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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-43089
THE GSI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-0856587
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 E. ILLINOIS STREET, ASSUMPTION, ILLINOIS 62510
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (217) 226-4421
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer: Yes
[ ] No [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: $0
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: Common stock, par
value $0.01 per share, 1,775,000 shares outstanding as of March 26, 2004.
Documents Incorporated by Reference: None
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1
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 46
Item 13. Certain Relationships and Related Transactions 46
Item 14. Controls and Procedures 47
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K 48
2
PART I
ITEM 1. BUSINESS.
NOTE ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of the federal securities laws. We intend these forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements in the
federal securities laws. Some forward-looking statements may be identified by
use of terms such as "believes," "anticipates," "intends" or "expects." These
forward-looking statements relate to the plans and expectations of The GSI
Group, Inc. (the "Company") for future operations. The inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the plans or expectations
of the Company will be achieved. The Company's plans and expectations could
differ materially from those contained in the forward-looking statements.
GENERAL
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company believes that it is the largest
global provider of both (i) grain storage bins and related drying and handling
systems and (ii) swine feed storage, feed delivery, confinement and ventilation
systems. The Company is also one of the largest global providers of poultry
feed storage, feed delivery, watering, ventilation and nesting systems. The
Company markets its agricultural products in approximately 75 countries through
a network of over 2,500 independent dealers to grain, swine and poultry
producers primarily under its GSI, DMC, FFI, Zimmerman, AP and Cumberland brand
names. The Company's current market position in the industry reflects both the
strong, long-term relationships the Company has developed with its customers as
well as the quality and reliability of its products.
The primary users of the Company's grain storage, drying and handling
products are farm operators or commercial businesses, such as the
Archer-Daniels-Midland Company and Cargill, Inc., that operate feed mills, grain
elevators, port storage facilities and commercial grain processing facilities.
The Company believes that its grain storage, drying and handling equipment is
superior to that of its principal competitors on the basis of strength,
durability, reliability, design efficiency and breadth of product offering. The
Company's feeding and ventilation systems are used primarily by growers that
raise swine and poultry, typically on a contract basis for large integrators
such as Perdue Farms Incorporated and Tyson Foods, Inc. In the swine industry
however, there is a significant portion of the industry that is not integrated
at this time that is also served. Because swine and poultry growers are always
concerned about the efficiency of their operations, especially where it relates
to feed, they seek to purchase systems that minimize the feed-to-meat ratio. As
a result of its proprietary designs, the Company believes that its swine and
poultry systems are the most effective in the industry in serving this customer
objective.
The industry in which the Company operates is characterized both
domestically and internationally by a few large companies with broad product
offerings and numerous small manufacturers of niche product lines.
Domestically, the Company intends to build on its established presence in the
grain, swine and poultry markets. Internationally, the Company intends to
capitalize on opportunities arising from still-developing agricultural
industries. The Company believes that less functionally sophisticated and
efficient grain storage systems used by facilities located outside the U.S. and
Western Europe, which experience relatively high levels of grain spoilage and
loss, are likely to be replaced by more modern systems. The Company also
believes that the economic growth occurring in the Company's international
markets will result in consumers devoting larger portions of their income to
improved and higher-protein diets, stimulating demand for poultry and pork. The
Company believes that it is well-positioned to capture increases in worldwide
demand for its products resulting from these industry trends because of its
leading brand names, broad and diversified product lines, strong distribution
network and high-quality products.
3
The Company was incorporated in Delaware on April 30, 1964. The Company's
principal executive office is located at 1004 East Illinois Street, Assumption,
Illinois 62510 and its telephone number is (217) 226-4421.
COMPANY STRENGTHS
Market Leader. The Company believes that it is the largest global provider
of both (i) grain storage bins and related drying and handling systems and (ii)
swine feed storage, feed delivery, confinement and ventilation systems. The
Company is also one of the largest global providers of poultry feed storage,
feed delivery, watering, ventilation and nesting systems.
Provider of Fully-Integrated Systems. The Company offers a broad range of
products that permit customers to purchase all of their grain, swine and poultry
production needs from one supplier. The Company believes that providing
fully-integrated systems significantly lowers total production costs and
enhances producer productivity by offering compatible products designed to
promote synergies and achieve maximum operating results. Dealers who purchase
fully-integrated systems also benefit from lower administrative and shipping
costs and the ease of dealing with a single supplier. The Company intends to
maintain its position as a provider of fully-integrated systems by continuing to
offer the most complete line of products available within its markets and by
developing and introducing new products within its existing lines.
Brand Name Recognition and Reputation for Quality Products and Service.
Through its manufacturing expertise and experience, the Company has established
recognition in its markets for the GSI, DMC, FFI, Zimmerman, AP and Cumberland
brand names. The Company seeks to protect the reputation for high quality,
reliability and specialized services that are associated with such brand names
through quality control and customer feedback programs. The Company believes
that its reputation and recognized brand names, along with its extensive
distribution network, will assist it in its efforts to further penetrate both
the domestic and international markets in which the Company operates.
Effective and Established Distribution Network. The Company believes that
its development of a highly effective and established distribution network
affords it significant competitive advantages. The Company's distribution
network consists of over 2,500 independent dealers that market the Company's
products in approximately 75 countries throughout the world. The breadth and
scope of the Company's distribution network makes its products readily available
in each of the Company's markets and lowers transportation costs for its
customers. Dealers are carefully selected and trained to ensure high levels of
customer service. In addition, the Company has experienced a very low turn-over
rate of its dealers since the Company's inception, which promotes consistency
and stability to customers.
Long-Term Alliances with Customers. The Company has a history of
developing long-term alliances with customers who are market leaders in both the
industries and the geographic markets they serve. The Company works closely
with customers through all stages of product development in order to tailor
products and systems to meet each customer's unique needs, making substitutions
with competitor products more difficult. The Company's commitment to product
quality, dedication to customer service and responsiveness to changing customer
needs have enabled the Company to develop and strengthen long-term alliances
with its customers.
Flexible Manufacturing Facilities. The Company's facilities are designed
to be easily reconfigured to adapt to demand changes for any or all of the
Company's products. The Company's primary manufacturing facility, located in
Assumption, Illinois, consists of approximately 950,000 square feet and operates
on a 24-hour basis during peak production periods. The Company's facilities
employ state-of-the-art machines that have enhanced production efficiencies.
Company Operated by Experienced Management Team. The Company is led by a
management team with significant experience in the agricultural products
industry. The Company believes that the agricultural expertise of its
management team permit it to establish strong customer relationships and respond
quickly to market opportunities.
BUSINESS STRATEGY
The Company's objective is to capitalize on its strengths through the
implementation of its business strategy, which includes the following principal
elements:
4
Capitalize on Opportunities in International Markets. The Company intends
to continue to leverage its worldwide brand name recognition, leading market
positions and international distribution network to capture the demand for its
products that exists in the international marketplace. The Company believes
that increasing the diversity of both its customer base and geographic coverage
by expanding its international operations will mitigate the effect of future
reductions in demand within any of its individual product lines, or within a
particular geographic selling region.
Continue Development of Proprietary Product Innovations. The Company's
research and development efforts focus on the development of new and
technologically advanced products to respond to customer demands, changes in the
marketplace and new technology. The Company employs a strategy of working
closely with its customers and capitalizing on existing technology to improve
existing products and develop new value-added products. The Company intends to
continue to actively develop product improvements and innovations to more
effectively serve its customers.
Reduce Expenses and Improve Profitability. The Company focuses on
improving its financial performance by reducing non-strategic expenses and
streamlining the processes at all levels of its organization.
INDUSTRY OVERVIEW
Demand for the Company's products is driven by the overall worldwide level
of grain, swine and poultry production as well as the increasing focus, both
domestically and internationally, on improving productivity in these industries.
These markets are driven by a number of factors, including consumption trends
affected by economic and population growth and government policies.
Demand for grain and the required infrastructure for grain storage, drying
and handling is driven by several factors, including the need for grain for
worldwide production of meat protein and cereals. The Company believes that
less functionally sophisticated and efficient grain storage facilities located
outside the U.S. and Western Europe, which experience higher levels of grain
spoilage and loss, are over time likely to be replaced by more modern equipment.
The Company also believes that these dynamics will continue to support domestic
and international demand for the Company's grain storage, drying and handling
systems.
Demand for the Company's swine and poultry feeding equipment and feed
storage and delivery systems is impacted by the rate of economic growth
occurring in international markets. As disposable incomes increase in these
international markets, consumers have in the past, and should in the future,
devote larger portions of their income to improved and higher protein-based
diets. In the past, this trend has stimulated stronger demand for meat,
specifically poultry and pork, as these meats provide more cost-effective
sources of animal protein than beef.
The Company's sales of grain equipment have historically been affected by
feed and grain prices, acreage planted, crop yields, demand, government
policies, government subsidies and other factors beyond the Company's control.
Weather conditions also can adversely impact the agricultural industry and delay
planned construction activity, resulting in fluctuating demand for the Company's
grain equipment and delayed or lost revenues. Increases in feed and grain
prices have in the past resulted in a decline in sales of feeding, watering and
ventilation systems. The Company's sales of swine and poultry equipment
historically have been affected by the level of construction activity by swine
and poultry producers, which is affected by feed prices, environmental
regulations and domestic and international demand for pork and poultry.
PRODUCTS
The Company manufactures and markets (i) grain storage bins and related
drying and handling equipment systems, (ii) swine feed storage, feed delivery,
confinement and ventilation systems and (iii) poultry feed storage, feed
delivery, watering, ventilation and nesting systems. The Company offers a broad
range of products that permits customers to purchase their grain, swine and
poultry production equipment needs from one supplier. The Company believes that
its ability to offer integrated systems provides it with a competitive advantage
by enabling producers to purchase complete, integrated production systems from a
single distributor who can offer high-quality installation and service.
5
Grain Product Line
The Company's grain equipment consists of the following products:
Grain Storage Bins. The Company manufactures and markets a complete line
of over 1,000 models of both flat and hopper bottomed grain storage bins with
capacities of up to 710,000 bushels. The Company markets its bins to both farm
and commercial end users under its GSI brand name. The Company's grain storage
bins are manufactured using high-yield, high tensile, galvanized steel (the
thickest in the industry) and are assembled with high strength, galvanized bolts
and anchor brackets. The Company's grain storage bins offer efficient design
enhancements, including patented walk-in doors and a roof design that provides
specialized vents for increased efficiency, extruded lips for protection against
leakage, large and accessible eave and peak openings for ease of access, and
reinforced supportive bends to increase rigidity. The Company believes that its
grain storage bins are the most reliable and heaviest in the industry.
Grain Conditioning Equipment. To meet the need to dry grain for storage,
the Company manufactures and markets a complete line of over 100 models of grain
drying devices with capacities of up to 10,000 bushels per hour. The Company
markets its grain drying equipment to both farm and commercial end users under
its GSI, DMC, Zimmerman, FFI, and Airstream brand names. The Company's drying
equipment, which includes fans, heaters, top dryers, stirring devices, portable
dryers, stack dryers, tower dryers and process dryers, is manufactured using
galvanized steel and high-grade electrical components and utilize patented
control systems, which offer computerized control of all dryer functions from
one panel.
Grain Handling Equipment. The Company manufactures and markets a complete
line of grain handling equipment to complement its grain storage and drying
product offerings. The Company markets its grain handling equipment, which
includes bucket elevators, conveyors and augers, to both farm and commercial end
users under its GSI and Grain King brand names. The Company's grain handling
equipment offers ease of integration into Company or competitor systems and
enables the Company to offer a fully-integrated product line to grain
producers.
Swine Product Line
The Company's swine equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its swine feeding
products under its AP brand name. The Company custom designs a wide array of
state of the art feeding systems used in today's modern swine facilities. These
include the popular Flex-Flo auger systems that typically transport feed from
the Bulk Feed Storage Tanks located outside of the buildings to inside of the
structure. Once inside it is moved either by additional Flex-Flo equipment or
is transferred to the versatile Chain Disk System, which can make turns and
changes in elevation much more easily. Finally, the feed is delivered to the
animals using either a wide variety of ad lib feeders that are specifically
designed to waste a minimum amount of feed, provide the animals a high degree of
comfort, and be user friendly to the producer. Sometimes an individual feed
dispenser that allows the producer to feed each animal an exact amount of feed
daily is used. All of these systems are highly automated and address the ever
changing and multifaceted production practices that still abound in the pork
production industry, such as "wean to finish" or "sorting technology".
Ventilation Systems. The Company manufactures and markets ventilation
systems for swine buildings under its AP and Airstream brand names. These
systems consist of fans, heating and evaporative cooling systems, winches,
inlets and other accessories (including computer based automated control
devices) that regulate temperature and air flow. Proper ventilation systems are
crucial for minimizing the feed-to-meat conversion ratio by reducing stress
caused by extreme temperature fluctuation, allowing for higher density
production and providing optimum swine health through disease prevention. The
Company's swine ventilation systems produce high levels of air output at low
levels of power consumption, adapt to a wide array of specialty fans and other
accessories, operate with little maintenance or cleaning and provide precision
monitoring of environmental control. The Company specializes in designs that
work with the new emerging production practices as they are being developed by
producers so that they are market ready when these practices become
commonplace.
6
Other Production Equipment. The Company manufactures and markets a wide
array of equipment used in the balance of the swine production process,
including plastic and cast iron slated flooring, highly efficient watering
devices, a wide variety of PVC extrusions used for construction applications in
the facilities, many sizes of rubber floor mats for pig comfort, creep heating
systems for baby pigs, several styles of steel confinement equipment, and the
latest in practical feed, water, and environmental monitoring equipment.
Poultry Product Line
The Company's poultry equipment consists of the following products:
Feeding Systems. The Company manufactures and markets its poultry feeding
systems under its Cumberland brand name. The Company manufactures feeding
systems that are custom tailored to both the general industry needs of different
types of poultry producers and to the specialized needs of individual poultry
producers. The Company's poultry feeding systems consist of a feed storage bin
located outside the poultry house, a feed delivery system that delivers the feed
from the feed storage bin into the house and an internal feed distribution
system that delivers feed to the birds. The Company's poultry feed storage bins
contain a number of patented features designed to maximize capacity, manage the
quality of stored feed, prevent rain and condensation from entering feed storage
bins and provide first-in, first-out material flow, thereby keeping feed fresh
to help prevent spoilage, and blended to provide uniform quality rations. The
Company's poultry feed delivery systems use non-corrosive plastic and galvanized
steel parts specially engineered for durability and reliable operations and
specialized tubing and auguring or chain components that allow feed to be
conveyed up, down and around corners. The Company believes that its patented
HI-LO pan feeder is superior to competitor products due to its unique ability to
adjust from floor feeding for young chicks to regulated feed levels for older
birds.
Watering Systems. The Company manufactures and markets nipple watering
systems for poultry producers under its Cumberland brand name. The ability of a
bird to obtain water easily and rapidly is an essential factor in facilitating
weight gain. The Company's poultry watering system consists of pipes that
distribute water throughout the house to drinking units supported by winches,
cables and other components. The water is delivered through a regulator
designed to provide differential water pressure according to demand. The
Company's poultry watering systems are distinguished by their toggle action
nipples, which transmit water from nipple to beak without causing undue stress
on the bird or excess water to be splashed onto the floor. The watering nipples
produced by the Company also are designed to allow large water droplets to form
on the cavity of the nipple, thereby attracting young birds to drink, which
ultimately promotes weight gain.
Ventilation Systems. The Company manufactures and markets ventilation
systems for poultry producers under its Cumberland brand name. Equipment
utilized in such systems include fiberglass and galvanized fans, the Komfort
Kooler evaporative cooling systems, manual and automated curtains, heating
systems and automated controls for complete ventilation, cooling and heating
management. The Company believes its poultry ventilation products are reliable
and easy to assemble in the field, permit energy-efficient airflow management
and are well-suited for international sales because they ship compactly and
inexpensively and assemble with little hardware and few tools. Accurate bird
weighing systems integrate with the environmental controls to give growers and
integrators running averages of their flock weights.
Nesting Systems. The Company manufactures and markets nesting systems for
poultry producers under its Cumberland brand name. These systems consist of
mechanical nests and egg collection tables. The Company's nesting systems are
manufactured using high-yield, high tensile galvanized steel and are designed to
promote comfort for nesting birds and efficiency for production personnel. The
Company believes that its nesting systems are among the most reliable and
cost-effective in the poultry industry.
In 2003, 2002 and 2001, no single customer represented more than 10% of the
Company's sales and no single class of products represented more than 10% of the
Company's sales.
PRODUCT DISTRIBUTION
The Company distributes its products primarily through a network of U.S.
and international independent dealers who offer targeted geographic coverage in
key grain, swine and poultry producing markets throughout the world. The
Company's dealers sell products to grain, swine and poultry producers,
agricultural companies and various other farm and commercial end-users. The
Company believes that its distribution network is one of the strongest in the
industry, providing its customers with high levels of service. Since its
inception, the Company has experienced a very low turnover rate of its dealers.
The Company believes this has resulted in a reputation of consistency in its
products and stability with its customers. The Company further believes that
the high level of commitment its dealers have to the Company is evidenced by the
fact that many of the Company's dealers choose not to sell products of the
Company's competitors.
7
The Company also maintains a sales force to provide oversight services for
the Company's distribution network, interact with integrators and end users,
recruit additional dealers for the Company's products, and educate the dealers
on the uses and functions of the Company's products. The Company further
supports and markets its products with a technical service and support team,
which provides training and advice to dealers and end users regarding
installation, operation and service of products and, when necessary, on-site
service.
For information regarding the Company's sales by geographic region, see
Note 13 to the Consolidated Financial Statements included in Item 8 hereof.
COMPETITION
The market for the Company's products is competitive. Domestically and
internationally, the Company competes with a variety of manufacturers and
suppliers that offer only a limited number of the products offered by the
Company.
Competition is based on the price, value, reputation, quality and design of
the products offered and the customer service provided by distributors, dealers
and manufacturers of the products. The Company believes that its leading brand
names, diversified product lines, strong distribution network and high quality
products enable it to compete effectively. The Company further believes that
its ability to offer integrated systems to grain, swine and poultry producers,
which significantly lowers total production costs and enhances producer
productivity, provides it with a competitive advantage. Integrated equipment
systems offer significant benefits to dealers, including lower administrative
and shipping costs and the ease of dealing with a single supplier for all of
their customer needs. In addition, the Company's dealers provide producers with
high quality service, installation and repair.
NEW PRODUCT DEVELOPMENT
The Company has a product development and design engineering staff, most of
whom are located in Assumption, Illinois. Expenditures by the Company for
product research and development were approximately $2.5 million, $2.7 million
and $2.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company charges research and development costs to operations
as incurred.
RAW MATERIALS
The primary raw materials used by the Company to manufacture its products
are steel and polymer materials, including PVC pipe, polypropylene and
polyethylene. The Company also purchases various component parts that are
integrated into the Company's products. The Company is not dependent on any one
of its suppliers and in the past has not experienced difficulty in obtaining
materials or components. In addition, materials and components purchased by the
Company are readily available from alternative suppliers. The Company has no
long-term supply contracts for materials or components.
REGULATORY AND ENVIRONMENTAL MATTERS
Like other manufacturers, the Company is subject to a broad range of
federal, state, local and foreign laws and requirements, including those
governing discharges to the air and water, the handling and disposal of solid
and hazardous substances and wastes, the remediation of contamination associated
with releases of hazardous substances at the Company's facilities and offsite
disposal locations, workplace safety and equal employment opportunities.
Expenditures made by the Company to comply with such laws and requirements
historically have not been material.
BACKLOG
Backlog is not a significant factor in the Company's business because most
of the Company's products are delivered within a few weeks of their order. The
Company's backlog at December 31, 2003 was $23.4 million compared to $28.8
million at December 31, 2002. The Company believes that all such backlog will
be filled by the end of 2004.
8
PATENTS AND TRADEMARKS
The Company protects its technological and proprietary developments. The
Company currently has several active U.S. and foreign patents, trademarks and
various licenses for other intellectual property. While the Company believes
its patents, trademarks and licensed information have significant value, the
Company does not believe that its competitive position or that its operations
are dependent on any individual patent or trademark or group of related patents
or trademarks.
EMPLOYEES
As of December 31, 2003, the Company had 1,510 employees of whom 1,408 were
permanent and 102 were seasonal. The Company's employees are not represented by
a union. Management believes that its relationships with the Company's
employees are good.
ITEM 2. PROPERTIES.
The principal properties of The GSI Group as of March 26, 2004, were as
follows:
Location Description of Property
- ---------------------- -----------------------------
Assumption, Illinois . Manufacturing/Sales
Paris, Illinois. . . . Manufacturing/Assembly
Newton, Illinois . . . Manufacturing/Assembly
Vandalia, Illinois . . Manufacturing/Assembly
Flora, Illinois. . . . Manufacturing/Assembly
Clear Lake, Iowa . . . Sales/Warehouse
Sioux City, Iowa . . . Sales/Warehouse
Marau, Brazil. . . . . Manufacturing/Sales
Penang, Malaysia . . . Manufacturing/Sales/Warehouse
Queretero, Mexico. . . Sales/Warehouse
Honeydew, South Africa Sales/Warehouse
Ludford, Great Britain Sales
Poznan, Poland . . . . Sales
Shanghai, China. . . . Sales/Warehouse
The corporate headquarters for the Company is located in Assumption,
Illinois.
The Company's owned facilities are subject to mortgages. The Company's
leased facilities are leased through operating lease agreements with varying
expiration dates. For information on operating leases, see Note 12 to the
Consolidated Financial Statements included in Item 8 hereof.
The Company believes that its facilities are suitable for their present and
intended purposes and have adequate capacity for the Company's current levels of
operation.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal matters arising in the ordinary
course of business which, in the opinion of management, will not have a
material adverse affect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2003.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is no established public trading market for any class of the
Company's Common Stock. As of March 26, 2004, the Company had 10 holders of its
Common Stock. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management".
The Company generally has not paid dividends in the past, except to enable
its stockholders to pay taxes resulting from the Company's status as a
subchapter S corporation. During the years ended December 31, 2003 and December
31, 2002, the Company declared dividends totaling $1.2 million and $1.9 million,
respectively. The Company is subject to certain restrictions on the payment of
dividends contained in the indenture governing the Company's 10 % Senior
Subordinated Notes due 2007 (the "Notes") and in the Company's credit facility
with Congress Financial Corporation (Central) (the "Credit Facility"). Future
dividends, if any, will depend upon, among other things, the Company's
operations, capital requirements, surplus, general financial condition,
contractual restrictions and such other factors, as the Board of Directors may
deem relevant.
10
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected historical consolidated financial data for the Company
as of and for the years ended December 31, 1999, 2000, 2001, 2002 and 2003. The selected
historical consolidated financial data for the years indicated were derived from the consolidated
financial statements of the Company. The information set forth below should be read in
conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and notes thereto included in Item 8
hereof.
YEARS ENDED DECEMBER 31,
------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
INCOME STATEMENT (000'S):
Sales . . . . . . . . . . . . . . . . . . $229,210 $243,961 $229,921 $230,636 $237,669
Cost of sales . . . . . . . . . . . . . . 179,927 184,622 174,254 176,836 190,694
--------- --------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . 49,283 59,339 55,667 53,800 46,975
Operating expenses. . . . . . . . . . . . 38,669 40,070 41,114 38,013 37,685
--------- --------- --------- --------- ---------
Operating income. . . . . . . . . . . . . 10,614 19,269 14,553 15,787 9,290
Interest expense. . . . . . . . . . . . . (14,768) (14,997) (14,397) (13,011) (13,216)
Other income (expense). . . . . . . . . . 477 439 242 (287) (3,281)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations. (3,677) 4,711 398 2,489 (7,207)
Provision (benefit) for income taxes. . . (336) (568) (656) 159 (975)
Net income (loss) . . . . . . . . . . . . $ (3,341) $ 5,279 $ 1,054 $ 2,330 $ (6,232)
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE:
Continuing operations . . . . . . . . . . $ (1.67) $ 2.82 $ 0.59 $ 1.31 $ (3.51)
Net income (loss) . . . . . . . . . . . . $ (1.67) $ 2.82 $ 0.59 $ 1.31 $ (3.51)
--------- --------- --------- --------- ---------
BALANCE SHEET (000'S):
Total Assets. . . . . . . . . . . . . . . $158,519 $164,123 $154,741 $152,007 $140,911
Long-term obligations . . . . . . . . . . $133,315 $130,870 $136,211 $139,735 $129,563
Dividends per share . . . . . . . . . . . $ 0.0 $ 1.05 $ 0.65 $ 1.08 $ 0.68
11
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 leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past have
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's sales and net income have historically been lower
during the first and fourth fiscal quarters as compared to the second and third
quarters.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for transactions
from the Company's Brazilian and South African operations), the production
costs, profit margins and competitive position of the Company are affected by
the strength of the U.S. dollar relative to the strength of the currencies in
countries where its products are sold.
The Company's international sales have historically comprised a significant
portion of sales. In 2003, 2002 and 2001, the Company's international sales
accounted for 34.4%, 36.6% and 32.3% of sales, respectively. International
operations generally are subject to various risks that are not present in
domestic operations, including restrictions on dividends, restrictions on
repatriation of funds, unexpected changes in tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely impact the
Company's international operations.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices of steel and, to a lesser
extent, polymer materials can impact the Company's cost of sales.
The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's
stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities. The Company intends
to continue this policy.
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Sales increased 3.1% or $7.0 million to $237.7 million in 2003 compared to
$230.6 million in 2002. Poultry equipment sales were essentially flat.
Increases in demand for grain products were partially offset by decreases in
demand for swine products.
Gross profit decreased to $47.0 million in 2003 or 19.8% of sales from
$53.8 million or 23.3% of sales in 2002. This decrease was primarily due to
higher material costs and an unfavorable shift in the mix of products sold.
12
Operating expenses decreased 0.9% or $0.3 million to $37.7 million in 2003
from $38.0 million in 2002. As a percentage of sales, operating expenses
decreased to 15.9% in 2003 from 16.5% in 2002. This decrease was primarily the
result of cost cutting measures.
Operating income decreased to $9.3 million in 2003 from $15.8 million in
2002. Operating income margins decreased to 3.9% of sales in 2003 from 6.8% in
2002.
Interest expense increased $0.2 million due to slightly higher borrowing
costs.
Other, net increased $3.7 million to $3.5 million of expense in 2003 from
$0.1 million of income in 2002. This increase in expense was primarily the
result of writing down the Yemen receivable.
Net income decreased to $6.2 million loss in 2003 from $2.3 million in
income in 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Sales increased 0.3% or $0.7 million to $230.6 million in 2002 compared to
$229.9 million in 2001. Grain equipment sales were essentially flat. Increases
in demand for poultry products were offset by decreases in demand for swine
products.
Gross profit decreased to $53.8 million in 2002 or 23.3% of sales from
$55.7 million or 24.2% of sales in 2001. This decrease was primarily due to
production inefficiencies caused by consolidation efforts.
Operating expenses decreased 7.5% or $3.1 million to $38.0 million in 2002
from $41.1 million in 2001. As a percentage of sales, operating expenses
decreased to 16.5% in 2002 from 17.9% in 2001. This decrease was primarily the
result of cost cutting measures, which included the consolidation of the
Indianapolis office.
Operating income increased to $15.8 million in 2002 from $14.6 million in
2001. Operating income margins increased to 6.8% of sales in 2002 from 6.3% in
2001.
Interest expense decreased $1.4 million due to lower borrowing costs.
Net income increased to $2.3 million in 2002 from $1.1 million in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Sales decreased 5.8% or $14.0 million to $229.9 million in 2001 compared to
$244.0 million in 2000. The decrease was primarily driven by weaker domestic
demand for grain storage and conditioning equipment. Brazilian and domestic
poultry sales were also lower due to weaker demand. This decrease was partially
offset by increased swine equipment sales, which were higher due to
strengthening demand.
Gross profit decreased to $55.7 million in 2001 or 24.2% of sales from
$59.3 million or 24.3% of net sales in 2000. This decrease was caused by
decreased sales and restructuring expenses incurred at the end of the year to
consolidate manufacturing operations.
Operating expenses increased 2.6% or $1.0 million to $41.1 million in 2001
from $40.1 million in 2000. This increase was primarily the result of
integration costs necessary to support the sales volume resulting from the FFI
acquisition. Restructuring charges incurred during the period were offset by
cost reduction and consolidation actions. As a percentage of sales, operating
expenses increased to 17.9% in 2001 from 16.4% in 2000.
Operating income decreased to $14.6 million in 2001 from $19.3 million in
2000. Operating income margins decreased to 6.3% of sales in 2001 from 7.9% in
2000. This decrease was attributable to the decrease in sales and increased
operating expenses.
Interest expense decreased $0.6 million due to lower borrowing costs.
Net income decreased to $1.1 million in 2001 from $5.3 million in 2000.
The decrease was primarily attributable to the factors discussed above relating
to operating expenses and operating income.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by borrowings made under various credit
agreements and the sale of the Notes.
The Company's working capital requirements for its operations are seasonal,
with investments in working capital typically building in the second and third
quarters and then declining in the first and fourth quarters. The Company
defines working capital as current assets less current liabilities. As of
December 31, 2003, the Company had $57.4 million of working capital, a decrease
of $10.0 million as compared to its working capital as of December 31, 2002.
This decrease in working capital was primarily due to decreases in inventory and
current maturities of long term debt and increases in accounts receivable,
accounts payable, and prepaids.
Operating activities generated $13.5 million, $4.0 million and $5.0 million
of cash in 2003, 2002 and 2001, respectively. The increase in cash flow from
operating activities from 2002 to 2003 of $9.6 million was primarily the result
of a change in inventory of $18.3 million offset by changes in net income,
depreciation and amortization, accounts receivable, accounts payable, other
current assets, accrued expenses, customer deposits and deferred taxes totaling
$8.9 million.
The Company's capital expenditures totaled $1.7 million, $5.2 million and
$4.4 million in 2003, 2002 and 2001, respectively. Capital expenditures have
primarily been for machinery and equipment and the expansion of facilities. The
Company anticipates that its capital expenditures in 2004 will be approximately
that of 2003.
Cash used in financing activities in 2003 consisted primarily of $15.0
million of payments of long-term debt, a $2.2 million payment of shareholder
loans and a $1.2 million dividend for taxes offset by $2.2 million of borrowing
under the Credit Facility and a $1.5 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 $1.9 million dividend for
taxes, and a $0.7 million payment of shareholder loans. Cash used in financing
activities in 2001 consisted primarily of $6.7 million of payments on long-term
debt, a $1.2 million dividend for taxes, and a $2.2 million payment of a
shareholder loan offset by $8.0 million of increased borrowings under the Credit
Facility and a $1.0 million shareholder loan.
The Company believes that existing cash, cash flow from operations and
available borrowings under the Credit Facility will be sufficient to support its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
On October 31, 2003, The GSI Group, Inc. (the "Company") entered into a
three-year credit facility with lenders led by Congress Financial Corporation
(Central) to provide up to a maximum amount of $75,000,000 subject to borrowing
base availability (the "Credit Facility") to replace the Company's existing
senior credit facility, which provided for maximum outstanding borrowings of
$60,000,000. Revolving loans and letters of credit under the Credit Facility
are based on a borrowing base, which includes accounts receivable, inventory and
fixed assets. A $12.5 million term loan due on October 31, 2006 is also
included in the Credit Facility. The revolving loan borrowings bear interest at
a floating rate per annum equal to (at the Company's option) 2.5% to 3.0% over
LIBOR or 0.0% to 0.50% over the Prime Rate, both based on excess availability
under the borrowing base. The term loan borrowings bear interest at a floating
rate per annum equal to 8% over the Prime Rate provided that the minimum
interest rate will not be less than 12.25% and the maximum will not be greater
than 14.5%. The Credit Facility requires the Company to maintain a senior debt
to EBITDA ratio and a fixed charge coverage ratio. Borrowings under the Credit
Facility are secured by substantially all of the assets of the Company,
including the capital stock of any existing or future subsidiaries, except the
Brazilian subsidiary. The Company had $19.5 million of revolving loans
outstanding, $3.8 million of standby letters of credit and $4.5 million letter
of credit guaranteeing the debt of FarmPro, Inc., which reduced the overall
availability on the line to $7.5 million as of December 31, 2003.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
14
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions, and estimates that
affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Note 2 to the Consolidated Financial Statements describes
the significant accounting policies and methods used in the preparation of the
Consolidated Financial Statements. Estimates are used for, but not limited to,
the accounting for the allowance for doubtful accounts and sales returns,
inventory allowances, warranty costs, investment impairments, goodwill
impairments, contingencies, restructuring costs and other special charges, and
taxes. Actual results could differ materially from these estimates. The
following critical accounting policies are impacted significantly by judgements,
assumptions, and estimates used in the preparation of the Consolidated Financial
Statements.
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.
A reserve for sales returns is established based on historical trends in
product return rates. If the actual future returns were to deviate from the
historical data on which the reserve had been established, our revenue could be
adversely affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there were to be a sudden significant decrease in demand for our products, or
if there were a higher incidence of inventory obsolescence because of rapidly
changing technology and customer requirements, we could be required to increase
our inventory allowances and our gross margins could be adversely affected.
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.
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.
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.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At December 31,
2003, principal exposed to interest rate risk was limited to $32.2 million in
variable rate debt. The interest rates on the various debt instruments range
from 4.25% to 12.25%. The Company measures its interest rate risk by estimating
the net amount by which potential future net earnings would be impacted by
hypothetical changes in market interest rates related to all interest rate
sensitive assets and liabilities. Therefore, a change in the interest rate of
1% will change earnings by $0.3 million.
At December 31, 2003, approximately 16.0% of sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian and South African subsidiary. The Company's exposure to such exchange
rate risk as it relates to the Company's financial position and results of
operations would be adversely impacted by devaluation of the Brazilian Real and
the South African Rand per U.S. dollar. These amounts are difficult to
accurately estimate due to factors such as the inherent fluctuations of
intercompany account balances, balance sheet accounts and the existing economic
uncertainty and future economic conditions in the international marketplace.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF THE GSI GROUP, INC.
PAGE
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheets as of December 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 . . . 21
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2001, 2002 and
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The GSI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GSI
Group, Inc. as of December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
two years in the period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
certain foreign, wholly owned subsidiaries, which statements reflect total
assets of $30.1 and $26.4 million as of December 31, 2003 and 2002 and total
revenue of $39.8 and $39.7 million for the years then ended. 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 subsidiaries, is based solely on the reports of other
accountants. The consolidated financial statements of The GSI Group, Inc. as of
December 31, 2001 were audited by other accountants who ceased operations and
whose report date February 21, 2002 expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The GSI Group, Inc. as
of December 31, 2003 and 2002 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 2, in 2002 the Company changed its method of
accounting for goodwill and other intangible assets.
BKD LLP
Decatur, IL
February 27, 2004
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The GSI Group, Inc.
We have audited the accompanying consolidated balance sheets of The GSI
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The GSI
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 4 to the consolidated financial statements, effective
for the year ended December 31, 2001, the Company has given retroactive effect
to the change in accounting principle for David Manufacturing Company, a wholly
owned subsidiary of The GSI Group Inc., from the last-in-first-out ("LIFO")
method to the first-in-first-out ("FIFO") method.
As explained in Note 4 to the consolidated financial statements, effective
for the year ended December 31, 2000, the Company has given retroactive effect
to the change in accounting principle for all of the Company's domestic
inventory except that of David Manufacturing Company, a wholly owned subsidiary
of The GSI Group Inc., from the last-in-first-out ("LIFO") method to the
first-in-first-out ("FIFO") method.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 25, 2002
19
PART I - FINANCIAL INFORMATION
THE GSI GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS 2003 2002
- ------------------------------------------------------------------------ --------- ---------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 3,439 $ 2,936
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 27,083 23,274
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,165 63,893
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,468 2,039
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . -- 66
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,882 5,261
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 92,037 97,469
--------- ---------
Property, Plant and Equipment, net . . . . . . . . . . . . . . . . . . . 32,673 38,705
--------- ---------
Other Assets:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,100 9,738
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . 2,143 3,237
Deferred financing costs, net. . . . . . . . . . . . . . . . . . . . . 2,773 2,054
Deferred taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . 1,077 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 804
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 16,201 15,833
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,911 $152,007
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,139 $ 11,064
Payroll and payroll related expenses . . . . . . . . . . . . . . . . . 3,071 2,987
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 12 --
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,379 1,340
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 4,057 4,144
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,875 7,159
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 148 3,404
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 34,681 30,098
--------- ---------
Long-Term Debt, less current maturities. . . . . . . . . . . . . . . . . 129,563 139,735
--------- ---------
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . -- 474
--------- ---------
Commitments and Contingencies
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 1,575,000 shares) . . . 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares) . . . . . . . . 2 2
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 3,006 3,006
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . (11,929) (14,336)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,531 19,971
Treasury stock, at cost, voting (5,058,652 shares) . . . . . . . . . . (26,950) (26,950)
Treasury stock, at cost, nonvoting (859,316 shares). . . . . . . . . . (9) (9)
--------- ---------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . (23,333) (18,300)
--------- ---------
Total liabilities and stockholders' deficit. . . . . . . . . . . . $140,911 $152,007
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002 2001
----------- ----------- -----------
Sales . . . . . . . . . . . . . . . . . . . . $ 237,669 $ 230,636 $ 229,921
Cost of Sales . . . . . . . . . . . . . . . . 190,694 176,836 174,254
----------- ----------- -----------
Gross profit. . . . . . . . . . . . . . . 46,975 53,800 55,667
Selling, General and Administrative Expenses. 36,591 36,767 39,386
Amortization Expense. . . . . . . . . . . . . 1,094 1,246 1,728
----------- ----------- -----------
Total operating expenses. . . . . . . . . . 37,685 38,013 41,114
----------- ----------- -----------
Operating income. . . . . . . . . . . . . 9,290 15,787 14,553
Other Income (Expense):
Interest expense. . . . . . . . . . . . . . (13,216) (13,011) (14,397)
Interest income . . . . . . . . . . . . . . 615 411 485
Loss on sale of fixed assets. . . . . . . . (250) (353) (350)
Foreign currency transaction gain (loss). . (102) (468) 33
Other, net. . . . . . . . . . . . . . . . . (3,544) 123 74
----------- ----------- -----------
Income (loss) before income taxes. . . (7,207) 2,489 398
----------- ----------- -----------
Income Tax Provision (Benefit). . . . . . . . (975) 159 (656)
----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . $ (6,232) $ 2,330 $ 1,054
=========== =========== ===========
Basic and Diluted Earnings Per Share. . . . . $ (3.51) $ 1.31 $ 0.59
----------- ----------- -----------
Weighted Average Common Shares Outstanding. . 1,775,000 1,775,000 1,775,000
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
------------
Voting Nonvoting
------------ ----------
Accumulated
Additional Other
Shares Shares Paid-In Comprehensive
Outstanding Amount Outstanding Amount Capital Income (Loss)
------------ ---------- ----------- ------- ----------- ---------------
Balance, December 31, 2000 . . . . . . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (8,105)
Net income. . . . . . . . . . . . . . . . - - - - - -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - (2,111)
Dividends . . . . . . . . . . . . . . . . - - - - - -
------------ ---------- ----------- ------- ----------- ---------------
Balance, December 31, 2001 . . . . . . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (10,216)
Net income. . . . . . . . . . . . . . . . - - - - - -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - (4,120)
Dividends . . . . . . . . . . . . . . . . - - - - - -
------------ ---------- ----------- ------- ----------- ---------------
Balance, December 31, 2002 . . . . . . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (14,336)
Net loss. . . . . . . . . . . . . . . . . - - - - - -
Other comprehensive loss-foreign currency
Translation adjustments . . . . . . . . - - - - - 2,407
Dividends . . . . . . . . . . . . . . . . - - - - - -
Balance, December 31, 2003 . . . . . . . . 1,575,000 $ 16 200,000 $ 2 $ 3,006 $ (11,929)
============ ========== =========== ======= =========== ===============
Treasury Stock
--------------
Voting Nonvoting
-------------- -----------
Total Comprehensive
Retained Stockholders' Income
Earnings Shares Amount Shares Amount Deficit (Loss)
---------- -------------- ----------- ------- -------- --------------- ---------------
Balance, December 31, 2000. . . . . $ 19,654 5,058,652 $ (26,950) 859,316 $ (9) $ (12,386)
Net income . . . . . . . . . . . . 1,054 - - - - 1,054 1,054
Other comprehensive
loss- foreign currency
Translation adjustments. . . . . - - - - - (2,111) (2,111)
Comprehensive loss $ (1,057)
===============
Dividends. . . . . . . . . . . . . (1,158) - - - - (1,158)
---------- -------------- ----------- ------- -------- ---------------
Balance, December 31, 2001. . . . . $ 19,550 5,058,652 $ (26,950) 859,316 $ (9) $ (14,601)
Net income . . . . . . . . . . . . 2,330 - - - - 2,330 2,330
Other comprehensive loss-foreign
Currency translation adjustments - - - - - (4,120) (4,120)
Comprehensive loss $ (1,790)
===============
Dividends. . . . . . . . . . . . . (1,909) - - - - (1,909)
---------- -------------- ----------- ------- -------- ---------------
Balance, December 31, 2002. . . . . $ 19,971 5,058,652 $ (26,950) 859,316 $ (9) $ (18,300)
Net loss . . . . . . . . . . . . . (6,232) - - - - (6,232) (6,232)
Other comprehensive loss-foreign
Currency translation adjustments - - - - - 2,407 2,407
Comprehensive loss $ (3,825)
===============
Dividends. . . . . . . . . . . . . (1,208) - - - - (1,208)
Balance, December 31, 2003. . . . . $ 12,531 5,058,652 $ (26,950) 859,316 $ (9) $ (23,333)
========== ============== =========== ======= ======== ===============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
THE GSI GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
--------- -------- --------
Cash Flows From Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ (6,232) $ 2,330 $ 1,054
Adjustments to reconcile net income (loss) to cash provided
By operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 6,349 7,065 8,775
Amortization of deferred financing costs and debt discount . . 928 643 725
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 250 353 350
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . (1,473) (188) (973)
Changes in:
Accounts receivable, net . . . . . . . . . . . . . . . . . . (3,809) 5,708 3,621
Inventories, net . . . . . . . . . . . . . . . . . . . . . . 9,728 (8,599) 568
Other current assets . . . . . . . . . . . . . . . . . . . . (50) (180) (1,069)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 6,075 (1,183) (3,437)
Payroll and payroll related expenses . . . . . . . . . . . . 84 (1,247) 287
Billings in excess of costs. . . . . . . . . . . . . . . . . -- (257) (1,777)
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . 39 (691) (409)
Other accrued expenses . . . . . . . . . . . . . . . . . . . (87) (711) (1,931)
Customer deposits. . . . . . . . . . . . . . . . . . . . . . 1,716 955 (814)
--------- -------- --------
Net cash flows provided by operating activities. . . . . . 13,518 3,998 4,970
--------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (1,739) (5,170) (4,387)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 2,742 1,299 1,523
Acquisition of FFI Corp., net of cash acquired . . . . . . . . . . -- -- (1,457)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 (11) 25
--------- -------- --------
Net cash flows provided by (used in) investing activities. 1,690 (3,882) (4,296)
--------- -------- --------
Cash Flows From Financing Activities:
Payments on shareholder loans. . . . . . . . . . . . . . . . . . . (2,194) (684) (2,182)
Proceeds from shareholder loans. . . . . . . . . . . . . . . . . . 1,574 1,452 1,017
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . (15,227) (4,512) (6,690)
Net borrowings under line-of-credit agreement. . . . . . . . . . . 2,242 7,800 8,000
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,208) (1,909) (1,158)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (205) (1,896) 541
--------- -------- --------
Net cash flows provided by (used in) financing activities. (15,018) 251 (472)
--------- -------- --------
Effect of Exchange Rate Changes on Cash. . . . . . . . . . . . . . . 313 (259) (53)
--------- -------- --------
Increase In Cash and Cash Equivalents . . . . . . . . . . . . . . . $ 503 $ 108 $ 149
Cash and Cash Equivalents, beginning of year . . . . . . . . . . . . 2,936 2,828 2,679
--------- -------- --------
Cash and Cash Equivalents, end of year . . . . . . . . . . . . . . . $ 3,439 $ 2,936 $ 2,828
========= ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements
23
THE GSI GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The GSI Group, Inc., a Delaware corporation, and its subsidiaries (the
"Company") manufacture and sell equipment for the agricultural industry. In
limited cases, the Company enters into contracts to manufacture and supervise
the assembly of grain handling systems. The Company's product lines include:
grain storage bins and related drying and handling equipment systems and swine
and poultry feed storage and delivery, ventilation, and watering systems. The
Company's headquarters and main manufacturing facility are in Assumption,
Illinois, with other manufacturing facilities in Illinois. In addition, the
Company has manufacturing and assembly operations in Brazil, Malaysia, China and
Canada and selling and distribution operations in Great Britain, Mexico, South
Africa, and Poland.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying financial statements reflect the consolidated results
of The GSI Group, Inc. and its subsidiaries. All intercompany transactions and
balances have been eliminated. The subsidiaries and their auditors are as
follows:
COMPANY NAME LOCATION AUDITOR
- ---------------------- ------------- -----------------------------------
GSI Group (Asia) . . . Malaysia Ernst & Young
GSI Group (Africa) . . South Africa PricewaterhouseCoopers
GSI Group (Europe) . . Great Britain Streets and Co.
GSI/Cumberland . . . . Mexico Deloitte & Touche
Agromarau Industria E
Comercio Ltda. . . . Brazil Deloitte & Touche
GSI Group (Shanghai) . China Horwath China Shanghai CPA Co., Ltd
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.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary investments with high
quality financial institutions. At times, such investments may be in excess of
the FDIC insurance limit. Temporary investments are valued at the lower of cost
or market and at the balance sheet dates approximate fair value. The Company
primarily serves customers in the agricultural industry. This risk exposure is
limited due to the large number of customers comprising the Company's customer
base and its dispersion across many geographic areas. The Company grants
unsecured credit to its customers. In doing so, the Company reviews a
customer's credit history before extending credit. In addition, the Company
routinely assesses the financial strength of its customers, and, as a
consequence, believes that its trade accounts receivable risk is limited. The
Company limits its international exposure to credit risk through the purchase of
insurance.
24
Fair Value of Financial Instruments
The carrying amounts of cash, receivables, accounts payable and accrued
expenses approximate fair value because of the short-term nature of the items.
The carrying amount of the Company's lines of credit, notes and other payables,
except for senior subordinated notes payable, approximate their fair values
either due to their short term nature, the variable rates associated with these
debt instruments or based on current rates offered to the Company for debt with
similar characteristics.
Accounts and Notes Receivable
Accounts receivable are stated at the amount billed to customers plus any
accrued and unpaid interest. The Company provides an allowance for doubtful
accounts, which is based upon a review of outstanding receivables, historical
collection information and existing economic conditions. Accounts receivable
are ordinarily due 30 days after the issuance of the invoice. Accounts that are
unpaid after the due date bear interest at 1% per month. Delinquent
receivables are written off based on individual credit evaluation and specific
circumstances of the customer.
Notes receivable are stated at their outstanding principal amount, net of
allowance for uncollectible notes. The Company provides an allowance for
uncollectible notes, which is based upon a review of outstanding receivables,
historical collection information and existing economic conditions. Outstanding
notes accrue interest based on the terms of the respective note agreements. A
note receivable is considered delinquent when the debtor has missed three or
more payments. Delinquent notes are written off based on individual credit
evaluation and specific circumstances of the borrower.
Inventories
Inventories are stated at the lower of cost or market. Cost includes the
cost of materials, labor and factory overhead. The cost of all domestic and
international inventories were determined using the first-in-first-out ("FIFO")
method. Inventories and cost of sales are based in part on accounting
estimates.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. The cost of property, plant and equipment acquired as part of a
business acquisition represents the estimated fair value of such assets at the
acquisition date. Depreciation is provided using the straight-line method over
the following estimated useful lives.
YEARS
-----
Building and Improvements. . . 10-25
Machinery and Equipment. . . . 3-10
Office Equipment and Furniture 3-10
Repairs and maintenance are charged to expense as incurred. Gains or
losses resulting from sales or retirements are recorded as incurred, at which
time related costs and accumulated depreciation are removed from the accounts.
Property, plant and equipment under capital leases are amortized over
the shorter of the estimated useful life of the asset or the term of the lease.
Product Warranties
The Company provides limited warranties on certain of its products, for
periods up to 1 year. The Company records an accrued liability and expense for
estimated future warranty claims based upon historical experience and
management's estimate of the level of future claims. Changes in the estimated
amounts recognized in prior years are recorded as an adjustment to the accrued
liability and expense in the current year.
25
Research and Development
Costs associated with research and development are expensed as
incurred. Such costs incurred were $2.5 million, $2.7 million and $2.8 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Intangible Assets
Goodwill is tested annually for impairment. If the implied fair value
of goodwill is lower than its carrying amount, a goodwill impairment is
indicated and goodwill is written down to its implied fair value. Subsequent
increases in goodwill value are not recognized in the financial statements.
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized
and amortized to the maturity period of the debt.
Revenue Recognition
Revenue is recorded when products are shipped, collection is
reasonably assured, the price is fixed and determinable and there is persuasive
evidence of an arrangement. Provisions are made at that time, when applicable,
for warranty costs to be incurred.
Revenues on long term fixed price contracts are recognized using the
percentage of completion method. Percentage of completion is determined by
relating the actual costs incurred to date to the total estimated cost for each
contract. If the estimate indicates a loss on a particular contract, a
provision is made for the entire estimated loss. Retainages are included as
current and noncurrent assets in the accompanying consolidated balance sheets.
Revenue earned in excess of billings is comprised of revenue recognized on
certain contracts in excess of contractual billings on such contracts. Billings
in excess of costs are classified as a current liability.
Shipping and Handling Fees
Shipping and handling costs of $8.6 million and $7.6 million for 2003 and
2002, respectively, are included in cost of goods sold.
Translation of Foreign Currency
The Company translates the financial statements of its foreign subsidiaries
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation." The Company's foreign operations are reported
in the local currency and translated to U.S. dollars. The balance sheets of the
Company's foreign operations are translated at the exchange rate in effect at
the end of the periods presented. The revenues and expenses of the Company's
foreign operations are translated at the average rates in effect during the
period. Exchange losses resulting from translations for the years ended
December 31, 2003, 2002 and 2001 have been recorded in the accompanying
Consolidated Statements of Stockholders' Deficit.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Such approach results in the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax basis of
assets and liabilities.
Earnings Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Diluted earnings per share equals basic earnings per share
for all periods presented.
26
Self Insurance
The Company has elected to self-insure certain costs related to worker's
compensation and general liability. Costs resulting from noninsured losses are
charged to income when incurred. The Company has purchased insurance that
limits its exposure for individual claims and that limits its aggregate exposure
to aproximately $3.4 million.
Change in Accounting Principle
On January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangible Assets" ("Statement No.
142"). Under Statement No. 142, goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. The adoption of Statement No.
142 had the affect of increasing 2002 net income by $0.3 million.
During 2003, the Company changed its method of accounting and financial
reporting for guarantees by adopting the provisions of Financial Accounting
Standards Board Interpretation No. 45 (FIN 45). The adoption of FIN 45 did not
have a material impact on the Company's results of operation or financial
position.
Thirteen Week Fiscal Periods
The Company uses thirteen-week fiscal quarter periods for operational
and financial reporting purposes. The Company's year-end will continue to be
December 31.
3. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 (Revised December 2003), the Financial Accounting Standards
Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities." This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The Company has determined there is no impact on the results of
operation or financial position at this time.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The Company has determined SFAS 149 will
have no impact on the results of operation or financial position at this time.
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, SFAS 150, establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company has determined SFAS 150 will have no impact on the
results of operation or financial position at this time.
4. TRADE RECEIVABLES ALLOWANCE
The following summarizes trade receivables allowance activity for the years
ended December 31, 2001, 2002 and 2003 (in thousands):
AMOUNT
--------
Balance, December 31, 2000. . $ 2,408
Increase to operating expense 169
Charge to allowance . . . . . (660)
--------
Balance, December 31, 2001. . $ 1,917
Increase to operating expense 324
Charge to allowance . . . . . (908)
--------
Balance, December 31, 2002. . $ 1,333
Increase to operating expense 316
Charge to allowance . . . . . (805)
--------
Balance, December 31, 2003. . $ 844
========
27
The Company had a $5.0 million line of credit arrangement with LaSalle
National Bank in 2002. Collateral for borrowings consisted of certain insured
foreign receivables that are not included in the Company's borrowing base. As
of December 31, 2002, non-recourse borrowings were $0.7 million and were
reflected as a reduction of the related trade receivables. There were no
covenant requirements relating to this line of credit. This line of credit did
not exist at December 31, 2003.
5. BUSINESS SEGMENT
In January 1998, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise wide disclosure requirements of SFAS 131, the Company reports sales,
in thousands, by each group of product lines. Amounts for the years ended
December 31, 2003, 2002 and 2001 are as shown in the table below (in thousands):
DECEMBER 31,
2003 2002 2001
------------- -------- --------
Grain product line . $ 140,290 $123,599 $123,801
Swine product line . 42,152 51,091 55,885
Poultry product line 55,227 55,946 50,235
------------- -------- --------
Sales . . . . . $ 237,669 $230,636 $229,921
============= ======== ========
For the years ended December 31, 2003, 2002 and 2001, sales in Brazil were
$17.4 million, $18.3 million and $17.0 million, respectively. Net income in
Brazil was $1.4 million, $1.3 million and $1.2 million in 2003, 2002 and 2001,
respectively. Long-lived assets in Brazil were $2.7 million and $2.1 million at
December 31, 2003 and 2002, respectively.
6. RISKS AND UNCERTAINTIES
International operations generally are subject to various risks that
are not present in domestic operations, including restrictions on dividends,
restrictions on repatriation of funds, unexpected changes in tariffs and other
trade barriers, difficulties in staffing and managing foreign operations,
political instability, fluctuations in currency exchange rates, reduced
protection for intellectual property rights in some countries, seasonal
reductions in business activity and potentially adverse tax consequences, any of
which could adversely impact the Company's international operations.
7. DETAIL OF CERTAIN ASSETS AND LIABILITIES
AS OF DECEMBER 31,
--------------------
2003 2002
-------------------- ---------
Accounts Receivable . . . . . (IN THOUSANDS)
------------------------------------
Trade receivables $ 27,927 $ 24,607
Allowance for doubtful accounts (844) (1,333)
-------------------- ---------
Total $ 27,083 $ 23,274
==================== =========
Inventories
Raw materials $ 13,940 $ 16,834
Work-in-process 18,443 19,236
Finished goods 21,782 27,823
54,165 63,893
==================== =========
Property, Plant and Equipment
Land $ 809 $ 929
Buildings and improvements 23,660 23,948
Machinery and equipment 47,863 48,962
Office equipment and furniture 8,917 8,706
Construction-in-progress -- 842
-------------------- ---------
81,249 83,387
Accumulated depreciation (48,576) (44,682)
Property, plant and equipment, net $ 32,673 $ 38,705
==================== =========
Intangible Assets
Goodwill $ 10,100 $ 9,738
==================== =========
Non-compete agreements $ 8,227 $ 8,227
Accumulated amortization (6,250) (5,186)
Total $ 1,977 $ 3,041
==================== =========
Patents and other intangible assets $ 383 $ 383
Accumulated amortization (217) (186)
Total $ 166 $ 197
==================== =========
Deferred Financing Costs
Deferred financing costs $ 6,253 $ 4,783
Accumulated amortization (3,480) (2,729)
Total $ 2,773 $ 2,054
==================== =========
Accrued Warranty
Beginning reserve $ 1,340 $ 2,031
Increase to expense 2,585 1,599
Charge to reserve (2,546) (2,290)
Ending reserve $ 1,379 $ 1,340
==================== =========
28
Amortization of patents and non-compete agreements are as follows (in
thousands):
2004 649
2005 397
2006 364
2007 131
2008 131
Transitional disclosures regarding the change in amortization and other
treatment of goodwill for the year ended December 31, 2001 are as follows:
EARNINGS
----------
AMOUNT PER SHARE
------- ----------
Reported Net Income . . . . . . . . . . . . . . . . . . . . . . . $ 1,054 $ 0.59
Add back: Goodwill Amortization. . . . . . . . . . . . . . . . . 300 0.17
------- ----------
Adjusted net income before cumulative effect of accounting change $ 1,354 $ 0.76
======= ==========
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $12.4 million, $12.3 million and $13.0
million in interest during the years ended December 31, 2003, 2002 and 2001,
respectively. The Company paid income taxes of $6,241, $34,836 and $48,135
during the years ended December 31, 2003, 2002 and 2001, respectively.
29
9. LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 consisted of the following (in
thousands):
2003 2002
--------- ---------
Citizens National Bank IRB with variable interest at 6.5% until March, 2000,
at which time the rate is subject to periodic adjustments based on U.S. Treasury
Note rates, the rate at December 31, 2003 is 6.5%, due $14 monthly plus
interest with unpaid principal balance due April, 2010, secured by certain
real estate and improvements in Paris, Illinois . . . . . . . . . . . . . . . . . $ -- $ 1,161
Various non-compete, license and patent agreements payable, noninterest-bearing
and payable in varying amounts through 2003 . . . . . . . . . . . . . . . . . . . -- 13
LaSalle Bank N. A. revolving line of credit . . . . . . . . . . . . . . . . . . . . -- 29,800
LaSalle Bank N. A. term note. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,203
Congress Financial Corporation (Central) revolving line of credit . . . . . . . . . 19,541 --
Congress Financial Corporation (Central) term note. . . . . . . . . . . . . . . . . 12,500 --
Shareholder Note, unsecured, payable on demand, under the same interest terms
as the Congress Financial Corporation (Central) revolving line of credit. . . . . 148 768
10.25% senior subordinated notes payable, principal due November, 2007, net of
unamortized debt discount of $628 and $806 as of December 31, 2003 and 2002,
respectively; amortization of debt discount was $178 and $166 for the years ended
December 31, 2003 and 2002, respectively; interest is payable semi-annually in
97,522 99,094
May and November
City of Assumption promissory note bearing interest at 5%; due $9 monthly through
December, 2003, secured by a $150 letter of credit. . . . . . . . . . . . . . . . -- 100
--------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,711 143,139
Less -
Current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) (3,404)
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,563 $139,735
========= =========
Maturities of long-term debt during the next five years and thereafter are
as follows (in thousands):
2004. . 148
2005. . --
2006. . 32,041
2007. . 97,522
--------
Total $129,711
========
In November 1997, the Company issued $100 million of Senior Subordinated
Notes ("Notes") which are due in 2007. The Notes represent unsecured senior
subordinated obligations of the Company. Upon occurrence of a change in control
(as defined), the Company is required to repurchase the Notes at a price equal
to 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of purchase. The indenture governing the Company's senior
subordinated notes provides for certain restrictive covenants. The more
significant of the covenants restrict the ability of the Company to dispose of
assets, incur additional indebtedness, pay dividends or make distributions and
other payments affecting subsidiaries. The Company was in compliance with the
covenants contained in the indenture as of December 31, 2003.
In 2002, a shareholder of the Company extended a loan to the Company for
$1.5 million which is payable on demand. This loan has the same interest terms
as the Congress Financial Corporation (Central) revolving line of credit. The
balance of the loan was $0.1 million as of December 31, 2003 and is included in
current maturities of long-term debt.
30
On October 31, 2003, The GSI Group, Inc. (the "Company") entered into a
three-year credit facility with lenders led by Congress Financial Corporation
(Central) to provide up to a maximum amount of $75,000,000 subject to borrowing
base availability (the "Credit Facility") to replace the Company's existing
senior credit facility, which provided for maximum outstanding borrowings of
$60,000,000. Revolving loans and letters of credit under the Credit Facility
are based on a borrowing base, which includes accounts receivable, inventory and
fixed assets. A $12.5 million term loan due on October 31, 2006 is also
included in the Credit Facility. The revolving loan borrowings bear interest at
a floating rate per annum equal to (at the Company's option) 2.5% to 3.0% over
LIBOR or 0.0% to 0.50% over the Prime Rate, both based on excess availability
under the borrowing base. The term loan borrowings bear interest at a floating
rate per annum equal to 8% over the Prime Rate provided that the minimum
interest rate will not be less than 12.25% and the maximum will not be greater
than 14.5%. The Credit Facility requires the Company to maintain a senior debt
to EBITDA ratio and a fixed charge coverage ratio. Borrowings under the Credit
Facility are secured by substantially all of the assets of the Company,
including the capital stock of any existing or future subsidiaries, except the
Brazilian subsidiary. The Company had $19.5 million of revolving loans
outstanding, $3.8 million of standby letters of credit and a $4.5 million letter
of credit guaranteeing the debt of FarmPro, Inc., which reduced the overall
availability on the line to $7.5 million as of December 31, 2003.
The fair value of the Senior Subordinated Notes was approximately $68.8
million (book value of $98.2 million) and $73.9 million (book value of $99.9
million) at December 31, 2003 and 2002, respectively, based on market price.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan covering virtually all
full-time employees. Under the plan, Company contributions are discretionary.
During 2003, 2002 and 2001, the Company provided a 25% matching contribution up
to 1% of the employees' compensation. Employer contributions to this plan were
$244,366, $245,630 and $203,873 during 2003, 2002 and 2001, respectively.
11. INCOME TAX MATTERS
The GSI Group, Inc. ("GSI") has elected to be treated as an S corporation
for income tax purposes. Accordingly, no provision for federal income taxes
related to GSI has been recorded. Earnings or losses of GSI are reported on the
personal income tax returns of the stockholders. At December 31, 2003, all of
the Company's foreign subsidiaries are eligible foreign entities which have
elected to be classified as a partnership or disregarded as a separate entity
under U.S. Treasury Regulation Section 301.7701. As a result, earnings or losses
of the foreign subsidiaries are not subject to U.S. tax except as reported on
the personal income tax returns of the stockholders. Dividends sufficient to pay
the resulting income taxes of the owners are declared and paid as needed. David
Manufacturing Company ("DMC") is taxed pursuant to the C Corporation provisions
of the Internal Revenue Code. Accordingly, provisions for federal taxes related
to DMC have been recorded. Both GSI and DMC are subject to certain state taxes.
All foreign entities are subject to local taxes. Accordingly, the provisions
for foreign local taxes have been recorded.
The income tax expense (benefit) differs from the amount of income tax
determined by applying the U.S. Federal income tax rate to pretax income for the
years ended December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
U.S. Federal statutory rate . . . . . . . . . . . . $(2,450) $ 846 $ 135
Increase (decrease) in income taxes resulting from:
Non-taxable S Corporation (income) losses . . . . 2,222 (878) 398
Foreign local taxes. . . . . . . . . . . . . (282) 380 295
Tax differences resulting from acquisition of DMC (503) (284) (1,274)
Nondeductible goodwill amortization . . . . . . . -- -- 33
Effective tax rate differences. . . . . . . . . . 93 91 (221)
State and other income taxes. . . . . . . . . . . (55) 4 (22)
$ (975) $ 159 $ (656)
======== ====== ========
The following is a summary of the Company's expense (benefit) for income
taxes (in thousands):
31
Years Ended December 31,
--------------------------
2003 2002 2001
-------------------------- ------ ------
Current
Federal . . . . . . . . . $ -- $ -- $(113)
State and local . . . . . 243 3 (24)
Foreign . . . . . . . . . 255 380 454
498 383 317
-------------------------- ------ ------
Deferred
Federal . . . . . . . . . (638) (153) (555)
State and local . . . . . (298) (71) (259)
Foreign . . . . . . . . . (537) -- (159)
(1,473) (224) (973)
-------------------------- ------ ------
Total expense (benefit) $ (975) $ 159 $(656)
-------------------------- ------ ------
The components of deferred tax assets and liabilities at December 31, 2003
and 2002 are as follows (in thousands):
2003 2002
Deferred tax assets:
Tax loss carryforwards - DMC . . $ 17 $ 68
Tax loss carryforwards - Brazil. 1,249 1,890
Tax loss carryforwards - Mexico. 45 140
Property and Equipment . . . . . 87 --
Inventory reserves . . . . . . . 29 14
Estimated product liability. . . 48 54
$ 1,116 $ 2,166
======== ========
Valuation Allowance - Brazil . . . -- (1,535)
Deferred tax liabilities:
Property and equipment . . . . . 262 742
Inventory. . . . . . . . . . . . 148 297
--------
410 1,039
-------- --------
Net Deferred tax liability (asset) $(1,065) $ 408
======== ========
The valuation allowance decreased by $1,535 during the current year. This
decrease resulted from a re-evaluation of the utilization of the net operating
loss carryforwards.
DMC has tax loss carryforwards of approximately $75,519, which begin to
expire in the year 2018. Brazil has tax loss carryforwards of approximately
$3,492,748 that do not expire. Mexico has tax loss carryforwards of
approximately $150,581 that begin to expire in 2008.
Remaining realizable assets are supported by anticipated turnaround of
deferred tax liabilities and future projected taxable income.
At December 31, 2003, if GSI's S corporation election were terminated, a
deferred income tax benefit of approximately $1.9 million would be recorded.
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters arising in the normal
course of business which, in the opinion of management, will not have a material
effect on the Company's financial position or results of operations.
Under the Company's insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company retains a significant portion of certain expected losses
related primarily to workers' compensation, physical loss to property and
comprehensive general, product and vehicle liability. Provisions for losses
expected under these programs are recorded based upon the Company's estimates of
the aggregate liability for claims incurred and totaled approximately $1.7
million for the year ended December 31, 2003. The amount of actual losses
incurred could differ materially from the estimates reflected in these financial
statements. The Company has provided letters of credit aggregating approximately
$3.3 million in connection with these insurance programs.
32
The Company has month-to-month leases for several buildings and paid
rentals in 2003, 2002 and 2001 of $0.9 million, $0.7 million and $0.8 million,
respectively. The Company also leases equipment and vehicles under operating
lease arrangements. Total lease expense related to the equipment and vehicle
leases for the years ended December 31, 2003, 2002 and 2001 was $1.3 million,
$1.8 million and $1.2 million, respectively.
Operating lease commitments are as follows (in thousands):
2004. . . . $1,489
2005. . . . 1,146
2006. . . . 916
2007. . . . 563
2008. . . . 75
Later years 11
------
Total . . . $4,200
======
The Company has a contract with the Yemen Company for Industrial
Development to manufacture and supervise the assembly of grain handling systems.
Other current and long-term assets include $0.5 million and $2.8 million as of
December 31, 2003 and 2002, respectively, of retainage withheld until completion
of the projects and the meeting of certain performance criteria. The Company
wrote down the retainage by $1.5 million at December 31, 2003.
13. REGIONAL INFORMATION
The Company is engaged in the manufacture and sale of equipment for the
agricultural industry. The Company's product lines include: grain storage bins
and related drying and handling equipment systems and swine and poultry feed
storage and delivery, ventilation, and watering systems. The Company's products
are sold primarily to independent dealers and distributors and are marketed
through the Company's sales personnel and network of independent dealers. Users
of the Company's products include farmers, feed mills, grain elevators, grain
processing plants and poultry/swine integrators. Sales by each major geographic
region are as follows (in millions):
2003 2002 2001
------ ------ ------
United States $156.1 $146.1 $155.6
Asia. . . . . 20.6 20.0 17.3
Canada. . . . 15.8 18.6 17.5
Latin America 27.1 29.9 28.3
Mideast . . . 8.9 5.8 3.3
Europe. . . . 6.0 7.4 5.6
All other . . 3.2 2.8 2.3
$237.7 $230.6 $229.9
====== ====== ======
14. RELATED PARTY TRANSACTIONS
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
family members of a shareholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $125,920, $196,691 and
$243,849 for 2003, 2002 and 2001, respectively.
33
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $72,619, $10,987
and $65,203 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Resintech,
which, as a result of a joint venture partnership, has a long-term supply
agreement pursuant to which Resintech agreed to purchase 100% of its equipment
requirements from the Company. Such transactions generally consist of sales of
grain equipment and amounted to $0, $2,538 and $129,245 for 2003, 2002 and 2001,
respectively.
The Company makes sales in the ordinary course of business to FarmPRO,
Inc., which has a long-term supply agreement pursuant to which FarmPRO agreed to
purchase 90% of its equipment requirements from the Company. In connection with
the agreement, the Company agreed to guarantee FarmPRO borrowings under a letter
of credit up to $4.5 million through 2006. In connection with such guarantee,
the Company received an option to purchase up to 60% of the common stock of
FarmPRO at a formula price, which approximates fair market value. The stock of
FarmPRO serves as collateral for the guarantee. In addition, the Company holds
two positions on the Board of Directors of FarmPRO. Sales to FarmPRO were $3.1
million, $5.0 million and $2.9 million in 2003, 2002 and 2001 respectively.
The Company makes sales and rent payments in the ordinary course of
business to Covell Bros., a distributor of poultry equipment, that is owned by
an employee of the Company. Such transactions generally consist of sales of
poultry equipment and amounted to $75,307, $128,838 and $178,432 for 2003, 2002
and 2001, respectively, and rent payments and expenses that amounted to $13,910
and $70,055 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, one of whom is a current employee of the
Company. Such transactions generally consist of purchases of materials, freight
payments, and commissions that amounted to $564,362, $538,388 and $195,000 for
2003, 2002 and 2001, respectively, and sales of poultry equipment that amounted
to $99,815, $63,225 and $9,000 for 2003, 2002 and 2001, respectively.
The Company conducts transactions in the ordinary course of business with
Reliance, a supplier of poultry equipment, which is owned by an employee of the
Company. Such transactions generally consist of purchases of materials for
poultry equipment that amounted to $238,095, $243,946 and $149,070 from 2003,
2002 and 2001, respectively, and sales of poultry equipment that amounted to
$239,005, $37,877 and $19,263 from 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Mayland
Enterprises, a distributor of grain equipment, that is owned by an employee of
the Company. Such transactions generally consist of sales of grain equipment
and amounted to $89,348, $26,056 and $22,464 for 2003, 2002 and 2001,
respectively.
The Company conducts transactions in the ordinary course of business with
RAD Properties, a corporation owned by a shareholder of the Company. Such
transactions generally consist of rent and lease payments that amounted to
$302,900 and $165,383 in 2003 and 2002, respectively. No rent payments were
made in 2001.
15. UNAUDITED QUARTERLY INFORMATION
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003:
Sales . . . . . . . . . . . . . . . . $ 44,310 $ 65,653 $ 77,270 $ 50,436
Gross profit. . . . . . . . . . . . . 9,180 13,021 17,849 6,925
Net income (loss) . . . . . . . . . . (2,710) (270) 4,350 (7,602)
Basic and diluted earnings per share. (1.53) (0.15) 2.45 (4.28)
====================================== ========= ======== =========
2002:
Sales . . . . . . . . . . . . . . . . $ 52,928 $ 65,901 $ 70,119 $ 41,688
Gross profit. . . . . . . . . . . . . 11,678 14,858 17,265 9,999
Net income (loss) . . . . . . . . . . (935) 1,605 4,225 (2,565)
Basic and diluted earnings per share. (0.53) 0.90 2.38 (1.45)
====================================== ========= ======== =========
2001:
Sales . . . . . . . . . . . . . . . . $ 44,969 $ 65,498 $ 71,834 $ 47,620
Gross profit. . . . . . . . . . . . . 11,254 15,154 18,984 10,275
Net income (loss) . . . . . . . . . . (2,370) 1,133 4,617 (2,326)
Basic and diluted earnings per share. (1.34) 0.64 2.60 (1.31)
====================================== ========= ======== =========
34
The change in accounting principle from LIFO to FIFO did not materially
effect the quarterly data for the year 2001; thus it was not restated.
16. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes are fully and unconditionally
guaranteed on a joint and several basis by DMC, GSI/Cumberland de Mexico S. de
R.L. de C.V., The GSI Group (Europe) Ltd., The GSI Group Africa (Pty) Ltd., GSI
Group (Asia) Sdn. Bhd. and Agromarau Industria E Comercio Ltda., The GSI Group,
Shanghai Ltd., and the GSI Group (Canada) Inc. (the "Guarantor Subsidiaries").
The Guarantor Subsidiaries are direct wholly owned subsidiaries of the Company.
The obligations of the Guarantor Subsidiaries under their guarantees are
subordinated to such subsidiaries' obligations under their guarantee of the
Congress Financial Corporation (Central) credit facility.
Presented below is unaudited condensed consolidating financial information for
The GSI Group, Inc. ("Parent Company") and the Guarantor Subsidiaries. In the
Company's opinion, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries would not provide additional information
that is material to investors.
Investments in subsidiaries are accounted for by the Parent Company using the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the Parent Company's investments in and advances to/from subsidiaries account
and earnings. The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions.
35
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 105 $ 3,334 $ -- $ 3,439
Accounts receivable, net. . . . . . . . . . . . 22,980 7,649 (3,546) 27,083
Inventories, net. . . . . . . . . . . . . . . . 40,876 13,289 -- 54,165
Other current assets. . . . . . . . . . . . . . 3,167 4,183 -- 7,350
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 67,128 28,455 (3,546) 92,037
Property, plant and equipment, net . . . . . . . . . 27,265 5,408 -- 32,673
Goodwill and other intangible assets, net. . . . . . 2,894 9,349 -- 12,243
Investment in and advances to/from subsidiaries. . . 43,481 (6,195) (37,646) --
Deferred Taxes . . . . . . . . . . . . . . . . . . . -- 1,077 -- 1,077
Other long-term assets . . . . . . . . . . . . . . . 2,873 8 -- 2,881
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $144,001 $ 38,102 $ (41,192) $ 140,911
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 148 $ -- $ -- $ 148
Accounts payable. . . . . . . . . . . . . . . . 11,267 9,418 (3,546) 17,139
Accrued liabilities . . . . . . . . . . . . . . 14,427 2,967 -- 17,394
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 25,842 12,385 (3,546) 34,681
Long-term debt . . . . . . . . . . . . . . . . . . . 129,563 7,478 (7,478) 129,563
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 155,405 18,786 (11,024) 163,167
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . 18 22,385 (22,385) 18
Additional paid-in capital. . . . . . . . . . . 3,006 505 (505) 3,006
Accumulated other comprehensive loss. . . . . . -- (11,929) -- (11,929)
Retained earnings . . . . . . . . . . . . . . . 12,531 7,278 (7,278) 12,531
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (11,404) 18,239 (30,168) (23,333)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $144,001 $ 38,102 $ (41,192) $ 140,911
========= ============== ============== ==============
36
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 205 $ 2,731 $ -- $ 2,936
Accounts receivable, net. . . . . . . . . . . . 21,578 7,635 (5,939) 23,274
Inventories, net. . . . . . . . . . . . . . . . 48,548 15,345 -- 63,893
Other current assets. . . . . . . . . . . . . . 5,620 1,746 -- 7,366
--------- -------------- -------------- --------------
Total current assets. . . . . . . . . . . . . . 75,951 27,457 (5,939) 97,469
Property, plant and equipment, net . . . . . . . . . 32,178 6,527 -- 38,705
Goodwill and other intangible assets, net. . . . . . 2,912 10,063 -- 12,975
Investment in and advances to/from subsidiaries. . . 45,883 (5,873) (40,010) --
Other long-term assets . . . . . . . . . . . . . . . 2,852 6 -- 2,858
--------- -------------- -------------- --------------
Total assets. . . . . . . . . . . . . . . . . . $159,776 $ 38,180 $ (45,949) $ 152,007
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . $ 3,404 $ -- $ -- $ 3,404
Accounts payable. . . . . . . . . . . . . . . . 8,502 8,501 (5,939) 11,064
Accrued liabilities . . . . . . . . . . . . . . 13,260 2,370 -- 15,630
--------- -------------- -------------- --------------
Total current liabilities . . . . . . . . . . . 25,166 10,871 (5,939) 30,098
Long-term debt . . . . . . . . . . . . . . . . . . . 138,574 10,585 (9,424) 139,735
Other long-term liabilities. . . . . . . . . . . . . -- 474 -- 474
--------- -------------- -------------- --------------
Total liabilities . . . . . . . . . . . . . . . 163,740 21,930 (15,363) 170,307
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . 18 23,022 (23,022) 18
Additional paid-in capital. . . . . . . . . . . 3,006 385 (385) 3,006
Accumulated other comprehensive loss. . . . . . -- (14,336) -- (14,336)
Retained earnings . . . . . . . . . . . . . . . 19,971 7,179 (7,179) 19,971
Treasury stock, at cost . . . . . . . . . . . . (26,959) -- -- (26,959)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit). . . . . . (3,964) 16,250 (30,586) (18,300)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $159,776 $ 38,180 $ (45,949) $ 152,007
========= ============== ============== ==============
37
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $201,906 $ 46,852 $ (11,089) $ 237,669
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,084 34,528 (10,918) 190,694
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 34,822 12,324 (171) 46,975
Selling, general and administrative expenses. . . . . . . . . . . . 26,779 10,906 -- 37,685
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 8,043 1,418 (171) 9,290
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (12,366) (850) -- (13,216)
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,179) (1,102) -- (3,281)
--------- -------------- -------------- --------------
Loss before income taxes. . . . . . . . . . . . . . . . . . . . . . (6,502) (534) (171) (7,207)
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . 3 (978) -- (975)
--------- -------------- -------------- --------------
Income (loss) before equity in income of consolidated subsidiaries. (6,505) 444 (171) (6,232)
Equity (deficit) in income of consolidated subsidiaries . . . . . . 444 -- (444) --
--------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,061) $ 444 $ (615) $ (6,232)
========= ============== ============== ==============
38
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $208,050 $ 50,040 $ (27,454) $ 230,636
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,747 39,779 (27,690) 176,836
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 43,303 10,261 236 53,800
Selling, general and administrative expenses. . . . . . . . . . . . 28,541 9,472 -- 38,013
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . . . . . . . . . 14,762 789 236 15,787
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . (12,346) (665) -- (13,011)
Other income (expense). . . . . . . . . . . . . . . . . . . . . . . 270 (557) -- (287)
--------- -------------- -------------- --------------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . 2,686 (433) 236 2,489
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . 44 115 -- 159
--------- -------------- -------------- --------------
Income (loss) before equity in income of consolidated subsidiaries. 2,642 (548) 236 2,330
Equity (deficit) in income of consolidated subsidiaries . . . . . . (548) -- 548 --
--------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,094 $ (548) $ 784 $ 2,330
========= ============== ============== ==============
39
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $190,509 $ 58,515 $ (19,103) $ 229,921
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 147,983 42,194 (15,923) 174,254
--------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 42,526 16,321 (3,180) 55,667
Selling, general and administrative expenses . . . . . . . . 26,227 14,887 -- 41,114
--------- -------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . . . . . . 16,299 1,434 (3,180) 14,553
Interest expense . . . . . . . . . . . . . . . . . . . . . . (13,755) (642) -- (14,397)
Other income (expense) . . . . . . . . . . . . . . . . . . . (218) 460 -- 242
--------- -------------- -------------- --------------
Income before income taxes . . . . . . . . . . . . . . . . . 2,326 1,252 (3,180) 398
Provision for income taxes . . . . . . . . . . . . . . . . . 68 (724) -- (656)
--------- -------------- -------------- --------------
Income before equity in income of consolidated subsidiaries. 2,258 1,976 (3,180) 1,054
Equity (deficit) in income of consolidated subsidiaries. . . 1,976 -- (1,976) --
--------- -------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,234 $ 1,976 $ (5,156) $ 1,054
========= ============== ============== ==============
40
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by (used in) operating activities . . . . . . $ 13,521 $ (3) $ -- $ 13,518
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (2,105) 366 -- (1,739)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,752 677 -- 3,429
--------- -------------- ------------- --------------
Net cash provided by investing activities. . . . . . . . . . 647 1,043 -- 1,690
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt. . . . . . . . . . . . . . . . . . . (10,498) (3,107) -- (13,605)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,770) 2,357 -- (1,413)
--------- -------------- ------------- --------------
Net cash used in financing activities. . . . . . . . . . . . (14,268) (750) -- (15,018)
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- 313 -- 313
Change in cash and cash equivalents . . . . . . . . . . . . . . . (100) 603 -- 503
Cash and cash equivalents, beginning of period. . . . . . . . . . 205 2,731 -- 2,936
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 105 $ 3,334 -- $ 3,439
========= ============== ============= ==============
41
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by operating activities . . . . . . . . . . . $ 1,774 $ 2,224 $ -- $ 3,998
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (4,058) (1,112) -- (5,170)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (765) 2,053 -- 1,288
--------- -------------- ------------- --------------
Net cash provided by (used in) investing activities. . . . . (4,823) 941 -- (3,882)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt. . . . . . . . . . . . . . . . . . . 2,744 1,312 -- 4,056
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (972) (2,833) -- (3,805)
--------- -------------- ------------- --------------
Net cash provided by (used in) financing activities. . . . . 1,772 (1,521) -- 251
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (259) -- (259)
Change in cash and cash equivalents . . . . . . . . . . . . . . . (1,277) 1,385 -- 108
Cash and cash equivalents, beginning of period. . . . . . . . . . 1,482 1,346 -- 2,828
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 205 $ 2,731 -- $ 2,936
========= ============== ============= ==============
42
16. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by (used in) operating activities . . . . . . $ 2,285 $ 2,685 $ -- $ 4,970
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (3,918) (469) -- (4,387)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,751) 2,842 -- 91
--------- -------------- ------------- --------------
Net cash used in investing activities. . . . . . . . . . . . (6,669) 2,373 -- (4,296)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net borrowings on debt. . . . . . . . . . . . . . . . . . . 4,720 (4,575) -- 145
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,126 (1,743) -- (617)
--------- -------------- ------------- --------------
Net cash provided by financing activities. . . . . . . . . . 5,846 (6,318) -- (472)
--------- -------------- ------------- --------------
Effect of exchange rate changes in cash . . . . . . . . . . . . . -- (53) -- (53)
Change in cash and cash equivalents . . . . . . . . . . . . . . . 1,462 (1,313) -- 149
Cash and cash equivalents, beginning of period. . . . . . . . . . 20 2,659 -- 2,679
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . $ 1,482 $ 1,346 -- $ 2,828
========= ============== ============= ==============
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive
officers and directors of the Company:
NAME AGE OFFICE
- ------------------ --- ------------------------------------------------
Craig Sloan. . . . 53 Chief Executive Officer and Director
Russell C. Mello . 42 Chief Financial Officer, Treasurer and Secretary
Dave Andricks. . . 55 President of GSI Division
Allen A. Deutsch . 53 President of AP/Cumberland Division
David L. Vettel. . 45 President of GSI International Division
Michael Brotherton 42 Senior Vice-President of Operations
Cathy Sloan. . . . 53 Director
CRAIG SLOAN joined the Company in November 1971. Mr. Sloan has been Chief
Executive Officer since December 1993. From December 1974 to December 1993, he
served as President of Grain Systems, Inc., a former subsidiary of the Company.
Mr. Sloan has been a Director of the Company since December 1972.
RUSSELL C. MELLO joined the Company in March 1995. Mr. Mello has been the
Chief Financial Officer, Secretary and Treasurer since September 2001. From
June 1999 to September 2001, he served as Senior Vice President, Finance and
Secretary and Treasurer. From September 1996 to June 1999, he served as Vice
President, Finance and Assistant Secretary and Assistant Treasurer. From March
1995 to September 1996, he served as the Controller of the GSI Division. From
October 1984 to March 1995, he held various management and finance positions
with Emerson Electric Company, a manufacturer of electrical equipment.
DAVE ANDRICKS joined the Company in July 1978. Mr. Andricks has been the
President of the GSI Division since May 2002. From 1996 to 2002, he served as
Vice President of Business Development. From 1992 to 1996, he served as
President of a former subsidiary of the Company. From 1982 to 1992, he served
as Vice President of Sales and Marketing.
ALLEN A. DEUTSCH joined the Company in January 1993. Mr. Deutsch has been
President of the AP/Cumberland Division since September 2001. From June 1996 to
September 2001, he served as President of the AP Division. From April 1995 to
June 1996, he served as Vice President of the AP Division. From January 1993 to
April 1995, he served as National Sales Manager of the AP Division. From August
1983 to January 1993, he served as Sales Manager of AAA Associates,
Incorporated, a manufacturer and marketer of livestock ventilation systems,
which business was acquired by the Company in January 1993.
DAVID L. VETTEL joined the Company in November 1993. Mr. Vettel has been
President of the GSI International Division since December 1995. From November
1993 to December 1995, he served as Vice President of the GSI International
Division. From November 1991 to November 1993, he served as International Sales
Manager of Chief Industries, Inc., a manufacturer of steel buildings and grain
storage bins.
44
MICHAEL BROTHERTON joined the Company in October 2002 as Senior
Vice-President of Operations. From June 1988 to September 2002, he held various
management positions culminating with Chief Operating Officer with Zexel Valeo
Compressor U.S.A., Inc., a manufacturer of compressors for the automotive
industry.
CATHY SLOAN has been a director of the Company since September 2001. Ms.
Sloan is the wife of Craig Sloan and is a homemaker.
The Company's bylaws provide that the number of directors shall be two.
Each director is elected to serve until the next annual meeting and until his or
her successor has been elected and qualified or until his or her earlier
resignation or removal. Executive officers are elected by the Board of
Directors and serve until their successors have been elected and qualified or
until their earlier resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company for the year ended December
31, 2003 of the Company's Chief Executive Officer and the other four most highly
compensated executive officers of the Company (the "Named Executives").
SUMMARY COMPENSATION TABLE
ALL OTHER
NAME & PRINCIPAL POSITION YEAR ANNUAL COMPENSATION COMPENSATION(1)
- ----------------------------------------- ---- -------------------- ----------------
SALARY BONUS
Craig Sloan 2003 $ 407,515 $ -- $ 13,235
Chief Executive Officer and Director 2002 $ 407,515 $ -- $ 11,288
2001 $ 407,515 $ -- $ 11,702
Dave Andricks 2003 $ 130,000 $ 27,023 $ --
President of GSI Division 2002 $ 130,000 $ 10,776 $ --
Allen A. Deutsch 2003 $ 130,000 $ 20,253 $ --
President of AP/Cumberland Division 2002 $ 130,000 $ 21,673 $ --
2001 $ 130,000 $ 26,000 $ --
David L. Vettel 2003 $ 130,000 $ 13,880 $ --
President of GSI International Division 2002 $ 130,000 $ 12,699 $ --
2001 $ 120,000 $ 19,000 $ --
Michael Brotherton 2003 $ 130,000 $ -- $ --
Senior Vice-President of Operations
(1) Consists of group insurance and other miscellaneous benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 2003. All members
of the Company's Board of Directors participated in deliberations regarding
executive officer compensation during 2003. See "Certain Relationships and
Related Transactions." During 2003, no member of the Company's Board of
Directors served as a director or a member of the compensation committee of any
other company of which any executive officer served as a member of the Company's
Board of Directors during 2003.
45
DIRECTOR COMPENSATION
There is no compensation for being a member of the Board of Directors or
for attending Board of Director meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 7, 2004 with
respect to the shares of the Company's voting common stock and non-voting common
stock beneficially owned by (i) each person or group that is known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (ii)
each director of the Company, (iii) each Named Executive and (iv) all directors
and executive officers of the Company as a group.
NON-VOTING
VOTING COMMON STOCK COMMON STOCK(2)
------------------- ---------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER . . . . SHARES VOTING SHARES NON-VOTING
- -------------------------------------------- ------------------- -------------- ---------- --------------
Craig Sloan (1) 1,575,000 100.00% 110,042 55.00%
Russell C. Mello (1) -- -- 11,830 5.92%
Dave Andricks (1) -- -- 6,216 3.11%
Allen A. Deutsch (1) -- -- 8,802 4.40%
David L. Vettel (1) -- -- 13,798 6.90%
Directors and executive officers as a group
(5 persons in group) 1,575,000 100.00% 150,688 75.33%
(1) The address of each stockholder is c/o The GSI Group, Inc., 1004 East
Illinois Street, Assumption, Illinois 62510, (217) 226-4421.
The Company has no compensation plans under which its equity securities are
authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company, the holder of voting common stock and each of the holders of
the Company's non-voting common stock have entered into an agreement that (i)
provides that the holders of non-voting common stock are entitled to sell their
shares on the same terms and conditions in the event the voting stockholders
transfer a majority of the voting stock, (ii) provides that the holders of the
non-voting common stock must under certain circumstances agree to sell their
shares on the terms and conditions approved by the Company's Board of Directors,
(iii) established that the holders of the non-voting common stock are restricted
in their ability to sell, pledge or transfer such shares, (iv) grants rights of
first refusal to Craig Sloan with respect to the transfer of any non-voting
common stock to other non-voting stockholders and (v) establishes procedures for
the optional purchase of shares by Mr. Sloan and the Company (subject to
compliance with the terms of the indenture) upon the death, permanent disability
or termination of employment of any holder of non-voting common stock. The
agreement also grants piggy-back registration rights to the holders of
non-voting common stock in the event of an underwritten public offering.
The Company makes sales in the ordinary course of business to Sloan
Implement Company, Inc., a supplier of agricultural equipment that is owned by
family members of a shareholder of the Company. Such transactions generally
consist of sales of grain equipment and amounted to $125,920, $196,691 and
$243,849 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Larry Sloan,
who is a family member of a shareholder of the Company. Such transactions
generally consist of sales of grain equipment and amounted to $72,619, $10,987
and $65,203 for 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Resintech,
which, as a result of a joint venture partnership, has a long-term supply
agreement pursuant to which Resintech agreed to purchase 100% of its equipment
requirements from the Company. Such transactions generally consist of sales of
grain equipment and amounted to $0, $2,538 and $129,245 for 2003, 2002 and 2001,
respectively.
46
The Company makes sales in the ordinary course of business to FarmPRO,
Inc., which has a long-term supply agreement pursuant to which FarmPRO agreed to
purchase 90% of its equipment requirements from the Company. In connection with
the agreement, the Company agreed to guarantee FarmPRO borrowings under a letter
of credit up to $4.5 million through 2006. In connection with such guarantee,
the Company received an option to purchase up to 60% of the common stock of
FarmPRO at a formula price, which approximates fair market value. The stock of
FarmPRO serves as collateral for the guarantee. In addition, the Company holds
two positions on the Board of Directors of FarmPRO. Sales to FarmPRO were
$3.1 million, $5.0 million and $2.9 million in 2003, 2002 and 2001 respectively.
The Company makes sales and rent payments in the ordinary course of
business to Covell Bros., a distributor of poultry equipment, that is owned by
an employee of the Company. Such transactions generally consist of sales of
poultry equipment and amounted to $75,307, $128,838 and $178,432 for 2003, 2002
and 2001, respectively, and rent payments and expenses that amounted to $13,910
and $70,055 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company conducts transactions in the ordinary course of business with
companies owned by the Segatt family, one of whom is a current employee of the
Company. Such transactions generally consist of purchases of materials, freight
payments, and commissions that amounted to $564,362, $538,388 and $195,000 for
2003, 2002 and 2001, respectively, and sales of poultry equipment that amounted
to $99,815, $63,225 and $9,000 for 2003, 2002 and 2001, respectively
The Company conducts transactions in the ordinary course of business with
Reliance, a supplier of poultry equipment, which is owned by an employee of the
Company. Such transactions generally consist of purchases of materials for
poultry equipment that amounted to $238,095, $243,946 and $149,070 from 2003,
2002 and 2001, respectively, and sales of poultry equipment that amounted to
$239,005, $37,877 and $19,263 from 2003, 2002 and 2001, respectively.
The Company makes sales in the ordinary course of business to Mayland
Enterprises, a distributor of grain equipment, that is owned by an employee of
the Company. Such transactions generally consist of sales of grain equipment
and amounted to $89,348, $26,056 and $22,464 for 2003, 2002 and 2001,
respectively.
The Company conducts transactions in the ordinary course of business with
RAD Properties, a corporation owned by a shareholder of the Company. Such
transactions generally consist of rent payments that amounted to $302,900 and
$165,383 in 2003 and 2002, respectively. No rent payments were made in 2001.
The Company believes that these transactions were, and future transactions
with Sloan Implement Company, Inc., Larry Sloan, Resintech, FarmPRO, Covell
Bros., the Segatt family, Reliance, RAD Properties and Mayland Enterprises will
be, on terms no less favorable to the Company than could have been obtained from
an independent third party in arm's length transactions.
ITEM 14. CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures
performed by the Company's management within 90 days of the filing date of this
annual report, the Company's Chief Executive Officer and Chief Financial Officer
believe that the Company has appropriate disclosure controls and procedures to
ensure that information required to be disclosed by the Company in its periodic
reports is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities Exchange Commission.
Since the date of such evaluation, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
The Company does not have an Audit Committee of its Board of Directors and
does not have a "financial expert" on its Board of Directors; the Company
believes that its internal controls and procedures are adequate to ensure the
accuracy of its financial reporting. The Company has not adopted a formal "code
of ethics" for its directors, officers or employees.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
See "Index to Consolidated Financial Statements of The GSI Group,
Inc." set forth in Item 8 hereof.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedules not listed above have been omitted because they are
inapplicable or the information required to be set forth therein is provided in
the Consolidated Financial Statements or the notes thereto.
(a)(3) EXHIBITS:
A list of the exhibits included as part of this Form 10-K is set
forth in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
In a current report filed on Form 8-K dated September 30, 2003 the company
reported information pursuant to "Item 5. Other Events".
48
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) THE SECURITIES EXCHANGE
ACT OF 1934, THE GSI GROUP, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN ASSUMPTION, ILLINOIS ON
MARCH 26, 2004.
The GSI Group, Inc.
By: /s/ Craig Sloan
---------------------------
Craig Sloan
Director and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF REGISTRANT IN
THE CAPACITIES INDICATED ON MARCH 26, 2004.
SIGNATURE TITLE
- ---------------------- ------------------------------------------------------
/s/ Craig Sloan. . . Director and Chief Executive Officer (Principal
- ----------------------
Craig Sloan. . . . . . Executive Officer)
/s/ Cathy Sloan. . . Director
- ----------------------
Cathy Sloan
/s/ Russell C. Mello Chief Financial Officer, Secretary and
- ----------------------
Russell C. Mello. . . Treasurer (Principal Financial and Accounting Officer)
49
CERTIFICATIONS
I, Craig Sloan, certify that:
1. I have reviewed this annual report on Form 10-K of The GSI Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2004
/s/ Craig Sloan
-----------------
Chief Executive Officer
50
I, Russell C. Mello, certify that:
1. I have reviewed this annual report on Form 10-K of The GSI Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2004
/s/ Russell C. Mello
-----------------------
Chief Financial Officer,
Secretary and Treasurer
51
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------
2.2** Agreement for Non-Competition, dated June 30, 1998, by and among the stockholders of Avemarau
Equipamentos Agricolas Ltda. And The GSI Group, Inc.
3.1* Amended and Restated Articles of Incorporation of The GSI Group, Inc., as amended as of
October 23, 1997
3.2* By-Laws of The GSI Group, Inc, as amended.
4.1* Indenture, dated November 1, 1997, between The GSI Group, Inc. and LaSalle National Bank, as
Trustee, including forms of the Old Notes and the New Notes issued pursuant to such Indenture.
4.2* First Supplemental Indenture, dated December 19, 1997, between The GSI Group, Inc. and LaSalle
National Bank, as Trustee, amending Indenture dated November 1, 1997, between The GSI Group, Inc.
and LaSalle National Bank, as Trustee, to qualify such Indenture under the Trust Indenture Act of 1939.
4.3* Second Supplemental Indenture, dated December 19, 1997, executed by David Manufacturing Co.,
amending Indenture dated November 1, 1997, between The GSI Group, Inc. and LaSalle National Bank,
as Trustee, to add David Manufacturing Co. as a Guarantor under such Indenture.
4.5* Agreement of The GSI Group, Inc. to furnish the Securities and Exchange Commission with a
copy of certain instruments relating to long-term debt of The GSI Group, Inc. upon request.
10.3* Agreement, dated April 9, 1997, between GSI/Cumberland Sdn. Bhd. and Ban Leng Fibre Sdn. Bhd.
relating to property located in Penang, Malaysia.
10.5++ Loan and Security Agreement dated October 31, 2003 between The GSI Group, Inc., as borrower
and Congress Financial Corporation, as lender.
10.6+ Indemnification Agreement, dated July 1, 2001, by and among The GSI Group, Inc. and John C. Sloan,
Howard Buffett, Jorge Andrade, and Russell C. Mello.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries of The GSI Group, Inc.
99.1 Certification of Chief Executive Officer and Chief Financial Officer.
____________
* Incorporated by reference from the Company's Registration Statement of
Form S-4 (Reg. No. 333-43089) filed with the Commission pursuant to the
Securities Act of 1933, as amended.
** Incorporated by reference from the Company's Form 8-K filed with the
Commission on July 27, 1998 pursuant to the Securities Act of 1934, as amended.
+ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on August 3, 2001 pursuant to the Securities Act of 1934.
52
++ Incorporated by reference from the Company's Form 10-Q filed with the
Commission on November 7, 2003 pursuant to the Securities Act of 1934.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Company did not send an annual report or proxy statement to security holders
covering 2002.
53
Exhibit 12.1
THE GSI GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
(Dollars in Thousands)
Year ended December 31,
-------------------------
1999 2000 2001 2002 2003
------------------------- ------- ------- ------- --------
Income (Loss) from continuing
Operations before tax $ (3,677) $ 4,711 $ 398 $ 2,489 $(7,207)
========================= ======= ======= ======= ========
Add Fixed Charges:
Interest expense on borrowings and
amortization of deferred
financing costs 14,768 14,996 14,397 13,011 13,216
Interest portion of rent expense 750 707 656 386 326
15,518 15,703 15,053 13,397 13,542
========================= ======= ======= ======= ========
Adjusted Earnings 11,841 20,414 15,451 15,886 6,335
========================= ======= ======= ======= ========
Ratio of Earnings to Fixed
Charges 0.76x 1.30x 1.03x 1.19x 0.47x
54
Exhibit 21.1
THE GSI GROUP, INC.
LIST OF SUBSIDIARIES
--------------------
COMPANY NAME LOCATION TYPE OF ENTITY
- ---------------------------- ------------- -----------------
GSI Group (Asia) . . . . . . Malaysia SDN, BHD
GSI Group (Africa) . . . . . South Africa SA Prop Limited
GSI Group (Europe) . . . . . Great Britain Limited Liab. Co.
GSI/Cumberland . . . . . . . Mexico Limited Liab. Co.
The GSI Group (Canada) Co. . Canada Corporation
David Manufacturing Company. USA - Iowa Corporation
Agromarau Industria E
Comercio Ltda. . . . . . . Brazil Limited Liab. Co.
GSI Group (Shanghai) . . . . China Limited Liab. Co.
GSI Group (Poland) . . . . . Poland Limited Liab. Co.
55