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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[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
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.
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 45
Item 9A. Controls and Procedures 45
Item 9B. Other Information 45
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 48
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 49
PART IV
Item 15. Exhibits and Financial Statement Schedules 50
3
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.
4
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.
5
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.
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.
6
- - 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.
7
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.
8
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.
9
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
The corporate headquarters for the Company is located in Assumption,
Illinois.
10
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.
11
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.
12
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 the years ended
December 31, 2001, 2002 and 2003.
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
INCOME STATEMENT (000'S):
Sales. . . . . . . . . . . . . . . . . . . . . $243,164 $228,938 $229,518 $236,868 $288,131
Cost of sales. . . . . . . . . . . . . . . . . 184,169 174,359 183,321 189,699 226,310
--------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . 58,995 54,579 46,197 47,169 61,821
Operating expenses . . . . . . . . . . . . . . 39,936 41,160 38,944 41,050 45,352
--------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . . 19,059 13,419 7,253 6,119 16,469
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. . . . . . . 4,501 (668) (6,367) (6,840) 2,275
Provision (benefit) for income taxes . . . . . (657) (762) 106 (995) 499
--------- --------- --------- --------- ---------
Income (loss) from continuing operations . . . 5,158 94 (6,473) (5,845) 1,776
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 . . . . 5,279 189 (6,170) (5,703) 1,801
Minority interest in Net Income of subsidiary. -- -- (26) (77) (92)
--------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . $ 5,279 $ 189 $ (6,196) $ (5,780) $ 1,709
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE:
Continuing operations. . . . . . . . . . . . . $ 2.76 $ 0.05 $ (3.65) $ (3.29) $ 1.36
Discontinued operations. . . . . . . . . . . . $ 0.07 $ 0.05 $ 0.17 $ 0.08 $ (0.07)
--------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . $ 2.82 $ 0.11 $ (3.49) $ (3.26) $ 1.31
--------- --------- --------- --------- ---------
BALANCE SHEET :
Total Assets (000's) . . . . . . . . . . . . . $164,123 $154,751 $145,618 $136,349 $135,612
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
13
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
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.
14
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.
The financial statement impact of the above noted adjustments is indicated in the table below
stated in (000's) except for per share line items;
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2003
Consolidated Balance Sheet:
Inventory . . . . . . . . . . . . . . . . . . $ 54,165 $ (4,562) $ 49,603
Payroll and payroll related expenses. . . . . 3,071 565 3,636
Other accrued expenses. . . . . . . . . . . . 4,057 1,891 5,948
Paid in capital . . . . . . . . . . . . . . . 3,006 574 3,580
Accumulated other comprehensive loss. . . . . (11,929) 345 (11,584)
Retained earnings . . . . . . . . . . . . . . 12,531 (8,678) 3,853
Consolidated Statement of Income:
Cost of sales . . . . . . . . . . . . . . . . 190,694 (481) 190,213
Selling, general and administrative expenses. 36,591 3,602 40,193
Operating income. . . . . . . . . . . . . . . 9,290 (3,121) 6,169
Foreign currency transaction loss . . . . . . (102) (99) (201)
Other, net. . . . . . . . . . . . . . . . . . (3,544) 3,749 205
Minority interest in net income of subsidiary -- (77) (77)
Net loss. . . . . . . . . . . . . . . . . . . (6,232) 452 (5,780)
Basic and diluted earnings per share. . . . . ($3.51) $ 0.259 ($3.26)
15
AS
AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED
FISCAL YEAR 2002
Consolidated Statement of Income:
Cost of sales. . . . . . . . . . . . . . . . . 176,836 7,097 183,933
Selling, general and administrative expenses . 36,767 1,087 37,854
Operating income . . . . . . . . . . . . . . . 15,787 (8,184) 7,603
Foreign currency transaction loss. . . . . . . (468) (316) (784)
Minority interest in net income of subsidiary. -- (26) (26)
Net income (loss). . . . . . . . . . . . . . . 2,330 (8,526) (6,196)
Basic and diluted earnings per share . . . . . $ 1.31 ($4.80) ($3.49)
RESULTS OF OPERATIONS
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 $61.8 million in 2004, or 21.5% of sales, from $47.2
million or 19.9% 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 $16.5 million in 2004 from $6.1 million in 2003.
Operating income margins increased to 5.7% of sales in 2004 from 2.6% 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 $1.7 million, compared to a net loss of $5.8 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.
16
Gross profit increased to $47.2 million in 2003 or 19.9% of sales from
$46.2 million or 20.1% of sales in 2002. This decrease was primarily due to
higher material costs and an unfavorable shift in the mix of products sold.
Operating expenses increased 5.6% or $2.2 million to $41.1 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 decreased to $6.1 million in 2003 from $7.3 million in
2002. Operating income margins decreased to 2.6% of sales in 2003 from 3.2% in
2002.
Interest expense increased $0.2 million due to slightly higher borrowing
costs.
Net loss decreased to $5.8 million in 2003 from $6.2 million in 2002.
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 $46.2 million in 2002 or 20.1% of sales from
$54.6 million or 23.9% 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 $7.3 million in 2002 from $13.4 million in
2001. Operating income margins increased to 3.2% of sales in 2002 from 5.9% in
2001.
Interest expense decreased $1.4 million due to lower borrowing costs.
Net income decreased to $6.2 million loss in 2002 from $0.2 million income
in 2001.
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 $45.3 million of working capital, a decrease
of $5.1 million as compared to its restated working capital as of December 31,
2003. This decrease in working capital was to a decrease in inventory and an
increase in accounts payable, offset by increases in accounts receivable and
prepaid expenses and a decrease in current maturities of long-term debt.
17
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 rations 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.
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.
18
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 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 judgements, assumptions, and estimates used in the
preparation of the consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there were a deterioration of a major customer's
creditworthiness, or actual defaults were higher than our historical experience,
our estimates of the recoverability of amounts due to us could be overstated,
which could have an adverse impact on our revenue.
REVENUE RECOGNITION
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.
INVENTORY
Inventories are stated at the lower of cost or market. Cost includes the
cost of materials, labor and factory overhead. The cost of all domestic and
international inventories was determined using the first-in-first-out ("FIFO")
method. Inventories and cost of sales are based in part on accounting
estimates.
19
WARRANTY
We accrue for warranty costs based on historical trends in product return
rates and the expected material and labor costs to provide warranty services.
If we were to experience an increase in warranty claims compared with our
historical experience or costs of servicing warranty claims were greater than
the expectations on which the accrual had been based, our gross margins could be
adversely affected.
GOODWILL IMPAIRMENT
We perform goodwill impairment tests on an annual basis. In response to
changes in industry and market conditions, we may be required to strategically
realign our resources and consider restructuring, disposing, or otherwise
exiting businesses, which could result in impairment of goodwill.
CONTINGENCIES
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of loss or
impairment of an asset or the incurrence of a liability, as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that an asset has been
impaired or a liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.
SELF INSURANCE
A reserve for workers compensation IBNR (incurred but not reported) claims
is established based on information provided by the insurance carrier. This
reserve is adjusted monthly.
COMPENSATION EXPENSE
In 1997, the majority shareholder sold non-voting shares to certain
employees at an arm's length market value price. The majority shareholder
helped finance each employee purchase with a non-recourse interest-bearing note
with each employee with the shares being held as collateral against that note.
The Company 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.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At December 31,
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.
21
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 23
Consolidated Balance Sheets as of December 31, 2004 and 2003 27
Consolidated Statements of Operations for the years ended December 31, 2004,
2003 and 2002 28
Consolidated Statements of Stockholders' Deficit for the years ended December
31, 2004, 2003 and 2002 29
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002 30
Notes to Consolidated Financial Statements 31
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The GSI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GSI Group,
Inc. as of December 31, 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 financial statements for the years ended December 31, 2003 and
December 31, 2002.
Decatur, IL
March 18, 2005
23
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 Sul - Brazil
January 21, 2005
ROKEMBACH & CIA. AUDITORES Roger Arthur Lahm
Independent Auditors Engagement Partner
CRCRS n 3.663 CRCRS n . 46.161
24
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
25
- ------
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
26
PART I - FINANCIAL INFORMATION
THE GSI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003
---------
ASSETS 2004 RESTATED
- --------------------------------------------------------------------------------- --------- ----------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,304 $ 3,439
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,656 27,083
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,588 49,603
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,489 4,468
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,416 2,882
--------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,453 87,475
--------- ----------
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,612 $ 136,349
========= ==========
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 1,575,000 shares) . . . . . . . . 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares). . . . . . . . . . . . . 2 2
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,821 3,580
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . (10,124) (11,584)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,944 3,853
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 . . . . . . . . . . . . . . . . . . . . . . . . (41,900) (31,092)
--------- ----------
Total liabilities and stockholders' deficit . . . . . . . . . . . . . . . . $135,612 $ 136,349
========= ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
27
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)
2003 2002
---- ----
2004 RESTATED RESTATED
----------- ----------- -----------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 288,131 $ 236,868 $ 229,518
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,310 189,699 183,321
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 61,821 47,169 46,197
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 . . . . . . . . . . . . . . . . . . . . . . . . 16,469 6,119 7,253
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. 2,275 (6,840) (6,367)
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . 499 (995) 106
----------- ----------- -----------
Income (loss) from continuing operations . . . . . . . . . . . . . . 1,776 (5,845) (6,473)
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 . . . . . . . . . . . . . . . 1,801 (5,703) (6,170)
Minority interest in net income from subsidiary. . . . . . . . . . . (92) (77) (26)
----------- ----------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ 1,709 $ (5,780) $ (6,196)
=========== =========== ===========
Basic and diluted earnings (loss) per share. . . . . . . . . . . . . $ 1.31 $ (3.26) $ (3.49)
----------- ----------- -----------
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.
28
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 . . . . . . . . . . . . . . . . - - - - - -
Balance, December 31, 2004 . . . . . . . . 1,575,000 $ 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 $ 18,770 5,058,652 $(26,950) 859,316 $ (9) $(15,451)
Restated net loss. . . . . . . . . (6,196) - - - - (6,196) (6,196)
Stock based compensation . . . . . 90
Other comprehensive loss-foreign
Currency translation adjustments - - - - - (3,804) (3,804)
Comprehensive loss . . . . . . . . $ (10,000)
================
Dividends. . . . . . . . . . . . . (1,795) - - - - (1,795)
---------------- -------------- --------- ------- -------- ---------
Restated Balance, December 31, 2002 $ 10,779 5,058,652 $(26,950) 859,316 $ (9) $(27,156)
Restated net loss. . . . . . . . . (5,780) - - - - (5,780) (5,780)
Stock based compensation . . . . . 484
Other comprehensive loss-foreign
Currency translation adjustments - - - - - 2,506 2,506
Comprehensive loss . . . . . . . . $ (3,274)
================
Dividends. . . . . . . . . . . . . (1,146) - - - - (1,146)
---------------- -------------- --------- ------- -------- ---------
Restated Balance, December 31, 2003 $ 3,853 5,058,652 $(26,950) 859,316 $ (9) $(31,092)
Net income . . . . . . . . . . . . 1,709 - - - - 1,709 1,709
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 . . . . . . . . $ 3,169
================
Dividends. . . . . . . . . . . . . (1,618) - - - - (1,618)
Balance, December 31, 2004. . . . . $ 3,944 6,006,704 $(41,550) 859,316 $ (9) $(41,900)
================ ============== ========= ======= ======== =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
2003 2002
---- ----
2004 RESTATED RESTATED
--------- ---------- ----------
Cash Flows From Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 1,709 $ (5,780) $ (6,196)
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 . . . . . . . . . . . . . . . . . . . . . . (3,985) 7,901 (2,200)
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
30
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.
31
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