<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 3, 1998
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
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 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, 2,000,000 shares outstanding as of August 7, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I--Financial Information
Item 1. - Financial Statements
Balance Sheets.............................................................. 3
Statements of Operations.................................................... 4
Statements of Cash Flows.................................................... 5
Notes to Financial Statements............................................... 6
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 15
Item 3. - Quantitative and Qualitative Disclosures about Market Risk.................. 18
PART II--Other Information
Item 1. Legal Proceedings...................................................... 17
Item 2. Changes in Securities and Use of Proceeds.............................. *
Item 3. Defaults Upon Senior Securities........................................ *
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
Item 5. Other Information...................................................... *
Item 6. Exhibits and Reports on Form 8-K....................................... 17
</TABLE>
- -------------
* No response to this item is included herein for the reason that it is
inapplicable.
<PAGE>
PART I - FINANCIAL INFORMATION
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
July 3, December 31,
ASSETS 1998 1997
------------------------------------------------------------- ---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................................... $ 0 $ 18,572
Accounts receivable, net...................................................... 41,945 23,214
Inventories, net.............................................................. 58,313 46,882
Prepaids...................................................................... 5,299 8,165
Other......................................................................... 2,421 3,155
-------- --------
Total current assets........................................................ 107,978 99,988
-------- --------
Notes Receivable............................................................... 1,084 1,084
-------- --------
Long-Term Retainage............................................................ 579 579
-------- --------
Property, Plant and Equipment, net............................................. 42,436 36,143
-------- --------
Other Assets:
Goodwill, net................................................................. 13,976 7,991
Other intangible assets, net.................................................. 8,077 564
Deferred financing costs, net................................................. 3,563 3,514
Other......................................................................... 332 246
-------- --------
Total other assets.......................................................... 25,948 12,315
-------- --------
Total assets................................................................ $178,025 $150,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------
Current Liabilities:
Accounts payable.............................................................. $ 19,811 $ 11,948
Note payable.................................................................. 853 --
Dividend payable.............................................................. -- 5,300
Payroll and payroll related expenses.......................................... 5,351 3,843
Deferred taxes................................................................ 1,234 1,234
Accrued expenses.............................................................. 10,776 9,067
Customer deposits............................................................. 6,961 4,883
Current maturities of long-term debt.......................................... 1,778 14,663
-------- --------
Total current liabilities................................................... 46,764 50,938
-------- --------
Long-Term Debt, less current maturities........................................ 134,857 101,868
-------- --------
Deferred Income Taxes.......................................................... 2,087 2,087
-------- --------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.01 par value, voting (authorized 6,900,000 shares;
issued 6,633,652 shares; outstanding 1,800,000 shares)....................... 18 18
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares)......................... 2 2
Paid-in capital............................................................... 2,473 2,473
Cumulative translation adjustment............................................. (1,939) (869)
Retained earnings............................................................. 19,296 19,125
Treasury stock, at cost....................................................... (25,533) (25,533)
-------- --------
Total stockholders' equity (deficit)........................................ $ (5,683) $ (4,784)
-------- --------
Total liabilities and stockholders' equity.................................. $178,025 $150,109
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
3
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 3, June 30, July 3, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales....................................... $ 64,386 $ 58,558 $ 116,547 $ 92,162
Cost of Sales................................... 49,035 43,214 89,189 69,812
---------- ---------- ---------- ----------
Gross profit................................ 15,351 15,344 27,358 22,350
Selling, General and Administrative
Expenses...................................... 11,296 8,046 21,686 15,033
---------- ---------- ---------- ----------
Operating income............................ 4,055 7,298 5,672 7,317
Other Income (Expense):
Interest expense.............................. (3,294) (1,306) (6,204) (2,305)
Interest income............................... 192 25 425 58
Other, net.................................... 483 (328) 457 (376)
---------- ---------- ---------- ----------
Income (loss) before income taxes........... 1,436 5,689 350 4,694
---------- ---------- ---------- ----------
Income Taxes.................................... (43) 15 (208) 5
---------- ---------- ---------- ----------
Net income.................................. $ 1,479 $ 5,674 $ 558 $ 4,689
---------- ---------- ---------- ----------
Basic and Diluted Earnings Per Share:
Net income.................................. $ 0.74 $ 2.84 $ 0.28 $ 2.34
---------- ---------- ---------- ----------
Weighted Average Common Shares
Outstanding................................... 2,000,000 2,000,000 2,000,000 2,000,000
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
4
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
July 3, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income.............................................................. $ 558 $ 4,689
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization......................................... 2,561 1,555
Amortization of deferred financing costs.............................. 261 --
Gain on sale of assets................................................ (376) (4)
Changes in assets and liabilities net of acquisitions:
Accounts receivable................................................. (15,177) (6,042)
Inventories......................................................... (8,658) (14,580)
Other current assets................................................ 4,444 (1,571)
Accounts payable.................................................... 5,844 3,972
Accrued expenses and payroll and payroll related expenses........... 1,716 141
Customer deposits................................................... 2,079 568
-------- --------
Net cash flows used in operating activities........................ (6,748) (11,272)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures.................................................... (7,815) (1,322)
Proceeds from sale of fixed assets...................................... 1,335 17
Payments received on notes receivable................................... -- 171
Acquisition of Clark Products, Inc., net of cash acquired............... -- (866)
Acquisition of Avemarau Equipamentos Agricolas Ltda. stock, net
of cash acquired....................................................... (4,954) --
Payment for noncompete agreement with former stockholders of
Avemarau Equipamentos Argicolas Ltda................................... (7,590) --
Other................................................................... (518) (309)
-------- --------
Net cash flows used in investing activities........................ (19,542) (2,309)
-------- --------
Cash Flows From Financing Activities:
Payments on former shareholder loans.................................... (14,312) --
Payments on long-term debt.............................................. (182) (1,657)
Deferred financing costs................................................ (234) --
Net borrowings under line-of-credit agreement........................... 28,147 22,116
Dividends............................................................... (5,687) (5,504)
Other................................................................... (14) (131)
-------- --------
Net cash flows provided by financing activities.................... 7,718 14,824
-------- --------
Increase (Decrease) In Cash and Cash Equivalents......................... $(18,572) $ 1,234
Cash and Cash Equivalents, beginning of period........................... 18,572 1,490
-------- --------
Cash and Cash Equivalents, end of period................................. $ 0 $ 2,733
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements
5
<PAGE>
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements reflect the consolidated results of
the GSI Group, Inc. and its subsidiaries (the "Company"). All intercompany
transactions and balances have been eliminated.
In the opinion of management, the accompanying unaudited financial
statements of the Company contain adjustments which are of a normal recurring
nature necessary to present fairly the financial position as of July 3, 1998 and
June 30, 1997 and the results of operations and cash flows for the periods
indicated in accordance with generally accepted accounting principals. Interim
financial results are not necessarily indicative of operating results for an
entire year.
Certain reclassifications have been made to prior-year amounts to conform
to the current-year presentation.
Beginning with the first quarter of 1998, the Company has adopted thirteen
week fiscal quarter periods for operational and financial reporting purposes.
Financial Information About Industry Segments
The Company operates in primarily one industry segment, which includes the
design, manufacture and sale of agricultural equipment.
New Accounting Pronouncements
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130"), which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distributions to
owners, in a financial statement for the period in which they are recognized.
The Company has chosen to disclose Comprehensive Income, which encompasses net
income and foreign currency translation adjustments, in the notes to financial
statements for interim periods.
The components of Comprehensive Income for the periods presented are as
follows:
<TABLE>
<CAPTION>
July 3, June 31,
1998 1997
---------- ----------
<S> <C> <C>
Net Income................................ $ 558 $4,689
Cumulative Translation Adjustment......... (1,070) --
---------- ----------
Comprehensive Income (Loss)............. $ (512) $4,689
========== ==========
</TABLE>
6
<PAGE>
2. DETAIL OF CERTAIN ASSETS
<TABLE>
<CAPTION>
As of
-----
July 3, December 31,
------- ------------
1998 1997
---- ----
(In thousands)
Accounts Receivable --------------
<S> <C> <C> <C>
Trade receivables............................ $ 44,174 $ 25,050
Allowance for doubtful accounts.............. (2,229) (1,836)
-------- --------
Total...................................... $ 41,945 $ 23,214
======== ========
Inventories
Raw materials................................ $ 13,995 $ 8,883
Work-in-process.............................. 12,829 12,464
Finished goods............................... 31,489 25,535
-------- --------
Total...................................... $ 58,313 $ 46,882
======== ========
Property, Plant and Equipment
Land......................................... $ 895 $ 895
Buildings.................................... 18,013 18,799
Machinery.................................... 35,945 34,897
Furniture and fixtures....................... 5,030 4,514
Construction-in-progress..................... 6,150 1,364
-------- --------
66,033 60,469
Accumulated depreciation..................... (23,597) (24,326)
-------- --------
Property, Plant and equipment, net........... $ 42,436 $ 36,143
======== ========
Intangible Assets
Goodwill..................................... $ 14,292 $ 8,182
Accumulated amortization..................... (316) (191)
-------- --------
Total...................................... $ 13,976 $ 7,991
======== ========
Other intangible assets...................... $ 9,553 $ 1,963
Accumulated amortization..................... (1,476) (1,399)
-------- --------
Total...................................... $ 8,077 $ 564
======== ========
Deferred Financing Costs
Deferred financing costs..................... $ 3,962 $ 3,728
Accumulated amortization..................... (399) (214)
-------- --------
Total...................................... $ 3,563 $ 3,514
======== ========
</TABLE>
3. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $5.8 and $2.3 million in interest during the
first two quarters ended July 3, 1998 and June 30, 1997, respectively. The
Company paid no income taxes during the first two quarters of 1998 and 1997.
7
<PAGE>
4. LONG-TERM DEBT
Long-term debt at July 3, 1998 and December 31, 1997 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
July 3, December 31,
1998 1997
---- ----
<S> <C> <C>
Citizens National Bank IRB................................................... $ 1,959 $ 2,042
Various noncompete, license and patent agreements............................ 65 78
Notes to former stockholders................................................. -- 14,312
LaSalle National Bank revolving line of credit............................... 29,272 --
Clark Products, Inc. promissory note......................................... 515 600
10.25% senior subordinated notes payable..................................... 98,450 98,374
Note payable to the former shareholders of Avemarau Equipamentos Agricolas
Ltda., noninterest-bearing and payable in four equal annual installments
beginning December 1998 through December 2001............................. 5,760 --
Various notes payable, bearing interest at rates ranging from 14.63% to
19.63% and payable in varying amounts through 2002........................ 614 --
Norwest Bank Iowa revolving line of credit................................... -- 1,125
-------- --------
Total............................................................... 136,635 116,531
Less -
Current maturities....................................................... (1,778) (14,663)
-------- --------
Total long-term debt................................................ $134,857 $101,868
======== ========
</TABLE>
The indenture governing the Company's Senior Subordinated Notes and credit
agreements provide for certain restrictive financial and non-financial
covenants. The more significant of the non-financial covenants restrict the
ability of the Company to dispose of assets, incur additional indebtedness, pay
dividends or make distributions and other payments affecting subsidiaries. In
addition, the Company is required to maintain a certain funded debt to EBITDA
ratio, fixed charge coverage ratio and certain levels of EBITDA. The Company was
in compliance with all covenants as of July 3, 1998.
The fair value of long-term debt approximates carrying value based on the
borrowing rate currently available to the Company for borrowing with similar
terms and maturities.
In August 1998, LaSalle National Bank committed to refinance the existing
credit facility with a new credit facility which includes a revolving line
providing for borrowings up to a maximum of $55 million (limited based on a
borrowing base) and a $35 million term loan. The new facility will bear interest
at a floating rate per annum equal to (at the Company's option) 0.75% to 1.75%
over LIBOR based on certain ratios of the Company or the prime rate. The Company
is required to repay all outstanding indebtedness under the revolving line for a
30 consecutive day period in each calendar year. The term loan is payable in
quarterly principal and interest installments over five years with a seven year
amortization schedule. The new credit facility agreement will require the
Company to maintain a certain debt to EBITDA ratio, fixed charge coverage ratio
and certain levels of EBITDA. Borrowing under the new facility will be secured
by substantially all of the assets of the Company including the capital stock of
any existing or future subsidiaries. The credit facility will terminate on the
fifth anniversary of the closing date.
8
<PAGE>
5. ACQUISITIONS
On November 5, 1997, the Company acquired all of the capital stock of David
Manufacturing Co. ("DMC") for approximately $17.9 million in cash. DMC is a
manufacturer and supplier of grain drying and handling equipment. The
acquisition was recorded in accordance with the purchase method of accounting
and accordingly, the acquired assets and assumed liabilities have been recorded
at their estimated fair market values at the date of acquisition. The purchase
price exceeded the fair market value of net assets acquired resulting in
goodwill of approximately $6.4 million.
The following summarized unaudited pro forma financial information assumes the
DMC acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
July 3, June 30,
1998 1997
(Unaudited)
(In thousands, except per share data)
----------------------------------------
<S> <C> <C>
Net sales.......................................... $ 64,386 $ 66,130
Net income......................................... 1,479 4,787
Basic and diluted earnings loss per share.......... .74 2.39
Six Months Ended
----------------------------------------
July 3, June 30,
1998 1997
(Unaudited)
(In thousands, except per share data)
----------------------------------------
Net sales.......................................... $116,547 $103,302
Net income......................................... 558 3,808
Basic and diluted earnings per share............... .28 1.90
</TABLE>
The pro forma results do not necessarily represent results that would have
occurred had the acquisition taken place on the basis assumed above, nor are
they indicative of the results of future operations.
On June 30, 1998, the Company acquired all of the capital stock of Avemarau
Equipamentos Agricolas Ltda. ("Avemarau"), a Brazilian manufacturer and supplier
of poultry feeding equipment. The acquisition was recorded in accordance with
the purchase method of accounting and accordingly, the acquired assets and
assumed liabilities have been recorded at their estimated fair market values at
the date of acquisition. The purchase price for Avemarau Stock consisted of a
cash down payment of $5.4 million and deferred payments of approximately $5.8
million payable through December 31, 2001. The stock purchase agreement also
calls for a contingent payment of up to $5.3 million (based on net profit as
defined), however management believes the probability of any contingent payment
is remote. Further the Company paid approximately $7.6 million to the former
stockholders of Avemarau for covenants not to compete. The noncompete agreements
have a five year term which begins at the employees termination date. The
Company also agreed to provide a minimum of $5.2 million infusion of capital
equipment over the next four years. The purchase price exceeded the fair market
value of net assets acquired resulting in goodwill of approximately $6.9 million
to be amortized over 15 years. The purchase price was based on preliminary
estimates and will be adjusted for any overstated assets or unrecorded
liabilities in excess of $125,000.
9
<PAGE>
6. GUARANTOR SUBSIDIARIES
The Company's payment obligation under the Senior Subordinated Notes are fully
and unconditionally guaranteed on a joint and several basis by David
Manufacturing Co., GSI/Cumberland de Mexico S. de R.L. de C.V., GSI/Cumberland
BV, GSI/Cumberland SA (Pty) Ltd., GSI/Cumberland Sdn. Bhd., Cumberland do Brazil
Ltda. and Avemarau Equipamentos Argicolas, Ltda. (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
LaSalle National Bank 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 on 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.
10
<PAGE>
6. GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
JULY 3, 1998
(In thousands)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ (737) $ 737 $ -- $ --
Accounts receivable, net........................ 49,398 9,161 (16,614) 41,945
Inventories, net................................ 32,574 27,075 (1,336) 58,313
Other current assets............................ 6,591 1,129 -- 7,720
-------- -------- -------- --------
Total current assets............................ 87,826 38,102 (17,950) 107,978
Property, plant and equipment, net................. 31,060 11,376 -- 42,436
Goodwill........................................... 1,622 12,354 -- 13,976
Investment in and advances to/from
subsidiaries.................................... 32,520 (19,809) (12,929) --
Other long-term assets............................. 5,936 7,699 -- 13,635
-------- -------- -------- --------
Total assets.................................... $159,182 $ 49,722 $(30,879) $178,025
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 338 $ 1,440 $ -- $ 1,778
Accounts payable................................ 15,982 15,190 (11,361) 19,811
Accrued liabilities............................. 19,551 5,624 -- 25,175
-------- -------- -------- --------
Total current liabilities....................... 35,871 22,254 (11,361) 46,764
Long-term debt..................................... 126,065 8,792 -- 134,857
Other long-term liabilities........................ -- 2,087 -- 2,087
-------- -------- -------- --------
Total liabilities............................... 161,936 33,133 (11,361) 183,708
Stockholders' equity:
Common stock.................................... 20 8,763 (8,763) 20
Additional paid-in capital...................... 2,473 516 (516) 2,473
Cumulative translation adjustment.............. -- (1,939) -- (1,939)
Retained earnings (deficit)..................... 20,286 9,249 (10,239) 19,296
Treasury stock, at cost......................... (25,533) -- -- (25,533)
-------- -------- -------- --------
Total stockholders' equity (deficit)............ (2,754) 16,589 (19,518) (5,683)
-------- -------- -------- --------
Total liabilities and stockholders' equity......... $159,182 $ 49,722 $(30,879) $178,025
======== ======== ======== ========
</TABLE>
11
<PAGE>
6. Guarantor Subsidiaries (Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JULY 3, 1998
(In thousands)
<TABLE>
<CAPTION>
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $57,220 $10,619 $(3,453) $64,386
Cost of sales...................................... 42,709 9,279 (2,953) 49,035
------- ------- ------- -------
Gross profit..................................... 14,511 1,340 (500) 15,351
Selling, general and administrative expenses....... 8,503 2,835 (42) 11,296
------- ------- ------- -------
Operating income (loss).......................... 6,008 (1,495) (458) 4,055
Interest expense................................... (2,811) (483) -- (3,294)
Other income (expense)............................. 672 3 -- 675
------- ------- ------- -------
Income (loss) before income taxes.................. 3,869 (1,975) (458) 1,436
Provision (benefit) for income taxes............... 4 (47) -- (43)
------- ------- ------- -------
Income (loss) before equity in income of
consolidated subsidiaries........................ 3,865 (1,928) (458) 1,479
Equity in income of consolidated subsidiaries...... (769) -- 769 --
------- ------- ------- -------
Net income (loss).................................. $ 3,096 $(1,928) $ 311 $ 1,479
======= ======= ======= =======
</TABLE>
12
<PAGE>
6. Guarantor Subsidiaries (Continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JULY 3, 1998
(In thousands)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales.......................................... $108,968 $ 14,040 $ (6,461) $116,547
Cost of sales...................................... 82,841 12,041 (5,693) 89,189
-------- -------- -------- --------
Gross profit.................................... 26,127 1,999 (768) 27,358
Selling, general and administrative expenses....... 18,074 3,636 (24) 21,686
-------- -------- -------- --------
Operating income (loss)......................... 8,053 (1,637) (744) 5,672
Interest expense................................... (5,431) (773) -- (6,204)
Other income (expense)............................. 879 3 -- 882
-------- -------- -------- --------
Income (loss) before income taxes.................. 3,501 (2,407) (744) 350
Provision (benefit) for income taxes............... 12 (220) -- (208)
-------- -------- -------- --------
Income (loss) before equity in income of
consolidated subsidiaries....................... 3,489 (2,187) (744) 558
Equity in income of consolidated subsidiaries...... (2,187) -- 2,187 --
-------- -------- -------- --------
Net income (loss).................................. $ 1,302 $ (2,187) $ 1,443 $ 558
======== ======== ======== ========
</TABLE>
13
<PAGE>
6. GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED JULY 3, 1998
(In Thousands)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities............... $ (4,389) $ (2,359) $ -- $ (6,748)
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (4,861) (2,954) -- (7,815)
Other........................................... 817 (12,544) -- (11,727)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities...................................... (4,044) (15,498) -- (19,542)
-------- -------- -------- --------
Cash flows from financing activities:
Advances (to) from affiliates................... (14,385) 14,385 -- --
Net borrowings (payments) on debt............... 10,021 3,814 -- 13,835
Dividends....................................... (5,687) -- -- (5,687)
Other........................................... (430) -- -- (430)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities...................................... (10,481) 18,199 -- 7,718
-------- -------- -------- --------
Change in cash and cash equivalents................ (18,914) 342 -- (18,572)
Cash and cash equivalents, beginning of period..... 18,177 395 -- 18,572
-------- -------- -------- --------
Cash and cash equivalents, end of period........... $ (737) $ 737 -- $ --
======== ======== ======== ========
</TABLE>
14
<PAGE>
Item 2. 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 thereto.
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 also can impact
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 net 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 affected by currency fluctuations, 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. With respect to sales that are not denominated in U.S.
dollars, the Company enters into foreign currency forward exchange contracts on
a limited basis.
The Company's international sales have historically comprised a significant
portion of net sales. In the first half of 1998 and 1997, the Company's
international sales accounted for 31.1% and 25.9% of net sales, respectively.
During 1997, the Company opened manufacturing and sales facilities in Malaysia,
South Africa, Brazil and Mexico to promote international expansion. In June
1998, the Company acquired a manufacturer and supplier of poultry feeding
equipment in Brazil. While the Company anticipates that sales will continue to
be generated worldwide, the Company is targeting Latin America, Eastern Europe
and the Far East where it believes the greatest potential for significant growth
exists. 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. For
example, the recent financial crises in many countries in Southeast Asia has
caused some agricultural producers to cancel orders or has led to the inability
of such producers to secure necessary lines of credit to buy agricultural
commodities. While this trend has not led to material cancellations of orders by
the Company's customers, the Company believes that it has contributed to a
decline in the number of new orders that the Company has received from customers
located in such region.
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. During the
first half of 1998, the Company continued to benefit from modest price
decreases in steel and polymers that occurred during 1997. There can be no
assurances that these price decreases will continue or that prices for these
materials will not increase in the future.
15
<PAGE>
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.
RESULTS OF OPERATIONS
Three Months Ended July 3, 1998 Compared to Three Months Ended June 30, 1997
Net sales increased 10.0% or $5.8 million to $64.4 million in the second
quarter of 1998 from $58.6 million in the same period of 1997. The increase
resulted from increased sales of grain storage products resulting from the
acquisition of DMC, offset by a slight decline in grain storage sales. Domestic
sales of swine and poultry equipment decreased approximately 6% due to shrinking
demand caused by delays in permits for construction and a flat poultry equipment
market. International sales increased approximately 6% due to the establishment
of sales offices in South Africa, Brazil, Malaysia and Mexico during 1997 and
increased market penetration in Latin America.
Gross profit increased to $15.4 million in the second quarter of 1998 or
23.8% of net sales from $15.3 million or 26.2% of net sales in the same period
of 1997. This decrease in the gross profit percentage of net sales reflected the
impact of cost inefficiencies associated with the introduction of two new
product lines. These negative impacts were partially offset by increased sales,
as well as the benefit of price increases in the grain storage product line.
Selling, general and administrative expenses increased 40.4% or $3.3
million to $11.3 million in the second quarter of 1998 from $8.0 million in the
same period of 1997. This increase was primarily due to a $1.5 million increase
in selling, general and administrative compensation attributable to increased
staffing and an increase of $0.8 million resulting from the acquisition of DMC.
As a percentage of net sales, selling, general and administrative expenses
increased to 17.5% in the second quarter of 1998 from 13.7% in the same period
of 1997.
Operating income decreased from $7.3 million in the second quarter of 1997
to $4.1 million in the same period of 1998. Operating income margins decreased
to 6.3% of net sales in the second quarter of 1998 from 12.5% in the same period
of 1997. These decreases were attributable to the increased selling, general and
administrative expenses. The impact of the increased sales volume was offset by
the start-up costs associated with the introduction of two new product lines.
Interest expense increased $2.0 million for the second quarter of 1998.
This increase was primarily due to interest expense on the Company's Senior
Subordinated Notes, due 2007, issued in November 1997.
Net income decreased 73.9% or $4.2 million to $1.5 million for the second
quarter of 1998 from $5.7 million in the same period of 1997.
Six Months Ended July 3, 1998 Compared to Six Months Ended June 30, 1997
Net sales increased 26.5% or $24.4 million to $116.5 million in the first
half of 1998 from $92.2 million in the same period of 1997. Of this 26.5%
increase, 15.6% was due to increased sales of grain storage products resulting
from the acquisition of DMC, increased demand for the winter discount program
and a price increase. Approximately 10.8% of this increase was a result of
increased international sales due to the establishment of sales offices in South
Africa, Brazil, Malaysia and Mexico during 1997 and increased market penetration
in Latin America.
Gross profit increased to $27.4 million in the first half of 1998 or 23.5%
of net sales from $22.4 million or 24.3% of net sales in the same period of
1997. This increase reflected the impact of increased sales, as well as the
benefit of price increases in the grain storage product line. These positive
impacts
16
<PAGE>
were offset by cost inefficiencies associated with new product introductions.
Selling, general and administrative expenses increased 44.3% or $6.7
million to $21.7 million in the first half of 1998 from $15 million in the same
period of 1997. This increase was primarily due to a $2.9 million increase in
selling, general and administrative compensation attributable to increased
staffing and an increase of $1.6 million resulting from the acquisition of DMC.
As a percentage of net sales, selling, general and administrative expenses
increased to 18.6% in the first half of 1998 from 16.3% in the same period of
1997.
Operating income decreased from $7.3 million in the first half of 1997 to
$5.7 million in the same period of 1998. Operating income margins decreased to
4.9% of net sales in the first half of 1998 from 7.9% in the same period of
1997. These decreases were attributable to the increased selling, general and
administrative expenses. The impact of the increased sales volume was partially
offset by the new product start-up costs.
Interest expense increased $3.9 million for the first half of 1998. This
increase was primarily due to interest expense on the Company's Senior
Subordinated Notes, due 2007, issued in November 1997.
Net income decreased 88.1% or $4.1 million to $0.6 million for the first
half of 1998 from $4.7 million in the same period of 1997.
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 temporary borrowings made under
various credit agreements.
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. As of July 3,
1998, the Company had $61.2 million of working capital, an increase of $12.2
million from working capital as of December 31, 1997. The increase in working
capital was primarily due to increased accounts receivable and inventory
partially offset by an increase in accounts payable, accrued expenses and
customer deposits. A portion of the inventory, accounts receivable and accounts
payable increases will be permanent in nature due to the establishment of
international facilities.
Operating activities used $6.7 million and $11.3 million in cash flow in
each of the first six months of 1998 and 1997, respectively. This $4.6 million
increase in cash flow was primarily the result of an decrease in other current
assets of $6.0 million, an increase of accounts payable, accrued expenses and
customer deposits of $5.0 million and an increase in accounts receivable and
inventory of $3.2 million, offset by a decrease in adjusted net income of $3.2
million.
Cash used in investing activities in the first half of 1998 and 1997 were
$19.5 million and $2.3 million, respectively. This $17.2 million increase was
primarily for the acquisition of Avemarau Equipamentos Agricolas Ltda. and
capital expenditures. Capital expenditures have primarily been for machinery and
equipment and the purchase and expansion of manufacturing and warehouse
facilities. The Company anticipates that capital expenditures will average
approximately $8.0 million to $9.0 million per year over the next five years,
although 1998 will be approximately $12.0 million.
Cash provided in financing activities in the first half of 1998 and 1997
were $7.7 million and $14.8 million, respectively. Net borrowings increased $6.0
million in 1998 which was offset by payments primarily to retire former
shareholder debt of $14.3 million.
The Company plans to continue to pursue a selective acquisition strategy,
which may result in the need for additional debt or equity financing in the
future.
17
<PAGE>
The Company believes that existing cash, cash flow from operations and
available borrowings under its new Credit Agreement will be sufficient to
support its working capital, capital expenditures and debt service requirements
for the foreseeable future.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes," "anticipates," "intends," or
"expects." Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from future
results expressed or implied by such statements, and such statements should not
be regarded as a representation the stated objectives will be achieved.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Not applicable.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings pending against the Company which, in the
opinion of management, would have a material adverse affect on the Company's
business, financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On June 4, 1998 the Company commenced a consent solicitation from holders
of its 10 1/4% Senior Subordinated Notes due 2007 to amend certain provisions of
the indenture governing such securities. The terms of the consent solicitation
were amended on June 16, 1998, to provide consent payments to holders of the
securities that delivered consents validly accepted by the Company. The consent
solicitation was terminated by the Company before it expired on its own terms,
with no consents being accepted by the Company and no consent payments being
made.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See the Index to Exhibits which immediately precedes such
exhibits and which is incorporated herein by reference.
(b) Reports on Form 8-K.
In a Current Report filed on Form 8-K dated June 4, 1998 the Company
reported information pursuant to "Item 5. Other Events" in connection
with entering into a letter of intent to acquire Avemarau Equipamentos
Agricolas Ltda.
In a Current Report filed on Form 8-K dated July 15, 1998 (as amended
by a Current Report filed on Form 8-K/A dated July 27, 1998) the
Company reported information pursuant to "Item 2. Acquisition or
Disposition of Assets" and "Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits" in connection with the purchase of
the capital stock of Avemarau Equipamentos Agricolas Ltda.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The GSI Group, Inc.
By: /s/ John W. Funk
John W. Funk, Director, Chief Financial Officer,
Secretary and General Counsel (Authorized
Signatory and Principal Financial Officer)
Date: August 10, 1998
20
<PAGE>
Index To Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet, Consolidated Statement of Operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-03-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,174
<ALLOWANCES> 2,229
<INVENTORY> 58,313
<CURRENT-ASSETS> 7,720
<PP&E> 66,033
<DEPRECIATION> 23,597
<TOTAL-ASSETS> 178,025
<CURRENT-LIABILITIES> 46,764
<BONDS> 134,857
0
0
<COMMON> 20
<OTHER-SE> (5,703)
<TOTAL-LIABILITY-AND-EQUITY> 178,025
<SALES> 116,547
<TOTAL-REVENUES> 116,547
<CGS> 89,189
<TOTAL-COSTS> 89,189
<OTHER-EXPENSES> 20,804
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,204
<INCOME-PRETAX> 350
<INCOME-TAX> (208)
<INCOME-CONTINUING> 558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
