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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K/A
(AMENDMENT NO. 1)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-43089
THE GSI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-0856587
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 E. ILLINOIS STREET, ASSUMPTION, ILLINOIS 62510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (217) 226-4421
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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 or Regulation S-K is not contained herein, and will not be contained, to 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. [X]
Indicate by check mark whether the registrant is an accelerated filer: Yes
[ ] No [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: $0
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: Common stock, par
value $0.01 per share, 826,948 shares outstanding as of April 26, 2005.
Documents Incorporated by Reference: None
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1
INTRODUCTORY NOTE
This Amendment No. 1 to The GSI Group, Inc.'s (the "Company's") Annual
Report on Form 10-K for the fiscal year ended December 31, 2003 (the "Form
10-K/A") includes restated consolidated financial statements as of December 31,
2003, 2002 and 2001. The accompanying restated consolidated financial
statements, including the notes thereto, have been revised to reflect the
restatement.
The restatement was initially disclosed in the Company's Current Report on
Form 8-K, filed on March 8, 2005 and was reflected in Company's Annual Report on
Form 10-K for the year ended December 31, 2004. The Company has restated in
this Form 10-K/A its consolidated balance sheets as of December 31, 2003 and
2002, and consolidated statements of operations, cash flows and stockholders'
deficit for the fiscal years ended December 31, 2003, 2002 and 2001 to reflect
this restatement.
This Form 10-K/A amends and restates Items 6, 7, 8 and 9A of Part II and
Items 11 and 13 of Part III of the original Form 10-K, and no other information
included in the original Form 10-K is amended hereby. Although not amended or
updated, all other Items of the original Form 10-K are contained herein for the
convenience of the reader.
All referenced amounts in this Form 10-K/A for prior periods and prior
period comparisons reflect the balances and amounts on a restated basis.
Except with respect to Item 9A of Part II, the information set forth under
"Forward-Looking Statements" and the statements included in this Introductory
Note, this Form 10-K/A has not been updated for changes in events, estimates or
other developments subsequent to March 30, 2004, the date of filing of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003. For a discussion of these subsequent events and developments as well as
revisions to prior estimates, please refer to the Company's Form 10-K for the
year ended December 31, 2004.
During the 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors have been corrected in the accompanying 2003, 2002 and 2001 financial
statements. A description of the errors and related impact of each on the
financial statements follows. Amounts are stated in whole dollars.
- At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6.5 million. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2.2 million in 2003 and $4.3 million in 2004. During the 2004
year-end closing process, this issue was re-examined, and the Company determined
that it would be appropriate to restate the 2002 cost of sales and year-end
inventory, the period when the overstatement occurred.
- In 1997, the majority shareholder sold non-voting shares to certain
employees at an arm's length market value price. The majority shareholder
helped finance each employee purchase with a non-recourse interest-bearing note
with each employee with the shares being held as collateral against that note.
The Company failed to ascertain the market value of those shares at each
year-end to determine if compensation expense should be recorded to comply with
generally accepted accounting principles. The Company has now performed that
review and determined that for the end of 2003, compensation expense of $484,097
was created. The dividends paid to the non-voting shareholders are classified
as compensation expense and reduced previously reported net income for 2003 by
$62,584.
- The Company mistakenly treated its Mexican subsidiary with the local
currency being the functional currency. The Company should have treated its
Mexican subsidiary with the U.S. dollar as being the functional currency. The
result of this error was an unfavorable impact to the profit and loss statement
of $98,644.
2
- The Company mistakenly did not capitalize the overhead component of the
Brazilian Subsidiary's inventory to comply with United States generally accepted
accounting principles. The result of this error was a favorable impact to the
profit and loss statement of $4,935.
- The Company had an error in its calculation of the intercompany profit and
loss component residing in the year end inventory balance. The result of this
error was an unfavorable impact to the profit and loss statement of $383,999.
- The Company, now with the benefit of hindsight, made the error of not
accruing the CEO's salary and board of director fees which were being refused at
that time by the CEO. The result of this error was an unfavorable impact to the
profit and loss statement of $100,000.
- The Company, when it made the shift in late 2000 from a premium stop-loss
worker's compensation insurance policy to a high-deductible self-insured policy,
failed to begin to accrue for the "incurred but not reported" liability. The
result of this error was an unfavorable impact to the profit and loss statement
of $289,506.
- The Company, when it entered into an agreement at the beginning of 2002
with the manager of its Brazilian Subsidiary to partially compensate him with an
ownership percentage of that subsidiary, neglected to initiate a process to
account for his minority ownership. The result of that error was an unfavorable
impact to the profit and loss statement of $77,333 and a reclassification of the
balance sheet equity section for $339,614.
- The quarterly impact of these issues to the profit and loss statement was
approximately $0.4 million per quarter, while the balance sheet equity section
cumulative impact was less than $0.1 million per quarter. Due to the straight
line nature of these adjustments, it was deemed that restating the 10-Q's would
not benefit the reader.
3
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 concerning, among other things,
the prospects and developments of the Company's and business strategies for its
operations, all of which are subject to risks and uncertainties. These
forward-looking statements are included in various sections of this report.
These statements are identified as "forward-looking statements" or by their use
of terms (and variations thereof) such as "will," "may," "can," "anticipate,"
"intend," "continue," "estimate," "expect," "plan," "should," "outlook,"
"believe," and "seek" and similar terms (and variations thereof) and phrases.
When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the Company cautions that, while
it believes such assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, it expresses that expectation or belief in good faith and believe it
has a reasonable basis, but the Company or its management can give no assurance
that the statement of expectation or belief will result or be achieved or
accomplished.
The Company's actual results may differ significantly from the results
discussed in the forward-looking statements.
4
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 6
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 46
Item 9A. Controls and Procedures 46
Item 9B. Other Information 46
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
5
PART I
ITEM 1. BUSINESS.
GENERAL
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company believes that it is the largest
global provider of both (i) grain storage bins and related drying and handling
systems and (ii) swine feed storage, feed delivery, confinement and ventilation
systems. The Company is also one of the largest global providers of poultry
feed storage, feed delivery, watering, ventilation and nesting systems. The
Company markets its agricultural products in approximately 75 countries through
a network of over 2,500 independent dealers to grain, swine and poultry
producers primarily under its GSI, DMC, FFI, Zimmerman, AP and Cumberland brand
names. The Company's current market position in the industry reflects both the
strong, long-term relationships the Company has developed with its customers as
well as the quality and reliability of its products.
The primary users of the Company's grain storage, drying and handling
products are farm operators or commercial businesses, such as the
Archer-Daniels-Midland Company and Cargill, Inc., that operate feed mills, grain
elevators, port storage facilities and commercial grain processing facilities.
The Company believes that its grain storage, drying and handling equipment is
superior to that of its principal competitors on the basis of strength,
durability, reliability, design efficiency and breadth of product offering. The
Company's feeding and ventilation systems are used primarily by growers that
raise swine and poultry, typically on a contract basis for large integrators
such as Perdue Farms Incorporated and Tyson Foods, Inc. In the swine industry
however, there is a significant portion of the industry that is not integrated
at this time that is also served. Because swine and poultry growers are always
concerned about the efficiency of their operations, especially where it relates
to feed, they seek to purchase systems that minimize the feed-to-meat ratio. As
a result of its proprietary designs, the Company believes that its swine and
poultry systems are the most effective in the industry in serving this customer
objective.
The industry in which the Company operates is characterized both
domestically and internationally by a few large companies with broad product
offerings and numerous small manufacturers of niche product lines.
Domestically, the Company intends to build on its established presence in the
grain, swine and poultry markets. Internationally, the Company intends to
capitalize on opportunities arising from still-developing agricultural
industries. The Company believes that less functionally sophisticated and
efficient grain storage systems used by facilities located outside the U.S. and
Western Europe, which experience relatively high levels of grain spoilage and
loss, are likely to be replaced by more modern systems. The Company also
believes that the economic growth occurring in the Company's international
markets will result in consumers devoting larger portions of their income to
improved and higher-protein diets, stimulating demand for poultry and pork. The
Company believes that it is well-positioned to capture increases in worldwide
demand for its products resulting from these industry trends because of its
leading brand names, broad and diversified product lines, strong distribution
network and high-quality products.
The Company was incorporated in Delaware on April 30, 1964. The Company's
principal executive office is located at 1004 East Illinois Street, Assumption,
Illinois 62510 and its telephone number is (217) 226-4421.
COMPANY STRENGTHS
Market Leader. The Company believes that it is the largest global provider
of both (i) grain storage bins and related drying and handling systems and (ii)
swine feed storage, feed delivery, confinement and ventilation systems. The
Company is also one of the largest global providers of poultry feed storage,
feed delivery, watering, ventilation and nesting systems.
Provider of Fully-Integrated Systems. The Company offers a broad range of
products that permit customers to purchase all of their grain, swine and poultry
production needs from one supplier. The Company believes that providing
fully-integrated systems significantly lowers total production costs and
enhances producer productivity by offering compatible products designed to
promote synergies and achieve maximum operating results. Dealers who purchase
fully-integrated systems also benefit from lower administrative and shipping
costs and the ease of dealing with a single supplier. The Company intends to
maintain its position as a provider of fully-integrated systems by continuing to
offer the most complete line of products available within its markets and by
developing and introducing new products within its existing lines.
6
Brand Name Recognition and Reputation for Quality Products and Service.
Through its manufacturing expertise and experience, the Company has established
recognition in its markets for the GSI, DMC, FFI, Zimmerman, AP and Cumberland
brand names. The Company seeks to protect the reputation for high quality,
reliability and specialized services that are associated with such brand names
through quality control and customer feedback programs. The Company believes
that its reputation and recognized brand names, along with its extensive
distribution network, will assist it in its efforts to further penetrate both
the domestic and international markets in which the Company operates.
Effective and Established Distribution Network. The Company believes that
its development of a highly effective and established distribution network
affords it significant competitive advantages. The Company's distribution
network consists of over 2,500 independent dealers that market the Company's
products in approximately 75 countries throughout the world. The breadth and
scope of the Company's distribution network makes its products readily available
in each of the Company's markets and lowers transportation costs for its
customers. Dealers are carefully selected and trained to ensure high levels of
customer service. In addition, the Company has experienced a very low turn-over
rate of its dealers since the Company's inception, which promotes consistency
and stability to customers.
Long-Term Alliances with Customers. The Company has a history of
developing long-term alliances with customers who are market leaders in both the
industries and the geographic markets they serve. The Company works closely
with customers through all stages of product development in order to tailor
products and systems to meet each customer's unique needs, making substitutions
with competitor products more difficult. The Company's commitment to product
quality, dedication to customer service and responsiveness to changing customer
needs have enabled the Company to develop and strengthen long-term alliances
with its customers.
Flexible Manufacturing Facilities. The Company's facilities are designed
to be easily reconfigured to adapt to demand changes for any or all of the
Company's products. The Company's primary manufacturing facility, located in
Assumption, Illinois, consists of approximately 950,000 square feet and operates
on a 24-hour basis during peak production periods. The Company's facilities
employ state-of-the-art machines that have enhanced production efficiencies.
Company Operated by Experienced Management Team. The Company is led by a
management team with significant experience in the agricultural products
industry. The Company believes that the agricultural expertise of its
management team permit it to establish strong customer relationships and respond
quickly to market opportunities.
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy, which includes the following principal
elements:
Capitalize on Opportunities in International Markets. The Company intends
to continue to leverage its worldwide brand name recognition, leading market
positions and international distribution network to capture the demand for its
products that exists in the international marketplace. The Company believes
that increasing the diversity of both its customer base and geographic coverage
by expanding its international operations will mitigate the effect of future
reductions in demand within any of its individual product lines, or within a
particular geographic selling region.
Continue Development of Proprietary Product Innovations. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes in the
marketplace and new technology. The Company employs a strategy of working
closely with its customers and capitalizing on existing technology to improve
existing products and develop new value-added products. The Company intends to
continue to actively develop product improvements and innovations to more
effectively serve its customers.
Reduce Expenses and Improve Profitability. The Company focuses on
improving its financial performance by reducing non-strategic expenses and
streamlining the processes at all levels of its organization.
7
INDUSTRY OVERVIEW
Demand for the Company's products is driven by the overall worldwide level
of grain, swine and poultry production as well as the increasing focus, both
domestically and internationally, on improving productivity in these industries.
These markets are driven by a number of factors, including consumption trends
affected by economic and population growth and government policies.
Demand for grain and the required infrastructure for grain storage, drying
and handling is driven by several factors, including the need for grain for
worldwide production of meat protein and cereals. The Company believes that
less functionally sophisticated and efficient grain storage facilities located
outside the U.S. and Western Europe, which experience higher levels of grain
spoilage and loss, are over time likely to be replaced by more modern equipment.
The Company also believes that these dynamics will continue to support domestic
and international demand for the Company's grain storage, drying and handling
systems.
Demand for the Company's swine and poultry feeding equipment and feed
storage and delivery systems is impacted by the rate of economic growth
occurring in international markets. As disposable incomes increase in these
international markets, consumers have in the past, and should in the future,
devote larger portions of their income to improved and higher protein-based
diets. In the past, this trend has stimulated stronger demand for meat,
specifically poultry and pork, as these meats provide more cost-effective
sources of animal protein than beef.
The Company's sales of grain equipment have historically been affected by
feed and grain prices, acreage planted, crop yields, demand, government
policies, government subsidies and other factors beyond the Company's control.
Weather conditions also can adversely impact the agricultural industry and delay
planned construction activity, resulting in fluctuating demand for the Company's
grain equipment and delayed or lost revenues. Increases in feed and grain
prices have in the past resulted in a decline in sales of feeding, watering and
ventilation systems. The Company's sales of swine and poultry equipment
historically have been affected by the level of construction activity by swine
and poultry producers, which is affected by feed prices, environmental
regulations and domestic and international demand for pork and poultry.
PRODUCTS
The Company manufactures and markets (i) grain storage bins and related
drying and handling equipment systems, (ii) swine feed storage, feed delivery,
confinement and ventilation systems and (iii) poultry feed storage, feed
delivery, watering, ventilation and nesting systems. The Company offers a broad
range of products that permits customers to purchase their grain, swine and
poultry production equipment needs from one supplier. The Company believes that
its ability to offer integrated systems provides it with a competitive advantage
by enabling producers to purchase complete, integrated production systems from a
single distributor who can offer high-quality installation and service.
Grain Product Line
The Company's grain equipment consists of the following products:
Grain Storage Bins. The Company manufactures and markets a complete line
of over 1,000 models of both flat and hopper bottomed grain storage bins with
capacities of up to 710,000 bushels. The Company markets its bins to both farm
and commercial end users under its GSI brand name. The Company's grain storage
bins are manufactured using high-yield, high tensile, galvanized steel (the
thickest in the industry) and are assembled with high strength, galvanized bolts
and anchor brackets. The Company's grain storage bins offer efficient design
enhancements, including patented walk-in doors and a roof design that provides
specialized vents for increased efficiency, extruded lips for protection against
leakage, large and accessible eave and peak openings for ease of access, and
reinforced supportive bends to increase rigidity. The Company believes that its
grain storage bins are the most reliable and heaviest in the industry.
Grain Conditioning Equipment. To meet the need to dry grain for storage,
the Company manufactures and markets a complete line of over 100 models of grain
drying devices with capacities of up to 10,000 bushels per hour. The Company
markets its grain drying equipment to both farm and commercial end users under
its GSI, DMC, Zimmerman, FFI, and Airstream brand names. The Company's drying
equipment, which includes fans, heaters, top dryers, stirring devices, portable
dryers, stack dryers, tower dryers and process dryers, is manufactured using
galvanized steel and high-grade electrical components and utilize patented
control systems, which offer computerized control of all dryer functions from
one panel.
8
Grain Handling Equipment. The Company manufactures and markets a complete
line of grain handling equipment to complement its grain storage and drying
product offerings. The Company markets its grain handling equipment, which
includes bucket elevators, conveyors and augers, to both farm and commercial end
users under its GSI and Grain King brand names. The Company's grain handling
equipment offers ease of integration into Company or competitor systems and
enables the Company to offer a fully-integrated product line to grain
producers.
Swine Product Line
The Company's swine equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its swine feeding
products under its AP brand name. The Company custom designs a wide array of
state of the art feeding systems used in today's modern swine facilities. These
include the popular Flex-Flo auger systems that typically transport feed from
the Bulk Feed Storage Tanks located outside of the buildings to inside of the
structure. Once inside it is moved either by additional Flex-Flo equipment or
is transferred to the versatile Chain Disk System, which can make turns and
changes in elevation much more easily. Finally, the feed is delivered to the
animals using either a wide variety of ad lib feeders that are specifically
designed to waste a minimum amount of feed, provide the animals a high degree of
comfort, and be user friendly to the producer. Sometimes an individual feed
dispenser that allows the producer to feed each animal an exact amount of feed
daily is used. All of these systems are highly automated and address the ever
changing and multifaceted production practices that still abound in the pork
production industry, such as "wean to finish" or "sorting technology".
Ventilation Systems. The Company manufactures and markets ventilation
systems for swine buildings under its AP and Airstream brand names. These
systems consist of fans, heating and evaporative cooling systems, winches,
inlets and other accessories (including computer based automated control
devices) that regulate temperature and air flow. Proper ventilation systems are
crucial for minimizing the feed-to-meat conversion ratio by reducing stress
caused by extreme temperature fluctuation, allowing for higher density
production and providing optimum swine health through disease prevention. The
Company's swine ventilation systems produce high levels of air output at low
levels of power consumption, adapt to a wide array of specialty fans and other
accessories, operate with little maintenance or cleaning and provide precision
monitoring of environmental control. The Company specializes in designs that
work with the new emerging production practices as they are being developed by
producers so that they are market ready when these practices become
commonplace.
Other Production Equipment. The Company manufactures and markets a wide
array of equipment used in the balance of the swine production process,
including plastic and cast iron slated flooring, highly efficient watering
devices, a wide variety of PVC extrusions used for construction applications in
the facilities, many sizes of rubber floor mats for pig comfort, creep heating
systems for baby pigs, several styles of steel confinement equipment, and the
latest in practical feed, water, and environmental monitoring equipment.
Poultry Product Line
The Company's poultry equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its poultry feeding
systems under its Cumberland brand name. The Company manufactures feeding
systems that are custom tailored to both the general industry needs of different
types of poultry producers and to the specialized needs of individual poultry
producers. The Company's poultry feeding systems consist of a feed storage bin
located outside the poultry house, a feed delivery system that delivers the feed
from the feed storage bin into the house and an internal feed distribution
system that delivers feed to the birds. The Company's poultry feed storage bins
contain a number of patented features designed to maximize capacity, manage the
quality of stored feed, prevent rain and condensation from entering feed storage
bins and provide first-in, first-out material flow, thereby keeping feed fresh
to help prevent spoilage, and blended to provide uniform quality rations. The
Company's poultry feed delivery systems use non-corrosive plastic and galvanized
steel parts specially engineered for durability and reliable operations and
specialized tubing and auguring or chain components that allow feed to be
conveyed up, down and around corners. The Company believes that its patented
HI-LO pan feeder is superior to competitor products due to its unique ability to
adjust from floor feeding for young chicks to regulated feed levels for older
birds.
9
Watering Systems. The Company manufactures and markets nipple watering
systems for poultry producers under its Cumberland brand name. The ability of a
bird to obtain water easily and rapidly is an essential factor in facilitating
weight gain. The Company's poultry watering system consists of pipes that
distribute water throughout the house to drinking units supported by winches,
cables and other components. The water is delivered through a regulator
designed to provide differential water pressure according to demand. The
Company's poultry watering systems are distinguished by their toggle action
nipples, which transmit water from nipple to beak without causing undue stress
on the bird or excess water to be splashed onto the floor. The watering nipples
produced by the Company also are designed to allow large water droplets to form
on the cavity of the nipple, thereby attracting young birds to drink, which
ultimately promotes weight gain.
Ventilation Systems. The Company manufactures and markets ventilation
systems for poultry producers under its Cumberland brand name. Equipment
utilized in such systems include fiberglass and galvanized fans, the Komfort
Kooler evaporative cooling systems, manual and automated curtains, heating
systems and automated controls for complete ventilation, cooling and heating
management. The Company believes its poultry ventilation products are reliable
and easy to assemble in the field, permit energy-efficient airflow management
and are well-suited for international sales because they ship compactly and
inexpensively and assemble with little hardware and few tools. Accurate bird
weighing systems integrate with the environmental controls to give growers and
integrators running averages of their flock weights.
Nesting Systems. The Company manufactures and markets nesting systems for
poultry producers under its Cumberland brand name. These systems consist of
mechanical nests and egg collection tables. The Company's nesting systems are
manufactured using high-yield, high tensile galvanized steel and are designed to
promote comfort for nesting birds and efficiency for production personnel. The
Company believes that its nesting systems are among the most reliable and
cost-effective in the poultry industry.
In 2003, 2002 and 2001, no single customer represented more than 10% of the
Company's sales and no single class of products represented more than 10% of the
Company's sales.
PRODUCT DISTRIBUTION
The Company distributes its products primarily through a network of U.S.
and international independent dealers who offer targeted geographic coverage in
key grain, swine and poultry producing markets throughout the world. The
Company's dealers sell products to grain, swine and poultry producers,
agricultural companies and various other farm and commercial end-users. The
Company believes that its distribution network is one of the strongest in the
industry, providing its customers with high levels of service. Since its
inception, the Company has experienced a very low turnover rate of its dealers.
The Company believes this has resulted in a reputation of consistency in its
products and stability with its customers. The Company further believes that
the high level of commitment its dealers have to the Company is evidenced by the
fact that many of the Company's dealers choose not to sell products of the
Company's competitors.
The Company also maintains a sales force to provide oversight services for
the Company's distribution network, interact with integrators and end users,
recruit additional dealers for the Company's products, and educate the dealers
on the uses and functions of the Company's products. The Company further
supports and markets its products with a technical service and support team,
which provides training and advice to dealers and end users regarding
installation, operation and service of products and, when necessary, on-site
service.
For information regarding the Company's sales by geographic region, see
Note 13 to the Consolidated Financial Statements included in Item 8 hereof.
COMPETITION
The market for the Company's products is competitive. Domestically and
internationally, the Company competes with a variety of manufacturers and
suppliers that offer only a limited number of the products offered by the
Company.
Competition is based on the price, value, reputation, quality and design of
the products offered and the customer service provided by distributors, dealers
and manufacturers of the products. The Company believes that its leading brand
names, diversified product lines, strong distribution network and high quality
products enable it to compete effectively. The Company further believes that
its ability to offer integrated systems to grain, swine and poultry producers,
which significantly lowers total production costs and enhances producer
productivity, provides it with a competitive advantage. Integrated equipment
systems offer significant benefits to dealers, including lower administrative
and shipping costs and the ease of dealing with a single supplier for all of
their customer needs. In addition, the Company's dealers provide producers with
high quality service, installation and repair.
10
NEW PRODUCT DEVELOPMENT
The Company has a product development and design engineering staff, most of
whom are located in Assumption, Illinois. Expenditures by the Company for
product research and development were approximately $2.5 million, $2.7 million
and $2.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company charges research and development costs to operations
as incurred.
RAW MATERIALS
The primary raw materials used by the Company to manufacture its products
are steel and polymer materials, including PVC pipe, polypropylene and
polyethylene. The Company also purchases various component parts that are
integrated into the Company's products. The Company is not dependent on any one
of its suppliers and in the past has not experienced difficulty in obtaining
materials or components. In addition, materials and components purchased by the
Company are readily available from alternative suppliers. The Company has no
long-term supply contracts for materials or components.
REGULATORY AND ENVIRONMENTAL MATTERS
Like other manufacturers, the Company is subject to a broad range of
federal, state, local and foreign laws and requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous substances and wastes, the remediation of contamination associated
with releases of hazardous substances at the Company's facilities and offsite
disposal locations, workplace safety and equal employment opportunities.
Expenditures made by the Company to comply with such laws and requirements
historically have not been material.
BACKLOG
Backlog is not a significant factor in the Company's business because most
of the Company's products are delivered within a few weeks of their order. The
Company's backlog at December 31, 2003 was $23.4 million compared to $28.8
million at December 31, 2002. The Company believes that all such backlog will
be filled by the end of 2004.
PATENTS AND TRADEMARKS
The Company protects its technological and proprietary developments. The
Company currently has several active U.S. and foreign patents, trademarks and
various licenses for other intellectual property. While the Company believes
its patents, trademarks and licensed information have significant value, the
Company does not believe that its competitive position or that its operations
are dependent on any individual patent or trademark or group of related patents
or trademarks.
EMPLOYEES
As of December 31, 2003, the Company had 1,510 employees of whom 1,408 were
permanent and 102 were seasonal. The Company's employees are not represented by
a union. Management believes that its relationships with the Company's
employees are good.
ITEM 2. PROPERTIES.
The principal properties of The GSI Group as of March 26, 2004, were as
follows:
Location Description of Property
---------------------- -----------------------------
Assumption, Illinois . Manufacturing/Sales
Paris, Illinois. . . . Manufacturing/Assembly
Newton, Illinois . . . Manufacturing/Assembly
Vandalia, Illinois . . Manufacturing/Assembly
Flora, Illinois. . . . Manufacturing/Assembly
Clear Lake, Iowa . . . Sales/Warehouse
Sioux City, Iowa . . . Sales/Warehouse
Marau, Brazil. . . . . Manufacturing/Sales
Penang, Malaysia . . . Manufacturing/Sales/Warehouse
Queretero, Mexico. . . Sales/Warehouse
Honeydew, South Africa Sales/Warehouse
Ludford, Great Britain Sales
Poznan, Poland . . . . Sales
Shanghai, China. . . . Sales/Warehouse
11
The corporate headquarters for the Company is located in Assumption,
Illinois.
The Company's owned facilities are subject to mortgages. The Company's
leased facilities are leased through operating lease agreements with varying
expiration dates. For information on operating leases, see Note 12 to the
Consolidated Financial Statements included in Item 8 hereof.
The Company believes that its facilities are suitable for their present and
intended purposes and have adequate capacity for the Company's current levels of
operation.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal matters arising in the ordinary
course of business which, in the opinion of management, will not have a
material adverse affect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2003.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is no established public trading market for any class of the
Company's Common Stock. As of March 26, 2004, the Company had 10 holders of its
Common Stock. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management".
The Company generally has not paid dividends in the past, except to enable
its stockholders to pay taxes resulting from the Company's status as a
subchapter S corporation. During the years ended December 31, 2003 and December
31, 2002, the Company declared dividends totaling $1.1 million and $1.8 million,
respectively. The Company is subject to certain restrictions on the payment of
dividends contained in the indenture governing the Company's 10 % Senior
Subordinated Notes due 2007 (the "Notes") and in the Company's credit facility
with Congress Financial Corporation (Central) (the "Credit Facility"). Future
dividends, if any, will depend upon, among other things, the Company's
operations, capital requirements, surplus, general financial condition,
contractual restrictions and such other factors, as the Board of Directors may
deem relevant.
13
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected historical consolidated financial data for the Company as of
and for the years ended December 31, 1999, 2000, 2001, 2002 and 2003. The selected historical
consolidated financial data for the years indicated were derived from the consolidated financial
statements of the Company. The information set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included in Item 8 hereof.
As discussed in the Note 16 to the Consolidated Financial Statements, certain historical
information in the Consolidated Financial Statements has been restated. Please read the Note 16 to the
Consolidated Financial Statements for additional information about these restatements. The selected
financial data set forth below has been adjusted to reflect these restatements.
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
INCOME STATEMENT (000'S):
Sales. . . . . . . . . . . . . . . . . . . . . . $229,210 $243,961 $229,921 $230,636 $237,669
Cost of sales. . . . . . . . . . . . . . . . . . 179,927 184,622 174,847 183,933 190,213
--------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 49,283 59,339 55,074 46,703 47,456
Operating expenses . . . . . . . . . . . . . . . 38,669 40,070 41,456 39,100 41,287
--------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . . . 10,614 19,269 13,618 7,603 6,169
Interest expense . . . . . . . . . . . . . . . . (14,768) (14,997) (14,397) (13,011) (13,216)
Other income (expense) . . . . . . . . . . . . . 477 439 312 (603) 369
--------- --------- --------- --------- ---------
Income (loss) from continuing operations . . . . (3,677) 4,711 (467) (6,011) (6,678)
Provision (benefit) for income taxes . . . . . . (336) (568) (656) 159 (975)
Income (loss) before minority interest . . . . . (3,341) 5,279 189 (6,170) (5,703)
--------- --------- --------- --------- ---------
Minority Interest in Net income of Subsidiaries. -- -- -- (26) (77)
Net income (loss). . . . . . . . . . . . . . . . $ (3,341) $ 5,279 $ 189 $ (6,196) $ (5,780)
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE:
Continuing operations. . . . . . . . . . . . . . $ (1.84) $ 2.52 $ (0.26) $ (3.39) $ (3.76)
Net income (loss). . . . . . . . . . . . . . . . $ (1.67) $ 2.82 $ 0.11 $ (3.49) $ (3.26)
--------- --------- --------- --------- ---------
BALANCE SHEET (000'S):
Total Assets . . . . . . . . . . . . . . . . . . $158,519 $164,123 $154,751 $145,618 $136,349
Long-term obligations. . . . . . . . . . . . . . $133,315 $130,870 $136,211 $139,735 $129,563
Dividends per share. . . . . . . . . . . . . . . $ 0.0 $ 1.05 $ 0.60 $ 1.01 $ 0.65
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes included in Item 8 hereof. The Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in this Item 7 has been restated to reflect certain adjustments to the
Company's consolidated financial information previously reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 filed
on March 30, 2004 (the "Form 10-K"). The Management's Discussion and Analysis
of Financial Condition and Results of Operations set forth in this Item 7 has
not been updated to reflect changes in events, estimates or other developments
subsequent to March 30, 2004, the date of filing of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2003. Refer to note 16,
"Restatement," to the Consolidated Financial Statements for further information.
GENERAL
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past have
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's sales and net income have historically been lower
during the first and fourth fiscal quarters as compared to the second and third
quarters.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for transactions
from the Company's Brazilian and South African operations), the production
costs, profit margins and competitive position of the Company are affected by
the strength of the U.S. dollar relative to the strength of the currencies in
countries where its products are sold.
The Company's international sales have historically comprised a significant
portion of sales. In 2003, 2002 and 2001, the Company's international sales
accounted for 34.4%, 36.6% and 32.3% of sales, respectively. International
operations generally are subject to various risks that are not present in
domestic operations, including restrictions on dividends, restrictions on
repatriation of funds, unexpected changes in tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely impact the
Company's international operations.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices of steel and, to a lesser
extent, polymer materials can impact the Company's cost of sales.
The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's
stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities. The Company intends
to continue this policy.
RESTATEMENT
During the 2004 year-end closing process, the Company discovered
unintentional accounting errors in prior years' financial statements. The
errors have been corrected in the accompanying 2003, 2002 and 2001 financial
statements. A description of the errors and related impact of each on the
financial statements follows. Amounts are stated in whole dollars.
15
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6.5 million. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2.2 million in 2003 and $4.3 million in 2004. During the 2004
year-end closing process, this issue was re-examined, and the Company determined
that it would be appropriate to restate the 2002 cost of sales and year-end
inventory, the period when the overstatement occurred. The effect of this
change reduced previously reported net income for 2002 by $6,470,161 and
increase previously reported net income of 2003 by $2,206,000.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employee's. The stockholder helped finance each purchase with
non-recourse interest-bearing notes with the shares as the only collateral on
the notes. APB Opinion 25 and its interpretations require that these
transactions be imputed to the Company's financial statements and be accounted
for as variable stock awards, which practice the Company had not followed. The
fair value of the underlying shares first exceeded the price paid for the shares
in 2002. The effect of recording the resulting compensation expense reduced
previously reported net income for 2003 by $484,097 and reduced previously
reported net income for 2002 by $89,511. The dividends paid to the non-voting
shareholders are classified as compensation expense and reduced previously
reported net income for 2003, 2002 and 2001 by $62,584, $113,647 and $84,810,
respectively.
In 2002 the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby it compensated him with shares of the subsidiary's
stock. This constitutes a stock compensation arrangement for which the Company
did not recognize compensation expense. The effect of recording compensation
expense related to this arrangement reduced previously reported net income for
2003 by $340,000 and reduced previously reported net income for 2002 by
$401,000.
The Company has determined that the functional currency of its Mexican
subsidiary should be U.S. Dollars rather than Pesos. The effect of this change
reduced previously reported 2003 and 2002 net income by $98,644 and $315,917,
respectively, and increased previously reported 2001 net income by $69,692.
In 2001, 2002 and 2003, the Company's CEO and majority stockholder elected
not to accept salary and board fees that were subsequently paid in 2004. The
company did not accrue these amounts in those years. The effects of accruing
compensation for this individual reduced previously reported 2003, 2002 and 2001
net income by $100,000, $507,515 and $257,000, respectively.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
for claims incurred but not reported. The effect of accruing for such claims in
2003, 2002 and 2001 reduced previously reported net income by $289,506, $698,246
and $603,090, respectively.
The Company also made adjustments in 2003, 2002 and 2001 to correct
previous reporting of overhead adjustments in overseas inventories and gain on
inter-company sales.
The financial statement impact of the above noted adjustments are indicated
in the table below:
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2003
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . . . . . . . $ 54,165 $ (4,562) $ 49,603
Payroll and payroll related expenses. . . . . 3,071 565 3,636
Other accrued expenses. . . . . . . . . . . . 4,057 1,891 5,948
Paid in capital . . . . . . . . . . . . . . . 3,006 574 3,580
Accumulated other comprehensive loss. . . . . (11,929) 345 (11,584)
Retained earnings . . . . . . . . . . . . . . 12,531 (8,678) 3,853
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . . . . . . . 190,694 (481) 190,213
Selling, general and administrative expenses. 36,591 3,602 40,193
Operating income. . . . . . . . . . . . . . . 9,290 (3,121) 6,169
Foreign currency transaction loss . . . . . . (102) (99) (201)
Other, net. . . . . . . . . . . . . . . . . . (3,544) 3,749 205
Minority interest in net income of subsidiary -- (77) (77)
Net loss. . . . . . . . . . . . . . . . . . . (6,232) 452 (5,780)
Basic and diluted earnings per share. . . . . ($3.51) $ 0.25 ($3.26)
16
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2002
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 63,893 $ (6,389) $ 57,504
Payroll and payroll related expenses . . . . . 2,987 565 3,552
Other accrued expenses . . . . . . . . . . . . 4,144 1,501 5,645
Paid in capital. . . . . . . . . . . . . . . . 3,006 90 3,096
Accumulated other comprehensive loss . . . . . (14,336) 246 (14,090)
Retained earnings. . . . . . . . . . . . . . . 19,971 (9,192) 10,779
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 176,836 7,097 183,933
Selling, general and administrative expenses . 36,767 1,087 37,854
Operating income . . . . . . . . . . . . . . . 15,787 (8,184) 7,603
Foreign currency transaction loss. . . . . . . (468) (316) (784)
Minority interest in net income of subsidiary. -- (26) (26)
Net income (loss). . . . . . . . . . . . . . . 2,330 (8,526) (6,196)
Basic and diluted earnings per share . . . . . $ 1.31 ($4.80) ($3.49)
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2001
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . 174,254 593 174,847
Selling, general and administrative expenses 39,386 342 39,728
Operating income . . . . . . . . . . . . . . 14,553 (935) 13,618
Foreign currency transaction loss. . . . . . 33 70 103
Net income . . . . . . . . . . . . . . . . . 1,054 (865) 189
Basic and diluted earnings per share . . . . $ 0.59 ($0.48) $ 0.11
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Sales increased 3.1% or $7.1 million to $237.7 million in 2003 compared to
$230.6 million in 2002. Poultry equipment sales were essentially flat.
Increases in demand for grain products were partially offset by decreases in
demand for swine products.
Gross profit increased to $47.5 million in 2003 or 20.0% of sales from
$46.7 million or 20.2% of sales in 2002. This decrease was primarily due to
higher material costs and an unfavorable shift in the mix of products sold.
Operating expenses increased 5.6% or $2.2 million to $41.3 million in 2003
from $39.1 million in 2002. As a percentage of sales, operating expenses
decreased to 17.4% in 2003 from 17.0% in 2002. This increase was primarily the
result of the write-off of international receivables.
17
Operating income decreased to $6.2 million in 2003 from $7.6 million in
2002. Operating income margins decreased to 2.6% of sales in 2003 from 3.3% in
2002.
Interest expense increased $0.2 million due to slightly higher borrowing
costs.
Other, net decreased $1.0 million to $0.4 million of income in 2003 from
$0.6 million of expense in 2002. This increase in expense was primarily the
result of writing down the Yemen receivable.
Net loss decreased to $5.8 million in 2003 from $6.2 million in 2002.
During the 2003 year-end closing process, the Company had the following
adjustments as part of its 4th quarter results. As described in Footnote 12,
the Company decided that the likelihood of collection had deteriorated for the
Yemen project so the retainage was written down by $1.5 million.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Sales increased 0.3% or $0.7 million to $230.6 million in 2002 compared to
$229.9 million in 2001. Grain equipment sales were essentially flat. Increases
in demand for poultry products were offset by decreases in demand for swine
products.
Gross profit decreased to $46.7 million in 2002 or 20.2% of sales from
$55.1 million or 24.0% of sales in 2001. This decrease was primarily due to
production inefficiencies caused by consolidation efforts.
Operating expenses decreased 5.7% or $2.4 million to $39.1 million in 2002
from $41.5 million in 2001. As a percentage of sales, operating expenses
decreased to 17.0% in 2002 from 18.0% in 2001. This decrease was primarily the
result of cost cutting measures, which included the consolidation of the
Indianapolis office.
Operating income decreased to $7.6 million in 2002 from $13.6 million in
2001. Operating income margins decreased to 3.3% of sales in 2002 from 5.9% in
2001.
Interest expense decreased $1.4 million due to lower borrowing costs.
Net income decreased to $6.2 million loss in 2002 from $0.2 million income
in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales decreased 5.8% or $14.1 million to $229.9 million in 2001 compared to
$244.0 million in 2000. The decrease was primarily driven by weaker domestic
demand for grain storage and conditioning equipment. Brazilian and domestic
poultry sales were also lower due to weaker demand. This decrease was partially
offset by increased swine equipment sales, which were higher due to
strengthening demand.
Gross profit decreased to $55.1 million in 2001 or 24.0% of sales from
$59.3 million or 24.3% of net sales in 2000. This decrease was caused by
decreased sales and restructuring expenses incurred at the end of the year to
consolidate manufacturing operations.
Operating expenses increased 3.5% or $1.4 million to $41.5 million in 2001
from $40.1 million in 2000. This increase was primarily the result of
integration costs necessary to support the sales volume resulting from the FFI
acquisition. Restructuring charges incurred during the period were offset by
cost reduction and consolidation actions. As a percentage of sales, operating
expenses increased to 18.0% in 2001 from 16.4% in 2000.
Operating income decreased to $13.6 million in 2001 from $19.3 million in
2000. Operating income margins decreased to 5.9% of sales in 2001 from 7.9% in
2000. This decrease was attributable to the decrease in sales and increased
operating expenses.
Interest expense decreased $0.6 million due to lower borrowing costs.
Net income decreased to $0.2 million in 2001 from $5.3 million in 2000.
The decrease was primarily attributable to the factors discussed above relating
to operating expenses and operating income.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by borrowings made under various credit
agreements and the sale of the Notes.
The Company's working capital requirements for its operations are seasonal,
with investments in working capital typically building in the second and third
quarters and then declining in the first and fourth quarters. The Company
defines working capital as current assets less current liabilities. As of
December 31, 2003, the Company had $50.3 million of working capital, a decrease
of $8.6 million as compared to its working capital as of December 31, 2002.
This decrease in working capital was primarily due to decreases in inventory and
current maturities of long term debt and increases in accounts receivable,
accounts payable, and prepaids.
Operating activities generated $13.4 million, $3.6 million and $5.0 million
of cash in 2003, 2002 and 2001, respectively. The increase in cash flow from
operating activities from 2002 to 2003 of $9.8 million was primarily the result
of a change in inventory, accounts payable, other current assets, accrued
expenses, customer deposits and net income of $20.8 million offset by changes in
depreciation and amortization, accounts receivable and deferred taxes totaling
$11.5 million.
The Company's capital expenditures totaled $1.7 million, $5.2 million and
$4.4 million in 2003, 2002 and 2001, respectively. Capital expenditures have
primarily been for machinery and equipment and the expansion of facilities. The
Company anticipates that its capital expenditures in 2004 will be approximately
that of 2003.
Cash used in financing activities in 2003 consisted primarily of $15.2
million of payments of long-term debt, a $2.2 million payment of shareholder
loans and a $1.1 million dividend for taxes offset by $2.2 million of borrowing
under the Credit Facility and a $1.6 million shareholder loan. Cash provided by
financing activities in 2002 consisted primarily of $7.8 million of increased
borrowings under the Credit Facility and a $1.5 million shareholder loan offset
by $4.5 million of payments of long-term debt, a $1.8 million dividend for
taxes, and a $0.7 million payment of shareholder loans. Cash used in financing
activities in 2001 consisted primarily of $6.7 million of payments on long-term
debt, a $1.1 million dividend for taxes, and a $2.2 million payment of a
shareholder loan offset by $8.0 million of increased borrowings under the Credit
Facility and a $1.0 million shareholder loan.
The Company believes that existing cash, cash flow from operations and
available borrowings under the Credit Facility will be sufficient to support its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
On October 31, 2003, The GSI Group, Inc. (the "Company") entered into a
three-year credit facility with lenders led by Congress Financial Corporation
(Central) to provide up to a maximum amount of $75,000,000 subject to borrowing
base availability (the "Credit Facility") to replace the Company's existing
senior credit facility, which provided for maximum outstanding borrowings of
$60,000,000. Revolving loans and letters of credit under the Credit Facility
are based on a borrowing base, which includes accounts receivable, inventory and
fixed assets. A $12.5 million term loan due on October 31, 2006 is also
included in the Credit Facility. The revolving loan borrowings bear interest at
a floating rate per annum equal to (at the Company's option) 2.5% to 3.0% over
LIBOR or 0.0% to 0.50% over the Prime Rate, both based on excess availability
under the borrowing base. The term loan borrowings bear interest at a floating
rate per annum equal to 8% over the Prime Rate provided that the minimum
interest rate will not be less than 12.25% and the maximum will not be greater
than 14.5%. The Credit Facility requires the Company to maintain a senior debt
to EBITDA ratio and a fixed charge coverage ratio. Borrowings under the Credit
Facility are secured by substantially all of the assets of the Company,
including the capital stock of any existing or future subsidiaries, except the
Brazilian subsidiary. The Company had $19.5 million of revolving loans
outstanding, $3.8 million of standby letters of credit and $4.5 million letter
of credit guaranteeing the debt of FarmPro, Inc., which reduced the overall
availability on the line to $7.5 million as of December 31, 2003.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
19
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions, and estimates that
affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Note 2 to the Consolidated Financial Statements describes
the significant accounting policies and methods used in the preparation of the
Consolidated Financial Statements. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts and sales returns,
inventory allowances, warranty costs, investment impairments, goodwill
impairments, contingencies, restructuring costs and other special charges, and
taxes. Actual results could differ materially from these estimates. The
following critical accounting policies are impacted significantly by judgements,
assumptions, and estimates used in the preparation of the Consolidated Financial
Statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there were a deterioration of a major customer's
creditworthiness, or actual defaults were higher than our historical experience,
our estimates of the recoverability of amounts due to us could be overstated,
which could have an adverse impact on our revenue.
REVENUE RECOGNITION
A reserve for sales returns is established based on historical trends in
product return rates. If the actual future returns were to deviate from the
historical data on which the reserve had been established, our revenue could be
adversely affected.
INVENTORY
Inventory purchases and commitments are based upon future demand forecasts.
If there were to be a sudden significant decrease in demand for our products, or
if there were a higher incidence of inventory obsolescence because of rapidly
changing technology and customer requirements, we could be required to increase
our inventory allowances and our gross margins could be adversely affected.
WARRANTY
We accrue for warranty costs based on historical trends in product return
rates and the expected material and labor costs to provide warranty services.
If we were to experience an increase in warranty claims compared with our
historical experience or costs of servicing warranty claims were greater than
the expectations on which the accrual had been based, our gross margins could be
adversely affected.
GOODWILL IMPAIRMENT
We perform goodwill impairment tests on an annual basis. In response to
changes in industry and market conditions, we may be required to strategically
realign our resources and consider restructuring, disposing, or otherwise
exiting businesses, which could result in impairment of goodwill.
CONTINGENCIES
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that an asset has been
impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.
SELF INSURANCE
A reserve for workers compensation IBNR (incurred but not reported) claims
is established based on information provided by the insurance carrier. This
reserve is adjusted monthly.
COMPENSATION EXPENSE
In 1997, the majority shareholder sold non-voting shares to certain
employees at an arm's length market value price. The majority shareholder
helped finance each employee purchase with a non-recourse interest-bearing note
with each employee with the shares being held as collateral against that note.
The Company failed to ascertain the market value of those shares at each
year-end to determine if compensation expense should be recorded to comply with
generally accepted accounting principles. The Company has now performed that
review and determines annually the compensation expense impact.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At December 31,
2003, principal exposed to interest rate risk was limited to $32.2 million in
variable rate debt. The interest rates on the various debt instruments range
from 4.25% to 12.25%. The Company measures its interest rate risk by estimating
the net amount by which potential future net earnings would be impacted by
hypothetical changes in market interest rates related to all interest rate
sensitive assets and liabilities. Therefore, a change in the interest rate of
1% will change earnings by $0.3 million.
At December 31, 2003, approximately 16.0% of sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian and South African subsidiary. The Company's exposure to such exchange
rate risk as it relates to the Company's financial position and results of
operations would be adversely impacted by devaluation of the Brazilian Real and
the South African Rand per U.S. dollar. These amounts are difficult to
accurately estimate due to factors such as the inherent fluctuations of
intercompany account balances, balance sheet accounts and the existing economic
uncertainty and future economic conditions in the international marketplace.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE GSI GROUP, INC.
PAGE
----
Reports of Independent Registered Public Accounting Firms. . . . . . . . . . . . . . . . . . . . 24
Consolidated Balance Sheets as of December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 . . . 28
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2003, 2002 and
2001 29
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The GSI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GSI Group,
Inc. as of December 31, 2003 and 2002 and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the two years in
the period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Agromarau Industria e
Comercio Ltda., a partially owned subsidiary (93.97 percent owned at December
31, 2003 and 95.46 percent owned at December 31, 2002), which statements reflect
total assets of $17.2 and $11.8 million as of December 31, 2003 and 2002 and
total revenue of $17.4 and $18.3 million for the years then ended. Those
statements were audited by other accountants whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Agromarau
Industria e Comercio Ltda., is based solely on the reports of other accountants.
The consolidated financial statements of The GSI Group, Inc. for the year ended
December 31, 2001, before the restatements discussed below, were audited by
other accountants who ceased operations and whose report date February 25, 2002
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States) of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of the other auditors provide a reasonable basis for our
opinion.
Our audits also included auditing the adjustments to convert the financial
statements of all foreign subsidiaries into accounting principles generally
accepted in the United States of America for purposes of consolidation.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The GSI Group, Inc. as
of December 31, 2003 and 2002 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2, in 2002 the Company changed its method of accounting for
goodwill and other intangible assets. Also, as discussed in Note 16 to the
consolidated financial statements, the Company has restated its financial
statements to correct its method of accounting for inventories, stock-based and
other compensation, certain matters involving foreign subsidiaries and insurance
costs.
As discussed above, the financial statements of The GSI Group, Inc. as of
December 31, 2001, and for the year then ended were audited by other auditors
who have ceased operations. As described in Note 16, these financial statements
have been restated. We audited the adjustments described in Note 16 that were
applied to restate 2001 financial statements. In our opinion, such adjustments
are appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 financial statements of the
Company other than with respect to such adjustments and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 financial
statements taken as a whole.
BKD LLP
Decatur, IL
March 18, 2005
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheets of Agromarau Industria e
Comercio Ltda. (the "Company") as of December 31, 2003 and 2002, and the related
statements of income, changes in shareholders' equity and changes in financial
position for each of the years in the two-year period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Agromarau Industria e Comercio
Ltda. as of December 31, 2003 and 2002, and the results of its operations and
changes in its financial position for each of the years in the two-year period
ended December 31, 2003, in conformity with accounting practices adopted in
Brazil.
DELOITTE TOUCHE TOHMATSU
Auditores Independentes
January 23, 2004
Porto Alegre, RS, Brazil
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The GSI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GSI
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The GSI
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 4 to the consolidated financial statements, effective
for the year ended December 31, 2001, the Company has given retroactive effect
to the change in accounting principle for David Manufacturing Company, a wholly
owned subsidiary of The GSI Group Inc., from the last-in-first-out ("LIFO")
method to the first-in-first-out ("FIFO") method.
As explained in Note 4 to the consolidated financial statements, effective
for the year ended December 31, 2000, the Company has given retroactive effect
to the change in accounting principle for all of the Company's domestic
inventory except that of David Manufacturing Company, a wholly owned subsidiary
of The GSI Group Inc., from the last-in-first-out ("LIFO") method to the
first-in-first-out ("FIFO") method.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 25, 2002
* This audit report of Arthur Andersen LLP, the Company's former independent
public accountants is a copy of the original audit report dated February 25,
2002 rendered by Arthur Andersen LLP on the Company's financial statements
included in its Annual Report on Form 10-K filed on April 3, 2002, and has not
been reissued by Arthur Andersen LLP since that date.
25
PART I - FINANCIAL INFORMATION
THE GSI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
--------- ----
ASSETS RESTATED RESTATED
------------------------------------------------------------------------ -------- ----------
Current Assets:
Cash and cash equivalents $ 3,439 $ 2,936
Accounts receivable, net 27,083 23,274
Inventories, net 49,603 57,504
Prepaids 4,468 2,039
Deferred income taxes -- 66
Other 2,882 5,261
---------- ---------
Total current assets 87,475 91,080
---------- ---------
Property, Plant and Equipment, net 32,673 38,705
---------- ---------
Other Assets:
Goodwill 10,100 9,738
Other intangible assets, net 2,143 3,237
Deferred financing costs, net 2,773 2,054
Deferred taxes, net 1,077 --
Other 108 804
---------- ---------
Total other assets 16,201 15,833
---------- ---------
Total assets $ 136,349 $145,618
========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 17,139 $ 11,063
Payroll and payroll related expenses 3,636 3,552
Deferred income taxes 12 --
Accrued warranty 1,379 1,341
Other accrued expenses 5,948 5,645
Customer deposits 8,875 7,159
Current maturities of long-term debt 148 3,404
---------- ---------
Total current liabilities 37,137 32,164
---------- ---------
Long-Term Debt, less current maturities 129,563 139,735
---------- ---------
Deferred Income Taxes -- 474
---------- ---------
MINORITY INTEREST 741 401
---------- ---------
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 1,575,000 shares) 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares) 2 2
Additional paid-in capital 3,580 3,096
Accumulated other comprehensive loss (11,584) (14,090)
Retained earnings 3,853 10,779
Treasury stock, at cost, voting (5,058,652 shares) (26,950) (26,950)
Treasury stock, at cost, nonvoting (859,316 shares) (9) (9)
---------- ---------
Total stockholders' deficit (31,092) (27,156)
---------- ---------
Total liabilities and stockholders' deficit $ 136,349 $145,618
========== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
26
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002 2001
---- ---- ----
RESTATED RESTATED RESTATED
----------- ----------- -----------
Sales. . . . . . . . . . . . . . . . . . . . . . $ 237,669 $ 230,636 $ 229,921
Cost of Sales. . . . . . . . . . . . . . . . . . 190,213 183,933 174,847
----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . 47,456 46,703 55,074
Selling, General and Administrative Expenses . . 40,193 37,854 39,728
Amortization Expense . . . . . . . . . . . . . . 1,094 1,246 1,728
----------- ----------- -----------
Total operating expenses . . . . . . . . . . . 41,287 39,100 41,456
----------- ----------- -----------
Operating income . . . . . . . . . . . . . . 6,169 7,603 13,618
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . (13,216) (13,011) (14,397)
Interest income. . . . . . . . . . . . . . . . 615 411 485
Loss on sale of fixed assets . . . . . . . . . (250) (353) (350)
Foreign currency transaction gain (loss) . . . (201) (784) 103
Other, net . . . . . . . . . . . . . . . . . . 205 123 74
----------- ----------- -----------
Income (loss) before income taxes . . . . (6,678) (6,011) (467)
----------- ----------- -----------
Income Tax Provision (Benefit) . . . . . . . . . (975) 159 (656)
----------- ----------- -----------
Income before minority interest. . . . . . . . . (5,703) (6,170) 189
Minority Interest in Net Income of Subsidiaries. (77) (26) --
----------- ----------- -----------
Net income (loss). . . . . . . . . . . . . . $ (5,780) $ (6,196) $ 189
=========== =========== ===========
Basic and Diluted Earnings Per Share . . . . . . $ (3.26) $ (3.49) $ 0.11
----------- ----------- -----------
Weighted Average Common Shares Outstanding . . . 1,775,000 1,775,000 1,775,000
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
27
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
------------
Voting Nonvoting
------------ ----------
Accumulated
Additional Other
Shares Shares Paid-In Comprehensive
Outstanding Amount Outstanding Amount Capital Income (Loss)
------------ ---------- ----------- -------------- -------- --------------
Balance, December 31, 2000 . . . . . . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (8,105)
Restated net income . . . . . . . . . . . - - - - - -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - (2,181)
Dividends . . . . . . . . . . . . . . . . - - - - - -
------------ ---------- ----------- -------------- -------- --------------
Restated Balance, December 31, 2001. . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (10,286)
Restated net loss . . . . . . . . . . . . - - - - - -
Stock Based Compensation. . . . . . . . . - - - - 90 -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - (3,804)
Dividends . . . . . . . . . . . . . . . . - - - - - -
------------ ---------- ----------- -------------- -------- --------------
Restated Balance, December 31, 2002. . . . 1,575,000 $ 16 200,000 $ 2 $ 3,096 $ (14,090)
Restated net loss . . . . . . . . . . . . - - - - - -
Stock Based Compensation. . . . . . . . . - - - - 484 -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - 2,506
Dividends . . . . . . . . . . . . . . . . - - - - - -
Restated Balance, December 31, 2003. . . . 1,575,000 $ 16 200,000 $ 2 $ 3,580 $ (11,584)
============ ========== =========== ============== ======== ==============
Treasury Stock
----------------
Voting Nonvoting
---------------- -------------
Total Comprehensive
Retained Stockholders' Income
Earnings Shares Amount Shares Amount Deficit (Loss)
---------------- ------------- --------- ------- -------- --------- -------
Balance, December 31, 2000. . . . . $ 19,654 5,058,652 $(26,950) 859,316 $ (9) $(12,386)
Restated net income. . . . . . . . 189 - - - - 189 189
Other comprehensive
loss- foreign currency
Translation adjustments. . . . . - - - - - (2,181) (2,181)
Comprehensive loss . . . . . . . . $ (1,992)
================
Dividends. . . . . . . . . . . . . (1,073) - - - - (1,073)
---------------- ------------- --------- ------- -------- ---------
Restated Balance, December 31, 2001 $ 18,770 5,058,652 $(26,950) 859,316 $ (9) $(15,451)
Restated net loss. . . . . . . . . (6,196) - - - - (6,196) (6,196)
Stock Based Compensation . . . . . 90
Other comprehensive loss-foreign
Currency translation adjustments - - - - - (3,804) (3,804)
Comprehensive loss . . . . . . . . $ (10,000)
================
Dividends. . . . . . . . . . . . . (1,795) - - - - (1,795)
---------------- ------------- --------- ------- -------- ---------
Restated Balance, December 31, 2002 $ 10,779 5,058,652 $(26,950) 859,316 $ (9) $(27,156)
Restated net loss. . . . . . . . . (5,780) - - - - (5,780) (5,780)
Stock Based Compensation . . . . . 484
Other comprehensive loss-foreign
Currency translation adjustments - - - - - 2,506 2,506
Comprehensive loss . . . . . . . . $ (3,274)
================
Dividends. . . . . . . . . . . . . (1,146) - - - - (1,146)
Restated Balance, December 31, 2003 $ 3,853 5,058,652 $(26,950) 859,316 $ (9) $(31,092)
================ ============= ========= ======= ======== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
28
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
---- ---- ----
RESTATED RESTATED RESTATED
---------- ---------- ----------
Cash Flows From Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ (5,780) $ (6,196) $ 189
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 6,350 7,065 8,775
Amortization of deferred financing costs and debt discount . . 928 643 725
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 249 353 350
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . (1,473) (188) (973)
Minority Interest in Net Income of Subsidiaries. . . . . . . . 77 26 --
Minority Interest Compensation Expense . . . . . . . . . . . . 263 375 --
Stock based Compensation . . . . . . . . . . . . . . . . . . . 484 90 --
Changes in:
Accounts receivable, net . . . . . . . . . . . . . . . . . . (3,809) 5,708 3,621
Inventories, net . . . . . . . . . . . . . . . . . . . . . . 7,901 (2,200) 558
Other current assets . . . . . . . . . . . . . . . . . . . . (50) (180) (1,069)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 6,076 (1,184) (3,437)
Payroll and payroll related expenses . . . . . . . . . . . . 160 (793) 444
Billings in excess of costs. . . . . . . . . . . . . . . . . -- (257) (1,777)
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . 39 (691) (409)
Other accrued expenses . . . . . . . . . . . . . . . . . . . 226 42 (1,228)
Customer deposits. . . . . . . . . . . . . . . . . . . . . . 1,716 955 (814)
---------- ---------- ----------
Net cash flows provided by operating activities. . . . . . 13,357 3,568 4,955
---------- ---------- ----------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (1,739) (5,170) (4,387)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 2,742 1,299 1,523
Acquisition of FFI Corp., net of cash acquired . . . . . . . . . . -- -- (1,457)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 (11) 25
---------- ---------- ----------
Net cash flows provided by (used in) investing activities. 1,690 (3,882) (4,296)
---------- ---------- ----------
Cash Flows From Financing Activities:
Payments on shareholder loans. . . . . . . . . . . . . . . . . . . (2,194) (684) (2,182)
Proceeds from shareholder loans. . . . . . . . . . . . . . . . . . 1,574 1,452 1,017
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . (15,227) (4,512) (6,690)
Net borrowings under line-of-credit agreement. . . . . . . . . . . 2,242 7,800 8,000
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,146) (1,795) (1,073)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (106) (1,580) 471
---------- ---------- ----------
Net cash flows provided by (used in) financing activities. (14,857) 681 (457)
---------- ---------- ----------
Effect of Exchange Rate Changes on Cash. . . . . . . . . . . . . . . 313 (259) (53)
---------- ---------- ----------
CHANGE In Cash and Cash Equivalents . . . . . . . . . . . . . . . . $ 503 $ 108 $ 149
Cash and Cash Equivalents, beginning of year . . . . . . . . . . . . 2,936 2,828 2,679
---------- ---------- ----------
Cash and Cash Equivalents, end of year . . . . . . . . . . . . . . . $ 3,439 $ 2,936 $ 2,828
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements
29
THE GSI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The GSI Group, Inc., a Delaware corporation, and its subsidiaries (the
"Company") manufacture and sell equipment for the agricultural industry. In
limited cases, the Company enters into contracts to manufacture and supervise
the assembly of grain handling systems. The Company's product lines include:
grain storage bins and related drying and handling equipment systems and swine
and poultry feed storage and delivery, ventilation, and watering systems. The
Company's headquarters and main manufacturing facility are in Assumption,
Illinois, with other manufacturing facilities in Illinois. In addition, the
Company has manufacturing and assembly operations in Brazil, Malaysia, China and
Canada and selling and distribution operations in Great Britain, Mexico, South
Africa, and Poland.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying financial statements reflect the consolidated results
of the Company. All intercompany transactions and balances have been
eliminated. The Company records income or loss on the sales to its foreign
subsidiaries. That income or loss is not recognized until the inventory is sold
by the subsidiary. The Company reviews and adjusts for any material differences
between United States of America and location country generally accepted
accounting principles. The Company's subsidiaries are as follows:
COMPANY NAME LOCATION
--------------------------------------------------- -------------
The GSI Asia Group Sdn.Bhd. . . . . . . . . . . . . Malaysia
The GSI Group Africa (Proprietary) Limited. . . . . South Africa
The GSI Group Europe Limited. . . . . . . . . . . . Great Britain
GSI Cumberland de Mexico, S. de R.L. de C.V.. . . . Mexico
Agromarau Industria E Comercio Ltda.. . . . . . . . Brazil
The GSI Group (Shanghai) Co., Ltd.. . . . . . . . . China
The GSI Agricultural Equipments (Shanghai) Co., Ltd China
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents.
30
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary investments with high
quality financial institutions. At times, such investments may be in excess of
the FDIC insurance limit. Temporary investments are valued at the lower of cost
or market and at the balance sheet dates approximate fair value. The Company
primarily serves customers in the agricultural industry. This risk exposure is
limited due to the large number of customers comprising the Company's customer
base and its dispersion across many geographic areas. The Company grants
unsecured credit to its customers. In doing so, the Company reviews a
customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers, and, as a
consequence, believes that its trade accounts receivable risk is limited. The
Company limits its international exposure to credit risk through the purchase of
insurance.
Fair Value of Financial Instruments
The carrying amounts of cash, receivables, accounts payable and accrued
expenses approximate fair value because of the short-term nature of the items.
The carrying amount of the Company's lines of credit, notes and other payables,
except for senior subordinated notes payable, approximate their fair values
either due to their short term nature, the variable rates associated with these
debt instruments or based on current rates offered to the Company for debt with
similar characteristics.
Accounts and Notes Receivable
Accounts receivable are stated at the amount billed to customers plus any
accrued and unpaid interest. The Company provides an allowance for doubtful
accounts, which is based upon a review of outstanding receivables, historical
collection information and existing economic conditions. Accounts receivable
are ordinarily due 30 days after the issuance of the invoice. Accounts that are
unpaid after the due date bear interest at 1% per month. Delinquent
receivables are written off based on individual credit evaluation and specific
circumstances of the customer.
Notes receivable are stated at their outstanding principal amount, net of
allowance for uncollectible notes. The Company provides an allowance for
uncollectible notes, which is based upon a review of outstanding receivables,
historical collection information and existing economic conditions. Outstanding
notes accrue interest based on the terms of the respective note agreements. A
note receivable is considered delinquent when the debtor has missed three or
more payments. Delinquent notes are written off based on individual credit
evaluation and specific circumstances of the borrower.
Inventories
Inventories are stated at the lower of cost or market. Cost includes the
cost of materials, labor and factory overhead. The cost of all domestic and
international inventories were determined using the first-in-first-out ("FIFO")
method. Inventories and cost of sales are based in part on accounting
estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. The cost of property, plant and equipment acquired as part of a
business acquisition represents the estimated fair value of such assets at the
acquisition date. Depreciation is provided using the straight-line method over
the following estimated useful lives.
YEARS
-----
Building and Improvements. . . 10-25
Machinery and Equipment. . . . 3-10
Office Equipment and Furniture 3-10
Repairs and maintenance are charged to expense as incurred. Gains or
losses resulting from sales or retirements are recorded as incurred, at which
time related costs and accumulated depreciation are removed from the accounts.
Product Warranties
The Company provides limited warranties on certain of its products, for
periods up to 1 year. The Company records an accrued liability and expense for
estimated future warranty claims based upon historical experience and
management's estimate of the level of future claims. Changes in the estimated
amounts recognized in prior years are recorded as an adjustment to the accrued
liability and expense in the current year.
31
Research and Development
Costs associated with research and development are expensed as
incurred. Such costs incurred were $2.5 million, $2.7 million and $2.8 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Intangible Assets
Goodwill is tested annually for impairment. If the implied fair value
of goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value. Subsequent
increases in goodwill value are not recognized in the financial statements.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized
and amortized to the maturity period of the debt.
Revenue Recognition
Revenue is recorded when products are shipped, collection is
reasonably assured, the price is fixed and determinable and there is persuasive
evidence of an arrangement. Provisions are made at that time, when applicable,
for warranty costs to be incurred.
Revenues on long term fixed price contracts are recognized using the
percentage of completion method. Percentage of completion is determined by
relating the actual costs incurred to date to the total estimated cost for each
contract. If the estimate indicates a loss on a particular contract, a
provision is made for the entire estimated loss. Retainages are included as
current and noncurrent assets in the accompanying consolidated balance sheets.
Revenue earned in excess of billings is comprised of revenue recognized on
certain contracts in excess of contractual billings on such contracts. Billings
in excess of costs are classified as a current liability.
Shipping and Handling Fees
Shipping and handling costs of $8.6 million and $7.6 million for 2003 and
2002, respectively, are included in cost of goods sold.
Translation of Foreign Currency
The Company translates the financial statements of its foreign subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation." The Company's foreign operations are reported
in the local currency and translated to U.S. dollars, with the exception of
Mexico, whose functional currency is the U.S. dollar. The balance sheets of the
Company's foreign operations are translated at the exchange rate in effect at
the end of the periods presented. The revenues and expenses of the Company's
foreign operations are translated at the average rates in effect during the
period. For locations where the U.S. dollar is not the functional currency,
exchange losses resulting from translations for the years ended December 31,
2003, 2002 and 2001 have been recorded in the accompanying Consolidated
Statements of Stockholders' Deficit. For Mexico, exchange losses from
translations for the years ended December 31, 2003, 2002 and 2001 have been
recorded in the accompanying Consolidated Statements of Operations.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Such approach results in the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax basis of
assets and liabilities.
32
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Diluted earnings per share equals basic earnings per share
for all periods presented.
Self Insurance
The Company has elected to self-insure certain costs related to health
insurance, worker's compensation and general liability. Costs resulting from
noninsured losses are charged to income when incurred. The Company has reserves
of $2.5 million, $2.0 million and $1.6 million at December 31, 2003, 2002 and
2001, respectively. The Company has purchased insurance that limits its
exposure for individual claims and that limits its aggregate exposure to
aproximately $3.4 million.
Change in Accounting Principle
On January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement No.
142"). Under Statement No. 142, goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. The adoption of Statement No.
142 had the affect of increasing 2002 net income by $0.3 million.
During 2003, the Company changed its method of accounting and financial
reporting for guarantees by adopting the provisions of Financial Accounting
Standards Board Interpretation No. 45 (FIN 45). The adoption of FIN 45 did not
have a material impact on the Company's results of operation or financial
position.
Thirteen Week Fiscal Periods
The Company uses thirteen-week fiscal quarter periods for operational
and financial reporting purposes. The Company's year-end will continue to be
December 31.
Reclassification
Certain amounts in the 2003 financial statements have been
reclassified from their previous presentation. Such reclassification had no
impact on earnings.
3. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 (Revised December 2003), the Financial Accounting Standards
Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has determined there is no impact on the results of
operation or financial position at this time.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The Company has determined SFAS 149 will
have no impact on the results of operation or financial position at this time.
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, SFAS 150, establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company has determined SFAS 150 will have no impact on the
results of operation or financial position at this time.
33
4. TRADE RECEIVABLES ALLOWANCE
The following summarizes trade receivables allowance activity for the years
ended December 31, 2001, 2002 and 2003 (in thousands):
AMOUNT
--------
Balance, December 31, 2000. . $ 2,408
Increase to operating expense 169
Charge to allowance . . . . . (660)
--------
Balance, December 31, 2001. . $ 1,917
Increase to operating expense 324
Charge to allowance . . . . . (908)
--------
Balance, December 31, 2002. . $ 1,333
Increase to operating expense 316
Charge to allowance . . . . . (805)
--------
Balance, December 31, 2003. . $ 844
========
The Company had a $5.0 million line of credit arrangement with LaSalle
National Bank in 2002. Collateral for borrowings consisted of certain insured
foreign receivables that are not included in the Company's borrowing base. As
of December 31, 2002, non-recourse borrowings were $0.7 million and were
reflected as a reduction of the related trade receivables. There were no
covenant requirements relating to this line of credit. This line of credit did
not exist at December 31, 2003.
5. BUSINESS SEGMENT
In January 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise wide disclosure requirements of SFAS 131, the Company reports sales,
in thousands, by each group of product lines. Amounts for the years ended
December 31, 2003, 2002 and 2001 are as shown in the table below (in thousands):
DECEMBER 31,
2003 2002 2001
------------- -------- --------
Grain product line . $ 140,290 $123,599 $123,801
Swine product line . 42,152 51,091 55,885
Poultry product line 55,227 55,946 50,235
------------- -------- --------
Sales . . . . . $ 237,669 $230,636 $229,921
============= ======== ========
For the years ended December 31, 2003, 2002 and 2001, sales in Brazil were
$17.4 million, $18.3 million and $17.0 million, respectively. Net income in
Brazil was $1.4 million, $1.3 million and $1.2 million in 2003, 2002 and 2001,
respectively. Long-lived assets in Brazil were $2.7 million and $2.1 million at
December 31, 2003 and 2002, respectively.
6. RISKS AND UNCERTAINTIES
International operations generally are subject to various risks that
are not present in domestic operations, including restrictions on dividends,
restrictions on repatriation of funds, unexpected changes in tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity and potentially adverse tax consequences, any of
which could adversely impact the Company's international operations.
34
7. DETAIL OF CERTAIN ASSETS AND LIABILITIES
AS OF DECEMBER 31,
--------------------
2003 2002
-------------------- ---------
RESTATED RESTATED
------------------------------------- --------------------
Accounts Receivable . . . . . . . . . (IN THOUSANDS)
--------------------
Trade receivables . . . . . . . . . $ 27,927 $ 24,607
Allowance for doubtful accounts . . (844) (1,333)
-------------------- ---------
Total. . . . . . . . . . . . . $ 27,083 $ 23,274
==================== =========
Inventories
Raw materials . . . . . . . . . . . $ 13,940 $ 16,834
Work-in-process . . . . . . . . . . 18,443 19,236
Finished goods. . . . . . . . . . . 17,220 21,434
49,603 57,504
==================== =========
Property, Plant and Equipment
Land. . . . . . . . . . . . . . . . $ 809 $ 929
Buildings and improvements. . . . . 23,660 23,948
Machinery and equipment . . . . . . 47,863 48,962
Office equipment and furniture. . . 8,917 8,706
Construction-in-progress. . . . . . -- 842
-------------------- ---------
81,249 83,387
Accumulated depreciation. . . . . . (48,576) (44,682)
Property, plant and equipment, net. $ 32,673 $ 38,705
==================== =========
Intangible Assets
Goodwill. . . . . . . . . . . . . . $ 10,100 $ 9,738
==================== =========
Non-compete agreements. . . . . . . $ 8,227 $ 8,227
Accumulated amortization. . . . . . (6,250) (5,187)
Total . . . . . . . . . . . . . . $ 1,977 $ 3,040
==================== =========
Patents and other intangible assets $ 383 $ 383
Accumulated amortization. . . . . . (217) (186)
Total. . . . . . . . . . . . . $ 166 $ 197
==================== =========
Deferred Financing Costs
Deferred financing costs. . . . . . $ 6,253 $ 4,783
Accumulated amortization. . . . . . (3,480) (2,729)
Total. . . . . . . . . . . . . $ 2,773 $ 2,054
==================== =========
Accrued Warranty
Beginning reserve . . . . . . . . . $ 1,340 $ 2,031
Increase to expense . . . . . . . . 2,585 1,600
Charge to reserve . . . . . . . . . (2,546) (2,290)
Ending reserve. . . . . . . . . . . $ 1,379 $ 1,341
==================== =========
Amortization of patents and non-compete agreements are as follows (in
thousands):
2004 649
2005 397
2006 364
2007 131
2008 131
35
Transitional disclosures regarding the change in amortization and other
treatment of goodwill for the year ended December 31, 2001 are as follows:
EARNINGS
---------
AMOUNT PER SHARE
--------- ----------
Reported Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 1,054 $ 0.59
Add back: Goodwill Amortization. . . . . . . . . . . . . . . . . 300 0.17
--------- ----------
Adjusted net income before cumulative effect of accounting change $ 1,354 $ 0.76
========= ==========
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $12.4 million, $12.3 million and $13.0
million in interest during the years ended December 31, 2003, 2002 and 2001,
respectively. The Company paid income taxes of $6,241, $34,836 and $48,135
during the years ended December 31, 2003, 2002 and 2001, respectively.
9. LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following (in
thousands):
2003 2002
--------- ---------
Citizens National Bank IRB with variable interest at 6.5% until March, 2000,
at which time the rate is subject to periodic adjustments based on U.S. Treasury
Note rates, the rate at December 31, 2003 is 6.5%, due $14 monthly plus
interest with unpaid principal balance due April, 2010, secured by certain
real estate and improvements in Paris, Illinois . . . . . . . . . . . . . . . . . $ -- $ 1,161
Various non-compete, license and patent agreements payable, noninterest-bearing
and payable in varying amounts through 2003 . . . . . . . . . . . . . . . . . . . -- 13
LaSalle Bank N. A. revolving line of credit . . . . . . . . . . . . . . . . . . . . -- 29,800
LaSalle Bank N. A. term note. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,203
Congress Financial Corporation (Central) revolving line of credit . . . . . . . . . 19,541 --
Congress Financial Corporation (Central) term note. . . . . . . . . . . . . . . . . 12,500 --
Shareholder Note, unsecured, payable on demand, under the same interest terms
as the Congress Financial Corporation (Central) revolving line of credit. . . . . 148 768
10.25% senior subordinated notes payable, principal due November, 2007, net of
unamortized debt discount of $628 and $806 as of December 31, 2003 and 2002,
respectively; amortization of debt discount was $178 and $166 for the years ended
December 31, 2003 and 2002, respectively; interest is payable semi-annually in
97,522 99,094
May and November
City of Assumption promissory note bearing interest at 5%; due $9 monthly through
December, 2003, secured by a $150 letter of credit. . . . . . . . . . . . . . . . -- 100
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,711 143,139
Less -
Current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) (3,404)
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,563 $139,735
========= =========
Maturities of long-term debt during the next five years and thereafter are
as follows (in thousands):
2004. . 148
2005. . --
2006. . 32,041
2007. . 97,522
--------
Total $129,711
========
36
In November 1997, the Company issued $100 million of Senior Subordinated
Notes ("Notes") which are due in 2007. The Notes represent unsecured senior
subordinated obligations of the Company. Upon occurrence of a change in control
(as defined), the Company is required to repurchase the Notes at a price equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase. The indenture governing the Company's senior
subordinated notes provides for certain restrictive covenants. The more
significant of the covenants restrict the ability of the Company to dispose of
assets, incur additional indebtedness, pay dividends or make distributions and
other payments affecting subsidiaries. The Company was in compliance with the
covenants contained in the indenture as of December 31, 2003.
In 2002, a shareholder of the Company extended a loan to the Company for
$1.5 million which is payable on demand. This loan has the same interest terms
as the Congress Financial Corporation (Central) revolving line of credit. The
balance of the loan was $0.1 million as of December 31, 2003 and is included in
current maturities of long-term debt.
On October 31, 2003, The GSI Group, Inc. (the "Company") entered into a
three-year credit facility with lenders led by Congress Financial Corporation
(Central) to provide up to a maximum amount of $75,000,000 subject to borrowing
base availability (the "Credit Facility") to replace the Company's existing
senior credit facility, which provided for maximum outstanding borrowings of
$60,000,000. Revolving loans and letters of credit under the Credit Facility
are based on a borrowing base, which includes accounts receivable, inventory and
fixed assets. A $12.5 million term loan due on October 31, 2006 is also
included in the Credit Facility. The revolving loan borrowings bear interest at
a floating rate per annum equal to (at the Company's option) 2.5% to 3.0% over
LIBOR or 0.0% to 0.50% over the Prime Rate, both based on excess availability
under the borrowing base. The term loan borrowings bear interest at a floating
rate per annum equal to 8% over the Prime Rate provided that the minimum
interest rate will not be less than 12.25% and the maximum will not be greater
than 14.5%. The Credit Facility requires the Company to maintain a senior debt
to EBITDA ratio and a fixed charge coverage ratio. Borrowings under the Credit
Facility are secured by substantially all of the assets of the Company,
including the capital stock of any existing or future subsidiaries, except the
Brazilian subsidiary. The Company had $19.5 million of revolving loans
outstanding, $3.8 million of standby letters of credit and a $4.5 million letter
of credit guaranteeing the debt of FarmPro, Inc., which reduced the overall
availability on the line to $7.5 million as of December 31, 2003.
The fair value of the Senior Subordinated Notes was approximately $68.8
million (book value of $98.2 million) and $73.9 million (book value of $99.9
million) at December 31, 2003 and 2002, respectively, based on market price.
10. EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
The Company has a defined contribution plan covering virtually all
full-time employees. Under the plan, Company contributions are discretionary.
During 2003, 2002 and 2001, the Company provided a 25% matching contribution up
to 1% of the employees' compensation. Employer contributions to this plan were
$244,366, $245,630 and $203,873 during 2003, 2002 and 2001, respectively.
Stock Based Compensation Plan (Restated)
The Company's majority stockholder has, from time to time, sold shares of
non-voting common stock to members of management in exchange for non-recourse
promissory notes. The notes are interest bearing and pre-payable. The shares are
sold subject to a Shareholders" Agreement, as described below. The Company
accounts for this plan under APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As the market value of the underlying
common stock exceeds the purchase price, the Company records compensation cost
for the difference. For the years 2003 and 2002, the Company has recognized
$484,097 and $89,511of compensation expense under this plan with a corresponding
credit to additional paid-in capital. The dividends paid to the non-voting
shareholders are classified as compensation expense and reduced net income for
2003, 2002 and 2001 by $62,584, $113,647 and $84,810, respectively.
A summary of the status of the plan at December 31, 2003 and 2002 and changes
during the years then ended is presented below:
37
2003 2002 2001
Outstanding shares, beginning of year 92,356 106,433 106,433
Shares sold by Craig Sloan. . . . . . 599 -- --
Shares purchased by Craig Sloan . . . 2,997 14,077 --
------ ------- -------
Outstanding shares, end of year . . . 89,958 92,356 106,433
The Stockholder Agreements generally (i) provide that the holders of a
majority of the stock may sell all of their shares at any time if the other
stockholders are entitled to participate in such sale on the same terms and
conditions, and that the holders of a majority of the stock may require the
other stockholders to sell all their stock at the same time on the same terms
and conditions, (ii) establish that the stockholders are restricted in their
ability to sell, pledge or transfer such shares, (iii) grants rights of first
refusal, first to the Company and then to all non-transferring stockholders,
with respect to the transfer of any shares, (iv) require that an affirmative
vote by a majority of the Company's voting stockholders is required to approve
certain corporate matters and (v) establish procedures for the optional purchase
of shares by the Company (subject to compliance with the terms of the Indenture)
or any remaining voting stockholders upon the death, permanent disability or
termination of employment of any stockholder. The Stockholder Agreements also
(i) provide that the holders of a majority of the Company's shares may cause the
Company to register their shares in an underwritten public offering and (ii)
grant piggy-back registration rights to the stockholders in the event of an
underwritten public offering.
11. INCOME TAX MATTERS
The GSI Group, Inc. ("GSI") has elected to be treated as an S corporation
for income tax purposes. Accordingly, no provision for federal income taxes
related to GSI has been recorded. Earnings or losses of GSI are reported on the
personal income tax returns of the stockholders. At December 31, 2003, all of
the Company's foreign subsidiaries are eligible foreign entities which have
elected to be classified as a partnership or disregarded as a separate entity
under U.S. Treasury Regulation Section 301.7701. As a result, earnings or losses
of the foreign subsidiaries are not subject to U.S. tax except as reported on
the personal income tax returns of the stockholders. Dividends sufficient to pay
the resulting income taxes of the owners are declared and paid as needed. David
Manufacturing Company ("DMC") is taxed pursuant to the C Corporation provisions
of the Internal Revenue Code. Accordingly, provisions for federal taxes related
to DMC have been recorded. Both GSI and DMC are subject to certain state taxes.
All foreign entities are subject to local taxes. Accordingly, the provisions
for foreign local taxes have been recorded.
The income tax expense (benefit) differs from the amount of income tax
determined by applying the U.S. Federal income tax rate to pretax income for the
years ended December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
RESTATED RESTATED RESTATED
U.S. Federal statutory rate . . . . . . . . . . . . $ (2,271) $ (2,044) $ (159)
Increase (decrease) in income taxes resulting from:
Non-taxable S Corporation (income) losses . . . . 2,792 188 692
Foreign local taxes. . . . . . . . . . . . . (282) 380 295
Valuation Allowance . . . . . . . . . . . . . . . (2,003) 1,590 --
Tax differences resulting from acquisition of DMC -- -- (1,274)
Nondeductible goodwill amortization . . . . . . . -- -- 33
Effective tax rate differences. . . . . . . . . . 93 91 (221)
State and other income taxes. . . . . . . . . . . (55) 4 (22)
Other . . . . . . . . . . . . . . . . . . . . . . 751 (50) --
$ (975) $ 159 $ (656)
========== ========== ==========
38
The following is a summary of the Company's expense (benefit) for income
taxes (in thousands):
Years Ended December 31,
------------------------
2003 2002 2001
-------- ------ ------
Current
Federal . . . . . . . . . $ -- $ -- $(113)
State and local . . . . . 243 3 (24)
Foreign . . . . . . . . . 255 380 454
498 383 317
-------- ------ ------
Deferred
Federal . . . . . . . . . (638) (153) (555)
State and local . . . . . (298) (71) (259)
Foreign . . . . . . . . . (537) -- (159)
(1,473) (224) (973)
-------- ------ ------
Total expense (benefit) $ (975) $ 159 $(656)
-------- ------ ------
The components of deferred tax assets and liabilities at December 31, 2003
and 2002 are as follows (in thousands):
2003 2002
RESTATED RESTATED
Deferred tax assets:
Tax loss carryforwards - DMC . . $ 972 $ 1,491
Tax loss carryforwards - Brazil. 1,249 1,890
Tax loss carryforwards - Mexico. 45 140
Property and Equipment . . . . . 87 --
Inventory reserves . . . . . . . 29 14
Estimated product liability. . . 48 54
$ 2,430 $ 3,589
========== ==========
Deferred tax liabilities:
Property and equipment . . . . . 262 742
Inventory. . . . . . . . . . . . 148 297
----------
410 1,039
---------- ----------
Valuation Allowance - DMC. . . . . (955) (1,423)
Valuation Allowance - Brazil . . . -- (1,535)
---------- ----------
Net Deferred tax liability (asset) $ (1,065) $ 408
========== ==========
The valuation allowance decreased by $2,003 (restated) during the current
year. This decrease resulted from a re-evaluation of the utilization of the net
operating loss carryforwards.
DMC has tax loss carryforwards of approximately $4,339,680 (restated),
which begin to expire in the year 2018. Brazil has tax loss carryforwards of
approximately $3,492,748 that do not expire. Mexico has tax loss carryforwards
of approximately $150,581 that begin to expire in 2008.
Remaining realizable assets are supported by anticipated turnaround of
deferred tax liabilities and future projected taxable income.
At December 31, 2003, if GSI's S corporation election were terminated, a
deferred income tax benefit of approximately $1.9 million would be recorded.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business which, in the opinion of management, will not have a material
effect on the Company's financial position or results of operations.
39
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
related primarily to workers' compensation, physical loss to property and
comprehensive general, product and vehicle liability. Provisions for losses
expected under these programs are recorded based upon the Company's estimates of
the aggregate liability for claims incurred and totaled approximately $1.7
million for the year ended December 31, 2003. The amount of actual losses
incurred could differ materially from the estimates reflected in these financial
statements. The Company has provided letters of credit aggregating approximately
$3.3 million in connection with these insurance programs.
The Company has month-to-month leases for several buildings and paid
rentals in 2003, 2002 and 2001 of $0.9 million, $0.7 million and $0.8 million,
respectively. The Company also leases equipment and vehicles under operating
lease arrangements. Total lease expense related to the equipment and vehicle
leases for the years ended December 31, 2003, 2002 and 2001 was $1.3 million,
$1.8 million and $1.2 million, respectively.
Operating lease commitments are as follows (in thousands):
2004. . . . $1,489
2005. . . . 1,146
2006. . . . 916
2007. . . . 563
2008. . . . 75
Later years 11
------
Total . . . $4,200
======
The Company has a contract with the Yemen Company for Industrial
Development to manufacture and supervise the assembly of grain handling systems.
Other current and long-term assets include $0.5 million and $2.8 million as of
December 31, 2003 and 2002, respectively, of retainage withheld until completion
of the projects and the meeting of certain performance criteria. The Company
wrote down the retainage by $1.5 million at December 31, 2003.
13. REGIONAL INFORMATION
The Company is engaged in the manufacture and sale of equipment for the
agricultural industry. The Company's product lines include: grain storage bins
and related drying and handling equipment systems and swine and poultry feed
storage and delivery, ventilation, and watering systems. The Company's products
are sold primarily to independent dealers and distributors and are marketed
through the Company's sales personnel and network of independent dealers. Users
of the Company's products include farmers, feed mills, grain elevators, grain
processing plants and poultry/swine integrators. Sales by each major geographic
region are as follows (in millions):
2003 2002 2001
------ ------ ------
United States $156.1 $146.1 $155.6
Asia. . . . . 20.6 20.0 17.3
Canada. . . . 15.8 18.6 17.5
Latin America 27.1 29.9 28.3
Mideast . . . 8.9 5.8 3.3
Europe. . . . 6.0 7.4 5.6
All other . . 3.2 2.8 2.3
$237.7 $230.6 $229.9
====== ====== ======
40
14. RELATED PARTY TRANSACTIONS
The Company and its stockholders entered into certain agreements relating
to the rights of the stockholders with respect to their ownership of the
Company's non-voting shares (the "Stockholder Agreements"). These agreements
generally (i) provide that the holders of a majority of the stock may sell all
of their shares at any time if the other stockholders are entitled to
participate in such sale on the same terms and conditions, and that the holders
of a majority of the stock may require the other stockholders to sell all their
stock at the same time on the same terms and conditions, (ii) establish that the
stockholders are restricted in their ability to sell, pledge or transfer such
shares, (iii) grant rights of first refusal, first to the Company and then to
all non-transferring stockholders, with respect to the transfer of any share,
(iv) require that an affirmative vote by a majority of the Company's voting
stockholders is required to approve certain corporate matters and (v) establish
procedures for the optional purchase of shares by the Company (subject to
compliance with the terms of the Indenture) or any remaining voting stockholders
upon the death, permanent disability or termination of employment of any
stockholder. The Stockholder Agreements also (i) provide that the holders of a
majority of the Company's shares may cause the Company to register their shares
in an underwritten public offering and (ii) grant piggy-back registration rights
to the stockholders in the event of an underwritten public offering. The
Company will recognize compensation expense when the fair value is greater than
the original purchase price and any subsequent increases in fair value. The
Company has recognized $0.4 million of compensation expense for 2003.
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
family members of a shareholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $125,920, $196,691 and
$243,849 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $72,619, $10,987
and $65,203 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Resintech,
which, as a result of a joint venture partnership, has a long-term supply
agreement pursuant to which Resintech agreed to purchase 100% of its equipment
requirements from the Company. Such transactions generally consist of sales of
grain equipment and amounted to $0, $2,538 and $129,245 for 2003, 2002 and 2001,
respectively.
The Company makes sales in the ordinary course of business to FarmPRO,
Inc., which has a long-term supply agreement pursuant to which FarmPRO agreed to
purchase 90% of its equipment requirements from the Company. In connection with
the agreement, the Company agreed to guarantee FarmPRO borrowings under a letter
of credit up to $4.5 million through 2006. In connection with such guarantee,
the Company received an option to purchase up to 60% of the common stock of
FarmPRO at a formula price, which approximates fair market value. The stock of
FarmPRO serves as collateral for the guarantee. In addition, the Company holds
two positions on the Board of Directors of FarmPRO. Sales to FarmPRO were $3.1
million, $5.0 million and $2.9 million in 2003, 2002 and 2001 respectively.
The Company makes sales and rent payments in the ordinary course of
business to Covell Bros., a distributor of poultry equipment, that is owned by
an employee of the Company. Such transactions generally consist of sales of
poultry equipment and amounted to $75,307, $128,838 and $178,432 for 2003, 2002
and 2001, respectively, and rent payments and expenses that amounted to $13,910
and $70,055 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, one of whom is a current employee of the
Company. Such transactions generally consist of purchases of materials, freight
payments, and commissions that amounted to $564,362, $538,388 and $195,000 for
2003, 2002 and 2001, respectively, and sales of poultry equipment that amounted
to $99,815, $63,225 and $9,000 for 2003, 2002 and 2001, respectively.
The Company conducts transactions in the ordinary course of business with
Reliance, a supplier of poultry equipment, which is owned by an employee of the
Company. Such transactions generally consist of purchases of materials for
poultry equipment that amounted to $238,095, $243,946 and $149,070 from 2003,
2002 and 2001, respectively, and sales of poultry equipment that amounted to
$239,005, $37,877 and $19,263 from 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Mayland
Enterprises, a distributor of grain equipment, that is owned by an employee of
the Company. Such transactions generally consist of sales of grain equipment
and amounted to $89,348, $26,056 and $22,464 for 2003, 2002 and 2001,
respectively.
The Company conducts transactions in the ordinary course of business with
RAD Properties, a corporation owned by a shareholder of the Company. Such
transactions generally consist of rent and lease payments that amounted to
$302,900 and $165,383 in 2003 and 2002, respectively. No rent payments were
made in 2001.
41
15. UNAUDITED QUARTERLY INFORMATION
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Restated 2003:
Sales . . . . . . . . . . . . . . . . $ 44,310 $ 65,653 $ 77,270 $ 50,436
Gross profit. . . . . . . . . . . . . 9,333 13,108 17,937 7,078
Net income (loss) . . . . . . . . . . (2,742) (510) 4,161 (6,689)
Basic and diluted earnings per share. (1.54) (0.29) 2.34 (3.77)
====================================== ========= ======== =========
Restated 2002:
Sales . . . . . . . . . . . . . . . . $ 52,928 $ 65,901 $ 70,119 $ 41,688
Gross profit. . . . . . . . . . . . . 10,905 13,848 16,161 5,789
Net income (loss) . . . . . . . . . . (2,052) 218 2,801 (6,196)
Basic and diluted earnings per share. (1.16) 0.12 1.58 (3.49)
====================================== ========= ======== =========
Restated 2001:
Sales . . . . . . . . . . . . . . . . $ 44,969 $ 65,498 $ 71,834 $ 47,620
Gross profit. . . . . . . . . . . . . 11,136 14,977 18,808 10,153
Net income (loss) . . . . . . . . . . (2,501) 919 4,407 (2,636)
Basic and diluted earnings per share. (1.41) 0.52 2.48 (1.49)
====================================== ========= ======== =========
The change in accounting principle from LIFO to FIFO did not materially
effect the quarterly data for the year 2001; thus it was not restated.
During the 2003 Year-end closing process, the Company the following
adjustments as part of its 4th quarter results. As described in Footnote 12,
the Company decided that the likelihood of collection had deteriorated for the
Yemen project so the retainage was written down by $1.5 million. The other
significant adjustment was an inventory writedown of $1.1 million after an
analysis of the warehouse inventory indicated that it was overvalued.
16. RESTATEMENT
During the 2004 closing process, the Company discovered unintentional
accounting errors in prior years' financial statements. The errors have been
corrected in the accompanying 2003, 2002 and 2001 financial statements. A
description of the errors and related impact of each on the financial statements
follows. Amounts are stated in whole dollars.
At the end of 2001, the Company began the process of shutting down its
Mason City, Iowa plant, which served as the headquarters for its DMC subsidiary.
As the Company began the revenue cycle process at its corporate headquarters,
cost of sales estimates were understated during 2002, while cost accounting
records were being developed for the products previously handled by the Mason
City employees, which caused the remaining inherited inventory costs to be
overstated by approximately $6.5 million. The Company became aware of the
overstatement in early 2003, but erroneously assigned the overstated value to
inventory that would flow through the cost of sales over the next few years.
This erroneous correction reduced the stated value of the inventory by
approximately $2.2 million in 2003 and $4.3 million in 2004. During the 2004
year-end closing process, this issue was re-examined, and the Company determined
that it would be appropriate to restate the 2002 cost of sales and year-end
inventory, the period when the overstatement occurred. The effect of this
change reduced previously reported net income for 2002 by $6,470,161 and
increase previously reported net income of 2003 by $2,206,000.
In 1997, the Company's majority stockholder began selling non-voting shares
to certain employee's. The stockholder helped finance each purchase with
non-recourse interest-bearing notes with the shares as the only collateral on
the notes. APB Opinion 25 and its interpretations require that these
transactions be imputed to the Company's financial statements and be accounted
for as variable stock awards, which practice the Company had not followed. The
fair value of the underlying shares first exceeded the price paid for the shares
in 2002. The effect of recording the resulting compensation expense reduced
previously reported net income for 2003 by $484,097 and reduced previously
reported net income for 2002 by $89,511. The dividends paid to the non-voting
shareholders are classified as compensation expense and reduced previously
reported net income for 2003, 2002 and 2001 by $62,584, $113,647 and $84,810,
respectively.
42
In 2002 the Company entered into an agreement with the manager of its
Brazilian subsidiary whereby it compensated him with shares of the subsidiary's
stock. This constitutes a stock compensation arrangement for which the Company
did not recognize compensation expense. The effect of recording compensation
expense related to this arrangement reduced previously reported net income for
2003 by $340,000 and reduced previously reported net income for 2002 by
$401,000.
The Company has determined that the functional currency of its Mexican
subsidiary should be U.S. Dollars rather than Pesos. The effect of this change
reduced previously reported 2003 and 2002 net income by $98,644 and $315,917,
respectively, and increased previously reported 2001 net income by $69,692.
In 2001, 2002 and 2003, the Company's CEO and majority stockholder elected
not to accept salary and board fees that were subsequently paid in 2004. The
company did not accrue these amounts in those years. The effects of accruing
compensation for this individual reduced previously reported 2003, 2002 and 2001
net income by $100,000, $507,515 and $257,000, respectively.
The Company changed from a stop-loss workers' compensation insurance policy
to a high-deductible self-insured policy in 2000 and did not subsequently accrue
for claims incurred but not reported. The effect of accruing for such claims in
2003, 2002 and 2001 reduced previously reported net income by $289,506, $698,246
and $603,090, respectively.
The Company also made adjustments in 2003, 2002 and 2001 to correct
previous reporting of overhead adjustments in overseas inventories and gain on
inter-company sales.
The financial statement impact of the above noted adjustments are indicated
in the table below:
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2003
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . . . . . . . $ 54,165 $ (4,562) $ 49,603
Payroll and payroll related expenses. . . . . 3,071 565 3,636
Other accrued expenses. . . . . . . . . . . . 4,057 1,891 5,948
Paid in capital . . . . . . . . . . . . . . . 3,006 574 3,580
Accumulated other comprehensive loss. . . . . (11,929) 345 (11,584)
Retained earnings . . . . . . . . . . . . . . 12,531 (8,678) 3,853
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . . . . . . . 190,694 (481) 190,213
Selling, general and administrative expenses. 36,591 3,602 40,193
Operating income. . . . . . . . . . . . . . . 9,290 (3,121) 6,169
Foreign currency transaction loss . . . . . . (102) (99) (201)
Other, net. . . . . . . . . . . . . . . . . . (3,544) 3,749 205
Minority interest in net income of subsidiary -- (77) (77)
Net loss. . . . . . . . . . . . . . . . . . . (6,232) 452 (5,780)
Basic and diluted earnings per share. . . . . ($3.51) $ 0.25 ($3.26)
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2002
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 63,893 $ (6,389) $ 57,504
Payroll and payroll related expenses . . . . . 2,987 565 3,552
Other accrued expenses . . . . . . . . . . . . 4,144 1,501 5,645
Paid in capital. . . . . . . . . . . . . . . . 3,006 90 3,096
Accumulated other comprehensive loss . . . . . (14,336) 246 (14,090)
Retained earnings. . . . . . . . . . . . . . . 19,971 (9,192) 10,779
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 176,836 7,097 183,933
Selling, general and administrative expenses . 36,767 1,087 37,854
Operating income . . . . . . . . . . . . . . . 15,787 (8,184) 7,603
Foreign currency transaction loss. . . . . . . (468) (316) (784)
Minority interest in net income of subsidiary. -- (26) (26)
Net income (loss). . . . . . . . . . . . . . . 2,330 (8,526) (6,196)
Basic and diluted earnings per share . . . . . $ 1.31 ($4.80) ($3.49)
43
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2001
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . 174,254 593 174,847
Selling, general and administrative expenses 39,386 342 39,728
Operating income . . . . . . . . . . . . . . 14,553 (935) 13,618
Foreign currency transaction loss. . . . . . 33 70 103
Net income . . . . . . . . . . . . . . . . . 1,054 (865) 189
Basic and diluted earnings per share . . . . $ 0.59 ($0.48) $ 0.11
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
OVERVIEW
In connection with the preparation of its Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, the Company's management identified
material weaknesses in the Company's internal control over financial reporting.
As defined by the Public Company Accounting Oversight Board ("PCAOB") in
Auditing Standard No. 2, a material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
The identified material weaknesses in the Company's internal control over
financial reporting have resulted in insufficient controls relating to inventory
accounting, consolidation of majority owned subsidiaries, the treatment of
foreign currency matters, accounting matters relating to differences between
U.S. and foreign accounting principles and practices, accounting for
non-operating expenses, the accounting treatment of purchases and sales of the
Company's debt securities, executive salary and board of director payment
accrual methodology, the identification and treatment of relevant workers'
compensation reserves and minority interest reserves, the treatment of stock
based compensation expense issues and weaknesses in financial reporting
processes. These weaknesses have resulted in adjustments being recorded in our
financial statements for the years ended December 31, 2003, 2002 and 2001. Our
management has discussed the material weaknesses with our independent registered
public accounting firm, BKD LLP, and the Company's Board of Directors from and
after March 8, 2005. BKD LLP issued a "material weakness" letter to the Company
in connection with its review of the Company's financial statements for the year
ending December 31, 2004. This letter also noted a deficiency in the Company's
internal controls relating to its inventory accounting and recommended that the
Company update its inventory accounting system.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Vice President of
Finance, as appropriate, to allow timely decisions regarding disclosure. Our
management, with the participation of our Chief Executive Officer and Vice
President of Finance, has performed an evaluation of our disclosure controls and
procedures as of December 31, 2003. Based on that evaluation, which included an
review of the matters discussed above, the Company's Chief Executive Officer and
Vice President of Finance concluded that the Company's disclosure controls and
procedures were not effective as of the end of the period covered by this Annual
Report on Form 10-K/A.
CHANGES IN INTERNAL CONTROLS
The Company's management believes that substantial remediation measures are
required in order to improve the Company's internal controls. The Company
believes that the material weaknesses identified above resulted in part from
inadequate staffing and training within the Company's finance and accounting
group, and the Company believes that the process of preparing this Annual Report
on Form 10-K/A and the related review of the Company's financial statements for
the years ended December 31, 2003, 2002 and 2001 has resulted in a significant
improvement in the finance and accounting staff's familiarity with the
accounting and financial treatment of the issues identified above. The Company's
management is in the process of reviewing whether additional accounting and
financial management staff should be retained, and intends to review the
question of whether it should utilize additional, or different, outside
resources. The Company's management also believes that additional work is
required to fully remedy these material weaknesses and intends to continue its
efforts to fully remedy the situation.
ITEM 9B. OTHER INFORMATION.
Not applicable.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive
officers and directors of the Company:
NAME AGE OFFICE
------------------ --- ------------------------------------------------
Craig Sloan. . . . 53 Chief Executive Officer and Director
Russell C. Mello . 42 Chief Financial Officer, Treasurer and Secretary
Dave Andricks. . . 55 President of GSI Division
Allen A. Deutsch . 53 President of AP/Cumberland Division
David L. Vettel. . 45 President of GSI International Division
Michael Brotherton 42 Senior Vice-President of Operations
Cathy Sloan. . . . 53 Director
CRAIG SLOAN joined the Company in November 1971. Mr. Sloan has been Chief
Executive Officer since December 1993. From December 1974 to December 1993, he
served as President of Grain Systems, Inc., a former subsidiary of the Company.
Mr. Sloan has been a Director of the Company since December 1972.
RUSSELL C. MELLO joined the Company in March 1995. Mr. Mello has been the
Chief Financial Officer, Secretary and Treasurer since September 2001. From
June 1999 to September 2001, he served as Senior Vice President, Finance and
Secretary and Treasurer. From September 1996 to June 1999, he served as Vice
President, Finance and Assistant Secretary and Assistant Treasurer. From March
1995 to September 1996, he served as the Controller of the GSI Division. From
October 1984 to March 1995, he held various management and finance positions
with Emerson Electric Company, a manufacturer of electrical equipment.
DAVE ANDRICKS joined the Company in July 1978. Mr. Andricks has been the
President of the GSI Division since May 2002. From 1996 to 2002, he served as
Vice President of Business Development. From 1992 to 1996, he served as
President of a former subsidiary of the Company. From 1982 to 1992, he served
as Vice President of Sales and Marketing.
ALLEN A. DEUTSCH joined the Company in January 1993. Mr. Deutsch has been
President of the AP/Cumberland Division since September 2001. From June 1996 to
September 2001, he served as President of the AP Division. From April 1995 to
June 1996, he served as Vice President of the AP Division. From January 1993 to
April 1995, he served as National Sales Manager of the AP Division. From August
1983 to January 1993, he served as Sales Manager of AAA Associates,
Incorporated, a manufacturer and marketer of livestock ventilation systems,
which business was acquired by the Company in January 1993.
DAVID L. VETTEL joined the Company in November 1993. Mr. Vettel has been
President of the GSI International Division since December 1995. From November
1993 to December 1995, he served as Vice President of the GSI International
Division. From November 1991 to November 1993, he served as International Sales
Manager of Chief Industries, Inc., a manufacturer of steel buildings and grain
storage bins.
MICHAEL BROTHERTON joined the Company in October 2002 as Senior
Vice-President of Operations. From June 1988 to September 2002, he held various
management positions culminating with Chief Operating Officer with Zexel Valeo
Compressor U.S.A., Inc., a manufacturer of compressors for the automotive
industry.
CATHY SLOAN has been a director of the Company since September 2001. Ms.
Sloan is the wife of Craig Sloan and is a homemaker.
46
The Company's bylaws provide that the number of directors shall be two.
Each director is elected to serve until the next annual meeting and until his or
her successor has been elected and qualified or until his or her earlier
resignation or removal. Executive officers are elected by the Board of
Directors and serve until their successors have been elected and qualified or
until their earlier resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 2003 of the Company's Chief Executive Officer and the other four most highly
compensated executive officers of the Company (the "Named Executives").
SUMMARY COMPENSATION TABLE
ALL OTHER
NAME & PRINCIPAL POSITION YEAR ANNUAL COMPENSATION COMPENSATION(1)
----------------------------------------- --------- -------------------- ----------------
SALARY BONUS
Craig Sloan 2003 $ 407,515 $ -- $13,235
Chief Executive Officer and Director 2002 $ 407,515 $ -- $11,288
2001 $ 407,515 $ -- $11,702
Dave Andricks 2003 $ 130,000 $ 27,023 $ --
President of GSI Division 2002 $ 130,000 $ 10,776 $ --
Allen A. Deutsch 2003 $ 130,000 $ 20,253 $ --
President of AP/Cumberland Division 2002 $ 130,000 $ 21,673 $ --
2001 $ 130,000 $ 26,000 $ --
David L. Vettel 2003 $ 130,000 $ 13,880 $ --
President of GSI International Division 2002 $ 130,000 $ 12,699 $ --
2001 $ 120,000 $ 19,000 $ --
Michael Brotherton 2003 $ 130,000 $ -- $ --
Senior Vice-President of Operations
(1) Consists of group insurance and other miscellaneous benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 2003. All members
of the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 2003. See "Certain Relationships and
Related Transactions." During 2003, no member of the Company's Board of
Directors served as a director or a member of the compensation committee of any
other company of which any executive officer served as a member of the Company's
Board of Directors during 2003.
DIRECTOR COMPENSATION
There is a $50,000 annual compensation for being a member of the Board of
Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 7, 2004 with
respect to the shares of the Company's voting common stock and non-voting common
stock beneficially owned by (i) each person or group that is known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (ii)
each director of the Company, (iii) each Named Executive and (iv) all directors
and executive officers of the Company as a group.
47
NON-VOTING
VOTING COMMON STOCK COMMON STOCK
------------------- ------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER . . . . SHARES VOTING SHARES NON-VOTING
-------------------------------------------- --------- -------------- --------- --------------
Craig Sloan (1) 1,575,000 100.00% 70,042 35.02%
Russell C. Mello (1) -- -- 51,830 25.92%
Dave Andricks (1) -- -- 6,216 3.11%
Allen A. Deutsch (1) -- -- 8,802 4.40%
David L. Vettel (1) -- -- 13,798 6.90%
Directors and executive officers as a group
(5 persons in group) 1,575,000 100.00% 150,688 75.33%
(1) The address of each stockholder is c/o The GSI Group, Inc., 1004 East
Illinois Street, Assumption, Illinois 62510, (217) 226-4421.
The Company has no compensation plans under which its equity securities are
authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
family members of a shareholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $125,920, $196,691 and
$243,849 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $72,619, $10,987
and $65,203 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Resintech,
which, as a result of a joint venture partnership, has a long-term supply
agreement pursuant to which Resintech agreed to purchase 100% of its equipment
requirements from the Company. Such transactions generally consist of sales of
grain equipment and amounted to $0, $2,538 and $129,245 for 2003, 2002 and 2001,
respectively.
The Company makes sales in the ordinary course of business to FarmPRO,
Inc., which has a long-term supply agreement pursuant to which FarmPRO agreed to
purchase 90% of its equipment requirements from the Company. In connection with
the agreement, the Company agreed to guarantee FarmPRO borrowings under a letter
of credit up to $4.5 million through 2006. In connection with such guarantee,
the Company received an option to purchase up to 60% of the common stock of
FarmPRO at a formula price, which approximates fair market value. The stock of
FarmPRO serves as collateral for the guarantee. In addition, the Company holds
two positions on the Board of Directors of FarmPRO. Sales to FarmPRO were
$3.1 million, $5.0 million and $2.9 million in 2003, 2002 and 2001 respectively.
The Company makes sales and rent payments in the ordinary course of
business to Covell Bros., a distributor of poultry equipment, that is owned by
an employee of the Company. Such transactions generally consist of sales of
poultry equipment and amounted to $75,307, $128,838 and $178,432 for 2003, 2002
and 2001, respectively, and rent payments and expenses that amounted to $13,910
and $70,055 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, one of whom is a current employee of the
Company. Such transactions generally consist of purchases of materials, freight
payments, and commissions that amounted to $564,362, $538,388 and $195,000 for
2003, 2002 and 2001, respectively, and sales of poultry equipment that amounted
to $99,815, $63,225 and $9,000 for 2003, 2002 and 2001, respectively
The Company conducts transactions in the ordinary course of business with
Reliance, a supplier of poultry equipment, which is owned by an employee of the
Company. Such transactions generally consist of purchases of materials for
poultry equipment that amounted to $238,095, $243,946 and $149,070 from 2003,
2002 and 2001, respectively, and sales of poultry equipment that amounted to
$239,005, $37,877 and $19,263 from 2003, 2002 and 2001, respectively.
48
The Company makes sales in the ordinary course of business to Mayland
Enterprises, a distributor of grain equipment, that is owned by an employee of
the Company. Such transactions generally consist of sales of grain equipment
and amounted to $89,348, $26,056 and $22,464 for 2003, 2002 and 2001,
respectively.
The Company conducts transactions in the ordinary course of business with
RAD Properties, a corporation owned by a shareholder of the Company. Such
transactions generally consist of rent payments that amounted to $302,900 and
$165,383 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company believes that these transactions were, and future transactions
with Sloan Implement Company, Inc., Larry Sloan, Resintech, FarmPRO, Covell
Bros., the Segatt family, Reliance, RAD Properties and Mayland Enterprises will
be, on terms no less favorable to the Company than could have been obtained from
an independent third party in arm's length transactions.
The Company and its stockholders entered into certain agreements relating
to the rights of the stockholders with respect to their ownership of the
Company's non-voting shares (the "Stockholder Agreements"). These agreements
generally (i) provide that the holders of a majority of the stock may sell all
of their shares at any time if the other stockholders are entitled to
participate in such sale on the same terms and conditions, and that the holders
of a majority of the stock may require the other stockholders to sell all their
stock at the same time on the same terms and conditions, (ii) establish that the
stockholders are restricted in their ability to sell, pledge or transfer such
shares, (iii) grant rights of first refusal, first to the Company and then to
all non-transferring stockholders, with respect to the transfer of any share,
(iv) require that an affirmative vote by a majority of the Company's voting
stockholders is required to approve certain corporate matters and (v) establish
procedures for the optional purchase of shares by the Company (subject to
compliance with the terms of the Indenture) or any remaining voting stockholders
upon the death, permanent disability or termination of employment of any
stockholder. The Stockholder Agreements also (i) provide that the holders of a
majority of the Company's shares may cause the Company to register their shares
in an underwritten public offering and (ii) grant piggy-back registration rights
to the stockholders in the event of an underwritten public offering. The
Company will recognize compensation expense when the fair value is greater than
the original purchase price and any subsequent increases in fair value. The
Company has recognized $0.4 million of compensation expense for 2003.
49
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
See "Index to Consolidated Financial Statements of The GSI Group,
Inc." set forth in Item 8 hereof.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedules not listed above have been omitted because they are
inapplicable or the information required to be set forth therein is provided in
the Consolidated Financial Statements or the notes thereto.
(a)(3) EXHIBITS:
A list of the exhibits included as part of this Form 10-K/A is set
forth in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
In a current report filed on Form 8-K dated September 30, 2003 the company
reported information pursuant to "Item 5. Other Events".
50
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) THE SECURITIES EXCHANGE
ACT OF 1934, THE GSI GROUP, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ASSUMPTION, ILLINOIS ON
APRIL 26, 2005.
The GSI Group, Inc.
By: /s/ Russell C. Mello
---------------------------------
Russell C. Mello
Chief Executive Officer
51
EXHIBIT 31.1
CERTIFICATIONS
I, Russell C. Mello, certify that:
1. I have reviewed this annual report on Form 10-K/A of The GSI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonable
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 26, 2005
/s/ Russell C. Mello
-----------------------
Chief Executive Officer
52
EXHIBIT 31.2
CERTIFICATIONS
I, Ann Montgomery, certify that:
1. I have reviewed this annual report on Form 10-K/A of The GSI Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonable
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 26, 2005
/s/ Ann Montgomery
--------------------
Vice-President of Finance
53
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-K/A of The GSI
Group, Inc., a Delaware corporation (the "Company"), for the year ended December
31, 2003, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), and pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Russell C. Mello, as
Chief Executive Officer of the Company, and Ann Montgomery, Vice President of
Finance of the Company, hereby certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: April 26, 2005
/s/ RUSSELL C. MELLO
-----------------------
Russell C. Mello
Chief Executive Officer
/s/ ANN MONTGOMERY
--------------------
Ann Montgomery
Vice President of Finance
This certification shall not be deemed "filed" by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934. In addition, this
certification shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its
staff upon request.
54
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- -------------------------------------------------------------------------------------------------------
2.2** Agreement for Non-Competition, dated June 30, 1998, by and among the stockholders of Avemarau
Equipamentos Agricolas Ltda. And The GSI Group, Inc.
3.1* Amended and Restated Articles of Incorporation of The GSI Group, Inc., as amended as of
October 23, 1997
3.2* By-Laws of The GSI Group, Inc, as amended.
4.1* Indenture, dated November 1, 1997, between The GSI Group, Inc. and LaSalle National Bank, as
Trustee, including forms of the Old Notes and the New Notes issued pursuant to such Indenture.
4.2* First Supplemental Indenture, dated December 19, 1997, between The GSI Group, Inc. and LaSalle
National Bank, as Trustee, amending Indenture dated November 1, 1997, between The GSI Group, Inc.
and LaSalle National Bank, as Trustee, to qualify such Indenture under the Trust Indenture Act of 1939.
4.3* Second Supplemental Indenture, dated December 19, 1997, executed by David Manufacturing Co.,
amending Indenture dated November 1, 1997, between The GSI Group, Inc. and LaSalle National Bank,
as Trustee, to add David Manufacturing Co. as a Guarantor under such Indenture.
4.5* Agreement of The GSI Group, Inc. to furnish the Securities and Exchange Commission with a
copy of certain instruments relating to long-term debt of The GSI Group, Inc. upon request.
10.3* Agreement, dated April 9, 1997, between GSI/Cumberland Sdn. Bhd. and Ban Leng Fibre Sdn. Bhd.
relating to property located in Penang, Malaysia.
10.4+ Amended and Restated Stock Restriction and Buy Sell Agreement - Non Voting, dated as of March 3,
2001, by and among The GSI Group, Inc., John C. Sloan, Jorge Andrade, and Howard Buffett and the
nonvoting shareholders of The GSI Group, Inc.
10.5++ Loan and Security Agreement dated October 31, 2003 between The GSI Group, Inc., as borrower
and Congress Financial Corporation, as lender.
10.6+ Indemnification Agreement, dated July 1, 2001, by and among The GSI Group, Inc. and John C. Sloan,
Howard Buffett, Jorge Andrade, and Russell C. Mello.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries of The GSI Group, Inc.
31.1 Certification of Chief Executive Officer.
31.2 Certification of Vice President of Finance.
32.1 Section 906 Certification.
55
____________
* Incorporated by reference from the Company's Registration Statement of
Form S-4 (Reg. No. 333-43089) filed with the Commission pursuant to the
Securities Act of 1933, as amended.
** Incorporated by reference from the Company's Form 8-K filed with the
Commission on July 27, 1998 pursuant to the Securities Act of 1934, as amended.
+ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on August 3, 2001 pursuant to the Securities Act of 1934.
++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on November 7, 2003 pursuant to the Securities Act of 1934.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Company did not send an annual report or proxy statement to security holders
covering 2003.
56
Exhibit 12.1
THE GSI GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Dollars in Thousands)
Year ended December 31,
-------------------------
1999 2000 2001 2002 2003
------------------------- ------- -------- -------- --------
Income (Loss) from continuing
Operations before tax $ (3,677) $ 4,711 $ (467) $(6,011) $(6,678)
========================= ======= ======== ======== ========
Add Fixed Charges:
Interest expense on borrowings and
amortization of deferred
financing costs 14,768 14,996 14,397 13,011 13,216
Interest portion of rent expense 750 707 656 386 326
15,518 15,703 15,053 13,397 13,542
========================= ======= ======== ======== ========
Adjusted Earnings 11,841 20,414 14,586 7,386 6,864
========================= ======= ======== ======== ========
Ratio of Earnings to Fixed
Charges 0.76x 1.30x 0.97x 0.55x 0.51x
57
Exhibit 21.1
THE GSI GROUP, INC.
LIST OF SUBSIDIARIES
--------------------
COMPANY NAME LOCATION TYPE OF ENTITY
---------------------------- ------------- -----------------
GSI Group (Asia) . . . . . . Malaysia SDN, BHD
GSI Group (Africa) . . . . . South Africa SA Prop Limited
GSI Group (Europe) . . . . . Great Britain Limited Liab. Co.
GSI/Cumberland . . . . . . . Mexico Limited Liab. Co.
The GSI Group (Canada) Co. . Canada Corporation
David Manufacturing Company. USA - Iowa Corporation
Agromarau Industria E
Comercio Ltda. . . . . . . Brazil Limited Liab. Co.
GSI Group (Shanghai) . . . . China Limited Liab. Co.
GSI Group (Poland) . . . . . Poland Limited Liab. Co.
58