to the Bank upon the Bank's demand. The Bank may apply payments received from the Borrower under this Paragraph to the obligations of the Borrower to the Bank in the order and the manner as the Bank, in its discretion, may determine. 2.3 Availability Period. The Revolving Line of Credit is available ------------------- between the date of this Amendment and the Expiration Date unless a Potential Event of Default or an Event of Default, other than the Existing Defaults, has occurred and is continuing. If a material Potential Event of Default (as determined in the Bank's sole discretion) or an Event of Default occurs, other than the Existing Defaults, then the Bank may terminate the availability period and immediately cease making advances hereunder. If an Event of Default occurs, other than the Existing Defaults, then in addition to the Bank's other remedies, the Bank may require the Borrower to repay any amounts outstanding under the Revolving Line of Credit immediately. 2.4 Revolving Line of Credit Interest Rate. Each advance under the -------------------------------------- Revolving Line of Credit shall bear interest on the outstanding principal amount thereof from the later to occur of December 31, 1996 or the date of such advance at the lesser of (a) the Maximum Rate, or (b) the Revolving Line of Credit Rate. Notwithstanding the foregoing, if at any time the Revolving Line of Credit Rate shall exceed the Maximum Rate and thereafter the Revolving Line of Credit Rate shall become less than the Maximum Rate, the rate of interest payable shall be the Maximum Rate until the Bank shall have received the amount of interest it otherwise would have received if the interest payable had not been limited by the Maximum Rate during the period of time the Revolving Line of Credit Rate exceeded the Maximum Rate. 2.5 Conditions to Each Advance Under Revolving Line of Credit. Before --------------------------------------------------------- each extension of credit under the Revolving Line of Credit, including the first advance made after December 31, 1996, Borrower will deliver the following to Bank: (a) A Borrowing Base and Compliance Certificate, in form and detail satisfactory to the Bank; (b) If requested by Bank, copies of the invoices or the record of invoices from Borrower's sales journal for each Eligible Account and a listing of the names and address of each Account Debtor obligated on such Eligible Accounts; and (c) If requested by Bank, copies of the delivery receipts, purchase orders, shipping instructions, bills of lading or other documentation pertaining to such Eligible Accounts. 2.6 Repayment Terms of Revolving Line of Credit. ------------------------------------------ (a) Except for advances made after the Expiration Date pursuant to Letters of Credit which expire after the Expiration Date, Borrower will repay in full all principal and any unpaid interest and other charges outstanding under the Revolving Line of Credit no later than the Expiration Date, Borrower will pay the amount of each advance made after the Expiration Date pursuant to any Letter of Credit that expires after the Expiration Date, together with interest thereon at the Revolving Line of Credit Rate, within 60 days after the Bank makes such advance. 2.7 Letters of Credit. The Revolving Line of Credit may be used for ----------------- financing standby letters of credit with a maximum maturity of 12 months unless otherwise agreed to by Bank in its sole discretion on a case-by-case basis; provided, however no letters of credit may have terms that extend beyond the Expiration Date unless otherwise agreed to by Bank in its sole discretion on a case-by-case basis. The Borrower agrees: (a) any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under the Revolving Line of Credit, which amount will bear interest and be due as described elsewhere in this Agreement; (b) the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content reasonably satisfactory to the Bank; (c) to sign the Bank's form Application and Agreement for Standby Letter of Credit; (d) to pay the Bank's standard amendment and negotiation fees, as applicable, and the issuance fees set forth in Section 3.1 to the Credit Agreement; and (e) to allow the Bank to automatically charge the Operating Account for applicable fees, discounts, and other charges. 2.8 Late Payments. In addition to the interest payments provided for ------------- above, any amount which is not paid when due under this Agreement (including payments of interest) shall bear interest as provided in Section 5.8 of the Credit Agreement. c. Fees and Expenses. Article 3 of the Credit Agreement, Fees and ----------------- -------- Expenses, is hereby amended by the addition of the following provisions: - -------- 3.5 Advance Fees. Subject to the provisions of Section 12.14 of the ------------ Credit Agreement, Borrower agrees to pay an advance fee in the amount of $50.00 at the time of each advance under the Revolving Line of Credit. 3.6 Fee. Borrower agrees to pay Bank on the date of this Agreement, --- a forbearance fee in the amount of $22,500.00. d. Disbursements, Payments and Costs. Article 5 of the Credit Agreement, --------------------------------- Disbursements, Payments and Costs, is hereby amended by the addition of the - --------------------------------- following provision: 5.11 Payments to Collection Account. Borrower shall notify all ------------------------------ Account Debtors to make all payments under its Accounts to the Collection Account, and shall provide Bank with reasonable evidence of such notification. In the event that any Account Debtor does make any payment directly to Borrower, Borrower shall promptly deposit such amounts into the Collection Account. Borrower and Bank each acknowledge and agree that the Collection Account is under the exclusive dominion and control of Bank. Withdrawals from the Collection Account by Borrower shall not be permitted. Bank may from day to day apply the entire balance of the Collection Account to the outstanding principal balance of the Revolving Line of Credit and transfer any remaining amounts on deposit into the Operating Account; however, Bank has absolutely no duty to make any such transfer and at any time may refuse to transfer any funds until all obligations of Borrower under this Credit Agreement have been satisfied. Any checks deposited into the Collection Account which are returned unpaid will be charged against the Operating Account. e. Subsections 8.2(d)-(f) of the Credit Agreement are hereby deleted in their entirety and replaced with the following: (d) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, statements showing an aging and reconciliation of the Borrower's receivables as of the end of the preceding month. (e) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a statement showing an aging of accounts payable as of the end of the preceding month. (f) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, an inventory listing and segment backlog schedules, by company as of the end of the preceding month; the listing must include a description of the inventory, its location and cost, and such other information as the Bank may reasonably require. f. Section 8.2 of the Credit Agreement, Financial Information, is --------------------- hereby amended by the addition of the following subsections: (j) Prior to the beginning of each fiscal quarter of Borrower, Borrower's quarterly operating projections for such fiscal quarter, in form, substance and detail reasonably satisfactory to the Bank. (k) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a statement showing a listing of all foreign Accounts and all Accounts not secured by letters of credit as of the end of the preceding month. (l) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a list of all deposits by Borrower's customers which are held by Borrower as of the end of the preceding month. (m) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a report showing a listing of Borrower's contract receivables including material terms and the expected payment due dates as of the end of the preceding month. (n) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a report classifying Borrower's inventory balances, including a reconciliation of Borrower's books and records with applicable tax classifications and a list of Borrower's inventory which is currently located in any foreign country as of the end of the preceding month. (o) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a list of any loaner equipment being used by Borrower as of the end of the preceding month. (p) On February 14, 1997, and three days after the Bernal Sale Date, a percentage of completion balance sheet and footnotes report as of the end of the preceding month. (q) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a list all unbilled Accounts together with the expected delivery date for the goods to be delivered in connection with such Account as of the end of the preceding month. (r) On January 30, 1997, February 20, 1997 and on the Bernal Sale Date, a Borrower prepared and reasonably detailed balance sheet, profit and loss statement and cash flow statement for the previous month. (s) On Tuesday of each week, a weekly consolidated cash forecast for the week of delivery. 4. Representations and Warranties. Borrower and each Guarantor hereby ------------------------------ represent and warrant to Bank as follows: a. Borrower and each Guarantor has the power and authority to execute and deliver this Agreement and each of the other documents and instruments to which it is a party and to consummate the transactions and perform its obligations contemplated hereby and thereby. b. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary actions of Borrower and each Guarantor. This Agreement constitutes the legal, valid and binding obligation of Borrower and each Guarantor, enforceable against each of them in accordance with its terms. c. The consummation of the transactions contemplated hereby will not (i) violate any provision of the organizational documents or governing instruments of Borrower or either Guarantor, (ii) violate any judgment, order, ruling, injunction, degree or award of any court, administrative agency or governmental body against, or binding upon, Borrower or either Guarantor, or (iii) constitute a violation by Borrower or either Guarantor of any law or regulation of any jurisdiction applicable to Borrower or either Guarantor. d. This Agreement was reviewed by both Guarantors and by Borrower and/or its authorized officer, each of whom acknowledges and agrees that he (i) understands fully the terms of this Agreement and the consequences of the execution hereof, (ii) has been afforded an opportunity to have this Agreement reviewed by, and to discuss this Agreement with, such attorneys and other persons as he may wish, and (iii) has entered into this Agreement of its own free will and accord and without threat or duress. e. This Agreement and all information furnished to Bank is made and furnished in good faith, for value and valuable consideration, and has not been made or induced by any fraud, duress or undue influence exercised by Bank or any other person. 5. Miscellaneous. -------------- a. Misrepresentation. Borrower and each Guarantor shall jointly and ----------------- severally indemnify and hold Bank harmless from and against any losses, damages, costs and expenses (including attorneys' fees) incurred by Bank as a direct or indirect result of (i) breach of any representation or warranty contained in this Agreement, or (ii) any breach or default under any of the covenants or agreements contained in this Agreement. b. Covenants and Agreements. Borrower hereby agrees and acknowledges ------------------------ that it is well and truly indebted to Bank pursuant to the terms of the Note and the Credit Agreement and hereby agrees to observe, comply with and perform all of the obligations, terms and conditions under or in connection with the Credit Agreement. c. Ratification of Liens and Security Interests. Borrower and each -------------------------------------------- Guarantor hereby acknowledge and agree that the liens and security interests of the Credit Agreement and the Loan Documents are valid and subsisting liens and security interests and are superior to all other liens and security interests. d. Full Force and Effect. Except as otherwise expressly modified --------------------- hereby, all terms and provisions of the Credit Agreement, the Note, and the other Loan Documents hereby are ratified and confirmed and shall be and shall remain in full force and effect, enforceable in accordance with their terms. e. Subordination and Waiver of Subrogation. Notwithstanding any --------------------------------------- payment or payments made by either Guarantor on behalf of or for the account of Borrower, neither Guarantor shall be subrogated to any rights of Bank. Any claim of either Guarantor against the Borrower arising from any payment or payments made by Guarantor by reason of this Agreement or otherwise shall be in all respects subordinated to the full and complete payment and discharge of the indebtedness of Borrower to Bank; and no payment by Guarantor by reason of this Agreement or otherwise shall give rise to any claim of either Guarantor against Bank. Neither Guarantor will assign or otherwise transfer any such claim against Borrower to any other person or entity. f. No Waiver. Borrower and each Guarantor agree that nothing --------- contained in this Agreement shall affect or impair the validity or priority of the liens and security interests under any of the Loan Documents. g. RELEASES. BORROWER AND EACH GUARANTOR FULLY, COMPLETELY AND -------- FOREVER RELEASES THE BANK AND ITS PRESENT AND FORMER AFFILIATES, SUBSIDIARIES, AGENTS, ATTORNEYS, APPRAISERS, CONSULTANTS, EMPLOYEES, OFFICERS, DIRECTORS, STOCKHOLDERS, SUCCESSORS AND ASSIGNS ("OTHER RELEASED PARTIES") FROM ANY ---------------------- DEMANDS, CLAIMS AND CAUSES OF ACTION EXISTING AS OF THE DATE HEREOF, WHETHER KNOWN OR UNKNOWN, WHETHER FOR KNOWN OR UNKNOWN DAMAGES OR ANY OTHER RELIEF, INCLUDING, BUT NOT LIMITED TO, DEMANDS, CLAIMS, CAUSES OF ACTION OR DAMAGES DIRECTLY OR INDIRECTLY RELATING TO OR BASED ON: (I) ANY AND ALL TRANSACTIONS RELATING TO THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS AS AMENDED FROM TIME TO TIME, INCLUDING, WITHOUT LIMITATION, ANY LOSS, EXPENSES AND/OR DETRIMENT OF ANY KIND OR CHARACTER GROWING OUT OF OR IN ANY WAY RESULTING FROM THE ACTS OR OMISSIONS OF BANK OR THE OTHER RELEASED PARTIES; (II) ANY LOSS, COST OR DAMAGE IN CONNECTION WITH ANY BREACH OF FIDUCIARY DUTY, FRAUD, BREACH OF A DUTY OF GOOD FAITH AND FAIR DEALING, BREACH OF CONFIDENCE, BREACH OF FUNDING COMMITMENT, IMPAIRMENT OF COLLATERAL, VIOLATIONS OF THE BANK TYING ACT (12 U.S.C. (S) 1971, ET SEQ.), UNDUE INFLUENCE, DURESS, ECONOMIC COERCION, CONFLICT OF INTERESTS, NEGLIGENCE, BAD FAITH, MALPRACTICE, INTENTIONAL OR NEGLIGENT INFLICTION OF MENTAL DISTRESS, TORTIOUS INTERFERENCE WITH CONTRACTUAL RELATIONS, TORTIOUS INTERFERENCE WITH CORPORATE GOVERNANCE OR PROSPECTIVE BUSINESS ADVANTAGE, BREACH OF CONTRACT, DECEPTIVE TRADE PRACTICES, LIBEL, SLANDER, OR CONSPIRACY; AND (III) ANY OTHER CLAIM BASED ON CONTRACT, TORT, COMMON LAW, OR ANY RIGHT CREATED BY A STATUTE OR REGULATION PROMULGATED BY ANY GOVERNMENT AGENCY. THE ABOVE LISTING OF DEMANDS, CLAIMS AND CAUSES OF ACTION RELEASED IS NOT EXCLUSIVE OR EXHAUSTIVE. IT IS THE EXPRESS INTENTION OF THE BORROWER AND GUARANTORS TO RELEASE AND FORGIVE THE BANK OF ALL DEMANDS, CLAIMS AND CAUSES OF ACTION FROM THE PAST AND HAVE A FRESH START FROM THIS DAY FORWARD. BORROWER AND EACH GUARANTOR, ON BEHALF OF THEMSELVES AND THEIR SUCCESSORS AND ASSIGNS, COVENANT AND AGREE NOT TO SUE, INSTITUTE, OR COOPERATE IN THE INSTITUTION, COMMENCEMENT, FILING, OR PROSECUTION OF ANY SUIT, ADMINISTRATIVE PROCEEDING, DEMAND, CLAIM OR CAUSE OF ACTION ARISING FROM ANY ASPECT OF THE CREDIT AGREEMENT OR ANY OTHER LOAN DOCUMENTS, AS AMENDED, WHETHER ASSERTED INDIVIDUALLY OR DERIVATIVELY OR IN ANY CAPACITY AGAINST BANK OR THE OTHER RELEASED PARTIES. FURTHERMORE, BORROWER AND EACH GUARANTOR REPRESENT AND WARRANT THAT THEY HAVE NOT ASSIGNED, AND WILL NOT HEREAFTER ASSIGN, ANY OF THEIR ALLEGED CLAIMS OR CAUSES OF ACTION, OF ANY KIND OR NATURE WHATSOEVER, AGAINST THE BANK OR THE OTHER RELEASED PARTIES TO ANY PERSON OR ENTITY, SO THAT NO OTHER PARTY IS IN A POSITION TO ASSERT ANY SUCH CLAIM OR CAUSE OF ACTION. BORROWER AND EACH GUARANTOR DECLARES THAT NEITHER BORROWER NOR EITHER GUARANTOR HAS ANY SET-OFF, COUNTERCLAIM, DEFENSE OR OTHER CAUSES OF ACTION (TOGETHER, THE "COUNTERCLAIMS") --------------- AGAINST BANK ARISING OUT OF THE TRANSACTIONS EVIDENCED BY THE NOTE, THE CREDIT AGREEMENT OR THE LOAN DOCUMENTS, ANY TRANSACTIONS THAT WERE RENEWED OR EXTENDED BY THE LOAN DOCUMENTS, OR ANY OTHER TRANSACTION WITH BANK. TO THE EXTENT ANY COUNTERCLAIMS MAY EXIST, WHETHER KNOWN OR UNKNOWN, SUCH ARE WAIVED AND RELEASED HEREBY BY BORROWER AND EACH GUARANTOR. h. Hold Harmless. Borrower and each Guarantor agree to indemnify and ------------- hold Bank harmless from any and all Counterclaims that Borrower, or either Guarantor or any other person or entity claiming by, through, or under Borrower or either Guarantor may at any time assert against Bank. i. Costs and Expenses. Borrower agrees to pay to Bank the reasonable ------------------ attorneys' fees and expenses of Bank's counsel, filing and recording fees and other reasonable expenses incurred by Bank in connection with this Agreement and the transactions contemplated hereby. j. No Commitment. Borrower and each Guarantor agree that Bank has ------------- made no commitment or other agreement regarding the Note, the Credit Agreement, or the Loan Documents, except as expressly set forth in the Loan Documents and this Agreement. Borrower and each Guarantor warrant and represent that neither Borrower nor either Guarantor will rely on any commitment, further agreement to forbear or other agreement on the part of Bank unless such commitment or agreement is in writing and signed by Bank. k. Survival. All representations, warranties, covenants and -------- agreements of the parties made in this Agreement shall survive the execution and delivery hereof, until such time as all of the obligations of the parties hereto shall have lapsed in accordance with their respective terms or shall have been discharged in full. l. Successors and Assigns. This Agreement shall be binding upon and ---------------------- shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. m. Modifications and Waivers. No delay on the part of Bank in ------------------------- exercising any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any waiver of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege hereunder. All rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the parties hereto may otherwise have at law or in equity. No waiver or modification, discharge or amendment of this Agreement will be valid in the absence of the written and signed consent of the party against which enforcement of such is sought. n. Entire Agreement. This Agreement, together with the other ---------------- documents and instruments referenced herein, contains the entire agreement between the parties relating to the transaction contemplated hereby. All prior or contemporaneous agreements, understandings, representations and statements, whether written or oral, are merged herein. o. Governing Law. This Agreement shall be construed in accordance ------------- with the applicable laws of the State of Texas and applicable federal law. In the event of a dispute involving this Agreement or any other instruments executed in connection herewith, the undersigned irrevocably agrees that venue for such dispute shall lie in any court of competent jurisdiction in Dallas County, Texas. p. Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which when taken together shall be deemed to be one original. q. Time of Essence. The parties to this Agreement have agreed --------------- specifically with regard to the times for performance set forth in this Agreement. Further, the parties to this Agreement acknowledge that the agreements with regard to the times for performance are material to this Agreement. Therefore, the parties agree and acknowledge that time is of the essence to this Agreement. r. Acknowledgment of Debt and Ratification of Security Documents. ------------------------------------------------------------- Borrower and each Guarantor agree that (i) as of December 30, 1996 $23,136,000.00 in principal was outstanding and letters of credit with a combined availability of $3,190,578.60 were outstanding and (ii) those certain security documents (as heretofore amended, the "Security Documents"), which are ------------------ more fully described in Exhibit A attached to that certain Master Amendment to Security Documents, dated May 16, 1995, executed by Guarantors and Borrower in favor of the Bank, in addition to securing all other amounts presently secured by the Security Documents, are hereby amended so that all references in the Security Documents to the amount of the principal obligation secured under the Note are hereby acknowledged and agreed to include, without limitation, all amounts outstanding from time to time under the Revolving Credit Line as amended hereby. Except as modified by the terms of this subsection r, the Security Documents shall remain unchanged; and the same are in full force and effect as of the date hereof. Borrower and each Guarantor hereby ratify the rights, titles, liens and security interests under the Security Documents existing in favor of Bank. s. Ratification of Guaranties. The Guarantors agree that that certain -------------------------- Business Loan Continuing Guaranty, dated May 16, 1995 (the "Guaranty"), executed -------- by the Guarantors in favor of the Bank, shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of the Guarantors enforceable against Guarantors in accordance with its terms. Furthermore, the Guarantors hereby agree and acknowledge that (a) the obligations, indebtedness and liabilities arising in connection with this Agreement constitute "Debt," as such term is defined in the Guaranty, (b) as of the date hereof, the Guaranty is not subject to any claims, defenses or offsets, (c) nothing contained in this Agreement shall adversely affect any right or remedy of Bank under the Guaranty, and (d) the execution and delivery of the Agreement shall in no way reduce, impair or discharge any obligations of the Guarantors pursuant to the Guaranty. t. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL ---------------------------------------------------------------- AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, - ------------------------------------------------------------------------------- CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. - ------------------------------------------------------------- THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ---------------------------------------------------------- Executed effective the 31st day of December, 1996. BANK OF AMERICA TEXAS, N.A. STEVENS INTERNATIONAL, INC., formerly known as Stevens Graphics Corporation By: /s/ Jay W. Denny By: /s/ George A. Wiederaenders ----------------------- ----------------------------------- Name: Jay W. Denny Name: George A. Wiederaenders ---------------------- --------------------------------- Title: Vice President Title: Treasurer & Chief Accounting --------------------- -------------------------------- Officer -------------------------------- GUARANTORS: ----------- PMC LIQUIDATION, INC. By: /s/ George A. Wiederaenders --------------------------------- Name: George A. Wiederaenders ------------------------------- Title: Chief Accounting Officer ------------------------------ PRINTING & PACKAGING EQUIPMENT FINANCE CORPORATION By: /s/ George A. Wiederaenders --------------------------------- Name: George A. Wiederaenders ------------------------------- Title: Treasurer & Chief Accounting ------------------------------ Officer ------------------------------ EX-10.25 3 1ST AMD. TO AGR. AND 4TH AMD. TO CREDIT AGREEMENT EXHIBIT 10.25 FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT ----------------------------- THIS FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of February 28, 1997 (this "First Amendment") is entered into by and --------------- among STEVENS INTERNATIONAL, INC. (the "Borrower"), PMC LIQUIDATION, INC. and -------- PRINTING AND PACKAGING EQUIPMENT FINANCE CORPORATION (individually a "Guarantor" --------- and together, the "Guarantors"), and BANK OF AMERICA TEXAS, N.A. (the "Bank"). ---------- ---- W I T N E S S E T H: -------------------- WHEREAS, Borrower, Guarantors and Bank entered into that certain Agreement and Fourth Amendment to Credit Agreement dated as of December 31, 1996 (the "Fourth Amendment"); and ---------------- WHEREAS, Borrower, Guarantors and Bank wish to amend the Fourth Amendment to extend the Expiration Date (as such term is defined in the Fourth Amendment) from February 28, 1997 to March 17, 1997. THEREFORE, in consideration of the mutual covenants and agreements herein contained, Borrower, Guarantors and Bank agree as follows: 1. Extension of Expiration Date. Section 3(b) of the Fourth Amendment, ---------------------------- The Loans, is amended by deleting the first sentence of subsection (a) of - --------- Section 2.2, Revolving Line of Credit, in its entirety and replacing it with the ------------------------ following: 2.2 Revolving Line of Credit. ------------------------ (a) The term "Expiration Date" is amended to mean the earliest to --------------- occur of (i) the Bernal Sale Date (as defined below) or (ii) the date any holder of any portion of the Subordinated Debt accelerates the maturity of any principal of the Subordinated Debt or otherwise pursues any rights or remedies it may have pursuant to the documents evidencing the Subordinated Debt, or (iii) the date any Default or Potential Default other than the Existing Defaults occurs under the Loan Documents, or (iv) 5:00 p.m., March 17, 1997. Except as set forth above, the Fourth Amendment shall continue in full force and effect in accordance with its original provisions. FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT - Page 1 2. Representations. To induce Bank to enter into this First Amendment, --------------- Borrower ratifies and confirms each representation and warranty set forth in the Fourth Amendment as if such representations and warranties were made on even date herewith, and further represents and warrants that (a) except as has been previously disclosed by Borrower to Bank, no material adverse change has occurred in the financial condition or business prospects of Borrower since the date of the last financial statements delivered to the Bank, and (b) that Borrower is fully authorized to enter into this First Amendment. 3. Miscellaneous. ------------- a. Defined Terms. Capitalized terms used herein which are not ------------- otherwise defined shall have the meanings set forth in the Fourth Amendment. b. Costs and Expenses. Borrower agrees to pay to Bank the reasonable ------------------ attorneys' fees and expenses of Bank's counsel and other reasonable expenses incurred by Bank in connection with this First Amendment and the transactions contemplated hereby. c. NO COMMITMENT. BORROWER AND EACH GUARANTOR AGREE THAT BANK HAS ------------- MADE NO COMMITMENT OR OTHER AGREEMENT REGARDING THE NOTE, THE CREDIT AGREEMENT, OR THE LOAN DOCUMENTS, EXCEPT AS EXPRESSLY SET FORTH IN THE LOAN DOCUMENTS AND THE FOURTH AMENDMENT, AS MODIFIED BY THIS FIRST AMENDMENT. BORROWER AND EACH GUARANTOR WARRANT AND REPRESENT THAT NEITHER BORROWER NOR EITHER GUARANTOR WILL RELY ON ANY COMMITMENT, FURTHER AGREEMENT TO FORBEAR OR OTHER AGREEMENT ON THE PART OF BANK UNLESS SUCH COMMITMENT OR AGREEMENT IS IN WRITING AND SIGNED BY BANK. d. Survival. All representations, warranties, covenants and -------- agreements of the parties made in this First Amendment shall survive the execution and delivery hereof, until such time as all of the obligations of the parties hereto shall have lapsed in accordance with their respective terms or shall have been discharged in full. e. Successors and Assigns. This First Amendment shall be binding upon ---------------------- and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. f. Modifications and Waivers. No delay on the part of Bank in ------------------------- exercising any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any waiver of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege hereunder. All rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT - Page 2 parties hereto may otherwise have at law or in equity. No waiver or modification, discharge or amendment of this First Amendment will be valid in the absence of the written and signed consent of the party against which enforcement of such is sought. g. Entire Agreement. This First Amendment, together with the other ---------------- documents and instruments referenced herein, contains the entire agreement between the parties relating to the extension contemplated hereby. All prior or contemporaneous agreements, understandings, representations and statements, whether written or oral, are merged herein. h. Governing Law. This Agreement shall be construed in accordance ------------- with the applicable laws of the State of Texas and applicable federal law. In the event of a dispute involving this First Amendment or any other instruments executed in connection herewith, the undersigned irrevocably agrees that venue for such dispute shall lie in any court of competent jurisdiction in Dallas County, Texas. i. Counterparts. This First Amendment may be executed in one or more ------------ counterparts, all of which when taken together shall be deemed to be one original. j. Time of Essence. The parties to this First Amendment have agreed --------------- specifically with regard to the times for performance set forth in this First Amendment. Further, the parties to this First Amendment acknowledge that the agreements with regard to the times for performance are material to this First Amendment. Therefore, the parties agree and acknowledge that time is of the essence to this First Amendment. k. Acknowledgment of Debt and Ratification of Security Documents. ------------------------------------------------------------- Borrower and each Guarantor agree that (i) as of February 28, 1997, $21,526,299.45 in principal was outstanding and letters of credit with a combined availability of $2,648,665.00 were outstanding and (ii) those certain security documents (as heretofore amended, including amendments to same contained in the Fourth Amendment, the "Security Documents"), which are more ------------------ fully described in Exhibit A attached to that certain Master Amendment to Security Documents, dated May 16, 1995, executed by Guarantors and Borrower in favor of the Bank remain unchanged; and the same are in full force and effect as of the date hereof. Borrower and each Guarantor hereby ratify the rights, titles, liens and security interests under the Security Documents existing in favor of Bank. l. Ratification of Guaranties. The Guarantors agree that that certain -------------------------- Business Loan Continuing Guaranty, dated May 16, 1995 (as heretofore amended, including amendments to same contained in the Fourth Amendment, the "Guaranty"), -------- executed by the Guarantors in favor of the Bank, remains in full force and effect and continues to be the legal, valid and binding obligation of the Guarantors enforceable against Guarantors in accordance with its terms. Furthermore, the Guarantors hereby agree and acknowledge that (a) as of the date hereof, the Guaranty is not subject to any claims, defenses or offsets, (b) nothing contained in this First Amendment shall adversely affect any right or FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT - Page 3 remedy of Bank under the Guaranty, and (c) the execution and delivery of this First Amendment shall in no way reduce, impair or discharge any obligations of the Guarantors pursuant to the Guaranty. m. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL ---------------------------------------------------------------- AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, - ------------------------------------------------------------------------------- CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. - -------------------------------------------------------------- THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ----------------------------------------------------------- Executed effective the date first written above. BANK OF AMERICA TEXAS, N.A. STEVENS INTERNATIONAL, INC., formerly known as Stevens Graphics Corporation By: /s/ Jay W. Denny By: /s/ George A. Wiederaenders -------------------------- --------------------------------- Name: Jay W. Denny Name: George A. Wiederaenders ------------------------ ------------------------------- Title: Vice President Title: Treasurer & Chief Accounting ----------------------- ------------------------------ Officer ------------------------------ GUARANTORS: ---------- PMC LIQUIDATION, INC. By: /s/ George A. Wiederaenders ----------------------------- Name: George A. Wiederaenders --------------------------- Title: Chief Accounting Officer -------------------------- FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT - Page 4 PRINTING & PACKAGING EQUIPMENT FINANCE CORPORATION By: /s/ George A. Wiederaenders --------------------------------- Name: George A. Wiederaenders ------------------------------- Title: Treasurer & Chief Accounting ------------------------------ Officer ------------------------------ FIRST AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT - Page 5 EX-10.26 4 2ND AMD. TO AGR. AND 4TH AMD. TO CREDIT AGREEMENT EXHIBIT 10.26 SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT ----------------------------- THIS SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT, dated as of March 17, 1997 (this "Second Amendment") is entered into ---------------- by and among STEVENS INTERNATIONAL, INC. (the "Borrower"), PMC LIQUIDATION, INC. -------- and PRINTING AND PACKAGING EQUIPMENT FINANCE CORPORATION (individually a "Guarantor" and together, the "Guarantors"), and BANK OF AMERICA TEXAS, N.A. - ---------- ---------- (the "Bank"). ---- W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower, Guarantors and Bank entered into that certain Agreement and Fourth Amendment to Credit Agreement dated as of December 31, 1996 (the "Fourth Amendment"); and ---------------- WHEREAS, Borrower, Guarantors and Bank entered into that certain First Amendment to Agreement and Fourth Amendment to Credit Agreement dated as of February 28, 1997 (the "First Amendment"), which First Amendment extended the --------------- Expiration Date (as such term is defined in the Fourth Amendment) from February 28, 1997 to March 17, 1997 (the Fourth Amendment, as amended by the First Amendment, hereinafter referred to as the "Fourth Amendment"); and ---------------- WHEREAS, Borrower, Guarantors and Bank wish to further amend the Fourth Amendment as set forth below. THEREFORE, in consideration of the mutual covenants and agreements herein contained, Borrower, Guarantors and Bank agree as follows: 1. Borrowing Base Advance Cap Definition. Section 3(b) of the Fourth ------------------------------------- Amendment, Additional Definitions, is amended by deleting the definition of ---------------------- "Borrowing Base Advance Cap" in its entirety and replacing it with the following: "Borrowing Base Advance Cap" means at any time an amount equal to the -------------------------- lesser of: (i) $15,000,000.00; or (ii) the sum of: (A) 80% of the amount of Eligible Accounts; plus SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 1 (B) the lesser of (A) $4,500,000.00; or (B) 25% of the amount of Eligible Inventory; plus (C) $7,387,000.00. 2. Revolving Line of Credit Definition. Section 3(b) of the Fourth ----------------------------------- Amendment, Additional Definitions, is amended by deleting the definition of ---------------------- "Revolving Line of Credit" in its entirety and replacing it with the following: "Revolving Line of Credit" means the committed line of credit for ------------------------ advances in an amount outstanding at any time not to exceed $15,000,000.00. All references in the Fourth Amendment to the Revolving Line of Credit being an amount of up to $27,000,000.00 are hereby amended to refer to an amount of up to $15,000,000.00. 3. Extension of Expiration Date. Section 3(b) of the Fourth Amendment, ---------------------------- The Loans, is amended by deleting the first sentence of subsection (a) of - --------- Section 2.2, Revolving Line of Credit, in its entirety and replacing it with the ------------------------ following: 2.2 Revolving Line of Credit. ------------------------ (a) The term "Expiration Date" is amended to mean the earliest to --------------- occur of (i) the date any holder of any portion of the Subordinated Debt accelerates the maturity of any principal of the Subordinated Debt or otherwise pursues any rights or remedies it may have pursuant to the documents evidencing the Subordinated Debt, or (ii) the date any Default or Potential Default other than the Existing Defaults occurs under the Loan Documents, or (iii) 5:00 p.m., May 1, 1997. Except as set forth above, the Fourth Amendment shall continue in full force and effect in accordance with its original provisions. 4. Fee. In consideration of Bank's agreement to extend the Expiration --- Date, Borrower agrees to pay Bank, on or before the Expiration Date as amended hereby, a forbearance fee in the amount of $20,000.00. 5. Section 3(e) of the Fourth Amendment is amended such that the phrase "On January 30, 1997, February 20, 1997 and the Bernal Sale Date" as appearing in each of subsections (d), (e) and (f) thereof is replaced in each such subsection with the phrase "On the 20th day of each month." 6. Section 3(f) of the Fourth Amendment is amended such that the phrase "On January 30, 1997, February 20, 1997 and the Bernal Sale Date" as appearing in each of subsections (k), (l), (m), (n), (o), (q) and (r) thereof is replaced in each such subsection with the phrase "On the 20th day of each month." SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 2 7. Representations. To induce Bank to enter into this Second --------------- Amendment, Borrower ratifies and confirms each representation and warranty set forth in the Fourth Amendment as if such representations and warranties were made on even date herewith, and further represents and warrants that (a) except as has been previously disclosed by Borrower to Bank, no material adverse change has occurred in the financial condition or business prospects of Borrower since the date of the last financial statements delivered to the Bank, and (b) that Borrower is fully authorized to enter into this Second Amendment. 8. Miscellaneous. ------------- a. Defined Terms. Capitalized terms used herein which are not ------------- otherwise defined shall have the meanings set forth in the Fourth Amendment. b. Costs and Expenses. Borrower agrees to pay to Bank the ------------------ reasonable attorneys' fees and expenses of Bank's counsel and other reasonable expenses incurred by Bank in connection with this Second Amendment and the transactions contemplated hereby. c. NO COMMITMENT. BORROWER AND EACH GUARANTOR AGREE THAT BANK ------------- HAS MADE NO COMMITMENT OR OTHER AGREEMENT REGARDING THE NOTE, THE CREDIT AGREEMENT, OR THE LOAN DOCUMENTS, EXCEPT AS EXPRESSLY SET FORTH IN THE LOAN DOCUMENTS AND THE FOURTH AMENDMENT, AS MODIFIED BY THIS SECOND AMENDMENT. BORROWER AND EACH GUARANTOR WARRANT AND REPRESENT THAT NEITHER BORROWER NOR EITHER GUARANTOR WILL RELY ON ANY COMMITMENT, FURTHER AGREEMENT TO FORBEAR OR OTHER AGREEMENT ON THE PART OF BANK UNLESS SUCH COMMITMENT OR AGREEMENT IS IN WRITING AND SIGNED BY BANK. d. Survival. All representations, warranties, covenants and -------- agreements of the parties made in this Second Amendment shall survive the execution and delivery hereof, until such time as all of the obligations of the parties hereto shall have lapsed in accordance with their respective terms or shall have been discharged in full. e. Successors and Assigns. This Second Amendment shall be ---------------------- binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. f. Modifications and Waivers. No delay on the part of Bank in ------------------------- exercising any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any waiver of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 3 shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege hereunder. All rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies which the parties hereto may otherwise have at law or in equity. No waiver or modification, discharge or amendment of this Second Amendment will be valid in the absence of the written and signed consent of the party against which enforcement of such is sought. g. Entire Agreement. This Second Amendment, together with the ---------------- other documents and instruments referenced herein, contains the entire agreement between the parties relating to the transactions contemplated hereby. All prior or contemporaneous agreements, understandings, representations and statements, whether written or oral, are merged herein. h. Governing Law. This Agreement shall be construed in ------------- accordance with the applicable laws of the State of Texas and applicable federal law. In the event of a dispute involving this Second Amendment or any other instruments executed in connection herewith, the undersigned irrevocably agrees that venue for such dispute shall lie in any court of competent jurisdiction in Dallas County, Texas. i. Counterparts. This Second Amendment may be executed in one or ------------ more counterparts, all of which when taken together shall be deemed to be one original. j. Time of Essence. The parties to this Second Amendment have --------------- agreed specifically with regard to the times for performance set forth in this Second Amendment. Further, the parties to this Second Amendment acknowledge that the agreements with regard to the times for performance are material to this Second Amendment. Therefore, the parties agree and acknowledge that time is of the essence to this Second Amendment. k. Acknowledgment of Debt and Ratification of Security Documents. ------------------------------------------------------------- Borrower and each Guarantor agree that those certain security documents (as heretofore amended, including amendments to same contained in the Fourth Amendment, the "Security Documents"), which are more fully described in Exhibit ------------------ A attached to that certain Master Amendment to Security Documents, dated May 16, 1995, executed by Guarantors and Borrower in favor of the Bank remain unchanged; and the same are in full force and effect as of the date hereof. Borrower and each Guarantor hereby ratify the rights, titles, liens and security interests under the Security Documents existing in favor of Bank, excluding the liens of Bank partially released pursuant to those certain UCC-3 partial releases releasing the liens of Bank on the assets sold pursuant to the Asset Purchase Agreement between Stevens International, Inc. and Bernal International, Inc. described in such Asset Purchase Agreement as "Bernal Assets". ------------- l. Ratification of Guaranties. The Guarantors agree that that -------------------------- certain Business Loan Continuing Guaranty, dated May 16, 1995 (as heretofore amended, including amendments to same SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 4 contained in the Fourth Amendment, the "Guaranty"), executed by the Guarantors -------- in favor of the Bank, remains in full force and effect and continues to be the legal, valid and binding obligation of the Guarantors enforceable against Guarantors in accordance with its terms. Furthermore, the Guarantors hereby agree and acknowledge that (a) as of the date hereof, the Guaranty is not subject to any claims, defenses or offsets, (b) nothing contained in this Second Amendment shall adversely affect any right or remedy of Bank under the Guaranty, and (c) the execution and delivery of this Second Amendment shall in no way reduce, impair or discharge any obligations of the Guarantors pursuant to the Guaranty. m. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT REPRESENTS THE ------------------- ------------------------------------- FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF - ------------------------------------------------------------------------------ PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. - --------------------------------------------------------------------- THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. ---------------------------------------------------------- Executed effective the date first written above. BANK OF AMERICA TEXAS, N.A. STEVENS INTERNATIONAL, INC., formerly known as Stevens Graphics Corporation By: /s/ Jay W. Denny By: /s/ George A. Wiederaenders ---------------------------- ----------------------------------------- Name: Jay W. Denny Name: George A. Wiederaenders -------------------------- --------------------------------------- Title: Vice President Title: Treasurer & Chief Accounting Officer ------------------------- -------------------------------------- SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 5 GUARANTORS: ---------- PMC LIQUIDATION, INC. By: /s/ George A. Wiederaenders -------------------------------- Name: George A. Wiederaenders ------------------------------- Title: Chief Accounting Officer ------------------------------ PRINTING & PACKAGING EQUIPMENT FINANCE CORPORATION By: /s/ George A. Wiederaenders --------------------------------- Name: George A. Wiederaenders -------------------------------- Title: Treasurer & Chief Accounting ------------------------------- Officer ------------------------------- SECOND AMENDMENT TO AGREEMENT AND FOURTH AMENDMENT TO CREDIT AGREEMENT-Page 6 EX-11.1 5 COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11.1 STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES COMPUTATIONS OF NET INCOME PER COMMON SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 --------- ------- ------- Primary and fully diluted: Weighted average shares outstanding.............. 9,451 9,408 9,122 Assumed exercise of Series A and B stock options and warrants (treasury stock method)............ -0- 145 134 --------- ------- ------- Total common share equivalents..................... 9,451 9,553 9,256 ========= ======= ======= Income (loss) before extraordinary item............ $(34,220) $ 4,299 $ 2,427 Extraordinary item................................. -- -- (85) --------- ------- ------- Net Income (loss).................................. $(34,220) $ 4,299 $ 2,342 ========= ======= ======= Per share amounts-- Primary and fully diluted: Income (loss) before extraordinary item.......... $ (3.62) $ 0.45 $ 0.26 Extraordinary item............................... -- -- (0.01) --------- ------- ------- Net Income (loss)................................ $ (3.62) $ 0.45 $ 0.25 ========= ======= =======
53 EX-21.1 6 LIST OF SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES Subsidiary Jurisdiction - ---------- ------------ PMC Liquidation, Inc. Delaware Printing & Packaging Equipment Finance, Inc. Texas Stevens International, S.A. France Societe Specialisee dans le Materiel d'Imprimerie France EX-23.1 7 AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-25949, No. 33-36852 and No. 333-00319 of Stevens International, Inc. on Form S-8 and Registration Statement No. 33-84246 of Stevens International, Inc. on Form S-3 of our report dated March 24, 1997, appearing in this Annual Report on Form 10-K of Stevens International, Inc. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Forth Worth, Texas March 31, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF STEVENS INTERNATIONAL, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 3,338 0 16,002 4,225 14,169 52,356 39,786 21,829 77,417 63,832 113 945 0 0 9,951 77,417 65,659 65,659 74,243 74,243 0 4,043 3,921 (41,220) 7,000 (34,220) 0 0 0 (34,220) (3.62) (3.62)
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