ITEM 1. BUSINESS
(a) General
Southside Bancshares Corp. (the "Registrant" or "Southside") was incorporated under the laws of the State of Missouri on January 25, 1982. Southside became a registered bank holding company on January 3, 1983, when South Side National Bank in St. Louis and a wholly-owned subsidiary of the Registrant were merged on that date. The wholly-owned subsidiary of the Registrant now continues banking operations under the name "South Side National Bank in St. Louis." Prior to such merger, the Registrant was not actively involved in any banking operations. Southside's principal office is located at 3606 Gravois Avenue, St. Louis, Missouri 63116.
Southside, through its subsidiary banks, is primarily engaged in commercial banking and providing trust services. The Registrant and its subsidiaries had, at December 31, 1996, consolidated total assets of approximately $528 million. The following table shows the year of acquisition, total assets, total loans and total deposits at December 31, 1996, of each of Southside's wholly-owned subsidiary banks, all of which are located in Missouri.
The Registrant's subsidiary banks, which operated 13 banking offices in Missouri during 1996, are engaged in the general banking business of accepting funds for deposit, making loans, renting safe deposit boxes and performing such other banking services as are usual and customary in banks of similar size and character. All of the subsidiary banks offer real estate, commercial and consumer loans. Customers of all subsidiary banks are offered regular checking, interest-bearing checking, money market, savings, certificates of deposit and IRA accounts. South Side National Bank in St. Louis ("SSNB"), State Bank of DeSoto and The Bank of St. Charles County also provide BankMate and CIRRUS 24-hour automated teller machines. Bank of Ste. Genevieve has a 24-hour banking machine on the Shazam and Plus automated teller networks at its Plaza Bank location. SSNB also provides a 24-hour automated teller machine (ATM) at its Customer-Bank Communications Terminal branch in St. Anthony's Medical Center located at 10010 Kennerly Road, St. Louis County, Missouri 63128.
Customers of all of the subsidiary banks are also offered the services of the trust department of SSNB. At December 31, 1996, the combined market value of fiduciary and custodial assets under management of the trust department was approximately $276 million, which are not included in the consolidated assets of the Registrant as they do not represent assets of the Registrant.
The responsibility for the management of the subsidiary banks remains with the officers and directors of the respective banks. Southside provides the subsidiary banks with assistance and service in auditing, record keeping, tax planning, trust operations, new business development, lending, regulatory compliance and human resources management.
Southside has nine officers. Southside utilizes, to the extent necessary, the officers, employees and services of its banking subsidiaries. The total number of full and part-time employees of the Registrant and its wholly-owned subsidiaries was 217 and 34, respectively, on December 31, 1996.
The information on page 4 of the Southside Bancshares Corp. 1996 Annual Report is incorporated herein by reference.
(b) Supervision and Regulation
Southside is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHCA"), and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Registered bank holding companies are required to file an annual report with the Federal Reserve Board and to provide the Federal Reserve Board with such additional information as the Federal Reserve Board may require pursuant to the BHCA.
The BHCA requires that bank holding companies obtain prior approval from the Federal Reserve Board before (1) acquiring (except in certain limited circumstances) direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company, (2) acquiring all or substantially all of the assets of any bank or bank holding company, or (3) merging or consolidating with any other bank holding company. In determining whether to approve a proposed acquisition, merger or consolidation, the Federal Reserve Board is required to take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served.
The BHCA also prohibits any bank holding company, or any subsidiary thereof, from acquiring, directly or indirectly, more than 5% of the voting shares of, interest in, or all or substantially all of the assets of any additional bank located outside the state in which the operations of such bank holding company's banking subsidiaries were principally conducted on the date which such company became a bank holding company unless the acquisition of such shares or assets of a state bank by an out-of-state bank holding company is specifically authorized by the statutes of the state in which the bank is located. Missouri law permits banks and bank holding companies in states contiguous to Missouri to acquire banks and bank holding companies located in Missouri, if such states have passed reciprocal interstate banking laws. A bank or bank holding company having its principal operations in Iowa, Illinois, Kentucky, Tennessee, Arkansas, Oklahoma, Kansas or Nebraska is currently permitted to acquire control of Missouri banks since all of the states listed above have adopted regional or national interstate banking legislation reciprocal with that of Missouri.
Missouri law provides that a bank holding company may not obtain control of any bank if as a result of the acquisition, the total deposits in such bank together with the total deposits of all banks located in the State of Missouri controlled by the bank holding company would exceed 13% of the total deposits of all depository financial institutions in the state, including banks, thrifts and credit unions. In computing the total deposits in all banks controlled by the bank holding company and the bank which the holding company seeks to acquire, certificates of deposit in the face amount of $100,000 or more, deposits from sources outside the United States and deposits of banks other than banks controlled by the bank holding company are to be deducted.
The BHCA further prohibits a bank holding company, with certain exceptions, from engaging in and from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in a business other than that of banking, managing and controlling banks, or furnishing services to its affiliated banks. An exception to this prohibition provides that a bank holding company may engage in, and may own shares of companies engaged in, certain businesses which the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Federal Reserve Board has adopted regulations specifying areas of activity which it regards as so closely related to banking or the managing of banks as to be permissible for bank holding companies under the law, subject to Board approval in individual cases. The Registrant is not engaged in any such non-banking activities.
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was enacted. As of September 29, 1995, bank holding companies have the right to expand, by acquiring existing banks, into all states, even those which had theretofore restricted entry, subject to state deposit caps and a 10% nationwide deposit cap. This legislation also provides that, subject to future action by individual states, a holding company has the right, commencing on June 1, 1997, to convert the banks which it owns in different states to branches of a single bank. States are permitted to "opt out" of this full interstate branching provision prior to the effective date, but may not "opt out" of the law allowing bank holding companies from other states to enter such states. Alternatively, states may "opt in" earlier than June 1, 1997. As of the date hereof, the state of Missouri, in which all of the Registrant's subsidiary banks are located, has neither "opted in" nor "opted out" of the interstate branching provisions of this legislation.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its other subsidiaries, on investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, under the BHCA and regulations of the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.
The primary subsidiary of the Registrant, South Side National Bank in St. Louis, is a national bank and, as such, its primary bank regulatory authority is the Office of the Comptroller of the Currency. A national bank is also regulated by the Federal Reserve Board and the Federal Deposit Insurance Corporation. Banks organized under state law which are members of the Federal Reserve System are regulated and examined primarily by the Federal Reserve Board and state banking authorities, while banks organized under state law which are not members of the Federal Reserve System are regulated and examined primarily by the Federal Deposit Insurance Corporation and state banking authorities. The Bank of Ste. Genevieve is a state-chartered bank which is a member of the Federal Reserve System, while State Bank of DeSoto and The Bank of St. Charles County are state-chartered banks which are not members of the Federal Reserve System. Regulation by the federal and state banking authorities is designed to protect depositors rather than shareholders.
Subsidiary bank dividends are the principal source of revenue to the Registrant although management fees may be charged to cover services rendered to such subsidiary banks. The ability of each subsidiary bank to pay such dividends to Southside is subject to limitations established by various state and federal laws and regulations. Banks organized under either federal or state laws are limited in the amount of dividends they may declare, depending upon the amount of their capital and surplus, and in certain instances must obtain regulatory approval before declaring dividends. Under the National Banking Act, until a national bank's surplus equals or exceeds the amount of its capital, no dividend may be declared unless at least one-tenth of the national bank's net profit earned since declaration of the last dividend has been transferred to surplus. Under federal law, regulatory approval is required for any dividend by a national bank or a state-chartered bank which is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its net income for that year combined with its retained net income for the preceding two years, less any required transfers to surplus. Under Missouri law, a state-chartered bank which is not a member of the Federal Reserve System whose surplus account for each dividend period does not equal at least 40% of the amount of its capital stock is required to transfer to its surplus account 10% of its net income for such dividend period. Retained earnings in excess of any such required transfer to surplus are available for dividends. In addition, sound banking practices require the maintenance of adequate levels of capital. Federal regulatory authorities have adopted standards for the maintenance of capital by banks, and adherence to such standards may further limit the ability of banks to pay dividends.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies the following capital standards for depository institutions: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. FDICIA requires a bank that is determined to be undercapitalized to submit a capital restoration plan, and the bank's holding company must guarantee that the bank will meet its capital plan, subject to certain limitations. FDICIA also prohibits banks from making any capital distribution or paying any management fee if the bank would thereafter be undercapitalized.
FDICIA grants the FDIC authority to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessment rates on Bank Insurance Fund ("BIF") member banks so as to maintain the BIF at the designated reserve ratio defined in FDICIA. FDICIA also required the FDIC to implement a risk-based insurance assessment system pursuant to which the premiums paid by a depository institution are based on the probability that the BIF will incur a loss in respect of such institution. The FDIC has adopted a deposit insurance assessment system that places each insured institution in one of nine risk categories based on the level of its capital, evaluation of its risks by its primary state or federal supervisor, statistical analysis and other information. The FDIC has recently adopted an amendment to the BIF risk-based assessment schedule which effectively eliminated deposit insurance assessments for most commercial banks and other depository institutions with deposits insured by the BIF. Under the FDIC amendment, the
assessment rates for BIF-insured institutions range from 0.27% of insured deposits for the most financially troubled BIF members to 0% of deposits for most well-capitalized institutions, including over 90% of BIF-insured institutions.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Under EGRPRA, qualified bank holding companies may commence a regulatory approved non-banking activity without prior notice to the Federal Reserve Board. Written notice is required within 10 days after commencing the activity. Under EGRPRA, the prior notice period is reduced to 12 days in the event of any non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier I capital. The foregoing prior notice requirement also applies to commencing non-banking activity de novo which has been previously approved by order of the Federal Reserve Board, but not yet implemented by regulations. EGRPRA also provides for the recapitalization of the Savings Association Insurance Fund in order to bring that fund into parity with the BIF of the FDIC.
The references in this section to various aspects of supervision and regulation are brief summaries which do not purport to be complete and which are qualified in their entirety by reference to applicable laws, rules and regulations. Any change in applicable laws or regulations may have a material effect on the business and prospects of Southside. The operations of Southside may be affected by legislative changes and by the policies of various regulatory authorities. Southside is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future.
The information contained in note 11 of the Notes to Consolidated Financial Statements on pages 39 and 40 of the Southside Bancshares Corp. 1996 Annual Report is incorporated herein by reference.
(c) Competition
The Registrant and its subsidiaries encounter substantial competition in all aspects of their banking activities. New banks may be established in the market areas of the subsidiary banks, and the location of existing banks may be moved on occasion. In addition, competing banks and competing bank holding companies are continuing to establish separate banking facilities or branches which have been permitted under Missouri law since 1972. Any such new or relocated banks and facilities may have a tendency to increase the competition faced by the subsidiary banks. Missouri law permits unlimited, state-wide branching for both national and state-chartered banks, subject to certain criteria.
As lenders, the subsidiary banks compete not only with other banks but also with savings and loans associations, credit unions, finance companies, insurance companies and other non-banking financial institutions that offer credit. The subsidiary banks also compete for savings and time deposits with other banks, savings and loan associations, credit unions, money market and mutual funds, and issuers of commercial paper, securities and various forms of fixed and variable income investments. The principal competitive factors in the markets for deposits and loans are interest rates paid and interest rates charged, along with related services; accessibility to customers is also a substantial factor.
(d) Monetary Policy and Economic Conditions
The principal sources of funds to banks and bank holding companies are deposits, stockholders' equity and borrowed funds. Stockholders' equity is represented by common stock, surplus and retained earnings, as well as current net income. Borrowed funds include short-, intermediate- and long-term debt, as well as Federal funds purchased and securities sold under agreements to repurchase. The availability of these various sources of funds and other potential sources, such as preferred stock, convertible securities and commercial paper, and the extent to which they are utilized, depends on many factors, the most important of which are the monetary policies of the Federal Reserve Board and the relative costs of different types of funds.
An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in United States Government Securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. The foregoing means are used in varying combinations to influence overall growth of bank loans. Investments and deposits may also affect interest rates charged on loans and paid for deposits. The availability and cost of various sources of funds are also affected by fiscal policies of the United States Government.
The monetary policies of the Federal Reserve Board and the fiscal policies of the United States Government have had a significant effect on operating results of commercial banks in the past and are expected to continue to do so in the future. No prediction can be made as to future changes in interest rates, credit availability, deposit levels, loan demand or the overall performance of banks generally and the subsidiaries of Southside in particular.
(e) Statistical Information
The following selected statistical information relative to Southside and its subsidiaries should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the Southside Bancshares Corp. 1996 Annual Report, incorporated herein by reference.
SELECTED STATISTICAL INFORMATION I. Loan Portfolio
A. Types of Loans
The following table shows the classification of loans by major category at December 31 for the years shown.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the remaining maturities of selected loan categories at December 31, 1996. (in thousands)
* Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due "One year or less."
The following table shows the amount of loans above having maturities over one year which have predetermined interest rates, and the amount which have floating or adjustable interest rates at December 31, 1996 (in thousands).
II. Summary of Loan Loss Experience
The information under the caption Allowance for Loan Losses and Risk Elements on pages 8 through 10 of the Southside Bancshares Corp. 1996 Annual Report is incorporated herein by reference.
The following table analyzes the loan loss experience of the Registrant for the periods indicated:
The following table sets forth at the end of each reported period, a breakdown of the allowance for possible loan losses by major categories of loans and the percentage of loans in each category to total loans at the dates indicated:
III. Investment Portfolio
The information contained in note 2 of the Notes to Consolidated Financial Statements on pages 34 and 35 of the Southside Bancshares Corp. 1996 Annual Report is incorporated herein by reference. The following table summarizes the carrying values and weighted average yields of investments in debt securities by contractual maturity. Actual maturities will differ from contractual maturities, because borrowers have the right to prepay obligations with or without prepayment penalties. A maturity distribution for mortgage-backed securities has not been prepared due to their accelerated prepayment characteristics.
* The weighted average yield for each maturity range was calculated using the yield on each security within that range, weighted by the amortized cost of each security at December 31, 1996. The yields for obligations of states and political subdivisions exempt from federal income taxes have been adjusted to a fully tax-equivalent basis at a maximum tax rate of 34% for 1996, adjusted for the disallowance of interest cost to carry nontaxable securities.
ITEM 2.

ITEM 2. PROPERTIES
The Registrant owned the following physical properties as of December 31, 1996:
South Side National Bank in St. Louis, a subsidiary of the Registrant, owns a nine-story banking and office building at 3606 Gravois Avenue in St. Louis, Missouri 63116, and the adjacent drive-up facilities and three parking lots. The Registrant and this subsidiary occupy all nine stories in the building. This subsidiary of the Registrant owns the land and bank building located at its branch facility at 10330 Gravois Road, St. Louis, Missouri 63126. This is a two story building and the lower level and a portion of the main level are leased to tenants for an annual rental of approximately $34,000. This subsidiary also owns the land and bank building at 9914 Kennerly Road in St. Louis County upon which its South County branch is located. This is a two-story building and the second floor is leased to tenants for an annual rental of approximately $83,000. This subsidiary also owns the land and bank buildings at 10385 West Florissant, Ferguson, Missouri 63136, 8440 Morganford Road, St. Louis County, Missouri 63123 and 3420 Iowa Street, St. Louis, Missouri 63118. This subsidiary leases a branch facility at 4666 Lansdowne, St. Louis, Missouri 63116.
State Bank of DeSoto owns the land and a two-story building at its main banking office at 224 S. Main Street, DeSoto, Missouri 63020. The State Bank of DeSoto also owns the land and a one-story building housing its facility located at 2000 Rock Road, DeSoto, Missouri 63020.
Bank of Ste. Genevieve owns the land, a one-story building and an adjacent parking lot at its main banking office at Second and Market Streets, Ste. Genevieve, Missouri 63670 and the land and one-story building at its facility at 710 Parkwood Drive, Ste. Genevieve, Missouri 63670.
The Bank of St. Charles County owns the land and a two-story building at its banking facility at 6004 Highway 94 South, St. Charles, Missouri 63304. This subsidiary bank occupies one story in the building and leases approximately 5,000 square feet for an annual rental of approximately $19,000. This subsidiary bank owns the land and a one-story building at its facility located at 750 First Capitol Drive, St. Charles, Missouri 63301.
In the opinion of the Registrant's management, the physical properties of the subsidiary banks are suitable and adequate and are being productively utilized.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The information contained in note 13 of the Notes to Consolidated Financial Statements on page 41 of the Southside Bancshares Corp. 1996 Annual Report is incorporated herein by reference.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of the executive officers of the Registrant and their business history for the past five years:
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The only class of the Registrant's common equity is common stock, $1.00 par value (the "Common Stock"). The number of shares of Common Stock of the Registrant outstanding at March 17, 1997 was 2,835,670 shares, and the market price for the Common Stock on March 17, 1997 was $23.50 bid; $28.50 asked.
The information on page 25 of the Southside Bancshares Corp. 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information on page 5 of the Southside Bancshares Corp. 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The information on pages 6 through 25 of the Southside Bancshares Corp. 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 26 through 43 of the Southside Bancshares Corp. 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on pages 4 through 6 of the Southside Bancshares Corp. Proxy Statement for the Annual Meeting of Shareholders scheduled for April 24, 1997 is incorporated herein by reference. The information on page 16 of the Southside Bancshares Corp. Proxy Statement for the Annual Meeting of Shareholders scheduled for April 24, 1997, with respect to compliance by the Registrant's officers and directors with Section 16(a) of the Securities Exchange Act of 1934, is incorporated herein by reference. The required information regarding Southside's executive officers is contained in PART I in the item captioned "Executive Officers of the Registrant."
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information on pages 6 through 11 of the Southside Bancshares Corp. Proxy Statement for the Annual Meeting of Shareholders scheduled for April 24, 1997 is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on pages 3 and 4 of the Southside Bancshares Corp. Proxy Statement for the Annual Meeting of Shareholders scheduled for April 24, 1997, is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 15 of the Southside Bancshares Corp. Proxy Statement for the Annual Meeting of Shareholders scheduled for April 24, 1997, is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements of Southside and its consolidated subsidiaries, and the accountants' report thereon are incorporated herein by reference in Item 8.
1. Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All other schedules are omitted because they are not applicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or notes thereto.
* The exhibits included under Exhibit 10 constitute all management contracts, compensatory plans and arrangements required to be filed as an exhibit to this form pursuant to Item 14(c) of this report.
(b) Reports filed on Form 8-K:
The following reports on Form 8-K were filed for the three months ended December 31, 1996:
None.
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.
SOUTHSIDE BANCSHARES CORP.
Pursuant to the requirements of the Securities 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.
EXHIBIT INDEX
* Incorporated by reference.


ITEM 1. BUSINESS.
Gerber Scientific, Inc., a Connecticut corporation incorporated in 1948, is a holding company providing corporate management services and financial resources to its subsidiaries. As used herein, the term "Company" means Gerber Scientific, Inc. and, unless the context indicates otherwise, its subsidiaries. The Company designs, develops, manufactures, markets, and services computer-aided design and computer-aided manufacturing (CAD/CAM) systems to automate the design and production processes in a broad range of industries. The Company's principal manufacturing and administrative facilities are located in Connecticut.
The Company conducts its business primarily through four wholly owned operating subsidiaries. Gerber Garment Technology, Inc. (GGT) designs, develops, manufactures, markets, and services computer-controlled systems and software for product design, marker-making (nesting), spreading, labeling, cutting, and handling flexible materials, such as fabrics and composites, in the apparel, aerospace, automotive, furniture, and other industries. Gerber Scientific Products, Inc. (GSP) designs, develops, manufactures, markets, and services microprocessor- and PC-controlled production systems, software, and aftermarket supplies for the signmaking, graphic arts, and screenprinting industries. Gerber Systems Corporation (GSC) designs, develops, manufactures, markets, and services interactive imaging and inspection systems for the electronics and commercial printing industries. Gerber Optical, Inc. designs, develops, manufactures, markets, and services computer- controlled production systems and aftermarket supplies for the ophthalmic lens manufacturing industry.
The Company has foreign subsidiaries which provide marketing and field service support for the Company's products. These subsidiaries are located in Belgium, Germany, Italy, France, Portugal, the United Kingdom, Sweden, Canada, Mexico, Australia, New Zealand, and Hong Kong. The Company also has a subsidiary in Denmark which performs manufacturing operations.
As of April 30, 1996, the Company had approximately 1,700 regular, full-time employees.
On March 1, 1994, the Company's GGT subsidiary purchased the business and certain assets and liabilities of Niebuhr Maskinfabrik A/S (Niebuhr) of Ikast, Denmark, for a total cost of approximately $1 million. Niebuhr manufactures and markets computer-automated fabric spreading equipment used in the apparel and related industries. The acquisition was accomplished through a newly formed Danish subsidiary of GGT known as GGT-Niebuhr A/S, which has continued to manufacture, market, and support Niebuhr equipment.
On September 1, 1994, GGT acquired the outstanding stock of Microdynamics, Inc. (Microdynamics) of Dallas, Texas, and subsequently merged that company into GGT. The Microdynamics purchase price was approximately $8.5 million plus additional contingent cash consideration based on the earnings performance of a certain acquired product line over the three-year period following the date of acquisition. Microdynamics was a leading supplier of computer-aided design (CAD), graphic design, and product management systems for the apparel, footwear, and other sewn goods industries. GGT has continued to develop, manufacture, market, and support the Microdynamics' product lines.
INFORMATION ABOUT INDUSTRY SEGMENTS
The Company designs, develops, manufactures, markets, and services CAD/CAM factory automation systems, software, and related aftermarket supplies for a wide range of industries, including apparel, automotive, aerospace, electronics, commercial printing, ophthalmic, graphic arts, screenprinting, and signmaking. No other segment of the Company constituted 10 percent or more of revenue or net earnings in the Company's last three fiscal years.
The Company's principal CAD/CAM products consist of the following: cutting, nesting, spreading, and material handling systems; microprocessor- and PC-controlled production systems; interactive imaging and inspection systems; and ophthalmic lens manufacturing systems. For each of the Company's last three fiscal years, the approximate percentage of consolidated sales and service revenue accounted for by these classes of products was as follows: 1996 1995 1994 ---- ---- ---- Cutting, nesting, spreading, and material handling systems 54% 57% 51% Microprocessor- and PC-controlled production systems 30% 29% 33% Interactive imaging and inspection systems 10% 8% 11% Ophthalmic lens manufacturing systems 6% 6% 5%
CAD/CAM CUTTING, NESTING, SPREADING, AND MATERIAL HANDLING SYSTEMS
The Company produces computer-controlled material spreading and cutting systems for the apparel, aerospace, automotive, and other industries that manufacture with sewn goods. Material spreading systems enhance cutting room efficiency by automating the preparation of multiple layers of material for the cutting table. The Company's GERBERcutters(R) are computer-controlled cutting systems which accurately cut parts out of single and multiple layers of flexible materials, such as textiles, vinyls, plastics, fiberglass, and advanced composite materials, quickly, efficiently, and with more precision than the traditional methods of hand cutting or die cutting.
The Company's computer-aided design, pattern-making, and marker-making (nesting) systems automate the design, pattern- making, pattern-grading (sizing), and marker-making functions. This improves the efficiency of material usage in the apparel, furniture, luggage, automotive, aerospace, sheet metal, composites, and other industries.
The Company's GERBERmover(R) material handling systems are computerized unit production systems that move and control the work flow among sewing operators, thereby reducing in-process inventory as well as improving efficiency and quality in the sewn goods industries.
The Company also produces several related hardware and software products for the sewn goods industries. Among the software products is PDM (R), a product management system that provides a powerful tool for developing product specifications, controlling and managing data, and documenting the product development process, along with production and quality requirements.
CAD/CAM MICROPROCESSOR- AND PC-CONTROLLED PRODUCTION SYSTEMS
The Company's microprocessor- and PC-controlled production systems and software bring computer automation to the signmaking, screenprinting, and graphic arts industries. The Company produces a full range of automated lettering systems, software, plotters, routers, and other output devices that permit the design and production of signs and graphic arts on adhesive-backed vinyls and other materials. The GERBER EDGE(R), an output device produced by the Company for the sign, screenprinting, and graphics industries, creates continuous length, durable, professional-quality text and graphics, including complicated halftones, multiple colors, and process four color images directly on signmaking vinyl.
The Company also sells aftermarket supplies to these industries, including a wide variety of adhesive-backed vinyls, translucent vinyl films, GERBER EDGE color cartridges, reflective sheeting, masking film, sandblast stencil, heat transfer flock, and specialty and screenprinting films.
CAD/CAM INTERACTIVE IMAGING AND INSPECTION SYSTEMS
The Company produces interactive computer-based photoplotting systems that automate the production of artwork, tooling, and documentation for printed circuit board (PCB) manufacturers. Photoplotting systems image with a beam of light on photographic film or glass. They are used in the electronics industry for producing master artwork and associated manufacturing aids for PCBs, micropackaging of microchips and ultra-large scale integrated circuits, and for various other applications requiring accurate, high-quality graphic masters. The Company also produces automatic optical inspection systems which are used for quality control in PCB manufacturing. These systems perform an on-line defect analysis by comparing a PCB or its artwork master to the original computer-aided design database.
The Company also produces laser imaging systems for the commercial printing industry which are used to expose digital printing plates, enabling direct computer-to-plate printing. This process eliminates the necessity to expose film in making a plate for the printing press. The result is the elimination of a number of steps in the printing process and a reduction in waste, providing cost savings and faster turnaround.
CAD/CAM OPHTHALMIC LENS MANUFACTURING SYSTEMS
The Company produces innovative, high-technology system solutions used in the manufacture of prescription eyewear. The ophthalmic manufacturing systems offered by the Company replace a set of related manual tasks with computer-controlled automation, reducing operator skill levels and increasing productivity. The Company's product offerings include the components required to process an entire prescription, including computerized frame tracing, lens blocking, surface generating, and lens edging. The individual systems can be used with other manufacturing equipment or can be combined in a complete system managed by the Company's processing software. The markets for the Company's ophthalmic manufacturing systems include wholesale optical laboratories and optical retail chains and superstores.
RESEARCH AND DEVELOPMENT
The Company continues to emphasize technological development with research and development programs designed to create new software and hardware products, improve existing products, and modify products to meet specific customer needs. The Company's research and development expenses for the years ended April 30, 1996, 1995, and 1994 were $25,771,000, $26,009,000, and $22,339,000, respectively. The Company also received and expended approximately $1,373,000, $3,109,000, and $1,583,000 for the years ended April 30, 1996, 1995, and 1994, respectively, for customer-funded research and development projects.
MARKETING
Most of the Company's product sales are to end-users and are sold through the Company's direct sales force in the United States, subsidiaries in Europe, Canada, Mexico, Australia, New Zealand, and the Far East, and independent sales representatives and distributors in various parts of the world. The Company's microprocessor- and PC-controlled production systems are sold principally to independent distributors for resale by them. Domestic sales personnel are located in a number of cities, including Hartford, New York, Atlanta, Chicago, Dallas, and Los Angeles. The Company's foreign sales and service subsidiaries are located in Belgium, Germany, Italy, France, Portugal, the United Kingdom, Sweden, Canada, Mexico, Australia, New Zealand, and Hong Kong. The Company's foreign subsidiaries act both as
---------------- (R) represents a registered trademark of the Company.
sales representatives on a commission basis and as distributors, depending upon the product line and the territory involved.
RAW MATERIALS
The Company purchases materials, such as computers, computer peripherals, electronic parts, hardware, and sheet metal from numerous suppliers. Many of these materials are incorporated directly into the Company's manufactured products, while others require additional processing. In some cases the Company uses only one source of supply for certain materials, but to date the Company has not experienced significant difficulties in obtaining timely deliveries. Increased demand for these materials or future unavailability could result in production delays which might adversely affect the Company's business. The Company believes that, if required, it could develop alternative sources of supply for the materials which it uses.
PATENTS AND TRADEMARKS
The Company owns and has applications pending for a large number of patents in the United States and other countries, which expire from time to time, and cover many of its products and systems. The Company has pending lawsuits in the United States and elsewhere where the Company alleges that others are violating one or more of its patents. While the Company considers that such patents and patent applications as a group are important to its operations, it does not consider that any patent or group of them related to a specific product or system is of such importance that the loss or expiration thereof would have a materially adverse effect on its business considered as a whole.
The Company believes that its success depends, to a significant extent, on the innovative skills, technical competence, and marketing abilities of its personnel.
The Company also has registered trademarks for a number of its products. Trademarks do not expire when continued in use and properly protected.
SEASONALITY
No portion of the Company's business is subject to significant seasonal fluctuation.
WORKING CAPITAL
The Company's business generally does not require unusually large amounts of working capital. The Company receives advance payments and progress payments on customer orders for some of its products. The Company also sells certain of its products under leases which are financed by third-party financial institutions. These leases are generally for three- to five- year terms. The Company's recourse obligations for leases which are financed by third parties are secured and collateralized by the underlying equipment.
CUSTOMERS
The Company's customers are primarily end-users, except in the sale of microprocessor- and PC-controlled production systems, for which the Company's customers are primarily independent distributors. No single customer accounted for 10 percent or more of the Company's consolidated revenue in 1996, 1995, or 1994. Customer purchases of capital goods often vary from year to year, and it is normal for the Company's customer base to change accordingly. The Company believes that the loss of any single customer or small group of customers would not have a materially adverse impact on the Company's business.
BACKLOG
The Company's backlog of orders considered firm was approximately $48,700,000 at April 30, 1996, compared with $53,800,000 at April 30, 1995. Substantially all the backlog at April 30, 1996, is scheduled for delivery in fiscal 1997. The Company records as backlog firm orders from customers for delivery at specified dates. Historically, the Company has experienced few cancellations of orders.
COMPETITION
The Company competes in a variety of markets and with a variety of other companies. In certain of these markets, competitors are larger and have greater financial, marketing, and technological resources than the Company. In the markets the Company serves, the principal competitive factors are product performance, price, and company reputation.
The Company believes that through its GERBERcutters and marker- making systems, it is the largest worldwide supplier to the apparel and allied industries of computer-controlled limp material cutting systems and pattern-making, grading, and nesting systems. There is worldwide competition in these markets, and certain competing companies have become significant suppliers. Certain of these competitors have marketed cutting equipment which the Company believes may have infringed the Company's patents, and the Company has lawsuits pending against such competitors.
In the marketplace for microprocessor- and PC-controlled signmaking, screenprinting, and graphic arts systems, the Company holds the predominant market position. The Company pioneered the development of these technologies, holding several key related patents. While there has been an increase in the number of competitors marketing software-only products, the Company believes that none have been able to match the product, marketing, and selling/distribution strengths offered by the Company.
The Company also produces laser imaging systems for the electronics and commercial printing industries. In the electronics marketplace there are significant competitors in the manufacture and sale of laser imaging systems. The Company's automated optical inspection equipment also has significant competition, primarily from foreign manufacturers. At the present time, the Company believes its direct computer- to-printing plate laser imaging system for the commercial printing industry has a leading position. There is competition in this market and the Company anticipates that additional competition will emerge.
The Company's ophthalmic manufacturing systems, used in the manufacture of eyeglass lenses, face entrenched competition. The Company believes that its leadership in technology has enabled it to become the major supplier of computerized surface blocking systems, three-axis lens generating systems, and three-axis edge polishing systems in the United States.
The Company could be adversely affected if it were unable to respond with competitive products, in a timely manner, to pricing changes or significant new product announcements affecting its product lines.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The financial information required by Item 1 relating to export sales is included in "Note 1 - Products and Operations" of "Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements" appearing on page 25 of this Form 10-K.
The approximate percentage of consolidated sales and service revenue from foreign (i.e., non-U.S.) customers for each of the last three fiscal years was as follows:
1996 1995 1994 ---- ---- ----
Percentage of consolidated sales and service revenue from foreign customers 49% 48% 44%
The Company is subject to the usual risks involved in international sales, such as unfavorable economic or political conditions in foreign countries, restrictive trade policies imposed by foreign governments, restrictions on the transfer of funds, and foreign currency exchange rate fluctuations. The Company's foreign product sales have generally been made in U.S. dollars, but for certain product lines and territories (principally in Western Europe), the Company has made sales in local currencies. The Company has a program to hedge such sales through the use of forward exchange contracts.
ITEM 2.

ITEM 2. PROPERTIES.
The Company's principal operations are conducted in the following facilities:
Type of Facility Location -------------------------------- -----------------
Manufacturing/office (O) South Windsor, CT (4 sites) Manufacturing/office (O) Tolland, CT Manufacturing/office (O) Manchester, CT Manufacturing/office (L) Ikast, Denmark Service/office (O) Richardson, TX Warehouses/sales and service offices (L) Various ----------------------- (O) Company owned (L) Leased
Management believes that the Company's present facilities, which are utilized primarily on a single-shift basis with overtime, are well maintained and are adequate to meet the Company's immediate requirements.
The Company has leases for warehouse and sales and service office space are generally on short-term bases. Rentals for leased facilities aggregated $2,426,000 in the fiscal year ended April 30, 1996.
The Company owns substantially all of the machinery and equipment used in its operations and leases the remainder. In the fiscal year ended April 30, 1996, the aggregate rental under such leases was $1,061,000. The Company fully utilizes such machinery and equipment.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
Various lawsuits, claims, and governmental proceedings are pending against the Company. Certain of these matters relate to the Company's patents. Management of the Company believes that the ultimate resolution of these matters will not have a materially adverse effect on the Company's consolidated financial position or the results of its operations.
Other relevant information regarding legal proceedings is included in Part II, Item 8, Note 10, "Deferred Litigation Award", of the "Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements" appearing on page 29 of this Form 10-K.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the fourth quarter of the Company's fiscal year ended April 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT.
Included in Part III, Item 10, "Directors and Executive Officers of the Registrant", appearing on page 42 of this Form 10-K.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the New York Stock Exchange under the symbol "GRB". Shareholders of record totaled 1,766 at April 30, 1996. The other information required by Item 5 is included in Part II, Item 8, Note 17, "Quarterly Results (Unaudited)" of the "Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements" appearing on page 39 of this Form 10-K.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEAR FINANCIAL SUMMARY
In thousands except per share amounts For years ended April 30 ------------------------------------------------------
1996 1995 1994 1993 1992
Sales and service revenue $ 359,120 $ 322,708 $ 260,734 $ 254,365 $ 249,978
Earnings before accounting change and patent settlement 1,2 19,868 18,111 11,133 8,336 7,428
Net earnings 1,2 19,868 18,111 15,321 8,336 7,428
Earnings per common share before accounting change and patent settlement 1,2 .84 .76 .47 .35 .31
Net earnings per common share 1,2 .84 .76 .64 .35 .31
Cash dividends per common share .32 .30 .23 .20 .20
Total assets 312,988 324,428 286,443 269,981 276,912
Long-term debt 7,338 7,531 7,724 7,916 8,109
Shareholders' equity $ 239,298 $ 237,302 $ 224,824 $ 215,460 $ 213,505
Weighted average common shares outstanding 23,689 23,950 23,967 23,918 23,909
(1) Net earnings for the year ended April 30, 1994 included a $788,000 gain ($.03 per share) from adopting the method of accounting for income taxes required by Statement of Financial Accounting Standards No. 109.
(2) In the year ended April 30, 1994, the Company received the proceeds of a final judgment in a U.S. patent infringement case brought against Lectra Systemes S.A. of France and its U.S. subsidiary. The judgment, net of the 1994 expenses associated with it and after income taxes, amounted to approximately $3,400,000, or $.14 per share.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For Years Ended April 30, 1996, 1995, and 1994 ------------------------------------------------------------------------ RESULTS OF OPERATIONS
Consolidated revenue in 1996 was $359.1 million, an increase of $36.4 million, or 11 percent, from $322.7 million in the prior year. The increase in 1996 reflected higher product sales while service revenue was substantially unchanged. Revenue in 1995 included the effect of a change in fiscal year-end for certain of the Company's foreign subsidiaries which added $6.7 million to the 1995 total. Excluding this amount from the comparison, year-to-year revenue increased 14 percent from 1995 to 1996.
Each of the Company's product classes experienced sales growth in 1996, with the largest increase occurring in microprocessor- and PC-controlled signmaking systems. Within this class, sales of the GERBER EDGE, a four- color process digital imaging system, were particularly strong as were sales of related aftermarket supplies. Also contributing to the higher sales in this product class was a new line of friction-fed plotters, which are used to cut sign images from signmaking vinyl.
Increased sales of the Company's computer-to-plate digital imaging systems for the commercial printing and graphic arts industries also contributed to the 1996 sales increase. The Company invested heavily in the development of this business in 1996, particularly in product development and marketing, and expects to continue to do so in 1997. Management believes the computer-to-plate systems business represents a significant growth opportunity for the Company.
Product sales gains were also realized in 1996 in optical lens manufacturing equipment for optical superstores and laboratories and in the Company's line of marker-making and fabric spreading systems for the apparel and allied industries. In the third quarter of 1996, the Company experienced a substantial drop in order entry from the U.S. apparel industry which affected primarily the Company's line of computer-controlled GERBERcutter fabric cutting systems. Management believes this reflected weakness in the domestic retail industry which caused apparel manufacturers to reduce their orders for new production equipment. Order entry in this product class rebounded in the fourth quarter of 1996 and appeared to mirror an improved retail environment.
Sales gains were realized in 1996 in each of the Company's major geographic markets. In total, export sales from the United States in 1996 rose $16.8 million, or 14 percent, from the previous year and represented 39 percent of total revenue compared with 38 percent in 1995 and 36 percent in 1994.
Consolidated revenue in 1995 was $322.7 million, an increase of $62 million, or 24 percent, from 1994. The increase reflected three factors: a year-over-year improvement in sales from the Company's baseline operations; the acquisition of two new businesses, Microdynamics, Inc. (Microdynamics) and Niebuhr Maskinfabrik A/S (Niebuhr); and a change in the fiscal year-end for certain foreign subsidiaries.
The sales gain in 1995 occurred in all major geographic markets but was particularly strong in Europe. Export sales to European customers improved significantly, up $19.5 million from the previous year. In total, export sales from the United States in 1995 rose $29 million or 32 percent from the previous year.
The Niebuhr and Microdynamics acquisitions added a total of $22.7 million to 1995 revenue. Niebuhr was a Danish-based company that manufactures computerized fabric spreading equipment for the apparel and related industries. In 1995, Niebuhr's operations added $10.1 million to the Company's consolidated revenue. Microdynamics was a Texas-based company and a leading supplier of computer-aided design, graphic design, and product management systems. Its operations added $12.6 million to the Company's 1995 consolidated revenue.
In 1995, the year-end of certain of the Company's foreign subsidiaries was changed from February to April to coincide with the parent Company's year- end. Accordingly, an additional two months of operating results from these subsidiaries was included in the fiscal 1995 financial statements. The effect of this change in year-ends was to increase sales and service revenue for the fourth quarter and year ended April 30, 1995 by $6.7 million. This change in year-ends had an insignificant effect on net earnings and earnings per share for these periods.
Service revenue rose $7.1 million in 1995 compared with 1994. Approximately one-half of this increase reflected the addition of the Microdynamics' service business. The additional two months of service revenue from the change in year-ends for certain foreign subsidiaries accounted for most of the remaining increase.
In terms of the Company's products, the largest sales increase in 1995 occurred in GERBERcutter fabric cutting systems for the apparel and allied industries, reflecting the introduction of a new series of GERBERcutters. Product sales gains were also realized in the Company's line of marker- making systems for these same industries. Other significant sources of the sales increase in 1995 were shipments of a new lens blocking system for the ophthalmic industry and higher sales of aftermarket supplies to the signmaking industry.
For the fiscal year ended April 30, 1994, consolidated revenue increased $6.4 million, or 3 percent, from the prior year. The increase reflected 4 percent growth in product sales, partially offset by an 8 percent decline in the smaller service component of revenue. In geographic terms, the sales increase in 1994 occurred primarily in North America and reflected an improved domestic economic environment and strength in capital spending. The relative weakness of foreign economies in 1994 was evident in the Company's lower export sales, particularly export sales to European markets which were down $12 million from the prior year.
Within the Company's major product classes, the largest sales increase in 1994 occurred in microprocessor- and PC-controlled systems for the signmaking industry and was related primarily to the introduction of the GERBER EDGE. Product sales also increased in optical lens manufacturing systems, primarily
for a low-cost surface generating system which uses computer-controlled machining to generate prescriptions in plastic eyeglass lenses. These increases were partially offset by lower sales of computer-controlled fabric cutting systems. The year-to-year decrease in cutting system sales occurred in European markets and reflected the weak state of those economies, particularly in the first half of the fiscal year.
The consolidated gross profit margin in 1996 was 44.8 percent compared with 44.3 percent in 1995 and 44.4 percent in 1994. Gross profit margins on product sales improved to 46.3 percent in 1996 from 45.9 percent in 1995, while margins on service revenue declined slightly. The improvement in product margins reflected the favorable impact of higher sales volume in 1996, although product margins continued to be pressured by price discounting on sales of cutting and marker-making systems to the apparel industry. Service gross margins were lower in 1996 due to less-than- anticipated revenue growth in servicing cutting and marker-making systems.
The gross profit margins on product sales in 1995 were lower than in 1994, while margins on service revenue improved. Contributing to the product margin decline in 1995 were the sales of Niebuhr fabric spreaders, whose margins were significantly below the Company's average product margin. Higher costs of manufacturing in Denmark coupled with the relative strength of the Danish currency versus the U.S. dollar pressured the margins on this product. Lower product margins in 1995 also reflected start-up costs on the early production runs of the new GERBERcutter series and the lens blocking system. The improved service margin in 1995 reflected the addition of the Microdynamics' service business.
Selling, general and administrative expenses were $111.7 million or 31.1 percent of revenue in 1996. This compared with $97.5 million and $82.5 million in 1995 and 1994, which represented 30.2 percent and 31.7 percent of revenue in the respective years. The higher selling, general and administrative expenses in 1996 and 1995 related to the higher volume of business, marketing expenses associated with the introduction of new products, the additional expenses of Niebuhr and Microdynamics, and in 1995 the inclusion of two additional months of expenses for the foreign subsidiaries whose year-end was changed. In 1996, the Company incurred significant marketing and other expenses in furthering sales of its new computer-to-plate systems for the commercial printing and graphic arts industries. The Company expects to continue to incur a high level of such expenses which will put pressure on earnings in the near future.
The Company has historically committed significant resources to research and the development of new products and strives to maintain a leading position in automation technology in the various markets it serves. Research and development (R&D) expenses represented 7.2 percent of revenue in 1996 compared with 8.1 percent and 8.6 percent of revenue in 1995 and 1994, respectively. Although R&D expenses in 1996 were slightly lower than in 1995, the pace of spending accelerated in the second half of the fiscal year and management expects this higher expenditure rate will continue for the near term. Among its ongoing R&D projects, the Company expects to continue to incur significant expenses in developing newer computer-to- plate systems for the commercial printing and graphic arts industries.
In each of the years 1996, 1995, and 1994, the Company's principal debt obligations were Industrial Revenue Bonds with variable tax-exempt interest rates. Since debt levels changed only slightly over this three-year period, the changes in the Company's interest expense reflected primarily the movements in short-term interest rates. The lower short-term interest rates that prevailed in 1994 resulted in comparatively lower interest expense in that year and with the rise in short-term interest rates that occurred in 1995, interest expense rose.
Other income in 1996 and 1995 consisted principally of royalty income and tax-exempt interest income from investments in municipal bonds. The lower interest income in 1996 compared with 1995 reflected a smaller investment portfolio, which is discussed below under "Financial Condition." In 1994, the Company received the proceeds of a final judgment in a U.S. patent infringement case brought against Lectra Systemes S.A. of France (Lectra) and its U.S. subsidiary. The judgment awarded the Company damages for Lectra's past patent infringement in the U.S. of a Company patent relating to its computer-controlled cutting systems. The award, net of the 1994 expenses associated with it, was $5.7 million and after income taxes amounted to $3.4 million, or $.14 per share. In 1995, the Company collected another damage award of $5.9 million in a patent infringement case related to computer-controlled cutting equipment brought in the United Kingdom against Lectra and its U.K. subsidiary. Lectra has appealed this damage award and the outcome of the litigation remains uncertain. Accordingly, the Company has deferred the income recognition of this award and has reflected the amount collected as an accrued liability in its consolidated balance sheet at April 30, 1996 and 1995.
The statutory U.S. Federal income tax rate was 35 percent for 1996, 1995, and 1994. The effective income tax provision rates were 28.7 percent, 27.9 percent, and 32.2 percent for 1996, 1995, and 1994, respectively. Offsetting the statutory U.S. Federal income tax rate in each year were tax-exempt interest income from the Company's municipal bond investments and the tax savings derived from the Company's Foreign Sales Corporation (FSC). The increase in the effective tax rate from 1995 to 1996 was due in part to the expiration and non-extension of the U.S. research and development tax credit.
In 1994, the Company adopted on a prospective basis Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The adoption of this Statement changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. The change in tax accounting resulted in a one-time gain of $.8 million ($.03 per share) which was recognized as a cumulative effect adjustment in the 1994 consolidated statement of earnings.
Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and No. 112, "Employers' Accounting for Postemployment Benefits," have no impact on the Company's consolidated financial position or results of operations. The Company does not provide postemployment or postretirement benefits other than through its pension plans.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation," requires the Company either to adopt a method of accounting for stock options at "fair value" in its financial statements or to retain its existing method and disclose the pro forma effects of this
"fair value" method beginning in fiscal year 1997. The Company intends to retain its existing method of accounting for stock options and to include the required pro forma disclosures in the notes to its consolidated financial statements. Accordingly, Statement No. 123 will have no effect on the Company's consolidated financial position or results of operations.
FINANCIAL CONDITION
The Company's short-term liquidity at April 30, 1996 was lower than in preceding years but adequate for the Company's requirements. Cash and short-term cash investments totaled $8.7 million at April 30, 1996 compared with $10.2 million at April 30, 1995 and $15.6 million at April 30, 1994. Net working capital increased to $101.7 million at April 30, 1996 from $78.5 million and $87.8 million at April 30, 1995 and 1994, respectively. The working capital ratio at April 30, 1996 was 2.8 to 1 compared with 2.1 to 1 and 3.1 to 1 at April 30, 1995 and 1994, respectively.
The Company's longer-term investment portfolio of tax-exempt municipal securities totaled $58.9 million at April 30, 1996, down from $82.7 million at April 30, 1995. The lower portfolio in 1996 resulted primarily from the use of funds for working capital requirements, fixed asset additions, and purchases of the Company's common stock. The securities in the investment portfolio had maturities ranging up to five years in length with a weighted average maturity of approximately one and one-half years at April 30, 1996. These investments are classified in the consolidated balance sheet as a long-term asset. The Company intends to hold these securities to maturity and, by doing so, expects to earn a higher rate of return than that provided by short-term money market instruments. The pre-tax equivalent yield on this portfolio was approximately 6.8 percent at April 30, 1996.
Operating activities provided $5.9 million in cash in 1996. The cash generated by earnings and by the non-cash charges against earnings for depreciation and amortization was substantially offset by growth in accounts receivable and inventories related to the higher volume of business, and by a reduction in accounts payable related primarily to the timing of vendor payments. Significant non-operating uses of cash in 1996 were for additions to property, plant and equipment ($12.6 million); open market purchases of the Company's common stock ($11.3 million); and dividends on common stock ($7.5 million).
The additions to property, plant and equipment of $12.6 million in 1996 were funded by operations and from the Company's investment portfolio. In 1995 and 1994, the Company spent $12.5 million and $4.6 million, respectively, for additions to property, plant and equipment. The Company expects that 1997 capital expenditures will be in the range of $12 million and expects to fund these additions with cash on hand and cash generated by operations.
Under a current Board of Directors' authorization, the Company may purchase an additional 763,000 shares of its outstanding common stock as, in the opinion of management, market conditions may warrant. In 1996, the Company spent $11.3 million to acquire and retire 681,200 shares, at an average purchase price of $16.64 per share. In 1995 and 1994, the Company purchased 100,400 and 136,900 shares, respectively, for $1.4 million and $1.7 million. These purchases were at average prices per share of $13.65 and $12.67, respectively.
At April 30, 1996 and 1995, the Company's long-term debt consisted entirely of tax-exempt Industrial Revenue Bonds amounting to $7.5 million and $7.7 million, respectively, at those dates. The Company's ratio of total debt to shareholders' equity was 3.1 percent at April 30, 1996 compared with 3.3 percent at April 30, 1995 and 3.5 percent at April 30, 1994. The Company
believes its low debt-to-equity ratio is an important indicator of the ability to borrow funds should needs arise. Scheduled maturities of long-term debt in 1997 amount to $.2 million, and payment is expected to be made with cash from operations.
In 1996, the Company entered into a formal line of credit agreement with a major U.S. commercial bank providing for $20 million in short-term borrowings by the Company. The Company also has a $15 million multi- currency line of credit with a major European bank. No amounts were borrowed against these credit lines as of April 30, 1996 and 1995. Any such borrowings would bear interest at 1/4 percent above the London Interbank Offered Rate (LIBOR). The lines of credit have commitment fees of 1/8 percent of the unused amounts.
Operating activities provided $29.3 million in cash in 1995. A significant use of this cash in 1995 was for the acquisitions of Niebuhr and Microdynamics. The Company paid approximately $1 million for the Niebuhr acquisition and repaid approximately $1.1 million of Niebuhr's bank debt subsequent to the acquisition. The Company paid approximately $8 million in 1995 for the Microdynamics' acquisition and repaid approximately $2.2 million of its debt.
In connection with the acquisitions, the Company recorded approximately $10 million of goodwill which is being amortized on a straight-line basis over 20 years. With regard to the Microdynamics' acquisition, the Company was contingently liable to make up to $4 million in additional payments based upon Microdynamics' closing balance sheet and the realizability of certain of the acquired assets. No additional payments were subsequently required under this provision. The Microdynamics acquisition agreement also provides for additional contingent cash consideration based on the earnings performance of a certain acquired product line over the three-year period following the acquisition. Any amounts due based upon the earnings-related contingency would be payable at the end of the three-year period. Any contingent amounts that become payable will be recorded as additional goodwill and will be amortized over the remainder of the 20-year amortization period.
In addition to the business acquisitions and the repayments of the acquired companies' debt, other significant uses of cash in 1995 were for additions to property, plant and equipment ($12.5 million); dividends on common stock ($7.1 million); additional investment in tax-exempt securities ($2.2 million); and open market purchases of the Company's common stock ($1.4 million).
In 1994, operating activities provided $14.3 million in cash. A primary use of cash in 1994 was to fund the Company's defined benefit and supplemental pension plans. Pension funding of $9.6 million in 1994 substantially exceeded expense recognition of $1.3 million and produced a significant income tax deduction. Other principal operating uses of cash in 1994 were to fund increases in accounts receivable and inventories which were related in
part to the higher volume of business. The primary non-operating uses of cash in 1994 were for dividends and for additional investments in tax- exempt securities.
FORWARD LOOKING STATEMENTS
This report includes forward-looking statements that describe the Company's business prospects. Readers should keep in mind factors that could have an adverse impact on those prospects. These include political, economic, or other conditions, such as recessionary or expansive trends, inflation rates, currency exchange rates, taxes and regulations and laws affecting the business, as well as product competition, pricing, the degree of acceptance of new products to the marketplace, and the difficulty of forecasting sales at various times in various markets.
ITEM 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 relating to identification of directors is incorporated herein by reference to the information contained under the caption "Election of Directors" in the Company's 1996 Annual Meeting Proxy Statement which will be filed within 120 days of the Company's April 30, 1996 fiscal year-end. The information required by Item 10 relating to disclosure of delinquent Section 16(a) filings by insiders is incorporated herein by reference to the information contained under the caption "Section 16(a) Reporting" in the Company's 1996 Annual Meeting Proxy Statement.
Identification of executive officers appears below. David J. Gerber, the Secretary and a director of the Company, is the son of H. Joseph Gerber, the Chairman of the Board of Directors and the President of the Company. Other than this relationship, there is no family relationship between the officers and the directors of the Company. All officers serve at the pleasure of the Board of Directors. The following table presents the name and age of each of the Company's executive officers, their present positions with the Company and date of initial appointment thereto, and other positions held during the past five years, including positions held with subsidiaries of the Company.
Present Position Other Positions and Date of Held During Name and Age Initial Appointment Last Five Years ------------------------------------------------------------------ H. Joseph Gerber (72) President (1948) None
George M. Gentile (60) Senior Vice President, Treasurer Finance (September 8, 1977)
Fredric K. Rosen (57) Senior Vice President President, Gerber (September 5, 1990) Garment Technology, Inc.
Ronald B. Webster (59) Senior Vice President Vice President; (September 4, 1991) President, Gerber Scientific Products, Inc.
Brian G. Eastman (50) Senior Vice President President, Gerber June 4, 1996 Systems Corporation; Senior Vice President Engineering, Leaf Systems, Inc.; General Manager, Business Planning and Control, AGFA Corporation
Richard F. Treacy, Jr. (51) Senior Vice President General Counsel, (June 1, 1994) Secretary
Gary K. Bennett (45) Vice President Treasurer and (June 4, 1996) Corporate Controller; Assistant Corporate Controller
David J. Gerber (35) Secretary Attorney (February 1, 1995)
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference to the information contained under the caption "Executive Compensation and Transactions" in the Company's 1996 Annual Meeting Proxy Statement which will be filed within 120 days of the Company's April 30, 1996 fiscal year-end.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference to the information contained under the captions "Voting Rights and Principal Shareholders" and "Election of Directors" in the Company's 1996 Annual Meeting Proxy Statement which will be filed within 120 days of the Company's April 30, 1996 fiscal year-end.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference to the information contained under the caption "Election of Directors" in the Company's 1996 Annual Meeting Proxy Statement which will be filed within 120 days of the Company's April 30, 1996 fiscal year-end.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: Page
Consolidated Statement of Earnings for the years ended April 30, 1996, 1995, and 1994 . . . . . . . . . . . . 19 Consolidated Balance Sheet at April 30, 1996 and 1995 . . . . . . . 20 Consolidated Statement of Changes in Shareholders' Equity for the years ended April 30, 1996, 1995, and 1994 . 21 Consolidated Statement of Cash Flows for the years ended April 30, 1996, 1995, and 1994 . . . . . . . . . . . . 22 Independent Auditors' Report . . . . . . 41 Summary of Significant Accounting Policies . . . . . . . . . . . . . . . 23 - 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 25 - 39
2. Financial Statement Schedules:
All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
4.1* Agreement pursuant to S-K Item 601(b)(4)(iii)(A) to provide to the Commission, upon request, copies of certain other instruments with respect to long-term debt where the amount of securities authorized under each such instrument does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.
10.1 Gerber Scientific, Inc. 1982 Employee Stock Plan.
10.2 Gerber Scientific, Inc. 1992 Employee Stock Plan as amended and restated as of April 28, 1995.
10.3 Gerber Scientific, Inc. 1992 Non- Employee Director Stock Option Plan.
10.4 Gerber Scientific, Inc. Profit and Growth Incentive Bonus Plan for the Fiscal Year Ending April 30, 1996.
10.5 Consulting Agreement dated September 15, 1995 between the Company and Stanley Simon & Associates.
11.1* Statement re Computation of Per Share Earnings.
22.1* Subsidiaries of the Registrant.
24.1* Consent of Independent Auditors.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of fiscal year 1996.
(c) See Item 14(a) 3. above.
(d) See Item 14(a) 2. above.
*Filed herewith.
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. GERBER SCIENTIFIC, INC. ----------------------- (Registrant)
BY: /s/ George M. Gentile ------------------------------- Date: July 23, 1996 George M. Gentile ------------- Senior Vice President,Finance and Principal Accounting Officer
Pursuant to the requirements of the Securities 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:
Date Signature Title ---- --------- -----
July 23, 1996 /s/ H. Joseph Gerber President ------------- ----------------------- Director (H. Joseph Gerber)
July 23, 1996 /s/ George M. Gentile Senior Vice President, ------------- ----------------------- Finance (George M. Gentile) Director
July 23, 1996 /s/ Stanley Simon Director ------------- ----------------------- (Stanley Simon)
July 23, 1996 /s/ W. Jerome Vereen Director ------------- ----------------------- (W. Jerome Vereen)
July 23, 1996 /s/ A. Robert Towbin Director ------------- ----------------------- (A. Robert Towbin)
July 23, 1996 /s/ David J. Gerber Secretary ------------- ----------------------- Director (David J. Gerber)
July 23, 1996 /s/ Edward E. Hood, Jr. Director ------------- ----------------------- (Edward E. Hood, Jr.)
July 23, 1996 /s/ Gary K. Bennett Vice President, ------------- ----------------------- Treasurer and Controller (Gary K. Bennett)
EXHIBIT INDEX
Exhibit Index Number Exhibit Page ------------- ------- ----
3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended April 30, 1990).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended April 30, 1990).
4.1* Agreement pursuant to S-K Item 49 601(b)(4)(iii)(A) to provide to the Commission, upon request, copies of certain other instruments with respect to long-term debt where the amount of securities authorized under each such instrument does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.
10.1 Gerber Scientific, Inc. 1982 Employee Stock Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8, File No. 2-93695 and Post-Effective Amendment No. 1 to the Registration Statement).
10.2 Gerber Scientific, Inc. 1992 Employee Stock Plan as amended and restated as of April 28, 1995 (incorporated herein by reference to Exhibit A to the Company's Proxy Statement filed in connection with the Annual Meeting of Shareholders held October 13, 1995, File No. 1-5865).
10.3 Gerber Scientific, Inc. 1992 Non- Employee Director Stock Option Plan (incorporated herein by reference to Exhibit B to the Company's Proxy Statement filed in connection with the Annual Meeting of Shareholders held September 24, 1992, File No. 1-5865).
*Filed herewith.
Exhibit Index Number Exhibit Page ------------- ------- ----
10.4 Gerber Scientific, Inc. Profit and Growth Incentive Bonus Plan for the Fiscal Year Ending April 30, 1996 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996).
10.5 Consulting Agreement dated September 15, 1995 between the Company and Stanley Simon & Associates (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996).
11.1* Statement re Computation of Per Share 51 Earnings.
22.1* Subsidiaries of the Registrant. 52
24.1* Consent of Independent Auditors. 53
27 Financial Data Schedule 54
*Filed herewith.
EXHIBIT 11.1 GERBER SCIENTIFIC, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
--------------------------------------------------------------------------- Years ended April 30, 1996 1995 1994 ---------------------------------------------------------------------------
Earnings before cumulative effect of accounting change $19,868,000 $18,111,000 $14,533,000
Cumulative effect of accounting change -- -- 788,000 ----------- ----------- ----------- Net earnings $19,868,000 $18,111,000 $15,321,000 =========== =========== ===========
Average common shares outstanding 23,463,141 23,795,774 23,792,137
Common stock equivalents: Common stock attributable to stock options (treasury stock method) 225,812 154,337 174,750 ----------- ----------- ----------- Weighted average shares of common stock outstanding during the period 23,688,953 23,950,111 23,966,887 =========== =========== ===========
Net earnings per common share:
Before cumulative effect of accounting change $ .84 $ .76 $ .61
Cumulative effect of accounting change -- -- .03 ----------- ----------- -----------
Net earnings per common share $ .84 $ .76 $ .64 =========== =========== ===========
Note:
Net earnings per common share as calculated above is presented on a primary and fully diluted basis.
EXHIBIT 22.1
GERBER SCIENTIFIC, INC.
SUBSIDIARIES OF THE REGISTRANT
State or Jurisdiction of Incorporation or Subsidiary Organization ---------- ----------------------
Gerber Systems Corporation Connecticut Gerber Systems GmbH Germany Gerber Systems Corporation S.R.L. Italy Gerber Systems Corporation N.V. Belgium Gerber Systems Corporation Limited United Kingdom Gerber Systems Corporation Hong Kong Limited Hong Kong
Gerber Garment Technology, Inc. Connecticut GGT Canada Ltd. Canada GGT International (Australia) Pty. Ltd. Australia GGT International (NZ) Pty. Ltd. New Zealand GGT International (Far East) Ltd. Hong Kong GGT International de Mexico, S.A. de C.V. Mexico Gerber Garment Technology GmbH Germany Gerber Garment Technology S.r.l. Italy Gerber Garment Technology N.V./S.A. Belgium Gerber Garment Technology S.A.R.L. France Gerber Garment Technology AB Sweden Gerber Garment Technology Ltd. United Kingdom GGT-Niebuhr A/S Denmark Gerber Garment Technology Systems Computorizados LDA Portugal M.D. "Europe" Ltd. United Kingdom C.I.M. Microdynamics Limited United Kingdom Microdynamics AB Sweden
Gerber Scientific Products, Inc. Connecticut Gerber Scientific Products GmbH Germany
Gerber Optical, Inc. Connecticut
Gerber Venture Capital Corporation Delaware
Gerber Foreign Sales Corporation, Inc. U.S. Virgin Islands
Other entities, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of April 30, 1996 and are not listed above.
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Gerber Scientific, Inc.
We consent to incorporation by reference in the registration statements No. 2-93695 and No. 33-58668 on Form S-8 and No. 33- 58670 on Form S-3 of Gerber Scientific, Inc. of our report dated May 23, 1996 relating to the consolidated balance sheet of Gerber Scientific, Inc. and subsidiaries as of April 30, 1996 and 1995 and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the years in the three-year period ended April 30, 1996, which report appears in the April 30, 1996 annual report on Form 10-K of Gerber Scientific, Inc.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut July 23, 1996