Back to GetFilings.com

Gerber Scientific, Inc.
(Exact name of Registrant as
specified in its charter)

1

See accompanying notes to consolidated financial statements.

2-3

See accompanying notes to consolidated financial statements.

 4-5

See accompanying notes to consolidated financial statements.

GERBER SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2002 are not necessarily indicative of the results that may be expected for the year ended April 30, 2003.

The balance sheet at April 30, 2002 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 2002 filed on August 27, 2002.

Financial statements for the three months ended July 31, 2001 have been restated. The restatements principally reflect results of an internal review conducted under the direction of the Audit and Finance Committee of the Company's Board of Directors. Certain items also have been reclassified.

Adjustments and reclassifications to the consolidated statement of operations for the three months ended July 31, 2001 are summarized below.

7

With respect to the Consolidated Statement of Cash Flows for the three-month period ended July 31, 2001, the effect of exchange rate changes on cash in the amount of ($217), which had previously been showed as an investing activity, has been reclassified to a separate line item.

The classification of inventories was as follows (in thousands):

8

In fiscal 2002, the Company recorded restructuring charges, consisting of employee separation costs, associated with ongoing efforts to reduce costs. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 2002 filed on August 27, 2002.

As of April 30, 2002, accruals of approximately $2.2 million for severance costs remained, the majority of which represented severance and other amounts payable to the former Chief Executive Officer. In the three months ended July 31, 2002, approximately $0.6 million in cash payments were charged against this accrual, reducing the balance to $1.6 million at July 31, 2002. As of July 31, 2002, 142 of 165 scheduled headcount reductions were implemented with the balance targeted for completion by January 31, 2003.

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," which established financial accounting and reporting standards for acquired goodwill and other intangible assets and superseded APB Opinion No. 17, "Intangible Assets." The Company adopted SFAS No. 142 on May 1, 2001, ceased amortization of goodwill (its only intangible asset with an indefinite useful life), and performed a transitional goodwill impairment evaluation. The Company identified assets and liabilities associated with its business units (including goodwill) as of May 1, 2001. The fair value of each unit was estimated using a combination of present value and earnings multiple valuation techniques. As a result of this review, it was determined that goodwill associated with the Ophthalmic Lens Processing and Sign Making and Specialty Graphics segments was impaired as of May 1, 2001. The amount of impairment was e stimated by comparing the implied fair value of the business unit's goodwill to its carrying value. Implied fair value of goodwill was determined by allocating the estimated fair value of each business unit's assets and liabilities in a manner similar to a purchase price allocation. Effective May 1, 2001, an impairment loss of $114.7 million was recognized as the cumulative effect of a change in accounting principle.

Circumstances leading to the goodwill impairment in the Ophthalmic Lens Processing segment of $21.7 million included softness in end sales of prescription optical lenses, consolidation in retail and wholesale segments of the ophthalmic industry, and global economic weakness for that segment's capital equipment products. These negative industry and economic trends had lowered the business' operating profits and cash flows over the last two fiscal years and current earnings expectations do not reflect improvement. Fair value used to measure impairment was based on a strategic review conducted by the Company in the fourth quarter of 2001.

9

Goodwill impairment for the European business units of the Sign Making and Specialty Graphics segment reflected increased competition in aftermarket supplies and weaker demand for sign making capital equipment consistent with worsening global economic trends. Lower than expected operating profits and cash flows resulted and are evidence that growth expectations assumed when these businesses were acquired have not materialized. Fair value used to determine the impairment loss in the Sign Making and Specialty Graphics segment, which amounted to $93.0 million, was based on a combination of earnings multiples and discounted cash flow valuation techniques.

Other intangible assets include:

Intangible amortization expense was $0.4 million and $0.3 million for the three months ended July 31, 2002 and 2001, respectively, and is estimated to be approximately $0.8 million in fiscal 2003 and approximately $0.4 million annually for fiscal years 2004-2007.

The following table displays the changes in the carrying amount of goodwill by operating segment for the quarter ended July 31, 2002 (in thousands):

10

The Company is exposed to fluctuations in foreign currency exchange rates and interest rates. To manage these risks, the Company uses derivative instruments, which include forward exchange contracts and an interest rate swap. Derivative instruments used in hedging activities are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. Counterparties to forward exchange contracts were major international commercial banks. The Company continually monitors its open forward exchange contract position and does not anticipate non-performance by the counterparties.

The Company's global presence and international sales and purchases expose it to fluctuations in foreign currency exchange rates. Foreign currency exposures are identified and managed at the operating unit level. The Company has foreign currency forward contracts that are designated as hedges of the cash flow variability arising from forecasted foreign-currency denominated sales and purchases. Gains and losses on those derivatives are recorded in shareholders' equity to the extent they are effective as hedges and reclassified into earnings in the period in which the hedged transaction impacts earnings.

As of July 31, 2002, the Company was party to approximately $23.6 million in forward exchange contracts providing for the delivery of the various currencies in exchange for others over the succeeding 9 months. The fair value of the contracts outstanding at July 31, 2002 was a $1.9 million net liability.

In April 1999, the Company entered into a four-year interest rate swap contract with an initial notional amount of $62.0 million that decreases ratably to $32.0 million over the term. The Company designated this swap as a hedge of its exposure to variability in future cash flows attributable to LIBOR based interest payments on the U.S. dollar denominated portion of its multi-currency revolving credit facility. The interest differential paid or received under this contract is recognized as interest expense, reflecting that portion at a fixed rate. The fair value of this swap was a $0.9 million net liability as of July 31, 2002.

At July 31, 2002, the fair value of derivatives held by the Company was a $2.8 million net liability. The non-shareholders' changes in equity associated with hedging activity for the three months ended July 31, 2002 and 2001 were as follows:

Of the amount recorded in shareholders' equity at July 31, 2002, a $1.7 million loss is expected to be reclassified into earnings in fiscal 2003.

11

The net amount of gains (losses) on foreign currency denominated balances designated and effective as economic hedges of a net investment in a foreign entity were a loss of $0.9 million and a gain of $0.3 million for the three months ended July 31, 2002 and 2001, respectively. These gains and losses were recorded in the cumulative translation adjustment, which is included in accumulated other comprehensive income (loss).

12

The Company's total comprehensive income was as follows:

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated:

13

On July 1, 2002, the Company completed the sale of Stereo Optical Company, Inc. (Stereo Optical), which was included in the Ophthalmic Lens Processing operating segment, for $7.5 million in cash less an amount held in escrow for purchase price adjustments. Stereo Optical was accounted for as a discontinued operation beginning with the fiscal 2003 consolidated financial statements. This accounting recognition was required by the Company's adoption of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the Consolidated Statement of Operations for the three-month period ended July 31, 2001 has been reclassified to reflect the effects of the discontinued operations. The gain on disposition was $3.5 million before income taxes and $1.2 million after taxes, or $.06 per diluted share. Stereo Optical's revenue and pre-tax income reported in discontinued operations were $0.7 million and $0.3 million, respectively, for the three-month period ended July 31, 2002 and $1.0 million and $0.4 million, respectively, for the three-month period ended July 31, 2001.

In June and July 2002, the Company completed the sale of two properties previously included in Net Assets Held for Sale for combined net sales proceeds of $2.5 million, which approximated net book value. Proceeds were used to reduce borrowings under the Company's credit agreement.

In September 2002, the Company completed the sale of the final property included in Net Assets Held for Sale for net proceeds of $1.5 million, which approximated net book value. These proceeds were also used to reduce borrowings under the Company's credit agreement.

14

There were no material changes to the commitments and contingencies from those disclosed in the Company's Annual Report on Form 10-K filed on August 27, 2002.

15

With respect to the unaudited consolidated financial statements of Gerber Scientific, Inc. and subsidiaries at July 31, 2002 and for the three-month periods ended July 31, 2002 and 2001, KPMG LLP has made a review (based on procedures adopted by the American Institute of Certified Public Accountants) and not an audit, as set forth in their separate report dated September 11, 2002 appearing on page 17. That report does not express an opinion on the interim unaudited consolidated financial information. KPMG LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, such report is not a "report" or "part of the Registration Statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply.

 16

To the Board of Directors and Shareholders of
Gerber Scientific, Inc.:

We have reviewed the consolidated balance sheet of Gerber Scientific, Inc. and subsidiaries as of July 31, 2002, and the related consolidated statements of operations and cash flows for the three-month periods ended July 31, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Gerber Scientific, Inc. and subsidiaries as of April 30, 2002, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 13, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of April 30, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 2, the accompanying consolidated financial statements as of and for the three-month period ended July 31, 2001 have been restated.

/s/ KPMG LLP

Hartford, Connecticut
September 11, 2002

 17

The Company reported net earnings of $3.6 million, or $0.16 per diluted share, on revenues of $125.9 million in the first quarter compared with a restated net loss of $113.8 million, or $5.14 per diluted share a year ago. Excluding the income and gain from the sale of a discontinued operation affecting both the current and prior year quarters of $0.06 and $0.01 per diluted share, respectively, and year-ago goodwill impairment charges of $5.18 per diluted share, first quarter earnings were $2.2 million, or $0.10 per diluted share compared with earnings of $0.6 million, or $0.03 per diluted share a year ago.

Global economic uncertainty and weak demand for the Company's capital equipment products continued in the first quarter of fiscal 2003. As a result of these uncertainties and lack of customer capital spending, the Company has seen only modest improvement in its revenues.

The restructuring activities implemented over the course of the last two years have resulted in higher operating income despite the weak demand for the Company's capital equipment products. The Company is currently implementing a shared services initiative to optimize its supply chain and improve the efficiency of its support functions, which should further reduce costs. The Company is also reviewing a number of actions to increase liquidity and enhance cash flow. These actions include refinancing its existing credit agreement, potential sale of some non-core businesses or assets, and further working capital reductions.

Revenues. The Company's consolidated revenue in the first quarter of 2003 was $125.9 million, an increase of $1.0 million or 0.8 percent from $124.9 million in 2002. The increase reflected higher service revenue offset by lower product sales. Revenues in the Sign Making and Specialty Graphics segment in fiscal 2003 were $66.4 million, compared to $64.0 million in the prior fiscal year. In the Apparel and Flexible Materials segment, fiscal 2003 revenues were $38.7 million, compared to $41.5 million in the prior fiscal year. In the Ophthalmic Lens Processing segment, revenues were $20.8 million, compared to $19.3 million in the prior fiscal year.

Capital spending in the Sign Making, Apparel, and Ophthalmic industries continued to be weak in the fiscal year 2003 first quarter. Sales of the Company's capital equipment products were lower than the prior year in both the Apparel and Flexible Materials and Sign Making and Specialty Graphics operating segments due to continued global economic uncertainty. Equipment sales were, however, higher in the fiscal 2003 first quarter compared to the prior year in the Ophthalmic Lens Processing segment as it benefited from shipments of automated lens processing equipment to large U.S. retail and discount chains that manufacture eyewear.

Aftermarket supplies and service revenues continued to be steady in the fiscal 2003 first quarter and offset the impact of the lower capital equipment sales. Year-over-year sales increases occurred in both the Sign Making and Specialty Graphics and Apparel and Flexible Materials operating segments and decreased slightly in the Ophthalmic Lens Processing segment.

18

The proportion of equipment sales to total revenues and aftermarket supplies and service revenues to total revenues was approximately 34 percent and 66 percent in the fiscal 2003 first quarter, which is substantially the same as a year ago.

Stronger foreign currency translation rates increased revenue approximately $6.3 million (5.2 percent) in the fiscal 2003 first quarter compared to the prior year, which affected primarily the Sign Making and Specialty Graphics and Apparel and Flexible Materials operating segments.

On a geographic basis, the Company's volume of business in the fiscal 2003 first quarter compared to the prior year was slightly higher in U.S. and European markets and almost entirely offset by declines in the rest of world markets. The U.S. gain occurred primarily in the Ophthalmic Lens Processing segment and was the result of the higher equipment shipments to U.S. retail and discount chains. Sales to European customers benefited from the effect of the stronger foreign currency translation rates, although weak market and industry conditions were a significant offset, particularly in the Apparel and Flexible Materials operating segment. The declines in the rest of world markets occurred primarily in the Sign Making and Specialty Graphics segment due to weak economic conditions in South America and competition in Asia. Overall, the geographic distribution of the Company's business was similar to a year ago; U.S. and Europe represented approximately 42 percent of business, respectively, with the rest of the world accounting for the remainder.

Gross Profit Margins. The overall gross profit margin in the fiscal 2003 first quarter was 34.9 percent, which was higher than the prior year margin of 34.3 percent. Margins on product sales were roughly the same and on service revenue were higher. Increases in the product gross profit margin occurred largely in the Apparel and Flexible Materials segment and were the result of favorable price effects; favorable foreign currency effects; product mix favoring higher margin software and multi-ply cutter equipment; and lower factory costs due to the restructuring initiatives implemented. Gross margin increases also occurred in the Ophthalmic Lens Processing segment due to favorable price effects and lower factory costs. These favorable effects were offset by a Sign Making and Specialty Graphics segment current year product mix favoring lower margin vinyl material products and continued aggressive discounting programs to address competitive market forces.

The increase in service margins in the fiscal 2003 first quarter resulted from lower costs associated with the 2002 and 2001 restructuring initiatives, principally in the Apparel and Flexible Materials segment.

Selling, General & Administrative Expenses. Selling, general and administrative (SG&A) expenses were 25.2 percent of revenue in the fiscal 2003 first quarter, which is roughly the same as the prior year. Cost reductions associated with prior year restructuring initiatives were more than offset by incremental legal and other professional services costs associated with the Company's review of its financial reporting under the direction of the Audit and Finance Committee of the Board of Directors of approximately $1.9 million. Research and development (R&D) expense in the fiscal 2003 first quarter was $6.3 million, or 5.0 percent of revenues, compared to $7.2 million, or 5.7 percent of revenues, last year.

19

Restructuring Charges. In the fiscal 2003 first quarter, the Company reversed previously established restructuring reserves totaling $0.1 million before taxes. The reversal of these reserves was recorded in the Consolidated Statement of Operations as restructuring charges, which is where the reserves were originally recorded. See Note 4 of the "Notes to Consolidated Financial Statements" contained in this Quarterly Report and the Company's fiscal 2002 Form 10-K filed on August 27, 2002 for further discussion of the restructuring charges.

Other Income (Expense). The fiscal 2003 first quarter included approximately $0.9 million of foreign currency losses caused by translating foreign currency denominated transactions. The impact of such foreign currency translation effects in the prior year period was insignificant.

Interest Expense. Interest expense in the fiscal 2003 first quarter of $2.2 million was $1.3 million lower than the prior year due to both lower average debt balances and lower interest rates. The lower debt balances were the result of using proceeds from sale and leaseback transactions, anticipated asset sales, the sale of a discontinued operation