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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, 2004
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 15, 2005.
Documents Incorporated by Reference: None
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1
EXPLANATORY NOTE
This Amendment No. 1 to The GSI Group Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 2004 includes restated consolidated financial
statements as of December 31, 2004, 2003 and 2002, and related changes to Item 6
- Selected Financial Data, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations and Exhibit 12.1 - Computation of
Ratio of Earnings to Fixed Charges (Unaudited). The accompanying restated
consolidated financial statements, including the notes thereto, have also been
revised to reflect the restatement adjustments. The restatements of our
consolidated financial statements as of December 31, 2003 and 2002 contained
herein are in addition to the restatement of those financial statements set
forth in Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003, which was filed on April 26, 2005.
In addition, this Amendment No. 1 includes changes to Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 9A - Controls and Procedures - Changes in Internal Controls, which changes
are being made in response to comments from the staff of the Securities and
Exchange Commission on this Item in the 2004 Form 10-K as initially filed and
certain other immaterial changes to correct inaccurate information contained in
the Form 10K for the fiscal year ended December 31, 2004 as originally filed.
On May 16, 2005, as reported in our Current Report on Form 8-K dated May
20, 2005, we were acquired by GSI Holdings Corp. Following consummation of this
transaction, new management commenced a review of our historical financial
condition and results of operations. On July 12, 2005, as reported in our
Current Report on Form 8-K of that date, we announced that management, in
consultation with our independent auditors, BKD, LLP, had determined that our
previously issued consolidated financial statements for the 2004, 2003 and 2002
fiscal years may contain errors and thus should not be relied upon until we were
able to ascertain whether a restatement would in fact be required. We have now
determined that it is necessary to restate these financial statements, and
include that information in this Amendment No. 1.
We, in consultation with our independent auditors, BKD, LLP, have
determined that it is necessary to restate to correct for historical errors in
inventory accounting. The identified errors relate to three separate issues:
1) capitalization rates of overhead expense in inventory, which were
inconsistent with actual spending;
2) the capitalization of warranty and R&D costs in inventory, which management
believes should be expensed in their entirety; and
3) improper application of our policy for establishing reserves for slow moving
inventory, which resulted in inadequate historical reserve levels.
Except as described above, this Form 10-K/A does not update or otherwise
amend our 2004 10-K for changes in events, estimates or other developments
subsequent to April 15, 2005 (the date of the original filing of the Annual
Report on Form 10-K for our fiscal year ended December 31, 2004). For a
discussion of subsequent events and developments that may be material to
investors, please refer to our filings with the Securities and Exchange
Commission subsequent to April 15, 2005.
Concurrently with the filing of this Form 10-K/A, we are filing Amendment
No. 1 to our Quarterly Report on Form 10-Q for the quarterly period ended April
1, 2005, which contains restatements of our unaudited condensed consolidated
financial statements as of April 1, 2005 and April 2, 2004, and related changes,
which restatements are being made for the reasons described above.
2
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 GSI Group, Inc. (the "Company") and
business strategies for our 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, we caution that, while we
believe such assumptions or bases to be reasonable and make 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, we or
our management expresses an expectation or belief as to future results, we
express that expectation or belief in good faith and believe it has a reasonable
basis, but we can give no assurance that the statement of expectation or belief
will result or be achieved or accomplished.
Our actual results may differ significantly from the results discussed in
the forward-looking statements.
3
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 5
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, Related Stockholder
Matters and Issuer Purchases of Equity Securities 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 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 48
Item 9A. Controls and Procedures 48
Item 9B. Other Information 49
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions 52
Item 14. Principal Accountant Fees and Services 53
PART IV
Item 15. Exhibits and Financial Statement Schedules 54
4
PART I
ITEM 1. BUSINESS.
GENERAL
The Company is a major worldwide manufacturer of agricultural equipment.
The Company believes that it is the largest global manufacturer of both (i)
grain storage bins and related conditioning and handling systems and (ii) swine
feed storage and delivery, ventilation and confinement systems. The Company is
also one of the largest global providers of equipment to the poultry producing
industry, providing feed storage and delivery, watering, ventilation and nesting
systems. The Company markets its agricultural equipment primarily under its
GSI, DMC, FFI, Zimmerman, AP and Cumberland brand names in approximately 75
countries through a network of over 2,500 independent dealers, with whom the
Company generally has long-term relationships. The Company's leading market
position in the industry reflects both the strong, long-term relationships it
has developed with its customers as well as the breadth, quality and reliability
of its products.
Through the Company's distribution network of independent dealers, the
Company markets and sells a broad range of fully integrated grain storage,
conditioning and handling products to farm operators and commercial businesses,
such as the Archer-Daniels-Midland Company and Cargill, Inc. The end users of
the Company's equipment operate grain farms, feed mills, grain elevators, port
storage facilities and commercial grain processing facilities. The Company
believes that its grain storage, conditioning 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 markets and sells its feeding and ventilation systems to swine
and poultry growers, who purchase equipment through the Company's distribution
network of independent dealers. The Company also markets its products to large
integrators, such as Pilgrim's Pride Corporation, Tyson Foods, Inc. and
Smithfield Foods, Inc., who purchase swine and poultry from growers pursuant to
contracts that specify that particular agricultural equipment be used in the
growing process. The Company believes that its swine and poultry systems are
the most effective in the industry in minimizing the feed-to-meat ratio, a key
measure of operational efficiency. The Company also believes that its swine and
poultry systems are superior to those of its principal competitors due to its
proprietary, patented designs and its broad range of fully integrated products
and systems.
On April 6, 2005, the Company's stockholders entered into an agreement to
sell all of the issued and outstanding shares of voting and non-voting equity of
the Company to an affiliate of Charlesbank Equity Fund V, Limited Partnership.
In connection with the consummation of the transaction, it is expected that the
Company will refinance or amend its senior credit facility and its 10-1/4%
senior subordinated notes due 2007. The consummation of the transaction, which
is expected to occur in May 2005, is subject to customary conditions, including
the receipt of financing.
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 COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include the following:
Leading Market Positions. The Company believes that it is the largest
global manufacturer of both (i) grain storage bins and related conditioning and
handling systems and (ii) swine feed storage and delivery, ventilation and
confinement systems. The Company is also one of the largest global providers of
equipment to the poultry producing industry, providing feed storage and
delivery, watering, ventilation and nesting systems. The Company believes
that it has achieved its leading market position due to the breadth, quality and
reliability of its products, its commitment to customer service and the
effectiveness of its distribution network of independent dealers.
5
Provider of Fully Integrated Systems with Strong Brand Names. The Company
offers a broad range of integrated products and systems that permits customers
to purchase all of their grain, swine and poultry production equipment needs
through its distribution network of independent dealers. Through the Company's
manufacturing expertise and experience, its GSI, DMC, FFI, Zimmerman, AP and
Cumberland brand names have achieved strong recognition in its markets. The
Company designs its fully integrated systems to help its end-user customers
achieve operational efficiencies and maximize operating results by lowering
their total production costs and enhancing their productivity. The Company also
believes that its dealers benefit from purchasing fully integrated systems due
to the strong after-market support for its end-user customers, lower
administrative and shipping costs and the efficiencies they gain from dealing
with a single supplier.
Effective Global Distribution Network. The Company believes that it has
developed a highly effective global distribution network consisting of over
2,500 independent dealers that market the Company's products in approximately 75
countries. To ensure a high level of customer service, the Company carefully
selects and trains its dealers. This approach to dealer selection and training
has helped the Company to maintain a very low turnover rate within its dealer
network, thereby providing its end-user customers with consistency and stability
of equipment and system supply. As a result, over the last three fiscal years,
no domestic dealer representing sales to the Company in excess of $1 million per
year has discontinued sales of any of the Company's principal products in favor
of those of a competitor. The Company's distribution network is also the
principal supplier of repair parts to the end users of its products, which
enables the Company to maintain strong ongoing relationships with its end-user
customers and dealers. These relationships often result in long-term brand
loyalty to the Company's products on the part of end-user customers, and create
a steady base of recurring revenues for the Company. For example, within each
of the Company's three product lines (grain, swine and poultry), its 10 largest
dealers have been purchasing the Company's equipment and systems for an average
of over 10 years.
Highly Diversified Revenue Base. The Company is well diversified by
product line, geography and customer base. The Company sells its products to
customers in approximately 75 countries through a network of over 2,500
independent dealers. In each of the last three fiscal years, no single customer
or product class represented more than 10% of the Company's sales.
Experienced Management Team. The Company is led by a management team with
significant experience in the agricultural products industry. The Company's
executive management team has an average of 23 years of industry experience,
which the Company believes helps it to establish strong, credible customer
relationships and identify and respond quickly to market opportunities. The
Company's Chairman and senior management own 100% of the Company's outstanding
common stock, and in the event the pending sale of the Company's stock is
consummated, have committed to purchase a significant portion of the new parent
company's common stock at the same price per share being paid by the purchaser.
BUSINESS STRATEGY
The Company is a major provider of agricultural equipment, and its
objective is to continue to pursue profitable growth in its markets. The
Company's business strategy includes the following principal elements:
Capitalize on Favorable Market Conditions and Trends. The Company intends
to capitalize on the strong conditions and attractive market trends that exist
in its industry. According to the United States Department of Agriculture, or
USDA, from 2003 to 2004 U.S. net farm income increased 24% to $74 billion. The
Company believes this increase will lead to increased domestic demand for its
equipment in 2005. In addition, the Company believes there are several trends
that will continue to drive demand for its grain equipment. As described in
more detail below under "Industry Overview," these trends include (i) conversion
of domestic cropland from soybeans to corn which continues to result in an
increase in the aggregate volume of bushels produced, (ii) growth in demand for
corn driven primarily by an increase in ethanol production in the United States,
(iii) growth in genetically modified grains, which have greater storage and
handling needs, (iv) continued increases in domestic corn yields and (v)
continuing consolidation of the grain farm sector and the resulting increase in
large scale on-farm grain storage. Demand for the Company's products is also
being driven by producers' increasing focus on the efficiency of their
agricultural equipment and by the increased presence of protein (for example,
poultry and pork) in the diets of consumers.
Leverage Extensive Global Distribution Network. The Company has developed
a highly effective and established global distribution network, and it intends
to continue to use its distribution network and strong brand names to deepen its
relationships with existing customers as well as to attract new customers. Part
of this strategy involves using its distribution network to introduce new
products into the market. For example, in 1998 the Company introduced through
its distribution network its grain handling equipment, including the Grain King
line of transport products for the movement of grain, which has accounted for
more than $30 million of its sales.
6
Capitalize on Growth in International Markets. The Company believes that it
has leading market positions in key international growth markets for grain and
livestock equipment, such as Brazil, China and Eastern Europe. The Company
intends to continue to leverage its worldwide brand name recognition, leading
market positions and international distribution network to capture the growing
demand for its products that exists in the international marketplace. The
Company also believes that the economic growth occurring in its international
markets will result in consumers devoting larger portions of their income to
improved and higher-protein diets, stimulating demand for poultry and pork and,
in turn, the Company's products.
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 works closely with its customers
and capitalizes on existing technology to improve existing products and develop
new value-added products. For example, the Company's HI-LO pan feeder has the
unique ability to adjust from floor feeding to regulated feed levels, thereby
minimizing the feed-to-meat ratio and increasing growers' efficiency. The
Company intends to continue to actively develop product improvements and
innovations to more effectively serve its customers.
Focus on Improving Profitability and Cash Flow Generation. In 2002, the
Company began to implement a lean manufacturing initiative, which is primarily
responsible for reducing our labor expense as a percent of sales from 2002 to
2004. The Company believes that significant opportunity exits to continue to
enhance its profitability and capital efficiency by further applying lean
techniques to its manufacturing operations.
INDUSTRY OVERVIEW
The industry in which the Company operates is characterized both
domestically and internationally by a few large companies with broad product
offerings, such as the Company, CTB, Inc., a Berkshire Hathaway company, and Big
Dutchman International GmbH, and numerous small manufacturers of single product
lines. Competition is based on product value, reputation, quality, design and
price as well as customer service. The Company believes that its leading brand
names, diversified high-quality product lines and strong distribution network
enable it to compete effectively.
Demand for agricultural equipment such as the Company's products is driven
by the overall level of grain, swine and poultry production, the level of net
farm income, agricultural real estate values and producers' increasing focus on
improving productivity. The USDA projects U.S. net farm income to average $61
billion per year over the next 10 years as compared to an average of $48 billion
per year in the 1990s.
Demand for grain equipment is increasing, due in large part to the
following factors:
- Conversion of Domestic Cropland from Soybeans to Corn. U.S. farmers are
increasingly converting cropland to corn production due to expanded applications
for corn and the increased relative profitability of corn production as compared
to soybean production. According to the USDA, 2004 corn yields averaged 160
bushels per acre, compared to an average yield of 43 bushels per acre of
soybeans. In addition, the harvesting, processing and distribution of corn is
more equipment intensive than that of soybeans, due principally to the greater
conditioning needs of corn. These factors are driving demand for additional
infrastructure for grain storage, conditioning and handling.
- Increase in Domestic Ethanol Production. Ethanol, produced from corn, is
used as an additive to gasoline. According to the USDA, corn used in ethanol
production grew at a compound annual growth rate of 14% from 1997 to 2004.
Approximately 12% of 2004 domestic corn production was devoted to the production
of ethanol. The USDA projects that demand for ethanol will continue to increase
due to, among other factors, continued strong petroleum prices and regulatory
bans on methyl tertiary butyl ether (MTBE) as an alternative fuel oxygenate.
- Proliferation of Genetically Modified Organisms ("GMOs"). GMO acceptance
among consumers has been growing, as has the breadth of GMO offerings. In order
to ensure traceability, genetically modified grains must be separated during
storage, transfer and conditioning, which requires that farmers and processors
maintain multiple storage units and related conditioning and handling
equipment.
7
- Long-term Increases in Corn Yields. The increase in grain production
attributable to advancements in seed and fertilizer engineering necessitates
additional storage and other equipment to keep pace with production. According
to the USDA, from 1984 to 2004, domestic corn production increased from 107
bushels per acre to 160 bushels per acre, which the Company believes resulted,
in part, from these engineering changes and other technological advancements.
- Consolidation of Grain Farm Production. According to the USDA, the
percentage of total cropland acreage managed by farms with more than $1 million
in annual revenue is projected to increase from 12% in 2004 to 26% in 2010.
Larger grain farms are more likely to invest in large on-farm storage facilities
due to their ability to afford greater capital goods purchases and their need
for greater scale economies.
The Company's sales of swine and poultry equipment historically have been
affected by the level of construction of new facilities undertaken by swine and
poultry producers, which is affected by feed prices, environmental regulations
and domestic and international demand for pork and poultry. Increases in feed
and grain prices, which historically have supported sales of the Company's grain
equipment and systems, have also historically resulted in a decline in sales of
feeding, watering and ventilation systems to swine and poultry producers.
Demand for the Company's swine and poultry equipment is also impacted by changes
in consumers' dietary habits, as consumers in the U.S. increase their
consumption of poultry and pork and as consumers in developing countries devote
larger portions of their income to improved and higher protein-based diets.
PRODUCTS
The Company manufactures (i) grain storage bins and related conditioning
and handling systems, (ii) swine feed storage and delivery, ventilation and
confinement systems and (iii) poultry feed storage and 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
its customers to purchase complete, integrated production systems from a single
supplier who can offer high-quality installation and service.
Grain Product Line
The Company manufactures the following grain production equipment and
systems:
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 over 730,000 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 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 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 to dry 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 and FFI 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.
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 can be easily integrated into the Company's systems and those of its
competitors and enables the Company to offer a fully integrated product line to
grain producers.
8
Swine Product Line
The Company manufactures the following swine production equipment and
systems:
Feeding Systems. The Company manufactures 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 are typically used to transport feed from
the bulk feed storage tanks located outside of the buildings to the inside of
the structure. Once inside it is moved either by additional Flex-Flo equipment
or is transferred to the Company's versatile "Chain Disk System", which makes
turns and changes in elevation much more easily. The feed is then delivered to
the swine using a wide variety of ad lib feeders that are specifically designed
to minimize feed waste by allowing a consistent setting to a predetermined
level, provide the swine with a high degree of comfort and be user-friendly to
the producer. The Company also manufactures and sells individual feed
dispensers, which producers use at times to feed each animal an exact amount of
feed daily. All of these systems are highly automated and are designed to
address the continually changing, multifaceted production practices in the pork
industry, such as "wean to finish" technology (where pigs are started on a
feeder at a very young age, using special designs that allow them to feed
without being injured) or "sorting technology" (where pigs are sorted by weight
daily and fed in accordance with selective parameters).
Ventilation Systems. The Company manufactures 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 perform a critical role in
minimizing the grower's feed-to-meat conversion ratio because they reduce stress
caused by extreme temperature fluctuation, allowing for higher-density
productions and facilitate 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 further specializes in designs
that work with the new emerging production practices as they are being developed
by producers so that the designs are market-ready when these production
practices gain more widespread market acceptance.
Other Production Equipment. The Company manufactures and markets a wide
array of equipment used in the balance of the swine production process,
including plastic slated flooring, highly efficient watering devices, a wide
variety of PVC extrusions used for construction applications in the facilities,
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 manufactures the following poultry production equipment and
systems:
Feeding Systems. The Company manufactures 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 competitors' products due to its unique ability
to adjust from floor feeding for young chicks to regulated feed levels for older
birds, thereby lowering the feed-to-meat ratio.
Watering Systems. The Company manufactures 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, which units contain a regulator designed to provide different
levels of 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 Company's watering nipples are also 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.
9
Ventilation Systems. The Company manufactures ventilation systems for
poultry producers under its Cumberland and Airstream brand names. 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 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 2004, 2003 and 2002, 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 among 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
its 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 those 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 few large companies with broad
product offerings, such as CTB, Inc. a Berkshire Hathaway company and Big
Dutchman International GmbH, and numerous small manufacturers of single product
lines. Competition is based on product value, reputation, quality, design and
price as well as customer service. The Company believes that its leading brand
names, diversified high-quality product lines and strong distribution network
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 their total production costs and enhances their
productivity, provides it with a competitive advantage versus competitors that
do not provide integrated systems.
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 $3.6 million, $2.5 million
and $2.7 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The Company charges research and development costs to operations
as incurred.
10
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, such as
motors, 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, except for steel.
REGULATORY AND ENVIRONMENTAL MATTERS
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, 2004 was $29.9 million compared to $23.4
million at December 31, 2003. The Company believes that the 2004 ending backlog
will be filled by the end of 2005.
PATENTS AND TRADEMARKS
The Company protects its technological and proprietary developments through
a combination of trade secrets, patents and trademarks. 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, 2004, the Company had 1,515 employees of whom 1,468 were
permanent and 47 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 Company as of April 15, 2005, were as
follows:
Location Owned/Leased Description of Property
---------------------- ------------ -----------------------------
Assumption, Illinois . Own Manufacturing/Sales
Paris, Illinois. . . . Own Manufacturing/Assembly
Newton, Illinois . . . Own Manufacturing/Assembly
Vandalia, Illinois . . Own Manufacturing/Assembly
Flora, Illinois. . . . Own Manufacturing/Assembly
Clear Lake, Iowa . . . Own Sales/Warehouse
Sioux City, Iowa . . . Lease Sales/Warehouse
Marau, Brazil. . . . . Lease Manufacturing/Sales
Penang, Malaysia . . . Lease Manufacturing/Sales/Warehouse
Queretero, Mexico. . . Lease Sales/Warehouse
Honeydew, South Africa Lease Sales/Warehouse
Poznan, Poland . . . . Lease Sales
Shanghai, China. . . . Lease Sales/Warehouse
11
The corporate headquarters for the Company is located in Assumption,
Illinois.
The Company's owned facilities (other than its Brazil facility) are subject
to mortgages held by Congress Financial Corporation. 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, are not expected to 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, 2004.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUERS PURCHASES OF EQUITY SECURITIES.
There is no established public trading market for any class of the
Company's common stock. As of April 15, 2005, the Company had 19 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, 2004 and December
31, 2003, the Company declared dividends totaling $1.6 million and $1.1 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 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 of the
Company, may deem relevant.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Total Number of Maximum Number
Shares Purchased as of Shares that may
Total Number of Average Price Paid part of Publicly yet be
Purchased
Shares Purchased Per Share Announced Plan under the Plan
7/1/04-8/1/04* 948,052 $ 15.40 -- --
* 948,052 shares purchased other than through publicly announced plan which
was a transaction contemplated and provided by the Board of Directors.
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, 2000, 2001, 2002, 2003 and 2004. The selected historical consolidated
financial data for the years indicated were derived from the audited 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 18 to the Consolidated Financial Statements, certain historical information
in the Consolidated Financial Statements has been restated. Please read the Note 18 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 for all periods.
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002 2003 2004
RESTATED RESTATED RESTATED RESTATED RESTATED
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT (000'S):
Sales. . . . . . . . . . . . . . . . . . . . . $ 243,164 $ 228,938 $ 229,518 $ 236,868 $ 288,131
Cost of sales. . . . . . . . . . . . . . . . . 186,847 176,195 187,528 188,197 224,027
---------- ---------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . . . . . . . 56,317 52,743 41,990 48,671 64,104
Operating expenses . . . . . . . . . . . . . . 39,936 41,160 38,944 41,050 45,352
---------- ---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . 16,381 11,583 3,046 7,621 18,752
Interest expense . . . . . . . . . . . . . . . (14,997) (14,397) (13,010) (13,215) (14,104)
Other income (expense) . . . . . . . . . . . . 439 310 (610) 256 (90)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes. . . . . . . 1,823 (2,504) (10,574) (5,338) 4,558
Provision (benefit) for income taxes . . . . . (657) (762) 106 (995) 499
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations . . . 2,480 (1,742) (10,680) (4,343) 4,059
Discontinued Operations:
Gain from sale of discontinued operations. . . -- -- -- -- 118
Gain from discontinued operations, net of tax. 121 95 303 142 (93)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest . . . . 2,601 (1,647) (10,377) (4,201) 4,084
Minority interest in Net Income of subsidiary. -- -- (26) (77) (92)
---------- ---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . . . . . 2,601 (1,647) (10,403) (4,278) 3,992
========== ========== ========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE:
Continuing operations. . . . . . . . . . . . . $ 1.40 $ (0.98) $ (6.03) $ (2.49) $ 2.32
Discontinued operations. . . . . . . . . . . . $ 0.07 $ 0.05 $ 0.17 $ 0.08 $ (0.07)
---------- ---------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . . . . . $ 1.47 $ (0.93) $ (5.86) $ (2.41) $ 2.25
---------- ---------- ---------- ---------- ----------
BALANCE SHEET :
Total Assets (000's) . . . . . . . . . . . . . $ 161,445 $ 150,238 $ 136,898 $ 129,131 $ 130,677
Long-term obligations (000's). . . . . . . . . $ 130,870 $ 136,211 $ 139,735 $ 129,563 $ 133,963
Dividends per share. . . . . . . . . . . . . . $ 1.05 $ 0.60 $ 1.01 $ 0.65 $ 1.24
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.
GENERAL
The Company is a major worldwide manufacturer and supplier of agricultural
equipment. The Company's grain, swine and poultry products are used by producers
and purchasers of grain, and by producers of swine and poultry. Demand for our
agricultural equipment is driven by the overall level of grain, swine and
poultry production, the level of net farm income, agricultural real estate
values and producers' increasing focus on improving productivity in their
operations. In addition, fluctuations in grain and feed prices affect our sales,
with sustained increases in grain and feed prices increasing demand for our
grain equipment and decreasing demand for our swine and poultry equipment. We
believe that our diversified product offerings mitigate the effects of
fluctuations in the price of grain. Sales of our swine and poultry equipment are
also affected by long-term trends in consumer demand for pork and poultry both
domestically and internationally.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain conditioning 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, operating income and net income
have historically been lower during the first and fourth fiscal quarters as
compared to the second and third quarters. Traditionally, this has caused the
Company to have increased working capital needs during the second and third
quarters as material is purchased and converted to inventory and then
receivables during the year.
Although our sales are primarily denominated in U.S. dollars and are not
generally affected by currency fluctuations (except for transactions from the
Company's Brazilian operation), our production costs, profit margins and
competitive position are affected by the strength of the U.S. dollar relative to
the strength of the currencies in countries where our products are sold.
Our international sales have historically comprised a significant portion
of our total sales. In 2004, 2003 and 2002, the Company's international sales
accounted for 35.1%, 34.4% and 36.6% of total 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 our
international operations.
In July 2004, Craig Sloan retired as our Chief Executive Officer, but was
retained as a consultant to the Company and continues to serve as a director of
the Company and as the non-executive Chairman of the Board. At that same time,
the Board of Directors elected Russell C. Mello as Chief Executive Officer of
the Company.
The primary raw materials we use to manufacture our products are steel and
polymers. Fluctuations in the prices of steel and, to a lesser extent, polymer
materials can impact our 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
FIRST RESTATEMENT
During the Company's year-end review of 2004, it 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 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 Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a non-recourse, loan (in the form of interest-bearing
notes) to each employee with the shares as the only collateral for 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 previously followed. Treatment
of the transaction as a variable stock award requires the Company to recognize
as compensation expense the extent to which the fair market value of the
underlying shares exceeds the original purchase price for such shares. 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 the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously 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.
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican 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 the Company's CEO 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
a liability 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.
SECOND RESTATEMENT
Subsequent to the sale of all of the stock of the Company on May 16, 2005,
the new management appointed by the new owner of the Company discovered
additional accounting errors in prior years' financial statements. The errors
have been corrected in the accompanying 2004, 2003 and 2002 financial
statements. A description of the errors and related impact on each of the
financial statements follows. Amounts are stated in whole dollars.
The Company made adjustments in 2004, 2003 and 2002 to correct its
allowance for obsolete inventory to conform to the Company's historical policy.
The effect of these changes reduced net income by $559,000 in 2004 and
$1,307,000 in 2002, and increased net income by $283,000 in 2003.
16
The Company made adjustments in 2004, 2003 and 2002 to expense warranty and
research and development costs, which were erroneously included in inventory.
The effect of these changes increased net income by $654,000 and $51,000 in 2004
and 2002, respectively, and decreased net income by $558,000 in 2003.
The Company made adjustments in 2004, 2003 and 2002 to correct the amount
of overhead that was included in inventory. The previous inventory balance
included an excessive amount of overhead. The effect of these changes increased
net income by $2,188,000 and $1,777,000 in 2004 and 2003, respectively, and
decreased net income by $2,951,000 in 2002.
The combined effect of these changes increased net income by $2,283,000 and
$ 1,502,000 in 2004 and 2003, respectively, and decreased net income by
$4,207,000 in 2002. With respect to prior fiscal years summarized in Item 6 -
Selected Financial Data above, the combined effect of the changes effected by
the these restatements decreased net income by $1,836,000 in 2001 and $2,678,000
in 2000.
The financial statement impact of the above noted adjustments is indicated
in the table below stated in thousands of dollars except for per share line
items:
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FISCAL YEAR 2004
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . $ 53,588 $ (4,935) $ 48,653
Retained earnings. . . . . . . . . . 3,944 (4,935) (991)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . 226,310 (2,283) $ 224,027
Operating income . . . . . . . . . . 16,469 2,283 18,752
Net income . . . . . . . . . . . . . 1,709 2,283 3,992
Basic and diluted earnings per share 1.31 0.94 2.25
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT
FISCAL YEAR 2003 (Note *)
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 54,165 $ (4,562) $ 49,603 $ (7,218)
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 (7,218)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 190,694 (481) 190,213 (1,502)
Selling, general and administrative expenses . 36,591 3,602 40,193
Operating income . . . . . . . . . . . . . . . 9,290 (3,121) 6,169 1,502
Foreign currency transaction loss. . . . . . . (102) (99) (201)
Other, net . . . . . . . . . . . . . . . . . . (3,544) 3,749 205
Minority interest in net income of subsidiary. -- (77) (77)
Net income (loss). . . . . . . . . . . . . . . (6,232) 452 (5,780) 1,502
Basic and diluted earnings per share . . . . . ($3.51) $ 0.25 ($3.26) 0.85
RESTATED
FISCAL YEAR 2003 (Note *)
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 42,385
Payroll and payroll related expenses
Other accrued expenses
Paid in capital
Accumulated other comprehensive loss
Retained earnings. . . . . . . . . . . . . . . (3,365)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 188,711
Selling, general and administrative expenses
Operating income . . . . . . . . . . . . . . . 7,671
Foreign currency transaction loss
Other, net
Minority interest in net income of subsidiary
Net income (loss). . . . . . . . . . . . . . . (4,278)
Basic and diluted earnings per share . . . . . (2.41)
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FISCAL YEAR 2002 (Note *)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 176,836 7,097 183,933 4,207 188,140
Selling, general and administrative expenses . 36,767 1,087 37,854
Operating income . . . . . . . . . . . . . . . 15,787 (8,184) 7,603 (4,207) 3,396
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) (4,207) (10,403
Basic and diluted earnings per share . . . . . $ 1.31 ($4.80) ($3.49) ($2.37) ($5.86)
17
Note * The reported figures in these tables may differ from the Consolidated
Statement of Operations because they do not reflect the reclassification of
certain amounts for discontinued operations.
RESULTS OF OPERATIONS (AFTER SECOND RESTATEMENT)
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Sales increased 21.6% to $288.1 million in 2004 compared to $236.9 million
in 2003. Swine equipment sales increased 11.0% due to improving market
conditions. Grain sales increased 26.6% in 2004 to $177.6 million primarily as a
result of strong grain storage demand due to increased crop size, higher
realized prices, and market share penetration of newer products such as grain
transportation equipment. Strong sales of grain equipment in our Agromarau
subsidiary also contributed to the increase. Poultry sales increased 16.5%
year-over-year, primarily as a result of gains in domestic market share and
higher realized prices. In October 2004, we sold the assets of our Canadian
subsidiary, which accounted for $0.6 million in 2004 sales as compared to $0.8
million in 2003 sales.
Gross profit increased to $64.1 million in 2004, or 22.3% of sales, from
$48.7 million or 20.6% of sales in 2003. This increase was primarily due to
increased volume, which allowed the company to leverage its fixed expenses and
higher realized prices, but was mostly offset by higher material costs.
Operating expenses increased 10.5%, or $4.3 million, to $45.4 million in
2004 from $41.1 million in 2003. This increase in operating expenses was the
result of a $2.0 million year-over-year increase in stock-based compensation, a
$7.2 million increase in expenses associated with the simultaneous purchase and
sale of FarmPRO in December 2004, offset in part by $1.8 million in lower
litigation and other expenses in 2004 relating to a dispute with the Yemen
Company for Industrial Investment ("YCII") and cost reduction initiatives. As a
percentage of sales, operating expenses decreased to 15.7% in 2004 from 17.3% in
2003.
Operating income increased to $18.8 million in 2004 from $7.6 million in
2003. Operating income margins increased to 6.5% of sales in 2004 from 3.2% in
2003.
Interest expense increased $0.9 million due to slightly higher borrowing
costs, as well as increased levels of debt incurred to fund stock repurchases in
2004.
Net income in 2004 was $4.0 million, compared to a net loss of $4.3 million
in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Sales increased 3.2% or $7.4 million to $236.9 million in 2003 compared to
$229.5 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 $48.7 million in 2003 or 20.6% of sales from
$42.0 million or 18.3% of sales in 2002. This increase was primarily due to an
improvement in production efficiencies following the 2002 consolidation efforts.
Operating expenses increased 5.6% or $2.2 million to $41.1 million in 2003
from $38.9 million in 2002. As a percentage of sales, operating expenses
increased to 17.3% in 2003 from 17.0% in 2002. This increase was primarily the
result of the write off of the Yemen receivable.
Operating income increased to $7.6 million in 2003 from $3.0 million in
2002. Operating income margins increased to 3.2% of sales in 2003 from 1.3% in
2002.
Interest expense increased $0.2 million due to slightly higher borrowing
costs.
Net loss decreased to $4.3 million in 2003 from $10.4 million in 2002.
18
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Sales increased 0.3% or $0.6 million to $229.5 million in 2002 compared to
$228.9 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 $42.0 million in 2002 or 18.3% of sales from
$52.7 million or 23.1% of sales in 2001. This decrease was primarily due to
production inefficiencies caused by consolidation efforts.
Operating expenses decreased 5.6% or $2.3 million to $38.9 million in 2002
from $41.2 million in 2001. As a percentage of sales, operating expenses
decreased to 16.9% 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 $3.0 million in 2002 from $11.6 million in
2001. Operating income margins decreased to 1.3% of sales in 2002 from 5.1% in
2001.
Interest expense decreased $1.4 million due to lower borrowing costs.
Net loss increased to $10.4 million in 2002 from $1.6 million in 2001.
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, 2004, the Company had $40.3 million of working capital, a decrease
of $2.8 million as compared to its restated working capital as of December 31,
2003. This decrease in working capital was due largely to an increase in
current maturities of long-term debt and a decrease in accounts receivable,
partially offset by an increase in inventory.
The change in the Company's accounts receivable balance from 2003 to 2004 was
attributable to a combination of the following factors:
(a) FarmPRO, Inc. Receivable Write Off: GSI wrote off $2.6 million in
accounts receivable from FarmPRO, Inc. in 2004 all of which was recorded in 2003
or prior years, in connection with their restructuring and subsequent sale (see
answer to question six.).
(b) Reversal of YCII Receivable Reserve: In 2004, GSI reversed $0.4 million
of a reserve that the Company recorded in 2003 in respect of amounts receivable
from YCII, a customer with whom GSI has a dispute relating to a grain facility
erection project begun in 1998.
(c) Other: In 2004, GSI shifted a significant number of international
accounts to prepay only accounts, in order to reduce bad debt expense.
Furthermore, GSI improved its collection policies relating to certain of its
product lines, in particular the transport augers, which contributed to a
decrease in days outstanding.
(d) Increase in Reserve for Doubtful Accounts: GSI's reserve for doubtful
accounts increased to $3.4 million during the fiscal year 2004.
From 2003 to 2004, on a restated basis, total inventory increased by 15%, while
cost of goods, on a restated basis, increased by 19%. A more specific
discussion of the year over year change in the components of inventory follows:
(a) Raw materials: Raw material inventory increased 67% from 2003 to 2004.
This was driven by i) growth in sales driven by favorable trends in GSI's end
markets (which management expects to continue in 2005); and ii) opportunistic
purchases by management of raw materials during the 4th quarter in anticipation
of rising steel costs in 2005.
(b) Work-in-process: Work in process inventory decreased by 49% during the
year as a result of continuing implementation of lean manufacturing techniques
as well as improved tracking and monitoring of work in process inventory in
GSI's plants.
(c) Finished goods: Finished goods inventory increased 31% during the year.
This was mainly attributable to sales growth during the year.
19
Operating activities generated $9.9 million, $13.4 million and $3.6 million
of cash in 2004, 2003 and 2002, respectively. The decrease in cash flow from
operating activities from 2003 to 2004 of $3.5 million was primarily the result
of a change in inventory, accounts payable and customer deposits of $22.0
million offset by changes in net income, accounts receivable, accrued expenses,
stock-based compensation and deferred taxes totaling $18.6 million.
The Company's capital expenditures totaled $6.3 million, $1.7 million and
$5.2 million in 2004, 2003 and 2002, respectively. Capital expenditures have
primarily been for machinery and equipment and the expansion of facilities. The
Company anticipates that its capital expenditures in 2005 will be less than that
of 2004.
Cash used in financing activities in 2004 consisted primarily of $14.6
million of treasury stock purchases, a $2.3 million payment of shareholder loans
and a $1.6 million dividend for taxes offset by $2.9 million of borrowing under
the Credit Facility and a $7.1 million shareholder loan. 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.
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 $75.0 million, subject to various
conditions including borrowing base availability to replace the Company's
then-existing senior credit facility, which provided for maximum outstanding
borrowings of $60.0 million. 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 (which was
subsequently increased to $20.8 million as described below) due October 31, 2006
is also included in the credit facility. Revolving loan borrowings bear
interest at a rate per annum as elected by the Company equal to 2.5% to 3.0%
over LIBOR or 0.0% to 0.50% over the Prime Rate, both being 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 (which was
subsequently decreased as discussed below.
On July 9, 2004, the Company's credit facility was amended to provide for
an additional $14.6 million term loan (approximately $6.2 million of the
original term loan then remained outstanding). The Company used the proceeds
from the increased term loan to repurchase shares of the Company's voting common
stock from Craig Sloan upon his retirement from the Company. In connection with
that amendment, Mr. Sloan and Congress Financial Corporation (Central) entered
into a capital call agreement that requires Mr. Sloan to either make an
investment in the Company or purchase a participation in the revolving loans if
certain conditions are met.
On October 19, 2004, the Company's credit facility was amended to decrease
the interest rate on the term loan to 6.75% over Prime Rate (subject to an 11%
minimum and a 13.25% maximum) and to permit additional term loans on or prior to
April 19, 2005, subject to various conditions including an aggregate limit of
$17.5 million for all term loans and restrictions on reducing the term loans
below $8 million.
On February 2, 2005, the Company's credit facility was amended to permit
under certain conditions the payment of annual dividends in an amount not to
exceed $2 million in the aggregate.
The Company's credit facility contains a number of covenants that, among
other things, restrict our ability to dispose of assets, incur additional
indebtedness, pay or make dividends or distributions to the Company's
stockholders, create liens on assets, enter into sale and leaseback transactions
and otherwise restrict our general corporate activities. The Company is also
required to comply with specified financial ratios and tests, including
maintenance of a minimum EBITDA, a senior debt to EBITDA ratio and a fixed
charge coverage ratio.
The Company's credit facility contains various events of default, including
defaults relating to payments, breaches of representations, warranties and
covenants, certain events of bankruptcy and insolvency, defaults on other
indebtedness, certain liens and encumbrances on assets and certain changes of
control of the Company.
Borrowings under the credit facility are secured by substantially all of
the Company's assets.
20
As of December 31, 2004, in addition to $11.0 million of outstanding term
loans, the Company had $23.5 million of revolving loans outstanding and $4.4
million of standby letters of credit under the credit facility, which reduced
the overall availability under the credit facility to $14.8 million.
CONTRACTUAL OBLIGATIONS
PAYMENTS DUE BY PERIOD
-----------------------
TOTAL 2005 2006 2007 THEREAFTER
------------------------------- ----------------------- ------- ------- -----------
Long-Term Debt Obligations (a). $ 139,130 $ 5,167 $34,483 $ 99,480 --
Operating Lease Obligations (b) 4,624 1,539 1,265 952 868
Purchase Obligations (c) . . . 79,300 43,200 36,100 -- --
Consulting Contract (d) . . . . 924 504 420 -- --
Interest Obligation (e) . . . . 30,750 10,250 10,250 10,250 --
Total . . . . . . . . . . . . . $ 254,728 $60,660 $82,518 $ 110,682 $868
(a) Included principal payments due on long-term debt. For additional
information, see note 9 "Long-term debt".
(b) For U.S. operations only. Lease obligations of foreign subsidiaries are
not material and therefore not included. For additional information, see note 12
"Commitments and Contingencies".
(c) Purchase obligation amounts represent the minimum obligation under our
supply arrangements related to product and/or services entered into in the
normal course of our business.
(d) Consulting Contract is with BMA Consulting.
(e) Interest related to the 10-1/4% Senior Subordinated Notes.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
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,
equity based compensation expense and taxes. Actual results could differ
materially from these estimates. The following critical accounting policies are
impacted significantly by judgments, 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
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
comparing 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.
21
INVENTORY
Inventories are stated at the lower of cost or market, net of reserve for
obsolete or slow moving inventory. Cost includes the cost of materials, labor
and factory overhead. The cost of all domestic and international inventories was
determined using the first-in-first-out" ("FIFO") method. As of December 31,
2004, the Company's policy for reserving for obsolete or slow moving inventory
was to accrue reserves in the amount of the excess of amounts on hand over the
trailing 36 month sales volumes for all finished goods and work in progress
inventory, unless such excess amounts relate to newly introduced SKUs for which
the Company has no long term sales history, in which case no reserve is applied.
The Company did not have in place a policy for reserving for raw material
inventory.
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 '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 ascertains the market value of those shares at each quarter-end to
determine if compensation expense should be recorded to comply with generally
accepted accounting principles.
22
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,
2004, principal exposed to interest rate risk was limited to $39.9 million in
variable rate debt. The interest rates on the Company's 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. By this measure, a change in
the interest rate of 1% would change the Company's earnings by $0.4 million.
At December 31, 2004, approximately 12.5% of the Company's 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 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 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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE GSI GROUP, INC.
PAGE
----
Report of Independent Registered Public Accounting Firms . . . . . . . . . . . . . . . . . . . . 25
Consolidated Balance Sheets as of December 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 . . . 30
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2004, 2003 and
2002 31
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
24
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, 2004 and 2003 and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 2004. 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 certain foreign, wholly
owned or majority owned subsidiaries, which statements reflect total assets of
$25.4 and $19.7 million as of December 31, 2004 and 2003 and total revenue of
$35.0, $21.5 and $20.9 for 2004, 2003 and 2002. Those statements were audited
by other accountants whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for the certain foreign, wholly
owned or majority owned subsidiaries, is based solely on the reports of other
accountants.
We conducted our audits in accordance with the 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 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, 2004 and 2003 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 18 to the consolidated financial statements, the Company
has restated its 2004 financial statements to correct its methods of accounting
for inventories. Also, as described in Note 18, the Company restated its 2003
and 2002 financial statements to correct its methods of accounting inventories,
stock-based and other compensation, certain matters involving foreign
subsidiaries and insurance costs.
Decatur, IL
March 18, 2005, except for Note 18 as to which the date is August 10, 2005
/s/ BKD LLP
25
Report of Independent Registered Public Accounting Firm
We have audited the accompanying balance sheets of Agromarau Ind stria e Com
rcio Ltda. as of December 31, 2004, and the related statements of operations,
stockholders' equity, and changes in financial position for the year then ended,
all expressed in Brazilian reais. 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 the 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 misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Agromarau Ind stria e Com rcio
Ltda. as of December 31, 2004, and the results of its operations and its
financial position for the year then ended in conformity with Brazilian
generally accepted accounting principles.
The financial statements for the years ended December 31,2003 and 2002, were
examined by other auditors, and them report is an unqualified opinion.
Porto Alegre, Rio Grande do S-l - Brazil
January 21, 2005
ROKEMBACH & CIA. AUDITORES Roger Arthur Lahm
Independent Auditors Engagement Partner
CRCRS n 3.663 CRCRS n . 46.161
26
Report of Independent Auditors to the Members of GSI Group Africa (Proprietary)
Limited
We have audited the annual financial statements of GSI Group Africa
(Proprietary) Limited set out on pages 3 to 16 for the year ended 31 December
2004. These financial statements are the responsibility of the company's
directors. Our responsibility is to express an opinion on these financial
statements based on our audit.
SCOPE
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States), except for PCAOB Auditing Standard
No.-2"- "An audit of internal control over financial reporting, conducted in
conjunction with an audit of financial statements". 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,
- Assessing the accounting principles used and significant estimates made by
management, and
- Evaluating the overall financial statement presentation.
We believe that our audit provides reasonable basis for our opinion.
AUDIT OPINION
In our opinion, the financial statements fairly present, in all material
respects, the financial position of the company at 31 December 2004, and the
results of its operations and cash flow for the year then ended in accordance
with South African Statements of Generally Accepted Accounting Practice, and in
the manner required by the Companies Act in South Africa.
GOING CONCERN
Without qualifying our opinion above we draw attention to the fact that the
liabilities of the company exceed the assets. The holding company has issued a
letter of continued financial support to The GSI Group Africa (pty) Ltd. Refer
to note 15 of the financial statements.
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES)
Without qualifying our opinion above we draw attention to the fact that the
audit was not conducted in accordance with PCAOB Auditing Standard No.-2"- "An
audit of internal control over financial reporting, conducted in conjunction
with an audit of financial statements".
PricewaterhouseCoopers Inc.
Chartered Accountants (SA)
Registered Accountants and Auditors
Pretoria
13 April 2005
27
------
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. 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
28
THE GSI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004 2003
--------- ---------
ASSETS RESTATED RESTATED
--------------------------------------------------------------------------------- --------- ----------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,304 $ 3,439
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,656 27,083
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,653 42,385
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,489 4,468
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,416 2,882
--------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,518 80,257
--------- ----------
Property, Plant and Equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 32,548 32,673
--------- ----------
Other Assets:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,264 10,100
Other intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . 1,494 2,143
Deferred financing costs, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,449 2,773
Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,309 1,077
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 108
--------- ----------
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,611 16,201
--------- ----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,677 $ 129,131
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------------------
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,629 $ 17,139
Payroll and payroll related expenses. . . . . . . . . . . . . . . . . . . . . . 4,652 3,636
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12
Accrued warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,764 1,379
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,881 5,948
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,090 8,875
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . . 5,167 148
--------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 42,183 37,137
--------- ----------
Long-Term Debt, less current maturities . . . . . . . . . . . . . . . . . . . . . 133,963 129,563
--------- ----------
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,366 741
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 626,948 shares at December 31, . 16 16
2004 and 1,575,000 shares at December 31, 2003
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. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,821 3,580
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . (10,124) (11,584)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (991) (3,365)
Treasury stock, at cost, voting (6,006,704 shares at December 31, 2004 and
5,058,652 shares at December 31, 2003). . . . . . . . . . . . . . . . . . . . (41,550) (26,950)
Treasury stock, at cost, nonvoting (859,316 shares) . . . . . . . . . . . . . . (9) (9)
--------- ----------
Total stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . (46,835) (31,092)
--------- ----------
Total liabilities and stockholders' deficit . . . . . . . . . . . . . . . . $130,677 $ 129,131
========= ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004 2003 2002
---- ---- ----
RESTATED RESTATED RESTATED
----------- ----------- -----------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 288,131 $ 236,868 $ 229,518
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,027 188,197 187,528
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 64,104 48,671 41,990
Selling, general and administrative expenses . . . . . . . . . . . . 37,551 39,956 37,698
FarmPro loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,152 -- --
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . 649 1,094 1,246
Total operating expenses . . . . . . . . . . . . . . . . . . . . . 45,352 41,050 38,944
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 18,752 7,621 3,046
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (14,104) (13,215) (13,010)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 446 615 411
Loss on sale of fixed assets . . . . . . . . . . . . . . . . . . . (452) (250) (353)
Foreign currency transaction loss. . . . . . . . . . . . . . . . . (146) (314) (791)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 205 123
----------- ----------- -----------
Income (loss) from continuing operations before income taxes. 4,558 (5,338) (10,574)
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . 499 (995) 106
----------- ----------- -----------
Income (loss) from continuing operations . . . . . . . . . . . . . . 4,059 (4,343) (10,680)
Discontinued operations:
Gain from sale of discontinued operations. . . . . . . . . . . . 118 -- --
Gain (loss) from discontinued operations, net of income taxes. . (93) 142 303
----------- ----------- -----------
Income (loss) before minority interest . . . . . . . . . . . . . . . 4,084 (4,201) (10,377)
Minority interest in net income from subsidiary. . . . . . . . . . . (92) (77) (26)
----------- ----------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ 3,992 $ (4,278) $ (10,403)
=========== =========== ===========
Basic and diluted earnings (loss) per share. . . . . . . . . . . . . $ 2.25 $ (2.41) $ (5.86)
----------- ----------- -----------
Weighted average common shares outstanding . . . . . . . . . . . . . 1,304,870 1,775,000 1,775,000
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
30
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
-------------
Voting Nonvoting
------------- ----------
Accumulated
Additional Other
Shares Shares Paid-In Comprehensive
Outstanding Amount Outstanding Amount Capital Income (Loss)
------------- ---------- ----------- -------------- -------- --------------
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)
Net income. . . . . . . . . . . . . . . . - - - - - -
Stock-based compensation. . . . . . . . . 2,241
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - 1,460
Dividends . . . . . . . . . . . . . . . . - - - - - -
Purchase of Treasury Stock. . . . . . (948,052) - - - - -
Balance, December 31, 2004 . . . . . . . . 626,948 $ 16 200,000 $ 2 $ 5,821 $ (10,124)
============= ========== =========== ============== ======== ==============
Treasury Stock
----------------
Voting Nonvoting
---------------- --------------
Total Comprehensive
Retained Stockholders' Income
Earnings Shares Amount Shares Amount Deficit (Loss)
---------------- -------------- --------- ------- -------- --------- --------
Restated Balance, December 31, 2001 $ 14,257 5,058,652 $(26,950) 859,316 $ (9) $(19,964)
Restated net loss. . . . . . . . . (10,403) - - - - (10,403) (10,403)
Stock based compensation . . . . . 90
Other comprehensive loss-foreign
Currency translation adjustments - - - - - (3,804) (3,804)
Comprehensive loss . . . . . . . . $ (14,207
================
Dividends. . . . . . . . . . . . . (1,795) - - - - (1,795)
---------------- -------------- --------- ------- -------- ---------
Restated Balance, December 31, 2002 $ 2,059 5,058,652 $(26,950) 859,316 $ (9) $(35,876)
Restated net loss. . . . . . . . . (4,278) - - - - (4,278) (4,278)
Stock based compensation . . . . . 484
Other comprehensive loss-foreign
Currency translation adjustments - - - - - 2,506 2,506
Comprehensive loss . . . . . . . . $ (1,772)
================
Dividends. . . . . . . . . . . . . (1,146) - - - - (1,146)
---------------- -------------- --------- ------- -------- ---------
Restated Balance, December 31, 2003 $ (3,365) 5,058,652 $(26,950) 859,316 $ (9) $(38,310)
Net income . . . . . . . . . . . . 3,992 - - - - 3,992 3,992
Stock based compensation . . . . . 2,241
Purchase of treasury stock . . . . 948,052 (14,600) (14,600)
Other comprehensive loss-foreign
Currency translation adjustments - - - - - 1,460 1,460
Comprehensive loss . . . . . . . . $ 5,452
================
Dividends. . . . . . . . . . . . . (1,618) - - - - (1,618)
Restated Balance, December 31, 2004 $ (991) 6,006,704 $(41,550) 859,316 $ (9) $(46,835)
================ ============== ========= ======= ======== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
---- ---- ----
RESTATED RESTATED RESTATED
---------- ---------- ----------
Cash Flows From Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 3,992 $ (4,278) $ (10,403)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 5,303 6,350 7,065
Amortization of deferred financing costs and debt discount . . 916 928 643
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 452 249 353
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . (244) (1,473) (188)
Minority interest in net income of subsidiaries. . . . . . . . 92 77 26
Minority interest compensation expense . . . . . . . . . . . . 533 263 375
Stock-based compensation . . . . . . . . . . . . . . . . . . . 2,241 484 90
Changes in:
Accounts receivable, net . . . . . . . . . . . . . . . . . . 2,427 (3,809) 5,708
Inventories, net . . . . . . . . . . . . . . . . . . . . . . (6,268) 6,399 2,007
Other current assets . . . . . . . . . . . . . . . . . . . . 445 (50) (180)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (510) 6,076 (1,184)
Payroll and payroll related expenses . . . . . . . . . . . . 1,016 84 (839)
Billings in excess of costs. . . . . . . . . . . . . . . . . -- -- (257)
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . 1,385 38 (690)
Other accrued expenses . . . . . . . . . . . . . . . . . . . (67) 303 87
Customer deposits. . . . . . . . . . . . . . . . . . . . . . (1,785) 1,716 955
---------- ---------- ----------
Net cash flows provided by operating activities. . . . . . 9,928 13,357 3,568
---------- ---------- ----------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (6,322) (1,739) (5,170)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 1,657 2,742 1,299
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 687 (11)
---------- ---------- ----------
Net cash flows provided by (used in) investing activities. (4,652) 1,690 (3,882)
---------- ---------- ----------
Cash Flows From Financing Activities:
Payments on shareholder loans. . . . . . . . . . . . . . . . . . . (2,295) (2,194) (684)
Proceeds from shareholder loans. . . . . . . . . . . . . . . . . . 7,146 1,574 1,452
Proceeds from issuance of long-term debt . . . . . . . . . . . . . 1,850 -- --
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . -- (15,227) (4,512)
Net borrowings under line-of-credit agreement. . . . . . . . . . . 2,881 2,242 7,800
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (14,600) -- --
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,619) (1,146) (1,795)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 (106) (1,580)
---------- ---------- ----------
Net cash flows provided by (used in) financing activities. (6,468) (14,857) 681
---------- ---------- ----------
Effect of Exchange Rate Changes on Cash. . . . . . . . . . . . . . . 57 313 (259)
---------- ---------- ----------
CHANGE in Cash and Cash Equivalents. . . . . . . . . . . . . . . . . $ (1,135) $ 503 $ 108
Cash and Cash Equivalents, beginning of year . . . . . . . . . . . . 3,439 2,936 2,828
---------- ---------- ----------
Cash and Cash Equivalents, end of year . . . . . . . . . . . . . . . $ 2,304 $ 3,439 $ 2,936
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements
32
THE GSI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The GSI Group, Inc., a Delaware corporation, and its subsidiaries
(collectively, 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 and China and selling and distribution operations in 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. There were no significant differences between the foreign
subsidiaries accounting principles pertinent to the countries they are domiciled
in and those accounting principles generally accepted in the United States of
America. 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.
33
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 or may not be covered by insurance in the Company's
foreign operations. 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 10 1/4% senior subordinated notes due 2007, 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. The fair value of the Notes was approximately
$94.6 million (book value of $99.5 million) and $68.8 million (book value of
$98.2 million) at December 31, 2004 and 2003, respectively, based on market
price.
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, net of reserve for
obsolete or slow moving inventory. Cost includes the cost of materials, labor
and factory overhead. The cost of all domestic and international inventories was
determined using the first-in-first-out" ("FIFO") method. As of December 31,
2004, the Company's policy for reserving for obsolete or slow moving inventory
was to accrue reserves in the amount of the excess of amounts on hand over the
trailing 36 month sales volumes for all finished goods and work in progress
inventory, unless such excess amounts relate to newly introduced SKUs for which
the Company has no long term sales history, in which case no reserve is applied.
The Company did not have in place a policy for reserving for raw material
inventory.
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.
34
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.
Research and Development
Costs associated with research and development are expensed as
incurred. Such costs incurred were $3.6 million, $2.5 million and $2.7 million
for the years ended December 31, 2004, 2003 and 2002, 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
comparing 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 $9.5 million, $8.6 million and $7.6 million
for 2004, 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. 5,
"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,
2004, 2003 and 2002 have been recorded in the accompanying Consolidated
Statements of Stockholders' Deficit. For Mexico, exchange losses from
translations for the years ended December 31, 2004, 2003 and 2002 have been
recorded in the accompanying Consolidated Statements of Operations.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 10",
"Accounting for Income Taxes". This 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.
35
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 12",
"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, workers' compensation and general liability. Costs resulting from
noninsured losses are charged to income when incurred. The Company has reserves
of $3.3 million, $2.5 million and $2.0 million at December 31, 2004, 2003 and
2002, respectively.
Change in Accounting Principle
On January 1, 2002, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 142, Goodwill and Other Intangible Asset"
("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 FASB 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.
Stock Based Compensation Plan
The Company is party to a stock based employee compensation plan, which is
described more fully in note 10. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Stock based employee
compensation cost is reflected in net income as the market value of the
underlying common stock exceeds the purchase price.
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.
Reclassifications
Certain reclassifications have been made to the 2003 financial
statements to conform to the 2004 financial statement presentation. These
reclassifications had no effect on net earnings.
3. NEW ACCOUNTING PRONOUNCEMENTS
On May 19, 2004, the FASB released FASB Staff Position FAS 106-2 (FSP
106-2), which provides accounting guidance with respect to the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (the Medicare
Act). FSP 106-2 provides guidance on accounting for the prescription drug
benefit of the Medicare Act, prescribes the transition to the new guidance, and
sets forth new disclosure requirements. The Company has determined the
accounting provisions of FSP 106-2 will have no impact on the results of
operations or financial position at this time.
In November 2004, the FASB issued SFAS No. 15, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No.
4", "Inventory Pricing," for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) requiring that those items be
recognized as current-period expenses regardless of whether they meet the
criterion of "so abnormal." This statement also requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The statement is effective for inventory
costs incurred during the fiscal years beginning after June 15, 2005. The
Company does not expect this statement to have a material impact on the results
of operations or financial position.
36
In December 2004, the FASB issued SFAS No. 15, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 9." APB Opinion No. 2, "Accounting for
Nonmonetary Transactions," is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. SFAS No. 153 amends APB Opinion No. 29, eliminating the exception to
fair value accounting for nonmonetary exchanges of similar productive assets and
replaces it with a general exception to fair value accounting for nonmonetary
exchanges that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Company does not expect this statement to have a material impact on
the results of operations or financial position
4. TRADE RECEIVABLES ALLOWANCE
The following summarizes trade receivables allowance activity for the years
ended December 31, 2002, 2003 and 2004 (in thousands):
AMOUNT
--------
Balance, December 31, 2001. . $ 2,117
Increase to operating expense 1824
Charge to allowance . . . . . (883)
--------
Balance, December 31, 2002. . 3,058
Increase to operating expense 936
Charge to allowance . . . . . (1,265)
--------
Balance, December 31, 2003. . 2,729
Increase to operating expense 904
Charge to allowance . . . . . (231)
--------
Balance, December 31, 2004. . $ 3,402
========
5. BUSINESS SEGMENT
In January 1998, the Company adopted SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information ("SFAS 31"). The Company has
no separately reportable segments under this standard. Under the
enterprise-wide disclosure requirements of SFAS 131, the Company reports sales,
by each group of product lines. Amounts for the years ended December 31, 2004,
2003 and 2002 are as shown in the table below (in thousands):
DECEMBER 31,
2004 2003 2002
-------------- --------- ---------
Grain product line. . . $ 177,622 $140,290 $123,599
Swine product line. . . 46,809 42,152 51,091
Poultry product line. . 64,348 55,227 55,946
Discontinued operations (648) (801) (1,118)
-------------- --------- ---------
Sales. . . . . . . $ 288,131 $236,868 $229,518
============== ========= =========
For the years ended December 31, 2004, 2003 and 2002, sales in Brazil were
$28.9 million, $17.4 million and $18.3 million, respectively. Net income in
Brazil was $1.3 million, $1.4 million and $1.3 million in 2004, 2003 and 2002,
respectively. Long-lived assets in Brazil were $4.3 million and $2.7 million at
December 31, 2004 and 2003, 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.
37
7. DETAIL OF CERTAIN ASSETS AND LIABILITIES
AS OF DECEMBER 31,
--------------------
2004 2003
-------------------- ---------
RESTATED RESTATED
-------------------------------------- --------------------
(IN THOUSANDS)
--------------------------------------
Accounts Receivable
Trade receivables. . . . . . . . . . $ 28,058 $ 29,812
Allowance for doubtful accounts. . . (3,402) (2,729)
-------------------- ---------
Total . . . . . . . . . . . . . $ 24,656 $ 27,083
==================== =========
Inventories
Raw materials. . . . . . . . . . . . $ 22,876 $ 13,653
Work-in-process. . . . . . . . . . . 7,581 14,843
18,196 13,889
Finished goods
Total. . . . . . . . . . . . . 48,653 42,385
==================== =========
Property, Plant and Equipment
Land . . . . . . . . . . . . . . . . $ 803 $ 809
Buildings and improvements . . . . . 25,061 23,660
Machinery and equipment. . . . . . . 48,277 47,863
Office equipment and furniture . . . 9,242 8,917
Construction-in-progress . . . . . . 488 --
-------------------- ---------
83,871 81,249
Accumulated depreciation . . . . . . (51,323) (48,576)
Property, plant and equipment, net . $ 32,548 $ 32,673
==================== =========
Intangible Assets
Goodwill . . . . . . . . . . . . . . $ 10,264 $ 10,100
==================== =========
Non-compete agreements . . . . . . . $ 8,227 $ 8,227
Accumulated amortization . . . . . . (6,869) (6,250)
Total. . . . . . . . . . . . . . . $ 1,358 $ 1,977
==================== =========
Patents and other intangible assets. $ 383 $ 383
Accumulated amortization . . . . . . (247) (217)
Total . . . . . . . . . . . . . $ 136 $ 166
==================== =========
Deferred Financing Costs
Deferred financing costs . . . . . . $ 7,008 $ 6,253
Accumulated amortization . . . . . . (4,559) (3,480)
Total . . . . . . . . . . . . . $ 2,449 $ 2,773
==================== =========
Accrued Warranty
Beginning reserve. . . . . . . . . . $ 1,379 $ 1,340
Increase to expense. . . . . . . . . 3,012 2,585
Charge to reserve. . . . . . . . . . (1,627) (2,546)
Ending reserve . . . . . . . . . . . $ 2,764 $ 1,379
==================== =========
Amortization of patents and non-compete agreements are as follows (in
thousands):
2005 $397
2006 $364
2007 $131
2008 $131
2009 $113
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $12.6 million, $12.4 million and $12.3
million in interest during the years ended December 31, 2004, 2003 and 2002,
respectively. The Company paid income taxes of $30,502, $6,241 and $34,836
during the years ended December 31, 2004, 2003 and 2002, respectively.
38
9. LONG-TERM DEBT
Long-term debt at December 31, 2004 and 2003 consisted of the following (in
thousands):
2004 2003
--------- ---------
Congress Financial Corporation (Central) revolving line of credit . . . . . . . . . . . . . . . . 23,511 19,541
Congress Financial Corporation (Central) term note. . . . . . . . . . . . . . . . . . . . . . . . 10,972 12,500
Stockholder note, unsecured, payable on demand, under the same interest terms
as the Congress Financial Corporation (Central) revolving line of credit. . . . . . . . . . . . 5,000 148
10.25% senior subordinated notes payable, principal due November, 2007, net of
Unamortized debt discount of $792 and $628 as of December 31, 2004 and 2003,
Respectively; amortization of debt discount was $157 and $178 for the years ended
December 31, 2004 and 2003, respectively; interest is payable semi-annually each
97,522
May 1 and November 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,208
Brazil note, secured by equipment, interest rate is LIBOR plus 4.5%, principal due long term debt
August 10, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 --
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,130 129,711
Less:
Current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,167) (148)
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $133,963 $129,563
========= =========
Maturities of long-term debt during the next three years are as follows (in
thousands):
2005. . 5,167
2006. . 34,483
2007. . 99,480
--------
Total $139,130
========
In November 1997, the Company issued $100 million aggregate principal of
senior subordinated note ("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 in the indenture governing the Notes), 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
repurchase. 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, 2004.
In 2002, a stockholder of the Company extended an additional loan to the
Company for $1.5 million which is payable on demand. It has revolver type
characteristics where the rate and outstanding balance can fluctuate depending
on the terms of the Company's senior credit facility. As of December 31, 2004,
this loan has the same interest terms as the Congress Financial Corporation
(Central) revolving line of credit and the balance of the loan was $5.0 million
and is included in current maturities of long-term debt.
39
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 $23.5 million of revolving loans
outstanding and $4.4 million of standby letters of credit, which reduced the
overall availability on the line to $14.8 million as of December 31, 2004.
On July 9, 2004, Congress Financial Corporation and the Company amended the
existing credit facility (the "Credit Facility") to provide for term loans up to
a maximum of $20.8 million, as well as to increase the Sloan Participation
Obligations set forth therein from $2.5 million to $5.0 million. Proceeds from
the increased term loan were used to purchase Voting Common Stock from Craig
Sloan upon his retirement. A Capital Call Agreement was also signed on this
date requiring Mr. Sloan to invest in the Company, if Excess Availability, as
defined in the Credit Facility, falls below $5.0 million, in an amount that
causes such availability to be at least $10.0 million.
On October 19, 2004, Congress Financial Corporation and the Company amended
the existing credit facility (the "Credit Facility") to decrease the interest
rate on the term note by 1.25% and to provide for a revolving feature where the
line can be between $8.0 million and $17.5 million for the period between
October 19, 2004 and April 19, 2005.
On December 4, 2003, the Company purchased $1.7 million of the Notes at a
25% discount that resulted in a gain of $0.4 million. On May 13, 2004, the
Company sold $1.8 million of Senior Subordinated Notes at a 23.5% discount that
resulted in a loss of $0.4 million, which is being amortized over the remaining
life of the bonds.
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 2004, 2003 and 2002, the Company provided a 25% matching contribution up
to 1% of the employees' compensation. Company contributions to this plan were
$245,027, $244,366 and $245,630 during 2004, 2003 and 2002, respectively.
Stock Based Compensation Plan
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 2004, 2003 and 2002, the Company has
recognized $2,241,354, $484,097 and $89,511 of 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 previously reported net income for 2003 and 2002 by $62,584 and
$113,647, respectively. The 2004 dividend that was classified as compensation
expense was $381,178.
A summary of the status of the plan at December 31, 2004, 2003 and 2002 and
changes during the years then ended is presented below:
2004 2003 2002
Outstanding shares, beginning of year 89,958 92,356 106,433
Shares sold by Craig Sloan. . . . . . 101,684 599 --
Shares purchased by Craig Sloan . . . 599 2,997 14,077
------- ------ -------
Outstanding shares, end of year . . . 191,043 89,958 92,356
40
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 Company has elected to be treated as a subchapter S corporation for
income tax purposes. Accordingly, no provision for federal income taxes related
to the Company has been recorded. Earnings or losses of the Company are reported
on the personal income tax returns of the stockholders. At December 31, 2004,
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. The Company is 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, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
RESTATED RESTATED RESTATED
U.S. federal statutory rate . . . . . . . . . . . . $ 1,550 $ (1,816) $ (3,596)
Increase (decrease) in income taxes resulting from:
Non-taxable S Corporation (income) losses . . . . (1,550) 2,337 1,364
Foreign local taxes. . . . . . . . . . . . . 585 (302) 327
Valuation Allowance. . . . . . . . . . . . . -- (749) 2,200
Tax differences resulting from acquisition of DMC (170) (503) (284)
Effective tax rate differences. . . . . . . . . . -- 93 91
State and other income taxes. . . . . . . . . . . 84 (55) 4
$ 499 $ (995) $ 106
========== ========== ==========
The following is a summary of the Company's expense (benefit) for income
taxes (in thousands):
Years Ended December 31,
--------------------------
2004 2003 2002
Restated Restated Restated
--------------------------- -------------------------- ----------
Current
State and local . . . . . 84 243 3
Foreign . . . . . . . . . 17 235 327
101 478 330
-------------------------- ---------- ------
Deferred
Federal . . . . . . . . . (116) (638) (153)
State and local . . . . . (54) (298) (71)
Foreign . . . . . . . . . 568 (537) --
398 (1,473) (224)
-------------------------- ---------- ------
Total expense (benefit) $ 499 $ (995) $ 106
-------------------------- ---------- ------
41
The components of deferred tax assets and liabilities at December 31, 2004
and 2003 are as follows (in thousands):
2004 2003
Deferred tax assets:
Tax loss carryforwards - DMC . . . . . . . $ -- $ 972
Tax loss carryforwards - Brazil . . . 1,161 1,249
Tax loss carryforwards - Mexico. . . . . . 118 45
Tax loss carryforwards - South Africa 41 --
Property and equipment . . . . . . . . . . -- 87
Inventory reserves . . . . . . . . . . . . -- 29
Estimated product liability. . . . . . . . -- 48
$ 1,320 $ 1,475
======== ========
Deferred tax liabilities:
Malaysia Inventory . . . . . . . . . . . . 11 --
Property and equipment . . . . . . . . . . -- 262
Inventory. . . . . . . . . . . . . . . . . -- 148
11 410
-------- --------
Valuation Allowan-e - DMC. . . . . . . . . . -- (955)
Net deferred tax asset . . . . . . . . . . . $(1,309) $(1,065)
======== ========
The valuation allowance decreased by $955 (restated) during the current
year. This decrease resulted from a re-evaluation of the utilization of the net
operating loss carryforwards.
Brazil has tax loss carryforwards of approximately $1.2 million that do not
expire. Mexico has tax loss carryforwards of $0.1 million that begin to expire
in 2008. South Africa has minimal tax loss carry forwards that begin to expire
in 2005.
Remaining realizable assets are supported by anticipated turnaround of
deferred tax liabilities and future projected taxable income.
At December 31, 2004, if the Company's S corporation election were
terminated, a deferred income tax expense of approximately $5.5 million would
have been 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.
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 $2.0
million for the year ended December 31, 2004. 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
$4.3 million in connection with these insurance programs.
The Company has month-to-month leases for several buildings and paid
rentals in 2004, 2003 and 2002 of $0.6 million, $0.9 million and $0.7 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, 2004, 2003 and 2002 was $1.4 million,
$1.3 million and $1.8 million, respectively. These amounts are for U.S.
operations only. Foreign lease obligations are not material and therefore not
included.
42
Operating lease commitments are as follows (in thousands):
2005. $1,539
2006. 1,265
2007. 952
2008. 617
2009. 251
------
Total $4,624
======
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 $0.6 million and $0.5 million as of
December 31, 2004 and 2003, respectively, of retainage withheld until completion
of the projects and the meeting of certain performance criteria. A dispute
over the contract has caused the matter to be placed in arbitration.
The Company previously engaged Rabobank International as its exclusive
financial advisor with respect to the exploration of strategic alternatives,
including but not limited to the sale of the Company. In return for these
services, in the event of a sale, the Company has agreed to pay a success fee
based on the aggregate consideration received for such a sale. This agreement
was terminated by the Company and has a clause whereby, if the Company is sold
within twelve months after the termination date, then Rabobank International
would likely be entitled to the aforementioned success fee.
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):
2004 2003 2002
United States. . . $187.5 $156.1 $146.1
Asia . . . . . . . 15.8 20.6 20.0
Canada . . . . . . 16.7 15.0 17.5
Latin America. . . 46.2 27.1 29.9
Mideast and Africa 10.6 8.9 5.8
Europe . . . . . . 7.2 6.0 7.4
All other. . . . . 4.1 3.2 2.8
$288.1 $236.9 $229.5
14. DISCONTINUED OPERATIONS
On November 2, 2004, the Company entered an agreement to discontinue and
sell the assets of its Canadian subsidiary to an unrelated third party. The
gain of $118 thousand has been reported in 2004's gain from the sale of
discontinued operations. 2004, 2003 and 2002 operations have been reclassified
to include all revenues and expenses of the subsidiary under discontinued
operations.
15. BUSINESS COMBINATIONS
On December 22, 2004, the Company participated in two simultaneous
transactions where the Company acquired 100 percent of the outstanding common
shares of FarmPro, Inc. (FarmPRO) and then sold substantially all of the assets
of FarmPRO to an unrelated third party.
43
The following table summarizes the estimated fair values of the assets
retained and liabilities assumed at the date of acquisition.
Current Assets. . . $243,000
Current Liabilities (40,000)
---------
Net Assets Acquired $203,000
=========
As a result of these transactions, the Company recognized a loss of $7.2
million related to $2.6 million of accounts receivable writeoffs and acting on a
$4.5 million guarantee for FarmPro, as well as other expenses of $0.6 million,
which were offset by $0.5 million cash received. The Company had a $93,000
reserve related to the guarantee recorded on the books throughout 2004.
16. RELATED PARTY 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 stockholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $487,439, $125,920 and
$196,691 for 2004, 2003 and 2002, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a stockholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $24,193, $72,619
and $10,987 for 2004, 2003 and 2002, respectively.
The Company has a contract with BMA Consulting, Inc.(BMA) where BMA
provides consulting services in the ordinary course of business to the Company.
BMA is owned by a shareholder of the Company. Such transactions amounted to
$699,210 for 2004.
The Company conducted transactions in the ordinary course of business with
RAD Properties, a corporation owned by Craig Sloan, shareholder of the Company.
Such transactions generally consist of rent and lease payments that amounted to
$216,200, $302,900 and $165,383 in 2004, 2003 and 2002, respectively.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, a member of which is a minority
shareholder of a subsidiary of the Company. Such transactions generally consist
of purchases of materials, freight payments, and commissions that amounted to
$925,786, $564,362 and $538,388 for 2004, 2003 and 2002, respectively, and sales
of poultry equipment that amounted to $296,681, $99,815 and $63,225 for 2004,
2003 and 2002, 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 $958,040, $238,095 and $243,946 from 2004,
2003 and 2002, respectively, and sales of poultry equipment that amounted to
$150,127, $239,005 and $37,877 from 2004, 2003 and 2002, 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 $41,178, $89,348 and $26,056 for 2004, 2003 and 2002,
respectively.
17. UNAUDITED QUARTERLY INFORMATION
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Restated 2004:
Sales . . . . . . . . . . . . . . . . . . . $ 58,444 $ 79,623 $ 89,692 $ 60,372
Gross profit. . . . . . . . . . . . . . . . 12,301 14,451 22,552 14,800
Net income (loss) . . . . . . . . . . . . . 105 632 6,820 (3,565)
Basic and diluted earnings(loss) per share. 0.06 0.36 4.67 (2.73)
====================================== ========= ======== =========
Restated 2003:
Sales . . . . . . . . . . . . . . . . . . . $ 44,224 $ 65,289 $ 77,062 $ 50,293
Gross profit. . . . . . . . . . . . . . . . 9,653 13,390 18,236 7,392
Net income (loss) . . . . . . . . . . . . . (2,367) (135) 4,536 (6,312)
Basic and diluted earnings(loss) per share. (1.33) 0.08 2.56 (3.56)
====================================== ========= ======== =========
Restated 2002:
Sales . . . . . . . . . . . . . . . . . . . $ 52,661 $ 65,581 $ 69,863 $ 41,413
Gross profit. . . . . . . . . . . . . . . . 9,705 12,620 15,004 4,661
Net income (loss) . . . . . . . . . . . . . (3,103) (833) 1,750 (8,217)
Basic and diluted earnings(loss) per share. (1.75) (0.47) 0.99 (4.63)
44
18. RESTATEMENT
FIRST RESTATEMENT
During the Company's year-end review of 2004, it 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 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 Company's majority stockholder began selling non-voting shares
to certain employees. The Company's majority stockholder helped finance each
employee's purchase with a non-recourse, loan (in the form of interest-bearing
notes) to each employee with the shares as the only collateral for 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 previously followed. Treatment
of the transaction as a variable stock award requires the Company to recognize
as compensation expense the extent to which the fair market value of the
underlying shares exceeds the original purchase price for such shares. 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 the Company agreed to issue him shares of the
Brazilian subsidiary's stock primarily based on the financial performance of the
Brazilian subsidiary. This agreement constitutes a stock compensation
arrangement for which the Company did not previously 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.
Prior to the 2004 closing process, the Company had been using Mexican Pesos
as the functional currency of its Mexican subsidiary. During the 2004 closing
process, the Company determined that the correct functional currency of its
Mexican subsidiary should be U.S. Dollars rather than Mexican 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 the Company's CEO reduced previously reported 2003, 2002 and
2001 net income by $100,000, $507,515 and $257,000, respectively.
45
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
a liability 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.
SECOND RESTATEMENT
Subsequent to the sale of all of the stock of the Company on May 16, 2005,
the new management appointed by the new owner of the Company discovered
additional accounting errors in prior years' financial statements. The errors
were corrected in the 2004, 2003 and 2002 financial statements. A description
of the errors and related impact of each on the financial statements follows.
Amounts are stated in whole dollars.
The Company made adjustments in 2004, 2003 and 2002 to correct its
allowance for obsolete inventory to conform to the Company's historical policy.
The effect of these changes reduced net income by $559,000 in 2004 and
$1,307,000 in 2002, and increased net income by $283,000 in 2003.
The Company made adjustments in 2004, 2003 and 2002 to expense warranty and
research and development costs, which were erroneously included in inventory.
The effect of these changes increased net income by $654,000 and $51,000 in 2004
and 2002, respectively, and decreased net income by $558,000 in 2003.
The Company made adjustments in 2004, 2003 and 2002 to correct the amount
of overhead that was included in inventory. The previous inventory balance
included an excessive amount of overhead. The effect of these changes increased
net income by $2,188,000 and $1,777,000 in 2004 and 2003, respectively, and
decreased net income by $2,951,000 in 2002.
The combined effect of these changes increased net income by $2,283,000 and
$ 1,502,000 in 2004 and 2003, respectively, and decreased net income by
$4,207,000 in 2002.
The financial statement impact of the above noted adjustments is indicated
in the table below stated in thousands of dollars except for per share line
items:
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FISCAL YEAR 2004
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . $ 53,588 $ (4,935) $ 48,653
Retained earnings. . . . . . . . . . 3,944 (4,935) (991)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . 226,310 (2,283) $ 224,027
Operating income . . . . . . . . . . 16,469 2,283 18,752
Net income . . . . . . . . . . . . . 1,709 2,283 3,992
Basic and diluted earnings per share 1.31 0.94 2.25
46
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT
FISCAL YEAR 2003 (Note *)
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 54,165 $ (4,562) $ 49,603 $ (7,218)
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 (7,218)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 190,694 (481) 190,213 (1,502)
Selling, general and administrative expenses . 36,591 3,602 40,193
Operating income . . . . . . . . . . . . . . . 9,290 (3,121) 6,169 1,502
Foreign currency transaction loss. . . . . . . (102) (99) (201)
Other, net . . . . . . . . . . . . . . . . . . (3,544) 3,749 205
Minority interest in net income of subsidiary. -- (77) (77)
Net income (loss). . . . . . . . . . . . . . . (6,232) 452 (5,780) 1,502
Basic and diluted earnings per share . . . . . ($3.51) $ 0.259 ($3.26) 0.85
RESTATED
FISCAL YEAR 2003 (Note *)
Consolidated Balance Sheet:
Inventory. . . . . . . . . . . . . . . . . . . $ 42,385
Payroll and payroll related expenses
Other accrued expenses
Paid in capital
Accumulated other comprehensive loss
Retained earnings. . . . . . . . . . . . . . . (3,365)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 188,711
Selling, general and administrative expenses
Operating income . . . . . . . . . . . . . . . 7,671
Foreign currency transaction loss
Other, net
Minority interest in net income of subsidiary
Net income (loss). . . . . . . . . . . . . . . (4,278)
Basic and diluted earnings per share . . . . . (2.41)
FIRST AS SECOND AS
AS PREVIOUSLY REPORTED RESTATEMENT RESTATED RESTATEMENT RESTATED
FISCAL YEAR 2002 (Note *)
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 176,836 7,097 183,933 4,207 188,140
Selling, general and administrative expenses . 36,767 1,087 37,854
Operating income . . . . . . . . . . . . . . . 15,787 (8,184) 7,603 (4,207) 3,396
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) (4,207) (10,403
Basic and diluted earnings per share . . . . . $ 1.31 ($4.80) ($3.49) ($2.37) ($5.86)
Note * The reported figures in these tables may differ from the Consolidated
Statement of Operations because they do not reflect the reclassification of
certain amounts for discontinued operations.
19. SUBSEQUENT EVENTS
On April 6, 2005, the Company's stockholders entered into an agreement to
sell all of the issued and outstanding shares of voting and non-voting equity of
the Company to an affiliate of Charlesbank Equity Fund V, Limited Partnership.
In connection with the consummation of the transaction, it is expected that the
Company will refinance or amend its senior credit facility and its 10-1/4%
senior subordinated notes due 2007. The consummation of the transaction, which
is expected to occur in May 2005, is subject to customary conditions, including
the receipt of financing.
47
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 this Annual Report on Form 10-K, the
Company's management has identified material weaknesses in the Company's
internal controls 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 controls over
financial reporting have resulted in insufficient controls relating to inventory
accounting, 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 accrual
methodology, the identification and treatment of relevant workers' compensation
reserves and minority interest reserves and the treatment of stock based
compensation expense issues. In addition, the Company has determined that the
Company's control environment at December 31, 2004 lacked certain controls
related to the prevention of improper accounting entries. These material
weaknesses resulted in restatements being recorded in the Company's financial
statements for the fiscal years ended December 31, 2004, 2003 and 2002. The
Company's management has discussed the material weaknesses with its independent
registered public accounting firm, BKD LLP, and the Company's Board of
Directors, and more recently the Audit Committee of the Board of Directors,
which was recently created. BKD LLP issued a "material weakness" letter in
connection with its audit of the Company's financial statements for the fiscal
year ended December 31, 2004.
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, 2004, the end of the period covered by this Annual
Report on Form 10-K. Based on that evaluation, which included a 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.
CHANGES IN INTERNAL CONTROLS
There were no changes to the Company's internal controls made during the
first quarter of 2005. The Company's management believes, however, 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 and the related review of
the Company's financial statements for the years ended December 31, 2004, 2003
and 2002 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. Although the Company believes that progress has
been made in addressing the material weaknesses in its internal controls
discussed above, the Company's management intends to continue to work to improve
its internal controls.
48
ITEM 9B. OTHER INFORMATION.
Not applicable.
49
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
------------------ --- ---------------------------------------
Russell C. Mello . 43 Chief Executive Officer
Ann Montgomery . . 38 Vice President of Finance
Allen A. Deutsch . 54 President of AP Division
David L. Vettel. . 46 President of GSI International Division
Charles Jordan . . 48 President of Cumberland Division
Michael Brotherton 43 Chief Operating Officer
RUSSELL C. MELLO joined the Company in March 1995. Mr. Mello has been the
Chief Executive Officer, Secretary and Treasurer since July 2004. From
September 2001 to July 2004, he served as Chief Financial Officer, Secretary and
Treasurer. 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.
ANN MONTGOMERY joined the Company in January 2001. Ms. Montgomery has been
the Vice-President of Finance since April 2004. From January 2001 to April
2004, she served as the Corporate Controller. From June 1998 to January 2001,
she held various management and finance positions with American General Life
Insurance Company.
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.
CHARLES JORDAN joined the Company in May 1975. Mr. Jordan has been
President of the Cumberland Poultry Division since October 2003. From May 1975
to March 1989, he held various management positions with the Grain and Swine
divisions of GSI. From March 1989 to February 1999, he held various management
positions within the Cumberland Division including President. From February
1999 to February 2002, he left the company to pursue other opportunities. From
February 2002 to October 2003, he served as the Director of Distribution.
MICHAEL BROTHERTON joined the Company in October 2002. Mr. Brotherton has
been the Chief Operating Officer since July 2004. From October 2002 to July
2004, he served 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.
CRAIG SLOAN joined the Company in November 1971. Mr. Sloan has been the
Chairman of the Board since 2002. From December 1993 to July 2004, he served as
the Chief Executive Officer. 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.
50
CATHY SLOAN has been a director of the Company since September 2001. Mrs.
Sloan is the wife of Craig Sloan and is a homemaker.
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, 2004 of the Company's Chairman of the Board and the other five most the
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
Russell C. Mello 2004 $ 193,281 $ -- $ --
Chief Executive Officer 2003 $ 113,102 $ 30,000 $ --
2002 $ 118,956 $ -- $ --
Gene Wiseman 2004 $ 90,800 $ 115,144 $21,583
Regional President of GSI Division 2003 $ 110,573 $ 27,023 $ --
2002 $ 112,208 $ 28,083
Charlie Jordan 2004 $ 78,440 $ 135,695 $ --
President of Cumberland Division 2003 $ 66,910 $ -- $ --
2002 $ 48,447 $ -- $ --
Mitch Golleher 2004 $ 98,180 $ 115,144 $ --
President of GSI Division 2003 $ 101,189 $ 27,023 $ --
2002 $ 100,923 $ 28,083 $ --
Burl Shuler 2004 $ 92,620 $ 115,144 $ --
Regional President of GSI Division 2003 $ 84,110 $ 27,023 $ --
2002 $ 81,620 $ 28,083 $ --
Craig Sloan 2004 $ 203,758 $ -- $ 7,056
Chief Executive Officer(2) 2003 $ 407,515 $ -- $13,235
2002 $ 407,515 $ -- $11,288
(1) Consists of group insurance and other miscellaneous benefits.
(2) Retired in July, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 2004. All members
of the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 2004. See "Certain Relationships and
Related Transactions." During 2004, 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 2004.
DIRECTOR COMPENSATION
There is $50,000 annual compensation for being a member of the Board of
Directors.
51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of April 15, 2005
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.
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) 626,948 100.00% 8,957 4.48%
Russell C. Mello (1) -- -- 51,830 25.92%
Mike Brotherton (1) -- -- 9,740 4.87%
Gene Wiseman (1) -- -- 15,174 7.59%
Charles Jordan (1) -- -- 6,493 3.25%
Mitch Golleher (1) -- -- 6,493 3.25%
Burl Shuler (1) -- -- 6,493 3.25%
Don Nicol (1) -- -- 6,493 3.25%
Ann Montgomery (1) -- -- 6,493 3.25%
David L. Vettel (1) -- -- 13,798 6.90%
Directors and executive officers as a group
(10 persons in group) 626,948 100.00% 131,964 65.98%
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, the holder of voting common stock and each of the holders of
the Company's non-voting common stock have entered into an agreement that (i)
provides that the holders of non-voting common stock are entitled to sell their
shares on the same terms and conditions in the event the voting stockholders
transfer a majority of the voting stock, (ii) provides that the holders of the
non-voting common stock must under certain circumstances agree to sell their
shares on the terms and conditions approved by the Company's Board of Directors,
(iii) established that the holders of the non-voting common stock are restricted
in their ability to sell, pledge or transfer such shares, (iv) grants rights of
first refusal to Craig Sloan with respect to the transfer of any non-voting
common stock to other non-voting stockholders and (v) establishes procedures for
the optional purchase of shares by Mr. Sloan and the Company (subject to
compliance with the terms of the indenture) upon the death, permanent disability
or termination of employment of any holder of non-voting common stock. The
agreement also grants piggy-back registration rights to the holders of
non-voting common stock in the event of an underwritten public offering.
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 stockholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $487,439, $125,920 and
$196,691 for 2004, 2003 and 2002, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a stockholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $24,193, $72,619
and $10,987 for 2004, 2003 and 2002, respectively.
The Company has a contract with BMA Consulting, Inc.(BMA) where BMA
provides consulting services in the ordinary course of business to the Company.
BMA is owned by a shareholder of the Company. Such transactions amounted to
$699,210 for 2004.
52
The Company conducted 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
$216,200, $302,900 and $165,383 in 2004, 2003 and 2002, 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 a
former employee of the Company. Such transactions generally consist of sales of
poultry equipment and amounted to $0, $75,307 and $128,838 for 2004, 2003 and
2002, respectively, and rent payments and expenses that amounted to $10,428,
$13,910 and $70,055 in 2004, 2003 and 2002, respectively.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, a member of which is a minority
shareholder of a subsidiary of the Company. Such transactions generally consist
of purchases of materials, freight payments, and commissions that amounted to
$925,768, $564,362 and $538,388 for 2004, 2003 and 2002, respectively, and sales
of poultry equipment that amounted to $296,681, $99,815 and $63,225 for 2004,
2003 and 2002, 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 $958,040, $238,095 and $243,946 from 2004,
2003 and 2002, respectively, and sales of poultry equipment that amounted to
$150,127, $239,005 and $37,877 from 2004, 2003 and 2002, 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 $41,178, $89,348 and $26,056 for 2004, 2003 and 2002,
respectively.
The Company believes that these transactions were, and future transactions
with Sloan Implement Company, Inc., Larry Sloan, BMA, RAD Properties, Covell
Bros., the Segatt family, Reliance, 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by BKD LLP, the Company's principal public
accountants, for the fiscal years ended December 31, 2004 and 2003 for
professional services rendered for the audit of the Company's annual financial
statements and review of financial statements included in the Company's
Quarterly Reports on Form 10-Q for those fiscal years were approximately
$116,750 and $123,500, respectively.
AUDIT-RELATED FEES
The aggregate fees billed by BKD LLP for the fiscal years ended December
31, 2004 and 2003 for audit-related services, which included an annual profit
sharing audit, were approximately $4,850 and $4,750, respectively.
TAX FEES
The aggregate fees billed by BKD LLP for the fiscal years ended December
31, 2004 and 2003 for tax-related services, which included international tax
issues and Form 5500, were approximately $600 and $12,007, respectively.
ALL OTHER FEES
The Company did not engage its principal public accountants to provide any other
services for the fiscal years ended December 31, 2004 and 2003.
53
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(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 is set
forth in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
54
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 Amendment No. 1 to this
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED,
IN ASSUMPTION, ILLINOIS ON AUGUST , 2005.
The GSI Group, Inc.
By: /s/ William Branch
------------ ---------------
William Branch
Interim Chief Executive Officer, Chairman of
the Board and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
AMENDMENT NO. 1 TO THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF REGISTRANT IN THE CAPACITIES INDICATED ON AUGUST 11, 2005.
SIGNATURE TITLE
-------------------- --------------------------------------------------------------------
/s/ William Branch Interim Chief Executive Officer, Chairman of the Board and President
--------------------
William Branch
/s/ Randall Paulfus Interim Chief Financial Officer
--------------------
Randall Paulfus
55
EXHIBIT 31.1
CERTIFICATIONS
I, William Branch, certify that:
1. I have reviewed this Amendment No.1 to the Annual Report on Form 10-KA 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) [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]
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 fourth fiscal
quarter 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: August 11, 2005
/s/ William Branch
--------------------
Interim Chief Executive Officer, Chairman of the Board and President.
56
EXHIBIT 31.2
CERTIFICATIONS
I, Randall Paulfus, certify that:
1. I have reviewed this Amendment No.1 to the Annual Report on Form 10-KA 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 officer 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) [Paragraph omitted pursuant to SEC Release nos. 33-8392 and 34-49313.]
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 fourth fiscal quarter
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 reasonably
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: August 11, 2005
/s/ Randall Paulfus
---------------------
Interim Chief Financial Officer
57
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 Amendment No.1 to the Annual Report on Form
10-K of The GSI Group, Inc., a Delaware corporation (the "Company"), for the
year ended December 31, 2004, 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,
William Branch, as Interim Chief Executive Officer of the Company, and Randall
Paulfus as Interim Chief Financial Officer of the Company, hereby certify that1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: August 11, 2005
/s/ WILLIAM BRANCH
--------------------
William Branch
Interim Chief Executive Officer, Chairman of the Board and President.
/s/ RANDALL PAULFUS_______________
------------------------------------
Randall Paulfus
Interim Chief Financial Officer
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.
58
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
------- -------------------------------------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated October 31, 2004, by and between The GSI Group, Inc., The GSI
Group (Canada) Co. and UHI Canada, Corporation.
2.2 Stock Purchase Agreement, dated December 22, 2004, by and between The GSI Group, Inc.,
And Kenneth Stonecipher.
2.3 Asset Purchase Agreement, dated December 22, 2004, by and between The GSI Group, Inc.,
And Hog Slat, 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.
4.4* 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.
10.1+ Loan and Security Agreement dated October 31, 2003 between The GSI Group, Inc., as borrower
And Congress Financial Corporation (Central), as lender.
10.2++ Amendment No. 1 to the October 31, 2003 Loan and Security Agreement, dated July 9,2004, between
The GSI Group, Inc., as borrower, and Congress Financial Corporation (Central), as lender.
10.3+++ Amendment No. 2 to the October 31, 2003 Loan and Security Agreement, dated October 19,2004,
Between The GSI Group, Inc., as borrower, and Congress Financial Corporation (Central), as lender.
10.4 Amendment No. 3 to the October 31, 2003 Loan and Security Agreement, dated February 2,2005,
Between The GSI Group, Inc., as borrower, and Congress Financial Corporation (Central), as lender.
10.5** 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.
10.6++ Indemnification Agreement, dated July 7, 2004, between The GSI Group, Inc. and Ann Montgomery.
10.7 Affirmative Pledge of Assignment of Quotas and Other Provisions Agreement, dated January 1, 2002,
Between The GSI Group, Inc. and Leonardo Segatt.
10.8*** Severance, Non-Compete and Consulting Agreement between The GSI Group, Inc., and John C. Sloan
Dated July 8, 2004.
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 Chief Financial Officer
32.1 Section 906 Certification.
____________
* 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 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 8-K filed with the
Commission on July 16, 2004 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.
++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on August 12, 2004 pursuant to the Securities Act of 1934.
+++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on November 10, 2004 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 covering the registrant's last fiscal
year or proxy statement to security holders.
59
Exhibit 12.1
THE GSI GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Dollars in Thousands)
Year ended December 31,
------------------------
2000 2001 2002 2003 2004
Restated . . . . . . . . . . . . . . . . . . . Restated Restated Restated Restated
-------------------------------------------------- ------------------------ ---------- ---------- ----------
Income (loss) from continuing
Operations before tax $ 1,823 $ (2,504) $ (10,574) $ (5,338) $ 4,558
======================== ========== ========== ========== =======
Add fixed charges:
Interest expense on borrowings and
Amortization of deferred
Financing costs 14,997 14,397 13,010 13,215 14,104
Interest portion of rent expense 707 656 386 326 278
15,704 15,053 13,396 13,541 14,382
======================== ========== ========== ========== =======
Adjusted earnings 17,527 12,549 2,822 8,203 18,940
======================== ========== ========== ========== =======
Ratio of earnings to fixed
Charges 1.12x 0.84x 0.21x 0.61x 1.32x
60
Exhibit 21.1
THE GSI GROUP, INC.
LIST OF SUBSIDIARIES
--------------------
COMPANY NAME LOCATION
---------------------------------------------------- ------------
The GSI Asia Group Sdn. Bhd. . . . . . . . . . . . . Malaysia
The GSI Group Africa (Proprietary) Limited . . . . . South Africa
GSI Cumberland de Mexico, S. de R.L. De C.V. . . . . Mexico
Agromarau Industia E Comercio Ltda.. . . . . . . . . Brazil
The GSI Group (Shanghai) C., Ltd.. . . . . . . . . . China
The GSI Agricultural Equipments (Shanghai) Co., Ltd. China
The GSI Group Europe Limited . . . . . . . . . . . . England
Assumption Leasing Company, Inc. . . . . . . . . . . Illinois
The GSI Group (Canada) Co. . . . . . . . . . . . . . Canada
The GSI Group (Poland) Sp. Z.o.o.. . . . . . . . . . Poland
FarmPro, Inc.. . . . . . . . . . . . . . . . . . . . Delaware
61